Indirect Tax News_issue 3 September 2014

CONTENTS ▶ BELGIUM Warehousing services: Belgium brings its interpretation in line with the EU implementing regulation 1

▶ EDITOR’S LETTER 2

▶ ECUADOR Value Added Tax (VAT) on import of services 2

▶ IRELAND Adjustment of tax deductible in relation to unpaid consideration 3

▶ ISRAEL Israeli and U.S. Customs authorities sign AEO mutual recognition agreement 3

▶ LATVIA Recommendations for the assessment of counterparty and transaction risks 3

▶ ROMANIA European Court of Justice ruling on Romanian authorities’ treatment of financial leases on termination of lease 4

▶ SPAIN Bill amending Spain’s VAT law 4

▶ UGANDA The legality of the imposition of domestic VAT on imports of goods into Uganda challenged 5

ECUADORVAT on import of services

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ISRAELIsraeli and U.S. customs authorities sign AEO mutual recognition agreement

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INDIRECT TAX NEWS

BELGIUMWAREHOUSING SERVICES: BELGIUM BRINGS ITS INTERPRETATION IN LINE WITH THE EU IMPLEMENTING REGULATION

With effect from 1 June 2014, the Belgian tax authorities have changed the place of supply rules, and hence the liability to Belgian VAT, for the provision of warehousing facilities.

When the EU’s place of supply rules were rewritten in 2010, the Belgian VAT authorities initially considered

warehousing services to be services connected with immovable property, as referred to in article 47 of Directive 2006/112/EC.

However, as this point of view was not in line with some of the other EU Member States, it was temporarily allowed to apply the general B2B place of supply rules.

From June 2014, this has changed. Belgium’s new rules now specify which warehousing services are connected with immovable property and which are not. This is believed to be in response to the European Court judgment in the C-155/12 RR Donnelley case last year, and in anticipation of Council Implementing Regulation no. 1042/2013, which becomes binding in all EU Member States in 2017.

The new rules outline the VAT treatment of three situations:

Exclusive use

Where warehousing facilities are provided for the “Exclusive use” of the foreign trader, this is now considered a supply of immovable property as per article 47 of Directive 2006/112/EC. This implies that Belgian VAT is, in principle, due (at the standard rate of 21%) on such services provided in a warehouse located in Belgium, regardless of where the service provider and/or the recipient are established.

Article 31a, 2(h) of the Implementing Regulation states that “Services connected with immovable property, as referred to in Article 47 of Directive 2006/112/EC, shall include only those services that have a sufficiently direct connection with that property [...] including the storage of goods for which a specific part of the property is assigned for the exclusive use of the customer.”

Facilities are deemed to be for “Exclusive use” if all of the following conditions are met:

• The exclusive use must be assigned to the service recipient for the entire period of the agreement;

• The service recipient is entitled to freely access its goods in the warehouse, irrespective of the fact that the warehouse owner provides some kind of security;

• The agreement must explicitly determine the location of the warehouse or the area within the warehouse where the goods will be stored;

• The goods must be identifiable;

• The service provider cannot change the actual place of storage of the goods within the warehouse without consent of the owner of the goods;

• The service recipient must be able to exclude any other person from the use of the locations attributed to the recipient, and use this at the recipient’s discretion; the owner of the warehouse is not entitled to render any additional services regarding to the stored goods.

ROMANIAECJ ruling on Romanian authorities’ treatment of financial leases on termination of lease

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2 INDIRECT TAX NEWS 3

Dear Readers,

Greetings from Barcelona where I’m currently transiting en route home to Dublin from Madrid where I

hosted BDO’s International VAT & Customs conference for 2014. This year’s conference was attended by 86 delegates from 34 Countries including the US, Canada, South Africa, India, the Dominican Republic, Israel and European countries from both within and outside the European Union.

This event, attended by Partners and Senior Management who are all full time Indirect Tax experts, was our largest Conference ever, surpassing last year’s attendance in Dublin by over 33%.

It was also the first time that we have had a Customs & International Trade focused forum running in tandem with our mainstream VAT focused event, which enabled all delegates to get together on the first morning and last afternoon of the event.

I am very proud of the progress that I and my colleagues at the BDO International VAT Centre of Excellence have made (assisted, of courses, by the leaders of our APAC and Customs sub-groups) over the three years since I initially became Chair. Hopefully it is a source of comfort to you knowing that BDO continues to improve its capacity and that we continue to ensure we have the highest standards to meet the ever increasing demands for both domestic and international guidance and leadership on indirect tax related issues.

I hope you will find this edition of ITN a useful source of information and many thanks, as always, to Sarah Halsted our editor, our contributors from around the globe, and our colleagues at the BDO International Office who provide background assistance to us.

Kind regards from Dublin.

IVOR FEERICKChair – BDO International VAT Centre of Excellence Committee Ireland – Dublin [email protected]

EDITOR’S LETTER

Non-exclusive use

Where the foreign trader does not have exclusive access because other traders may rent the facility too, then the general B2B and B2C rules apply.

In general this will be the case if one or more of the previously mentioned criteria are not met, for example if there is no specific warehouse (or part of a warehouse) designated for the goods to be stored at, or if the owner does not have access to the stored goods.

Additional warehousing services

If warehousing services are rendered along with other services related to the storage of goods, this transaction no longer qualifies as the mere letting of storage space. Under agreements that do not grant an exclusive use and/or the warehouse owner renders a set of services (in order to maintain or improve the quality of the goods) of which the warehouse service is only a part, the link with the warehousing services is less direct. In this case, the general B2B or B2C place of supply rules apply.

KAATJE BONDEWELBelgium – Brussels [email protected]

Value Added Tax (VAT) is levied in Ecuador on the transfer of ownership and importation of goods and services

at all stages of manufacture, as well as on copyrights, industrial property, and related rights.

In the case of services imported into Ecuador, the tax law specifies that they are subject to VAT at 12%. VAT paid on imported services can be deducted from VAT the importer generates on its sales. In other words, the taxpayer in Ecuador can reduce the VAT it must pay to the tax authorities by the amount of VAT it pays on imported services.

In order to qualify for this deduction, the services must meet the following requirements:

• The service provider must be domiciled abroad and must provide a proper invoice that shows, in detail, the service provided, the price charged for the service, and identification of the buyer (the taxpayer in Ecuador).

• The taxpayer in Ecuador must issue a document authorised by the tax authorities called “Liquidación de Compras de bienes y prestación de servicios”. This document must show the VAT rate of 12% separate from the total cost of the imported services.

VAT generated on the importation of services is subject to 100% withholding and must be paid to the Ecuadoran tax authorities by the importer of the services in the month following the registered date of the invoice in the accounting books of the taxpayer.

VERONICA PEÑAEcuador – Quito [email protected]

ECUADOR VALUE ADDED TAX (VAT) ON IMPORT OF SERVICES

3INDIRECT TAX NEWS 3

IRELANDADJUSTMENT OF TAX DEDUCTIBLE IN RELATION TO UNPAID CONSIDERATION

ISRAELISRAELI AND U.S. CUSTOMS AUTHORITIES SIGN AEO MUTUAL RECOGNITION AGREEMENT

LATVIARECOMMENDATIONS FOR THE ASSESSMENT OF COUNTERPARTY AND TRANSACTION RISKS

Introduction

The Finance (No. 2) Act 2013 introduced Section 62A to the VAT Consolidation Act 2010. This new Section provides

for adjustments to be made in respect of tax deductible in relation to unpaid consideration.

In simple terms, this means that where a taxable person has claimed a VAT deduction in a taxable period (referred to as the “initial period”) on a valid VAT invoice received from a supplier but the taxable person has not paid the supplier for the related goods or services within six months, that person must repay to Revenue the amount of input credit originally claimed.

This provision was introduced with effect from 1 January 2014. As a result, the consideration in respect of invoices on which VAT was reclaimed in the January/February 2014 VAT return must be paid no later than 31 August 2014, the last day of the sixth month following the initial period. Consequently, the July/August 2014 VAT return will be the first return that an adjustment in respect of unpaid consideration may arise.

Similarly, an adjustment must be made where only part payment is made in satisfaction of the debt. In such cases an adjustment is required to be made in respect of the amount of the invoice that remains unpaid.

Where a taxpayer has made a full or partial adjustment but subsequently makes a payment to the supplier, the taxpayer can claim the input credit in its VAT return for the period in which the payment is made.

Grounds for not making an adjustment

The Revenue Commissioners accept that there may be instances where an adjustment is not required and Revenue has issued some guidance in this regard. The guidelines relate to situations where there are genuine commercial reasons why the taxpayer has made no payment or only partial payment to the supplier.

JIMMY RYNHARTIreland – Dublin [email protected]

In June 2014 a mutual recognition agreement was signed by the Israeli Customs authority and the U.S.’s Customs

and Border Protection. The agreement acknowledges each other’s approvals process for “Authorised Economic Operator” programs for the purpose of customs mutual simplifications and facilitation (the US program is known as “C-TPAT”, which stands for Customs Trade Partnership against Terrorism). Mutual recognition helps facilitate trade between the two countries because it reduces the need for security and customs inspections of authorised exporters from one country by the customs authority of the other country.

An authorised economic operator (or “authorised operator”) is a trader that has been examined by the customs authorities of one of the two countries and has been found to satisfy certain requirements and criteria, such as security, customs compliance, compliance with tax and trade rules and regulations, financial strength, appropriate computerised systems, documentary controls, inventory controls, a proper plan for recovery from catastrophic incident, and so on. Authorised operators will enjoy simplified process regarding their international trading, including: a lower level of customs checking and procedural requirements that will save them time and costs, including, for example, the possibility of having documents examined before the arrival of the Imported goods, and so on.

The Authorised Economic Operator program of the Israeli Tax Authority is based on the SAFE Framework of Standards of the World Customs Organisation. As part of this program, unified standards for the security, compliance, and financial viability of the global supply chain were introduced. The program is based on voluntary participation of companies (including importers, exporters, intermediaries, carriers, terminal operators, distributors and so on) that are willing to adopt the SAFE framework for trade facilitation and global supply chain security.

As of today, Israel has signed mutual recognition agreements with the American and Taiwan authorities and it is in the process of negotiating such an agreement with South Korea and other countries.

AYELET YITZHAKIIsrael – Tel Aviv [email protected]

In daily operations, companies are exposed to the risk of being involved in fraudulent transactions. Companies that are involved

in such transactions can lose the right to claim deductions in Latvia for input VAT. To minimise the chances of being involved in such transactions, taxpayers should conduct reliability assessments of counterparties they deal with.

There are two requirements under the Latvian VAT Act that taxpayers must comply with to recover input VAT:

1. The taxpayer must check to see whether the counterparty is registered in the Latvian VAT register; and

2. If the counterparty is from another Member State, the taxpayer must check to see if the counterparty has a valid VAT number.

The Latvian State Revenue Service (SRS) recommends that taxpayers get evidence on counterparties’ reliability themselves. Unfortunately, it is not always possible for taxpayers to obtain all the information about a counterparty (for example, whether a business unit is registered with SRS, whether it uses the assets in its possession for business activities, and so on). As a result, taxpayers are exposed to a certain amount of risk.

To help taxpayers protect their right to recover input VAT, the Latvian SRS recently issued recommendations regarding assessment of a counterparty and the risk of a transaction. The recommendations are based on the guidance developed by the United Kingdom.

The recommendations outline the steps taxpayers should take to assess reliability of a counterparty. For example, the SRS recommends that taxpayers look for publicly available information on counterparties – things like registration data, licenses and permits issued to the counterparty, information about the counterparty’s financial position (such as liabilities, insolvency proceedings, and so on), and the operational results of the counterparty. It is worth emphasising, however, that the recommendations are for information purposes only and are not binding on taxpayers.

INITA SKRODERE GITA AVOTINALatvia – Riga [email protected] [email protected]


ROMANIAEUROPEAN COURT OF JUSTICE RULING ON ROMANIAN AUTHORITIES’ TREATMENT OF FINANCIAL LEASES ON TERMINATION OF LEASE

The European Court of Justice’s opinion was sought in the Romanian case of BCR Leasing IFN SA vs. National Agency for

Fiscal Administration (ANAF)-DGAMC & DGSC with the payment of value added tax on goods leased under a financial leasing contract but deemed missing after not being returned to the leasing company.

BCR Leasing (BCR) is a limited company whose main activity is financial leasing. It acquires cars from various suppliers and fully deducts the input VAT paid on these purchases. After acquiring the cars, the company enters into financial leasing contracts with natural and legal persons who then use the vehicles for the term of the contract. BCR remains the owner of the cars. As a result of late or non-payment under the leases, BCR terminated some of the contracts it had with defaulting lessees. Since BCR did not receive payments in respect of the terminated contracts, BCR stopped issuing invoices relating to those contracts and it stopped collecting the corresponding VAT.

During an audit carried out in 2011, the tax authorities found irregularities relating to the manner in which BCR indicated, recorded, and declared VAT for the period from 1 September 2008 through 31 December 2010. By notice of 30 August 2011 and a tax audit report of the same date, the tax authorities imposed an additional payment of RON 19,266,551 on BCR in respect of VAT, as well as a penalty of RON 9,502,774 for delayed payment.

The tax authorities took the position that for the entire term of a financial lease the lease must be treated as a supply of services and, depending on whether the lessee exercises an option to purchase the vehicle, there may be a supply of goods on expiry of the contract. According to the tax authorities, if the goods are vehicles that are returned to BSR at the end of the financial lease, BSR is required to apply the provisions of the Romanian Fiscal Code on self-supplies and must collection VAT and must issue invoices to itself in respect of those supplies.

BSR argued that the national legislation the tax authorities relied on is not compatible with the system introduced by the VAT Directive. As a result, BCR filed an action for the annulment of the tax notice. The Bucharest Court of appeal recently heard the case.

Because of the possible conflict between the Romanian tax authorities’ interpretation and the VAT Directive, the ECJ was asked to determine:

• Whether a leasing company could be considered to supply goods for consideration within the meaning of article 16 of Directive 2016/112/EC in which the lease terminated as a result of the lessee’s breach of the terms of the lease and the lessor has followed the statutory procedures for recovery but did not recover anything from the lessee. Or,

• Whether there might there be a supply of goods for consideration within the meaning of Article 18 of Directive 2006/112/EC.

The ECJ ruled (Judgment C-438/13) that Articles 16 and 18 of Directive 2006/112/EC must be interpreted as meaning that there has not been a supply of goods for consideration for the purposes of the Directive if a leasing company cannot recover from the lessee following termination as a result of the lessee’s breach and therefore BCR should not be required to collect VAT for unrecovered goods from the lessees.

DAN BARASCU HORIA MATEIRomania – Bucharest [email protected] [email protected]

SPAINBILL AMENDING SPAIN’S VAT LAW

On 6 August 2014 a proposed bill amending various provisions of Spain’s VAT law was published in the

Houses Official Journal.

The provisions of the bill can be categorised into three groups:

1. Changes made to implement the new place of supply rule for telecommunication, broadcasting, and electronic services as a result of Directive 2006/112/EC, which will come into force on 1 January 2015.

2. Various modifications required as a result of recent decisions in the Court of Justice of the European Union, including:

• Application of the general VAT rate (21%), rather than the reduced VAT rate (10%), on medical and health equipment and other medical devices meant for hospital use (Case C-360/11).

• Modification of the Special Regime applicable to Travel Agencies (Case C-189/11).

• Modifications to the determination of the taxable base for payments in kind (Case C-549/11).

• Abolition of the exemption for intervention services provided by public notaries in exempt financial transactions.

• Other miscellaneous modifications.

3. Various other measures, including:

• Antifraud measures.

• Modifications intended to introduce technical improvements.

• Simplification measures within the scope of the VAT Directive that are meant to clarify and eliminate certain requirements.

The final amending law will be published in the State Official Journal in the following months with these modifications expected to come into force at the end of the year.

CARLOS BAUTISTA ROSARIO ESTELLASpain – Madrid [email protected] [email protected]

5INDIRECT TAX NEWS 3

UGANDATHE LEGALITY OF THE IMPOSITION OF DOMESTIC VAT ON IMPORTS OF GOODS INTO UGANDA CHALLENGED

Like most developing countries, Uganda struggles with the problem of how to collect tax from one of the biggest

sectors of the economy: the so-called “informal sector”. The legislators and the Uganda Revenue Authority (URA) have made several attempts to bring Uganda’s informal traders within the tax net in a manner that is administratively efficient. One such effort is the URA’s imposition and collection of “domestic VAT” on imports of goods.

Though the imposition and collection of domestic VAT has long been considered controversial, it was not legally challenged until the class action case of Kiki Rwaheru and 13,945 others vs. URA (Civil Suit No. 117 of 2013). In that case the plaintiffs sought a declaration that there is no legal basis for the URA to charge domestic VAT on imported goods. On 10 January 2014, the Commercial Division of the High Court of Uganda delivered is partial judgement covering the points of law raised in the case. The court will deliver its judgment separately on the merits of the facts of the case as proven by the plaintiffs, particularly for the purposes of awarding costs.

Background

Article 152 (1) of Uganda’s Constitution of 1995 prohibits the imposition of tax unless authorised by an Act of Parliament and there is no specific Act of Parliament authorising the imposition of domestic VAT on non VAT registered importers. As a result, the general public and tax community were surprised when the URA included a note in its VAT guidelines that stated that “Domestic VAT for Non VAT registered importers” had come into effect on 1 March 2002. In the guidelines the URA defined domestic VAT as VAT charged on goods whose value is UGX 4 million or more. According to the guidelines, importers who meet the following are required to pay domestic VAT:

• The importer is not VAT registered.

• The Cost, Insurance, Freight (CIF) value (as determined by Customs) of the goods is UGX 4 million or more.

• The goods are subject to the standard VAT rate of 18%.

• The goods are not personal effects or motor vehicles.

The guidelines further provide that domestic VAT is payable at the customs entry point together with “other customs taxes” and the value for domestic tax purposes is computed by applying a 15% mark-up on the value on which VAT at Customs is computed, which is the sum total of CIF plus import duty and excise duty (the so-called Customs VAT value). The mark-up is the expected value added between the stage of importation and sale.

Based on the URA’s guidelines, the total combined VAT suffered by the importers is 33%, which is neither provided for by the Value Added Tax Act (Cap 349) nor the East African Community Customs Management Act, 2004.

In the Kiki Rwaheru case, the URA explained its justification for imposition of domestic VAT on imports of goods. According to the URA, given the fact that many of taxpayers that fall into the informal sector intend to circumvent compulsory VAT registration, since they do not keep proper records, have no fixed places of abode, have multiple registrations, or are simply not registered for VAT at all, the URA faces administrative challenges in ascertaining output VAT. As a result, the URA feels it is important to collect input VAT (18% VAT at importation) and output VAT (domestic VAT at 15%) at the point of importation. Furthermore, the URA claims that it has authority to do so under Section 32 (1) (c) of Cap 349, which empowers the URA Commissioner General to make an assessment of the amount of tax payable by a person where the Commissioner General has reasonable grounds to believe that a person will become liable to pay tax but is unlikely to pay the amount due.

The URA further explained that the domestic VAT did not amount to a different tax with a different rate because the calculation was based on an estimated mark-up (15%) that was meant to represent the expected value added on imports between the stage of importation and sale in the domestic market, taking into account costs incurred as well as the profit margin. The URA also noted that aggrieved taxpayers had a legal right to file a VAT return and could seek a refund for the overpaid tax under Section 42 (3) of Cap 349.

As the plaintiffs’ counsel in the case pointed out, by imposing domestic VAT on imports, the URA made several assumptions that contravened the provisions of Cap 349. First, the URA assumed that all imports of goods worth over UGX 4,000,000 are for sale in the domestic market at a profit and that from such a sale, output tax would always exceed input tax and, as a result, an importer is always in a VAT payable position rather than a VAT refundable position. The plaintiffs argued that by assuming that all importers of goods worth over UGX 4,000,000 are eligible for VAT registration, the URA was effectively rendering the annual VAT registration threshold of UGX 50,000,000 set out in Cap 349 meaningless.

And finally, the plaintiffs argued that to require unregistered persons to pay VAT without establishing whether they are taxable persons under the Act is contrary to the provisions of Cap 349.

In concluding that imposition of domestic VAT is not illegal per se, the judge pointed out that it is was irregular for the URA to assess taxes on taxable supplies before the supply takes place. The judge added that the URA’s conclusion that all importers are unlikely to pay VAT on future taxable supplies of goods should be determined on a case-by-case basis, rather than on a blanket basis for administrative convenience. The judge concluded that it was unnecessary for the URA to resort to relying on estimated VAT assessments on speculative future supplies and, instead, the URA should use the various penal provisions specified by Cap 349, such as penalties for failure to apply for registration, failure to lodge returns, and failure to maintain proper records.

The judge’s conclusion in this case has wide-ranging implications for the URA and taxpayers alike. Subject to factual evidence and, of course, verification by a URA audit, some taxpayers may seek refunds of overpaid VAT in accordance with the provisions of Cap 349. Given the URA’s practice of instigating wide-ranging audits into taxpayer’s affairs to verify refunds claimed, the URA may be overwhelmed by the large number of pre-refund verification audits and possible legal challenges that may result. Importers who have erroneously paid import VAT face the dilemma of deciding whether to pursue the VAT refund or to forfeit it in order to avoid the intrusive URA audits.

RITA ZABALIUganda – Kampala [email protected]


This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained herein without obtaining specific professional advice. Please contact the appropriate BDO Member Firm to discuss these matters in the context of your particular circumstances. Neither the BDO network, nor the BDO Member Firms or their partners, employees or agents accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

BDO is an international network of public accounting firms, the BDO Member Firms, which perform professional services under the name of BDO. Each BDO Member Firm is a member of BDO International Limited, a UK company limited by guarantee that is the governing entity of the international BDO network. Service provision within the BDO network is coordinated by Brussels Worldwide Services BVBA, a limited liability company incorporated in Belgium with its statutory seat in Brussels.

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BDO is the brand name for the BDO network and for each of the BDO Member Firms.

© Brussels Worldwide Services BVBA, September 2014. 1409-02

CONTACT PERSONS

The BDO VAT Centre of Excellence consists of the following persons:Ivor Feerick (Chair) Ireland Dublin [email protected] Haslinger Austria Vienna [email protected] Boumans Belgium Brussels [email protected] Pogodda-Grünwald Germany Berlin [email protected] Padian Ireland Dublin [email protected] Loquet Luxembourg Luxembourg [email protected] Geurtse Netherlands Rotterdam [email protected] Giger Switzerland Zurich [email protected] Kivlehan United Kingdom Reading [email protected]

CURRENCY COMPARISON TABLE

The table below shows comparative exchange rates against the euro and the US dollar for the currencies mentioned in this issue, as at 17 September 2014.

Currency unitValue in euros

(EUR)Value in US dollars

(USD)

Romanian New Lei (RON) 0.22636 0.29310

Uganda Shilling 0.00029 0.00038

Indirect Tax News_issue 3 September 2014

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Transcript of Indirect Tax News_issue 3 September 2014