Trends in the Indirect Tax landscape & the impact …...law in light of recommendations − OECD and...

© 2015 Deloitte Academy

Trends in the Indirect Tax

landscape & the impact of

BEPS

Liesbet Nevelsteen (Deloitte)

Eric von Frenckell (Laga)

Charlotte Degadt (Laga)

20 October 2015

1


Welcome & Introduction 8:00 – 8:15

Update on BEPS & impact on indirect tax 8.15 – 9:00

Indirect tax: update & trends 9:00 – 9:45

Q&A 9:45 – 10:00

Agenda


Update on BEPS and

impact on indirect tax


Update on BEPS


OECD/G20 BEPS project nears the finish line (1)

5

2013 — Action Plan adopted

− 44 countries commit to develop 15 sets of recommendations (“Actions”) to

address loss of corporate tax revenue from base erosion and profit shifting

(“BEPS”)


BEPS

15 Actions (reminder)

Establishing international

coherence of corporate

income taxation

Restoring the full effects

and benefits of

international standards

Ensuring transparency while

promoting increased certainty

and predictability

Swift implementation

2. Neutralising hybrids3. Strengthen CFC rules4. Limit interest/finance deductions5. Counter harmful tax practices – substance

6. Prevent treaty abuse 7. Prevent PE avoidance 8. Value creation – intangibles9. Value creation – risk and capital10. Value creation – high-risk transactions

11. Data collection/analysis12. Disclosure (aggressive tax planning)13. Transfer pricing documentation14. Dispute resolution

15. Multilateral instrument

1. Digital economy


OECD/G20 BEPS project nears the finish line (2)

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2014 — Reports on 7 Actions approved by OECD Committee on Fiscal Affairs,

G20 Leaders

− The “2014 Deliverables”

− Result of public discussion drafts and consultations

− Recommended changes to:

o Domestic laws

o OECD Model Tax Convention (“OECD Model”)

o OECD Transfer Pricing Guidelines (“TPG”)

2015 — “Final Reports” released on all 15 Actions

− After numerous public discussion drafts and consultations

− Additional countries participated

− Awaiting approval by governments

− “Final” isn’t entirely final


The 2015 final reports

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• What is final?

− TPG changes are largely done

− OECD Model change recommendations have partly been finished

• What is not final?

− Individual countries must still decide extent to which they will amend domestic

law in light of recommendations

− OECD and other countries must still:

o Develop multilateral instrument for speeding incorporation of recommended

OECD Model changes into existing bilateral treaties

o Complete anti-treaty-abuse recommendations for OECD Model when

Treasury Dep’t finalizes US Model treaty updates

o Report on attribution of profits to PEs in light of PE definition changes,

transfer pricing of financial transactions, and several other items

o Monitor each other for compliance with “minimum standards”


The global tax environment

• Risk assessment to identify relevant focus areas

• Quantify potential risks/impact

• Develop strategy to respond to current and anticipated changes

• Stakeholder management

Response

BEPS is part of the bigger picture

• Stakeholder engagement/brand protection

• Increased tax audits and adjustments

• Possible double taxation

• Increased complexity/ compliance

• Uncertainty

Responsible tax agenda

Change in tax authorities’ approach to

interpretation of existing tax law and tax treaties

Unilateral tax law changes

OECD BEPS action plan


Corporate tax rate competition

Source: EU Commission


Financial crisis

Public outcry

VAT WE PAY, WHY DONT THEY……


And our survey says…

1. Has your business started

considering the potential

impact of BEPS?

2. To what extent has this

involved the indirect

tax team?

3. What do you see the main

indirect tax implication

as being?

9%

50%17%

24%

17%

31%40%

12%

25%

13%

13%23%

26%

Yes - in some detail

Yes

No

Don’t know

Close involvement

Limited involvement

No involvement

Don’t know

Impact on place of taxation

Changes to compliance process

Impact on supply chain

No implications

Don’t know


It seems that Indirect tax is not specifically mentioned in BEPS

Upon first read ‘VAT’ is mentioned in some places in the OECD’s 44

page Action Plan

1. In ‘Action 1’ which relates

to taxation of the digital

economy (lots of mentions)

2. In the middle of the words

How is BEPS relevant for Indirect Tax?

‘PriVATe’ ‘InnoVATe’

‘DeriVATive’

…So is there still a lot of thinking yet to be done on Indirect Tax?


Highlights: BEPS and Indirect Tax

• Changes to how and where products are valued;new transfer pricing documentation

Transfer pricing alignedto value creation

• Complex step plans, partial exemption, VAT groupingChanges to intercompany financing arrangements

• More onerous rules, information sharing, cross-bordertax authority challenges

Data exchange/disclosureof tax planning

Major changes to existing operating modelsand supply chains

Challenges of thedigital economy

• Businesses may have taxable presence for corporate tax where previously one did not exist; compliance changes

• Creation of ‘digital’ PEs; re-evaluation of where ‘consumption’ occurs


Indirect Tax challenges

The digital economy


Challenges of the digital economy

17

• Overview

− Digital economy cannot be ring-fenced

− BEPS risks, addressed in other Actions, are exacerbated by the digital

economy

• Significant developments

− Generally concludes that other parts of the BEPS Package addressing mobile

income effectively address BEPS concerns in the digital economy

− Does not adopt proposals discussed in 2014 Deliverable regarding Significant

Economic Presence Test, Withholding Taxes, and Equalizing Levies

• Next steps

− Post-project monitoring process to be developed in 2016


Insight


Transparency

Tax-by-Tax reporting?

NL EUR 673mio VAT

Country-by-countryreporting

AUS

0,941mio VAT

Spain

0,440mio VAT



Permanent establishments,

operating models and

supply chains


Key areas of focus

BEPS

Tollmanufacturing

operations

Centralisedwarehouses

and/or packing activities

Structures with overseas

Principals which supply digitised

content

Supply chainswith overseas

commissionaire entities

Supply chainswith limited risk

distributors


Some indirect

tax considerations

Changes to inter-company transactions and supply chains can create new and unanticipated Indirect Tax compliance, cost and operational challenges

Consequences might include new VAT regs, undesirable sticking VAT or customs duty or other circumstances which reduce the benefits being sought as a resultof the restructuring

The valuation of inter-company goods and services may be affected, with related impact on VAT, and particularly customs duty

Need to make sure any new operating or supply chain is indirect tax compliant in the ERP system

Changes to the treaty definition of “Permanent Establishment” for direct tax purposes and the interaction with VAT

Unfair tax competition between compliant/larger companies who register and smaller ones who operate under the radar


PE: Dependent Agent PE

23

• Change to Article 5(5) of OECD Model: “Dependent Agent PE”

Current Model Final Report Language

“where a person... is acting in on behalf of

an enterprise and has, and habitually

exercises, in a Contracting State, an

authority to conclude contracts... in the

name of the enterprise... that enterprise

shall be deemed to have a permanent

establishment.”

Adds “or habitually plays the principal

role leading to the conclusion of

contracts that are routinely concluded

without material modification by the

enterprise”

Contracts may be 1) “for the transfer of

the ownership of, or for the granting of

the right to use, property owned by that

enterprise or that the enterprise has the

right to use,” or 2) “for the provision of

services by that enterprise.”

Removes broader “or negotiates the

material elements of contracts” language

in last discussion draft.


PE: Excluded activities

24

• Change to the Article 5(4) list of activities excluded from PE definition in the

OECD Model

− Every activity on the list of currently excluded activities would have to be of a

“preparatory or auxiliary character” to be excluded

− Additional Commentary carried over from prior discussion draft, including

Paragraph 22, which provides an example of activities involving a warehouse

used for storage and delivery of goods sold online as not being of a

preparatory or auxiliary character


PE: Article 5(4) and the Anti-Fragmentation

Rule—New Article 5(4.1)

25

Foreign parent Foreign parent Foreign parent

Closely related

Foreign

Enterprise

#1: 5(4)

FPB

#2: (5(1)

FPB

Closely related

Local Enterprise

#1: 5(4)

FPB #1: 5(4)

FPB#2: (5(1)

FPB

#2: (5(1)

FPB

• The Article 5(4) exception shall not apply to #1 if the same enterprise or a closely

related enterprise carries on business at the same place of at another place in the

same Contracting State (#2) and the business activities carried on by the 2

enterprises at the same place, or by the same enterprise or closely related

enterprises at the 2 places, constitute complementary functions that are part of a

cohesive business operation, and either

• One of the places constitutes a PE for the enterprise or the closely related

enterprise, or

• The overall activity from the combination of the activities carried by the 2

enterprises at the same place, or by the same enterprise or closely related

enterprises at the 2 places, is not of a preparatory or auxiliary character



Ensuring that Transfer

Pricing outcomes are

in line with value creation


Action 9Risks and capital

Action 8 Intangibles

Action 10Other high risk

transactions

• Develop rules to

prevent BEPS by

transferring risk

among, or

allocating

excessive capital

to group

members

• Develop rules to

ensure

intangibles are

appropriately

priced in relation

to use, creation

or transfer within

groups

• Consider high

risk transactions

and when these

should be re-

characterised,

and common

base eroding

payments such

as co-manage-

ment fees and

head office

charges

Actions 8,9,10, and13

Action 13 Re-examine TP documentation

• Action plan to

consider the

rules regarding

transfer pricing

documentation

with a goal to

enhance

transparency

for tax

administrations


Some indirect tax considerations

Broad spectrum of outcomes – from basic compliance to real supply chain and end-user/ consumer pricing implications

The valuation of inter-company goods and services is likely to be affected

Customs duty – capacity for changes to the customs value (and possibility of increased duty payments)

Customs/Global trade considerations –serious sanctions for international trade non-compliance

Possible new costs for FS businesses on international charges

New Transfer Pricing documentation reviewed to ensure Indirect Tax compliance understood, etc.


What can you do about

this?


Evaluatethe possible

indirect tax implications of activities performed

by a related entityor third party

EvaluateIndirect Tax

collection and reporting obligations based upon current

activities

Help thewider business understand the

Indirect tax effectsfor VAT andU.S. Sales& Use Tax

BEPS and Indirect Tax

Considerthe systems challenges

Think aboutfeeding into

discussions with the OECD, legislators,

or taxingauthoritiesFeed into

internal discussionson the possible

impact

What can you do about it?


Indirect Tax

Update & trends


VAT on the agenda


VAT on the (political) agenda

‘Unilateral’ introduction of

stricter compliance requirements

VAT represents 20% of the global tax

revenu, 7.5% of theEU GDP

Trend of more & more qualitativeaudits, including

exchange of information

VAT/GST exists in> 100 countries & continues to be

introduced

VAT/GST exists in> 100 countries & continues to be

introduced

Increasing case law of CJEU with high

impact


Some numbers: VAT revenues in the EU

34


Some numbers: standard VAT rate

Indirect Tax—Perspective = everything 35

Source: OECD(2012), Consumption Tax Trends 2012

0

5

10

15

20

25

30

2013 2007

Standard VAT rate 2007 vs. 2013


Some numbers: VAT GAP

36

The difference between the expected VAT receipts if all the

VAT which is due is collected and the actual VAT collected

by Member States.

2012:

+/- € 177

billion or 16%

of total

expected VAT

revenues


Some numbers: VAT recovery ratio

37

0,00

0,20

0,40

0,60

0,80

1,00

1,20

Ratio between actual VAT revenue and revenue that would theoretically be raised

if VAT were applied at standard rate to all final consumption.

Source: OECD(2012), Consumption Tax Trends 2012


Indirect tax update


On the agenda

Indirect tax update

• Head office – branch supplies

• VAT PE

• VAT recovery for holding companies

• Use of exemptions & flash title supplies

• Increased focus on EX works supplies


Head office – branch supplies

Digital supplies to exempt businesses

IT services no VAT?

Skandia Case C-7/13 (17 September 2014)

Branch2 Main

seat

Branch3

Branch4

Subsidiary1

VAT group

Skandia America Corp

Multinational

Bank

Branch1


• CJEU: in that particular case: supply from head office to branch subject to VAT sincebranch member of VAT group

• Different interpretations in EU Member States… or no interpretation yet

• EU VAT Expert group recommendations:

− Strict interpretation (“Swedish” style VAT groups, involvement 3rd countries, inboundsupplies)

− To be seen in context of abuse: only if no anti-abuse provisions implemented

− Change Directive to tax all head office – branch transactions?

− Cf. OECD position

• General taxation of head office-branch supplies would constitute major VAT change

− Impact on VAT treatment flows, VAT registrations, ERP systems, etc.

− Possible impact on neutrality (cf. exempt businesses)

Head office - branch supplies


Before Skandia decision After Skandia decision

Head office - branch supplies

Ongoing uncertaintyNot subject to VAT


VAT PE

Requirements & relevance

VAT fixedestablishment

Sufficientdegree of

permanence

Human & technicalresources

Receive / supply

goods or services

Suitablestructure

Place of supply

Licences &

approvals

Liability to

account for VAT –

Local reverse

charge

Simplification for

triangulation

Audit position &

Risk profile

VAT grouping


VAT PE

Although legal definition & high practical relevance >< concept not fully clear

• Different notions of “established” for different VAT rules?

• Purchase (passive) FE; Sales (active) FE; other?

• “Suitable structure”

• Determine in function of nature of business carried out?

e.g. fully digitalised services vs. ‘traditional‘ supply of goods

• Also if merely auxiliary and preparatory activities?

• Some guidance in Welmory decision of CJEU


VAT PE: Welmory (C-605/12 – 16 October 2014)

Welmory Sp. Z.o.o Welmory Ltd.

Sale of bids

Bids

Goods

Cooperation agreement

Reverse charge service invoice(advertising, servicing, provision of information & data processing)

FE? Invoice + Polish VAT?


VAT PE

What can we learn from Welmory?

• Digital services: suitable structure requires computer equipment, servers & software

• Being able to receive & use the services for performing its economic activities

• Absence of human presence could suffice

• However reference to the national court, no fixed decision

• Not determining factors:

• Fact that economic activities of both companies, which are linked to a cooperation

agreement, form an economic whole

• Fact that results of combined efforts essentially benefit consumers in Poland

• Required suitable structure could be owned by a third party

• Level of control of that structure to be determined

• Seems to allow to still distinguish purchase FE from sales FE (cf. auxiliary & preparatory)


Today: not all questions answered > uncertainty for businesses

… But also opportunities

• National evolutions (rulings, case law, etc.)

• Notion of VAT PE subject to further investigation of EU VAT expert group:

► determine criteria for VAT PE

• being able to perform the full supply vs. preparatory & auxiliary?

• TP remuneration type (cost plus vs. profit split)?

• technical resources prevail over human presence ?

• business dependent?

• Possible impact of BEPS Action 7?

• To be continued…

VAT PE


Larentia & Minerva (C-108/14, C-109/14)

VAT recovery of holding companies

48

Larentia &

Minerva

Holding

Sub 1 Sub 2

Administrative +

commercial servicesAdministrative +

commercial services

Costs acquisition participations

(EUR 764k VAT)

L&M: Attraction of EUR 25M new

capital, 77.69% invested in subs

DE tax authorities reject

77.69% of input VAT


Larentia & Minerva


• Confirmation of principle of VAT recovery for holding companies

− actively managing their subsidiaries

− for consideration

• Unless (part of) the services rendered to the subsidiaries should be considered

as VAT exempt

• Mixed holding companies (managing some subs but not all, passive

managment): partial rejection of VAT recovery

• apportionment between economic and non-economic activities

• based on an investment formula, a transaction formula or any other

appropriate formula

49


Larentia & Minerva


• Former practice:

• often VAT recovery limitations because of out of scope activities

− rejection based on pro rata – including dividends

can now be countered:

assess possibility to reclaim previous non-recovered VAT

• Positive development for holding companies and private equity investment

funds: improve ability to recover VAT

• By developing service activities in those companies (which are now

sometimes in other companies)

Attention point upon restructuring of holding companies

50


Background

VAT exemptions & flash title supplies

• Traders established in one country trading goods situated in/moving between

many countries

• VAT exemptions (with credit) are crucial to minimising VAT registration

requirements and cash flow implications of trade:

• Exemptions for intra-Community transactions

• Exemptions on exportation / importation

• Exemptions related to international transport

• Exemptions for transactions relating to international trade (warehouses / tax

suspension)

51


Fast Bunkering Klaipeda UAB (C-526/13)VAT exemptions & flash title supplies

52

FBK (LT) INTERMEDIARIES CUSTOMER

Sale

VAT?

Sale

VAT exempt?

148 (a) VAT Dir

• Fuel physically delivered by FBK to vessel operator; legal ownership (and

invoices) through intermediary

• Likely that legal ownership only passed to intermediaries once fuel

delivered to vessel operator

• Fuelling intermediaries prefer not to be charged VAT – and to have no

domestic VAT registration / credit position


Fast Bunkering Klaipeda UAB


53




Question referred

Article 148(a)- exemption (with credit) on goods supplied for fuelling and

provisioning of vessels:

Must this provision mean that exemption from VAT is available to both

− The supplies to the vessel operator; and also

− The supplies to the intermediaries where the ultimate use of the goods is

known in advance (and duly evidenced in accordance with national law)?

54




A judgment of two halves: (a) Velker remains good law

• Velker (C-185-89): exemption may only apply to the final supply to vessel operator –

exemption is not applicable to supplies to intermediaries

However… (b) FBK’s facts differed from Velker

• Transfer of ownership in FBK’s case may have taken place only at end of loading >

ownership does not transfer to intermediaries until vessel operators are entitled to dispose

of fuel (as owners)

• Therefore, intermediaries have at no time been in position to dispose of fuel

• Paragpraph 52: Transactions carried out by FBK:

• Cannot be classified as supplies to intermediaries, but instead

• Should be regarded as exempt supplies to vessel operators

• National Court to determine whether ownership transferred “at the earliest at the same

time” when vessel operators able to dispose of fuel

55




Decision raises a number of questions

• What could a “direct supply” from supplier A to vessel operator C mean?

• Could this be applied to commodity chain transactions more generally?

− Are there other situations in which an intermediary never obtains right to

dispose of goods?

• How will individual tax authorities respond?56

A B

C

contract

Supply/Invoice?

contract

Supply/Invoice?

VAT exempt invoice?

“Supply of right to dispose goods”


Increased focus on EXW supplies

These EXW supplies often treated erroneously

Absence of transport information / documents

EXW supply not recognized in ERP system (e.g. customer master data, pricing,

Incoterm)

EXW supply not duly implemented in tax logic

VAT Exempt IC supply


Increased focus on EXW supplies

Consequences of unrightfully claiming of exemption:

• Underpayment of local VAT in relation A-B

• Liability for late payment interest

• Possible requirement to correct the past

• Intragroup & vis-à-vis customers

• Need for additional VAT registrations

• Change of ERP system to reflect EXW supplies

Possible high (VAT) bill


Questions?


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Trends in the Indirect Tax landscape & the impact …...law in light of recommendations − OECD and...

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Transcript of Trends in the Indirect Tax landscape & the impact …...law in light of recommendations − OECD and...