TaxTech – February 18th, 2019
In this newsletter, we summarise recent cases before the European Court of Justice. We also included a few local court cases, which cover interesting discussions such as the difference between an agent and a principal (United Kingdom) and the consequences of making errors in VAT Returns (India).
Furthermore, we provide an update on VAT systems in the GCC countries and highlight some points of attention relating to Brexit.
India –Wrong box on VAT Return? No refund!
In a case before the Indian High Court, the tax payer wanted to recover input VAT that it had reported in its VAT Return. Due to an error, however, the tax payer had incorrectly reported the VAT credit, placing it in the wrong box of the VAT Return form.
The tax inspector in India was reluctant to cooperate in order to resolve this mistake, and therefore the company asked the High Court for a decision. The court decided that the tax inspector was obligated to consider the complaint and take a decision in the matter.
The good news is that India will be training more people in GST (Goods and Services Tax) regulations. In fact, another 100,000 students will be able to follow specific courses, which will be funded by the government.
United Kingdom – Taxi organizer acting in its own name or on behalf of others?
In an interesting case, The English First Tier Tribunal was asked to determine whether an individual’s business activities were considered to be providing taxi services, or merely acting as an intermediary between other taxi drivers and customers.
Mr. Bryn Williams took bookings and tenders for contracts with local authorities who provide cab travel. He sent other taxi drivers out to complete the contracts he signed.
The UK tax authorities argued that Mr. Williams was acting as a principal, supplying taxi services to local authorities and, in turn, receiving taxi services from drivers. Mr. Williams owned some of the cars himself and he bears the running costs of the contracts, which were negotiated without driver input.
Mr. Williams, on the other hand, argued that he was an agent, as he was merely bringing the taxi drivers and customers together, and drivers could negotiate their own fees with him or decide not to take on the ride.
The Court decided that to be regarded as an agent, you must act in the name and on behalf of someone else. In this case, Mr. Williams negotiated the contracts with the local authorities in his own name, and there was no pre-determined driver, meaning that there was no relationship between the local authority and the driver. Therefore Mr. Williams acted as a principal, and not as agent.
The result is that Mr. Williams should have submitted VAT Returns and reported the turnover and VAT due on the services he provided.
The case is relevant to companies that use agents or act as agents themselves. Legal agreements may appoint someone as an ‘agent,’ but the way a person acts determines the VAT treatment.
Netherlands – VAT Grouping with non-active companies
In the Netherlands, it is possible to form a VAT Group between businesses that are established in the Netherlands and which are economically, organisationally and financially linked. The advantage is that the VAT Group can submit a single VAT Return for the whole group, and all transactions between the members of the group are considered to be outside the scope of VAT.
In the case before the Dutch High Court, the Dutch Advocate General considered whether a business that does not have any economic activities can be part of a VAT Group.
It concerns a foundation that includes several schools, which established its own cleaning company. As cleaning is different from education, the foundation asks an external party to coordinate the cleaning activities.
The tax inspector did not accept a VAT Group between the foundation and the cleaning company, because the foundation did not directly manage the cleaning company, and there was no economical link.
The Advocate General agrees with the decisions from the lower courts that a VAT Group is possible. The foundation owns the cleaning company and can thus manage the company, and the economic link exists since the cleaning company only provides its services to the foundations.
Not all countries have a VAT Group regime. However, if you have more than one company, legal entity or business in a country, you may want to check the possibilities.
United Kingdom – Brexit relevant – Import VAT on small parcels
The UK government issued a notice about how to deal with the importation of small parcels. The main rule is that if you are based outside the UK and sell parcels to UK buyers worth GBP 135 or less, you must pay import VAT in the UK. Parcels include letters, packages, packets and any other article that could be sent by post, even if different methods are used to send them.
This notice is especially important for companies that are established in or shipping goods from the European Union, as after 29 March 2019, these rules will apply to all parcels shipped from the EU as well.
One of the exceptions will be a case where the seller uses a parcel operator that offers a service to pay import VAT to the UK tax authorities on behalf of the seller.
The notice can be found HERE.
Ireland – Brexit relevant – Postponed accounting for import of goods
Ireland will implement a postponed accounting system for VAT in case of a no-deal Brexit. This means that companies importing goods from the UK will no longer have to pay import VAT at the moment the goods arrive at the border in Ireland. Instead, they will be allowed to apply the reverse charge, and account for import VAT on their VAT return.
The Irish government indicated that this will at first be a temporary measure, for a period of two months. However, Irish companies have already complained, and argued that this must be extended to at least three months. It may well be that it will continue for a longer period. It is unclear whether the system will also apply to the importation of the goods from (other) non-EU countries.
European Court of Justice – Overview of case-law
The European Court of Justice summary of selected cases:
In case C-531/17 (Vetsch), the ECJ decided that the exemption for VAT on goods being transported to another EU country right after their importation, still stands, even when there is VAT fraud later in the supply chain.
The case deals with Vetsch Int. Transporte GmbH (‘Vetsch’), a company that imports goods into Austria. The goods are owned by two Bulgarian businesses, which inform Vetsch that the imported goods are transported to Bulgaria right after the importation. Vetsch submitted declarations as an indirect representative of the respective Bulgarian recipients and applied for an exemption from VAT on import. As an indirect representative, Vetsch was fully liable for the VAT and customs duties.
As it goes, the Bulgarian companies did not actually sell the goods in Bulgaria, but they transported the goods back to Austria, where they were sold on the black market. Vetsch did not know this and was not involved in any way in the fraudulent scheme.
The ECJ decided that the exemption from import VAT may in this case not be refused, as (1) the goods were in fact brought to another EU country after the importation and (2) Vetsch did not and could not know that subsequent transactions entailed tax evasion on the part of the recipient.
- The ECJ rendered its judgement in C-562/17 (Nestrade), which deals with a VAT refund question by a non-EU company.Nestrade SA, established in Switzerland, asked for a VAT refund in Spain on the basis of the so-called 13th The Spanish tax authorities denied the VAT refund, as the invoices mentioned Nestrade’s Dutch VAT ID number and not its Swiss VAT ID. Nestrade was requested to provide corrected invoices, but it failed to provide these invoices on time.In its subsequentVAT refund request, Nestrade did, in fact, add the corrected invoices, and again asked for a refund of the VAT paid.The decision of the ECJ is that Spain was allowed, first of all, to ask for a correction of the invoices, and to set a deadline. As Nestrade did not respond within this deadline and did not appeal against the decision to deny the VAT refund, even after it had obtained the corrected invoices, it is not unreasonable that the Spanish tax authorities denied the VAT refund request when they were submitted the second time.The case makes it clear that it is very important for a company to hold the correct invoices when submitting a VAT refund claim, and in the event a mistake is found, to meet the required deadlines for submitting the corrected invoices.The full judgement can be found HERE.
- The last ECJ case this week is case C‑434/17 (Human Operator), which deals with the question of whether VAT rules can be applied retroactively.The retroactive application of rules is always a point of discussion. Especially in the case where the taxpayer could not have known that new rules would apply because these new rules (and their starting date) were not yet published.Human Operator Zrt, established in Hungary, did not apply the reverse charge mechanism. The European Commission had stated that Hungary was allowed to apply the reverse charge, but they only providedformal notice to Hungary about one year after Human Operator had deducted input VAT invoiced by suppliers, who, under the new rules, should not have done so.The ECJ decided that, although Hungary was allowed to implement new rules, the effective starting date for these services could not be before the official notice was given with the approval from the EU Commission. In other words, Hungary could not apply the rules retroactively.The full text of the case is available on the website of the ECJ, HERE.
GCC – More and more clarity on the VAT rules in Bahrain, and year-end adjustments in UAE
The United Arab Emirates have a VAT system in place for more than a year. For companies that make ‘mixed supplies’ in UAE, it is necessary to check and calculate whether any year-end adjustments must be made through the pro-rata correction.
The calculation after the tax year-end and any adjustment for “actual use” is required to be included in the first tax return following the end of the tax year. This means that if you submit monthly VAT Returns in UAE, any adjustment for 2018 must be included in the January 2019 tax return (submission deadline: 28 February 2019). If you submit quarterly VAT Returns, the adjustment must be included in the June 2019 tax return (submission deadline: 28 July 2019). More information can be found HERE.
The implementation of VAT in UAE has had very limited inflationary impact, mainly because it raised more revenue than was initially expected. This is good news for Bahrain, who implemented its VAT system on 1 January 2019.
Bahrain has now released an import and export guide, describing and explaining the main VAT rules that importers and exporters have to deal with. The main rules are that goods that are imported into Bahrain are subject to 5% VAT unless they are specifically exempt from VAT at import. Exports are subject to 0% VAT.
The GCC countries that have not yet implemented VAT are Oman, Kuwait and Qatar. Kuwait is eager to move forward with the tax, and the Kuwait government announced that they want to publish its VAT Law before June this year. The main concern seems to be ensuring that the VAT rules do not have a major impact on citizens, so they want to include strict price controls to avoid unjustified price hikes.
VAT compliance and invoicing
Several countries have announced new rules with regard to the submission of VAT Returns or issuing of invoices. Here’s a brief overview.
Portugal: Taxpayers in Portugal will have another five days to pay their monthly and quarterly taxes. However, this extension does not affect the deadline for the submission of periodic VAT declarations, which have remained unchanged.
Greece: Greece is planning to introduce mandatory real-time reporting of invoices from 2020 onwards. The Greek Ministry of Finance wants to start with a pilot group of all invoices issued to public entities (B2G invoicing) and issued to Limited Liability Companies.
India: Inis has implemented the new Return filing system of GSTN. GSTN is the platform used to submit VAT Returns and additional data electronically in India. Additionally, new functionality on the GST Portal has been added, concerning monthly refund applications.
Bahrain: Tax authorities reveal VAT Return format.
United States – Will there ever be VAT in the US?
It has been tried before: advocating the roll-out of a VAT system in the United States. Now, a young member of the Democratic party is trying it again. Andrew Yang is proposing a basic income for American adults, which should be financed from the income generated by a 10 percent VAT.
As usual, these statements are often only used as tests, to see how hot or cold the political water is. Often, they are waved aside by critics, and described as ‘vague,’ ‘not feasible,’ and ‘will never work.’ This, despite VAT systems having been proven in more than 150 countries around the world, and in fact is often one of the largest sources of income for governments.
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Read the blog to find out more.
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