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February 4

TaxTech – February 4th, 2019

Brexit – Consequences for VAT refunds

The United Kingdom and Prime Minister May, confirmed once again, that the UK is still planning to leave the European Union on  March 29th, 2019. As long as there is no agreement in place, the EU VAT refund procedure will in principle stop for VAT refund applications to and from the UK and other EU Member States, as laid out in Directive 2008/9/EC and as in effect today. Therefore, businesses established in other EU countries will not be able to submit UK VAT refund applications through their respective countries’ portals. Likewise, UK businesses can no longer submit EU VAT reclaims through the HMRC portal.

Post-Brexit, UK businesses will have to switch to the paper-based ‘13th Directive’ claim system that all other non-EU businesses are required to use today. Similarly, EU businesses must submit paper invoices and claims based on the UK rules for UK VAT refunds to foreign businesses (after Brexit that includes all EU Member States).

Given the current uncertainty, it is best to submit 2018 claims before March 29th still, 2019. In our blog, we will publish a full article on how to get ready for the Brexit and safeguard your VAT refunds.

 

Poland – Split payment mechanism

As of July 1st, 2019, Poland will introduce a mandatory split-payment mechanism for VAT. Poland is not the first European Union country to do this: Romania already has this mechanism in place, as well as Italy for certain types of transactions. Some other countries such as the UK and Singapore are considering implementing the split payment mechanism as well.

The EU Commission is keeping a close look at these mechanisms, as they do not want this to become an overly-heavy administrative burden for taxpayers. The EU Commission therefore already demanded that Romania change or abolish its split payment regime.

More information regarding this mechanism in Poland can be found HERE.

 

EU – Equal treatment for electronic publications and reaction from the EU Parliament to quick fixes

In our earlier newsletters, we informed you that a European Union Council Directive was released to align the VAT treatment of electronic publications to that of physical publications. Various EU countries immediately implemented a change, allowing suppliers of digital publications to apply a reduced rate already as of January 1st, 2019.

Some countries are a little behind, for example, the Netherlands, where the Ministry of Finance is struggling with the definition of electronically delivered books, newspapers and magazines, and has now entered into exploratory discussions with the industry. A rate change is therefore expected only by January 1st, 2020.

Meanwhile, the European Parliament published a report on the proposal for detailed rules of a definitive VAT system that was published by the European Commission in 2018. In the Report, the European Parliament suggests certain amendments to the original proposal.

For businesses, this means that there may be more uncertainty about the implementation and interpretation of these quick fixes. We will certainly hear more about the developments this year.

 

Japan – Standard VAT rate increases to 10%, but a reduced rate of 8% remains

The increase in Japan’s consumption tax rate as of October 1st, 2019 from 8% to 10% was already planned a long time ago. In fact, the first part of the increase, from 5% to 8%, was already enacted on April 1st, 2014.

However, that earlier increase had quite a (negative) impact on the Japanese economy. Therefore, the Japanese government announced that besides the increase from 8% to 10%, a reduced VAT rate of 8% would be introduced. This reduced rate will apply to basic foodstuffs.

 

Russia – Electronic services and VAT registration

If you are providing electronic services to customers in Russia, you may have to register for VAT. The deadline for registration is February 15th, 2019.

As of  January 1st, 2019, non-Russian entities providing electronic services to Russian companies (B2B supplies) must account for and pay VAT. For this, foreign suppliers have to register for VAT purposes in Russia and submit quarterly VAT returns. Foreign companies that are already registered and pay VAT on electronic services supplied to Russian individuals will likewise have to calculate and pay VAT. Foreign companies that are VAT-registered must calculate VAT at the rate of 20% (standard rate as of  January 1st,2019).

Italy – e-invoicing

Per January 1st, 2019, e-invoicing has become mandatory for B2B and B2C among Italian operators. The Italian tax authorities are providing many clarifications on various matters related to the e-invoicing rules. A summary of the most recent clarifications can be found here.

Hungary – VAT refunds on bad debts

If you charged VAT on an invoice, and your customer pays late, it’s a pity. But if he doesn’t pay at all, the question arises if you can (at least) claim back the VAT that you have charged but never received. Countries may have specific rules for the collection of VAT on bad debts, but these rules are not the same everywhere. In some countries, the VAT can be claimed back automatically after a certain period of time (e.g. six months in the UK, or one year in the Netherlands). However, in most countries, you must have evidence that your customer is bankrupt, or at least that your customer is unwilling to pay.

In some countries, including Hungary, there are no specific rules for claiming back VAT on bad debts. However, even without specific rules, it now seems that on the basis of a case before the European Court of Justice, Enzo di Maura (C-246/16), this may change. In that case, the ECJ determined that taxpayers should have the ability to claim back VAT on bad debts.

So even without specific rules, you may want to check if you have any bad debts where you have outstanding VAT.

India – VAT refunds delayed because of lack of knowledge

In 2017, India introduced a brand-new VAT system. Now, 20 months later, it seems that the Indian authorities are having difficulties dealing with VAT refunds.

The authorities claim that this is caused by a large number of claims resulting in high revenue leakage and denial of input tax refunds to eligible taxpayers.

The VAT system and rules in India are certainly not the easiest to understand and interpret. The Indian government, therefore, publishes guides on how to interpret the rules. The latest guide, applicable as of February 1st, 2019, can be found HERE.

United States – Immersed in the implementation of Wayfair-decision

The Wayfair-decision from mid-2018 is still making waves within the US sales tax ecosystem. In Wayfair, the US Supreme Court overruled the physical presence nexus standard regarding state and local taxation of remote sales. Soon after the Supreme Court issued its decision, various states began issuing guidance or statements or began to take legislative actions in response to the Wayfair case.

The majority of states now require companies that meet a specific dollar or transaction threshold in their state to collect sales tax.

Links to the current bills and rules can be found HERE.

European Court of Justice – Overview of case-law

We had two interesting cases before the European Court of Justice in the past couple of weeks. A judgement in the Morgan Stanley case, and an opinion in a very interesting customs case.

  • The Advocate General gave its opinion in Case C‑1/18 (SIA Oribalt Riga), which deals with the question of how the customs value must be determined. Although customs related, the customs value is also important for VAT, as it is the basis for the value to be used upon the importation of goods. There are different methods for calculating the customs value, whereby the transaction value method is the default method for customs valuation. In this case, there is no transaction value at the moment of import, as there is only a pro-forma invoice available. The importer (SIA Oribalt Riga) argues that the imported goods should be valued on the basis of the transaction value of identical or similar goods, whereas the Customs authorities believe that the goods should be valued on the basis of the unit price at which the imported goods are eventually sold, without taking into account the discounts. The Advocate General is of the opinion that in order to determine and identify ‘similar goods,’ customs authorities are to consider primarily whether the goods perform the same functions and whether they are commercially interchangeable.

Furthermore, for determining the customs value, any discounts granted at a later stage cannot be taken into account. A summary of the case can be found HERE. The full opinion can be found HERE.

  • The ECJ gave its judgment in Case C‑165/17 (Morgan Stanley & Co International plc), in which it answers the question of whether the pro rata of a head-office also applies to a branch (fixed establishment) of that head-office and vice versa. The French branch of Morgan Stanley, a financial services business with a UK head office, has taxable income (banking and financial operations that the branch opted to tax) and income that is outside the scope of VAT (between the head office and the branch). The branch had been recovering the French input tax in full in accordance with the recovery rate of its French branch. The French tax authorities denied the input VAT deduction in as far as the branch had activities carried out for its head office. In short, the CJEU concluded that the VAT recovery of those activities in both the Member State of the head office and the Member State of the branch must be considered. The CJEU addressed two scenarios:
    – Exclusive use of the costs by the head office – in which case the VAT recovery by the branch is in proportion to the extent those supplies give right to VAT recovery in both jurisdictions.
    Partial use of the costs by the head office and partial use by the branch – in this case, the branch must determine the recoverable amount by adding the total turnover of the head office to the denominator of the branch’s VAT recovery calculation, and adding only the amount of that turnover, giving right to recovery in both jurisdictions to the numerator of that same calculation. A summary of the case can be found HERE. The full judgement can be found HERE.

Deloitte’s Tech Trends 2019 – Beyond the digital frontier

Some technology trends are becoming integral to business and IT strategies.
The eight chapters of Tech Trends 2019 look to guide CIOs through today’s most promising trends, with an eye toward innovation and growth. The publication spotlights emerging trends that may well offer new avenues for pursuing strategic ambitions and understanding how they function, together and separately.

See you in two weeks!

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