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Issue No. 6, 2013
VAT newsletter
Welcome to the sixth issue of Ernst & Young LLP’s 2013 VAT Newsletter for the US. These newsletters cover a variety of topics, as VAT can impact businesses in many ways. Approximately 150 countries around the world now have a VAT, goods and services tax (GST), consumption tax, service tax or similar VAT, and the laws and regulations are constantly changing. We use this newsletter as a way of informing you of significant changes taking place.
At the end of this newsletter you will find contact details for the senior members of our team who can help answer any questions you may have about the articles in this newsletter, or any other VAT questions.
We are interested in your feedback on the items covered and what topics you would like to see covered in the future. Please provide any feedback to Howard Lambert at [email protected].
GlobalEY’s report on managing indirect taxes in rapid-
growth markets
AmericasBahamas — Introduction of VAT
Costa Rica — Sales Tax — Amendment to input tax deduction regulated
US — VAT could lower corporate rates and exempt more from income tax
Asia-PacificMalaysia — GST Guides
EuropeEU — European Commission — 14 Member States to
pilot system of cross-border EU VAT rulings
EU — EU gives final approval to VAT rules to fight cross-border fraud schemes
EU — Opinion: Infringement cases — special regime for travel agents
Finland — Referral: Finland: Different VAT rates applied to printed books versus ebooks
Germany — New requirements for invoices
Germany — Partnerships as VAT group subsidiaries
Luxembourg — Right to deduct VAT
Montenegro — VAT rate increase
Netherlands — European Court of Justice case C-651/11 Staatssecretaris van Financiën v X BV
Poland — Various items
Portugal — Cash accounting introduced
Russia — Law offers 2014 Winter Olympic sponsors and broadcasters new VAT breaks
Middle East, India and AfricaIsrael — VAT rate increase
Palestine Autonomous Area — VAT rate increase
South Africa — National Treasury releases VAT proposals involving ecommerce
Introduction
Summary of items included in this newsletter
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Bahamas — Introduction of VATA value-added tax will be introduced on 1 July 2014 along with concurrent reductions in import duties and excise taxes. There is still much ambiguity in the details. As soon as we have clearer information, we will include in a future edition of this newsletter.
Costa Rica — Sales Tax — Amendment to input tax deduction regulatedCosta Rica’s Congress approved a major change regarding the computation of tax credits under the Sales Tax on 12 March 2013. This change will enter into force as soon as it is signed by the President of Costa Rica and then published in the Costa Rican Official Gazette, which can take from a couple of days to circa one month.
The new rule
Article 14 of the Sales Tax Act is entirely changed and now allows taxpayers to take a credit for the sales tax paid on the purchase of raw materials; supplies; packaging and label materials; machinery and equipment; electricity; and other goods and merchandise used in the production, sales and distribution phases of the final products sold to customers.
Implications
This modification significantly broadens the scope of tax credits under the Sales Tax in two ways.
Firstly, taxpayers are no longer restricted by the requirement to have the supplies and merchandise purchased physically incorporated into the final product, or service subject to sales tax, to get a tax credit.
AmericasGlobal
EY’s report on managing indirect taxes in rapid-growth marketsIn this report, we look at issues and opportunities that multinational companies face in doing business in emerging and fast-growing economies. Through interviews conducted with clients, investment agencies and EY Indirect Tax professionals who live and work in rapid-growth markets, we highlight some of the everyday challenges that businesses encounter and how they tackle them in practice. We draw on some of the lessons they have learned and the “leading practices” they have developed. We hope that you find this report interesting and useful for your business. The report can be accessed by clicking here.
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For example, the sales tax paid by a beverage manufacturer on the purchase of bottles, or cans used for the final product sold to customers, which did not give rise to a tax credit under the old Article 14, should now be fully creditable under the new version of Article 14.
Secondly, creditable sales tax paid is no longer limited to the production process, but also includes the whole economic cycle from manufacturing to selling activities.
US — VAT could lower corporate rates and exempt more from income taxAdvocates for a national consumption tax say lawmakers should incorporate it into their tax reform plans. Using a value-added tax would be revenue neutral and retain current progressivity in the tax code, says Michael Stumo, CEO for Coalition for a Prosperous America. Stumo says setting a VAT rate at 12.3% could lower the corporate tax rate to 15% from 35%, exempt the first USD100,000 in joint filer income or the first USD50,000 for individual filers from personal income taxes, and provide rebates for the working and non-working poor.
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Malaysia — GST guides Royal Malaysian Customs (RMC) has issued a number of GST guides since 2012 for public and industry comments. The GST guides issued are still in draft form and may be subject to changes before they are finalized.
The “draft” GST guides (with ”control and click” links) that have been published to date by the RMC are as follows:
General guide
General Guide
Industry guides
Manufacturing Sector
Warehousing Scheme
Duty Free Shop
Approved Jeweler Scheme
Approved Toll Manufacturer Scheme
Auctioneer
Approved Trader Scheme
Relief on Second-Hand Goods
Hire Purchase and Credit Sale
Leasing
Freight Transportation Guide
Passenger Transportation Guide
Insurance and Takaful
Money Lenders
Pawn Broking
Specific guides
Export
Transfer of a business as a going concern
Partial Exemption
Import
Designated Areas
Agent
Registration Guide
Tax Invoice & Record Keeping
Input Tax Guide
Guide on Supply
It should be noted that the proposed Goods and Services Tax (GST) has not been implemented in Malaysia. If implemented, GST will replace the current sales tax and service tax. The GST Bill, which was due for its first reading in the Malaysia Parliament on 16 December 2009, has been withdrawn for amendments after taking public feedback into consideration. The revised GST Bill would be introduced at a suitable time.
The deferment of the implementation of the GST is to enable the Malaysian Government to take he appropriate actions to ensure that laws and regulations relating to the implementation of the GST are all in place. At the same time, the Malaysian Government continues to engage inclusively with the public, in matters pertaining to the GST. The Government also has promised to take into account the interest and welfare of society to ensure that the implementation of the GST is well received.
Notwithstanding the deferment of the GST implementation, the Malaysian Government recognizes the importance of GST in ensuring a strong and sustainable fiscal position to support the long-term economic growth.”
However, to date, there is no indication as to when GST will be introduced.
Asia-Pacific
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Europe
EU — European Commission — 14 Member States to pilot system of cross-border EU VAT rulingsThe European Commission (EC) has announced that, within the framework of the EU VAT Forum, a group of 14 EU Member States have agreed to participate in a pilot system of EU VAT rulings involving complex cross-border transactions, between 1 June 2013 and 31 December 2013. The purpose of the open forum structure is to create a platform where business and national tax authorities’ subject-matter professionals can informally discuss tax administration issues in the field of VAT, with a view of achieving a smoother functioning of the current VAT system.
The 14 Member States involved are Belgium, Cyprus, Estonia, France, Hungary, Latvia, Lithuania, Malta, Netherlands, Portugal, Slovenia, Spain, Portugal and the United Kingdom.
The trial envisages that taxable persons planning complex cross-border transactions involving one or more of the participating Member States may request a cross-border ruling on the VAT treatment of the proposed transactions. The request should be made via the tax authority in the participating Member State where the taxable person is registered for VAT purposes, in line with the conditions governing national VAT rulings in that Member State (although the anticipated response times may be different). On the basis of such a request, the tax authorities of the Member States concerned will consult each other with a view of reaching a common approach on the VAT treatment of the proposed transactions, although there is no guarantee that a consensus will be reached in all cases. Taxable persons are invited to offer their comments and experiences of the trial, the outcome of which will be evaluated in 2014.
Further information on the trial (in terms of the conditions and procedures) can be accessed by clicking here.
EU — EU gives final approval to VAT rules to fight cross-border fraud schemesEU Member States gave final approval on 22 July 2013 to amendments to EU VAT rules, designed to give governments more flexibility to stamp out cross-border fraud that is estimated to cost the EU more than USD100 billion annually in lost revenue. “Fraud schemes evolve rapidly, giving rise to situations that require a rapid response,” the European Council of Ministers said in a statement released on 22 July 2013. “Until now, such situations have been tackled either by amendments to the Council Directive 2006/112/EC or through individual derogations granted to Member States. Both require a proposal from the European Commission and a unanimous decision by the European Council of Ministers, a process that can take several months.”
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EU — Opinion: Infringement cases — special regime for travel agentsOn 6 June 2013, the European Court of Justice (ECJ) released the Opinion of Advocate General Sharpston in infringement proceedings brought by the EC against eight Member States (Spain, Poland, Italy, Czech Republic, Greece, France, Finland and Portugal) regarding to their application of the special regime for travel agents. The case references are as follows:
C-189/11 European Commission v Spain
C-193/11 European Commission v Poland
C-236/11 European Commission v Italy
C-269/11 European Commission v Czech Republic
C-293/11 European Commission v Greece
C-296/11 European Commission v France
C-309/11 European Commission v Finland
C-450/11 European Commission v Portugal
Specifically, the EC considers that, in accordance with Articles 306 to 310 of the VAT Directive, the special regime for travel agents applies only to travel services which are supplied directly to travelers, such that it does not extend to cover transactions between travel agencies/tour operators, or services supplied to other businesses for subsequent resale.
On this basis, the EC considers that, insofar as each of these Member States apply the special regime for travel agents to travel services supplied to persons other than travelers, their application of that regime is incompatible with EU law.
In relation to Spain alone, the EC also objected to three further aspects of its domestic application of the special regime for travel agents concerning, respectively, the exclusion from the special regime for travel agents of situations in which retail travel agents sell travel packages organized by wholesale agents; the statement of the amount of VAT included in the price of a travel service; and the determination by travel agents of their taxable amount globally for each tax period.
On the one issue common to all eight Member States, the Advocate General concluded that the special regime for travel agents, as set out in Articles 306 to 310 of the VAT Directive, applies regardless of whether the customer is actually the traveler or not.
In finding for the Member States, the Advocate General considered that the European Court should dismiss the EC’s action in this regard. In regard to the three additional issues specific to Spain, the Advocate General considered that the European Court should uphold each of the EC’s actions.
We wait to see if the ECJ follows the Advocate General’s Opinion.
The full Opinion can be accessed by clicking here.
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Finland — Referral: Finland: Different VAT rates applied to printed books versus ebooksThe European Court website shows a Finnish referral, C-219/13 K Oy V Other parties: Veronsaajien oikeudenvalvontayksikkö, Valtiovarainministeriö asking whether national legislation that applies different VAT rates to printed books and books supplied on other physical formats (e.g., CD or CD-ROM) is compatible with EU law.
The questions referred are:
Do the first subparagraph of Article 98(2) and point 6 of Annex III (as that point appears in Council Directive 2009/47/EC to Council Directive 2006/112/EC “on the common system of VAT”), when the principle of tax neutrality is taken into account, preclude national legislation under which a reduced rate of VAT is applied to printed books, but the standard rate of tax is applied to books on other physical means of support such as a CD, CD-ROM or memory stick?
Concerning the answer given to the above question:
• Is it significant whether a book is intended to be read or to be listened to (an audio book)?
• Is it significant whether there exists a printed book with the same content as a book or audio book on a CD, CD-ROM, memory stick or other equivalent physical means of support?
• Is it significant whether a book on a physical means of support other than paper can exploit technical features provided by that means of support, such as search functions?
Germany — New requirements for invoicesThe Mutual Assistance Implementation Act (JStG — Light) amends a range of regulations governing invoices. The Act has been adopted by both houses of the German parliament and awaits only the execution and promulgation in order to enter into force.
The new law will introduce changes to the requirements for a German VAT invoice and may result in immediate system changes to your current German VAT invoice format.
Background
Parliamentary hurdles have been overcome and the EU Invoicing Directive (2010/45/EU) has been implemented into German VAT Law. It only remains for the German Federal President to execute it and its promulgation in the official gazette. The new requirements for invoices will apply from the day after the law is enacted.
Applicable invoice regulations
When implementing the new Art. 219a of the VAT System Directive, § 14 subs. 7 of the German VAT Act (UStG) was introduced. Where an entity with its registered office abroad renders services or supplies to a German entity for which the tax burden is transferred to the recipient of the service or supply, the requirements for the invoices are governed by the regulations of the country where the entity rendering the service or supply resides. However, this does not apply if the recipient of the service or supply issues the invoice (Gutschrift = self-billed invoice). Since the provisions of the directive are also to be implemented in the other EU Member States, the German entities that render advisory services to clients in numerous EU Member States must only comply with the German
VAT Newsletter8
regulations in these cases. At the same time, the law provides that foreign entities rendering services may invoice such revenues according to their local law.
Statement “Gutschrift” (self-billed invoice)
In § 14 subs. 4 s. 1 UStG, a new no. 10 has been added. This requires that when the receiver of a service or supply issues the invoice the receiver must explicitly declare a “Gutschrift.”
If the self-billed invoice is issued in another language, then the term “Gutschrift” should be added in German to the invoice. Since according to §15 subs. 1 no. 1 UStG, an invoice issued according to §14, 14a UStG is required for deduction of input tax, the new information states that it is a necessary requirement in order to avoid forfeiting input tax deductions.
The amendment also has additional consequences. Use of the term “Gutschrift” is understood in a variety of ways in Germany. For VAT purposes, one understands a Gutschrift as an invoice document that is issued by the recipient of the service or supply (self-billed invoice). In accounting, it is understood as a document with which the supplier either cancels an invoice issued or returns a credit for part of the remuneration. Since such a document under some circumstances can confusingly resemble an invoice, it is important in the future to ensure that another form of document is used for this type of transaction. Otherwise, there is a risk that the tax authorities will treat the document as an invoice in terms of § 14c UStG and deem the VAT stated as owed by the recipient/supposed performer. In this situation, the terms “Entgeltminderungsbeleg” (remuneration reduction voucher) or just “Stornobeleg” (cancellation voucher) would be better.
Statement “Steuerschuldnerschaft des Leistungsempfängers” (reverse charge)
On the day after the JStG – Light is promulgated, the explicit declaration that the reverse charge scheme applies (Steuerschuldnerschaft des Leistungsempfängers = reverse charge) will be mandatory for all cases in which the service or supply rendered is conveyed to a domestic recipient or one in another EU Member State. The revised § 14a subs. 1 s. 1 UStG applies here to the case where a service or supply is rendered to an entity in another EU Member State if the VAT in the recipient country is owed by the recipient of the service or the supply.
In addition to the services rendered to an entity domiciled in another EU member state (basic case according to § 3a subs. 2 UStG), this pertains to such services subject to a special reverse charge rule in the relevant Member State, e.g., some Member States apply the reverse charge method even for purely domestic suppliers by a non-resident entity or, as in Germany, for example, for certain waste, scrap or mobile radio devices — to certain revenues between domestic entities. Even in these cases, the notice on the invoice would be obligatory. Revised § 14a subs. 5 UStG governs the same obligation for cases covered by §13b subs 2 no. 2.10 UStG in which the service or supply stated is conveyed to the recipient. However, just as it was unnecessary under the old law, a German recipient is still not required to make these statements to qualify for input tax deduction.
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Other invoice information in special cases
If a service is deemed a travel service subject to the special rule of § 25 UStG, the invoice must contain the information “Sonderregelung für Reisebüros” (special rule for travel agencies).
In cases where taxation is differentiated in accordance with § 25a UStG, depending on the actual transaction, the following information is needed:
• Used items/special rule
• Art works/special rule
• Collectibles and antiques/special rule
Time limit for issuing invoice
Until now, in certain cases, § 14 subs. 2 UStG provided for supplies or services that were performed in Germany (only) required that an invoice be issued within six months.
The JStG – Light introduces two additional time limits. The invoice for a service rendered to an entity resident in another EU Member State, where the recipient is liable for tax on this service pursuant to the revised § 14a subs. 1 s. 2 UStG, is to be issued by the 15th day of the month subsequent to inception of the revenue.
The same applies to an invoice for an intra-community delivery (§ 14a subs 3 UStG revised).
Conclusion
The creation of uniform provisions, especially for invoice information, is intended as a simplification for enterprises.
For example, a German entity that supplies services or goods to clients in a number of Member States has to satisfy the German regulations for preparation of a correct invoice.
Unfortunately, after all the debate in the legislative process, the changes will take effect on the day after the law is promulgated. It has not yet been
determined when this will occur. Thus, again, there is no planning certainty although the amendments will require a substantial intervention in the invoicing process. There is currently no indication that the German Federal Finance Ministry will issue any non-objection rules applicable for six months, as demanded by the business community.
It is advisable to carefully monitor the last stages of the legislative process in order to note the precise day on which the new rules enter into force. As information comes forth, we will include in a future edition of this newsletter.
Germany — Partnerships as VAT group subsidiariesContrary to the wording of the German VAT Act and the opinion of the tax authority, the Munich Tax Court has decided that commercial partnerships in the form of the GmbH & Co. KG can also become integrated VAT group subsidiaries in VAT groups (Decision of 13 March 2013, Ref. 3 K 235/10, published on 10 July 2013).
Background
The German VAT Code permits legal entities to be considered as controlled VAT group subsidiaries only. In principle, any company with a business activity is to be treated as an independent taxable person for VAT on a stand-alone basis, regardless of whether it is a partnership or legal entity.
Section 2, paragraph 2, number 2 of the German VAT Act stipulates that legal entities (e.g., stock corporations and corporations) that are integrated financially, economically and organizationally into another taxable person are not independent. The VAT group scheme is compulsory if the conditions are satisfied, i.e., a special application is not required. As a result, the dependent entities and the taxable person that are integrated are considered as one single taxable person only (VAT group).
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Beside the declaration of all output and input VAT amounts of all VAT group members in one single VAT return, the VAT group means that all supplies between the VAT group members are not subject to VAT, i.e., they are disregarded. As a result, the VAT group allows entities that have no, or limited, input VAT recovery (e.g., because of VAT exempt supplies), to reduce the costs resulting from non-recoverable input VAT on intra-VAT group supplies.
Furthermore, a VAT group may lead to substantial cash flow advantages, since an interim financing of VAT and input VAT for supplies exchanged between the VAT group members is not required.
Decision of the Munich Tax Court
The Munich Tax Court decided that the aforementioned limitation of a VAT group to legal entities as subordinated, controlled companies only, is impermissible.
According to the tax court, partnerships with legal characteristics in the form of the GmbH & Co. KG can also become integrated VAT group subsidiaries.
The decision is based on the circumstances that the EU VAT law (6th Directive, now VAT directive) does not impose a limitation that VAT group subsidiaries should be legal entities only, but uses the broader term “persons.” Also, no other valid reasons for limitation are apparent. As a result, it was concluded that the taxpayer may choose to apply the more favorable principles of the EU VAT law.
The tax office has appealed against the judgment and the case is now pending with the Federal Fiscal Court (Ref. V R 25/13). We must wait to see whether the Federal Fiscal Court confirms the judgment of the Munich Tax Court before we conclude on this matter. It may also be that the Federal Fiscal Court refers the case to the European Court of Justice for a decision.
Action required now
If the judgment is confirmed by the Federal Fiscal Court and possibly the ECJ, it may be possible to apply, retrospectively, the more favorable principle of EU law, or the current law. Should the inclusion of a partnership not be beneficial for the taxpayer, one may still rely on the current wording of the German VAT law and not report a VAT group.
Since the German VAT Act is very clear in its wording it is very unlikely that the tax authority itself will ask for an inclusion of partnerships with legal characteristics in the form of the GmbH & Co. KG into a VAT group. This may only be the case upon an amendment of the German VAT Act, which is not anticipated in the foreseeable future.
To the extent partnerships may be considered as potential VAT group subsidiaries, the positive VAT and interest effects that may result from applying the VAT group scheme retrospectively should be analyzed now.
Even if the conditions for a VAT group (economic, financial and organizational integration) are not satisfied yet, it could be advantageous to develop satisfactory conditions now, in order to ensure that the opportunity to reduce costs from non-recoverable input VAT may be maximized in the future.
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Before any requests for the application of the VAT group scheme are filed with the German tax authority, or measures are undertaken to satisfy the conditions for a VAT group, analyzing whether the VAT group scheme bears any negative VAT or interest effects, is recommended. In this context, secondary liability risks for taxes in accordance with Sec. 73 of the General Tax Code and potential effects under insolvency law should be considered.
Finally, it must be noted that the judgment was made in a case concerning a GmbH & Co. KG. It should not automatically be concluded that the principles apply to any other partnership as well (e.g., partnerships with natural persons as partners only).
Luxembourg — Right to deduct VATOn 15 May 2013, the Luxembourg tax authority issued a circular regarding the calculation of deductible VAT.
Currently, the most commonly used method to calculate deductible VAT is the general pro rata method (where the numerator is the total taxable transactions and the denominator is the taxable and exempt transactions). However, in the circular, the Luxembourg tax authorities have stated that the following methods should now become the principal methods:
• The “direct allocation“ method, which requires the allocation of costs between activities allowing the right to recover VAT (taxable sales) and other activities (non-taxable sales).
• The “special pro rata” method, which is based on appropriate allocation calculations (e.g., head count, floor space)
The general pro rata method will now become the residual method for general costs that cannot be attributed when using the other calculations listed above. These changes have immediate effect.
As a result of these changes, Luxembourg businesses that have both exempt and taxable activities should review their VAT deduction methodology immediately. For further information, read the EYSD Limited and Partners SCS Tax Alert here.
FCPs and management companies — double taxation
Fonds commun de placement (FCPs or common funds) are open-ended collective investment funds that are legally defined as a co-proprietorship. Therefore, they have no legal personality and, as a consequence, are not viewed as VAT-taxable persons in Luxembourg. Consequently, they are not liable to register for VAT in Luxembourg. However, this is not the case in other Member States, such as the UK and Ireland, where the FCP is seen as a taxable person.
Accordingly, double taxation issues arise when the FCP and the management company are not located in the same Member State, as one Member State may consider that the FCP should pay the VAT on services received from foreign providers according to the reverse charge mechanism, while the other Member State considers that the management company is liable for the VAT. This issue has been discussed in Luxembourg and at the European Commission, and we anticipate that it will be the subject of further discussion.
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Montenegro — VAT rate increase The Parliament of Montenegro, at its session on 19 June 2013, has adopted the Law on Amendments to the VAT Law which comes into force after eight days following the day of publishing in the Official Gazette of Montenegro.
The Law has been published in the Official Gazette of Montenegro number 29/13 from 22 June 2013 and entered into force on 1 July 2013. One of the main changes introduced by this Law is that the general VAT rate was increased from 17% to 19%.
The reduced rate of 7%, applicable to the supply of basic food products, hotel accommodation services, public transport services, maintenance services provided aboard of ships and vessels, authorship fees and computer equipment, remains the same.
Netherlands — European Court of Justice case C-651/11 Staatssecretaris van Financiën v X BVThe European Court of Justice (ECJ) released its judgment on 30 May 2013 in this Dutch referral asking whether, following the ECJ’s earlier judgment in the case of SKF (C-29/08), the disposal of a minority (30%) shareholding in a company can be regarded as a transfer of a going concern (TOGC), for VAT purposes, thereby enabling input tax deduction on associated costs. This case proceeded to judgment without a written Advocate General’s Opinion.
In 1996, X held 30% of the shares in A BV (A), a company carrying on business in the field of automation. The remaining shares in A were held by B Holding BV (20.01%), X1 Beheer BV (30%) and C BV (19.99%). As a member of the Management Board, X, like B Holding BV and XI Beheer BV, carried out management work for A in return for a contractually agreed remuneration.
At the end of 1996, X and the other holders of shares in A sold their shares to D Plc. In connection with that sale, the management work for A came to an end and X resigned from A’s Management Board. A number of services were supplied, and invoiced with VAT, to X in conjunction with that sale of shares. X deducted that VAT in its VAT returns, on the basis that the disposal of its shareholding constituted a TOGC and that the costs incurred by X in connection with that transaction had to be considered part of the general costs associated with its entire economic activity and were, therefore, fully deductible. The tax authorities rejected that deduction and issued an assessment.
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The ECJ held that the transfer of 30% of shares in a company, that also supplies services to the acquirer, is not capable of being treated as a VAT-free TOGC. However, in line with SKF, the ECJ did not rule out the possibility that a transfer of 100% of a shareholding, may, in some circumstances, qualify as equivalent to a TOGC. In particular, this would require that all of the elements transferred were sufficient to allow the underlying business to be carried on post TOGC.
Using established principles, the ECJ held that the supply of shares in this case is exempt under Article 13B(d)(5) of the Sixth Directive. Based on this conclusion, the question to consider then became whether X has a right to deduct VAT on the costs incurred in relation to the share disposal. In providing guidance on the right to deduct, the European Court confirms that the right to deduct exists where the input transactions effected have a direct and immediate link with taxable output transactions. Specifically, the European Court asks whether the VAT incurred by X relates to the exempt disposal of shares, and was incorporated into the price of the shares (in which case the VAT would not be recoverable) or whether the VAT incurred on costs relates to the underlying taxable business. This question was referred back to the referring court for further consideration.
The Court summary judgment reads:
“Articles 5(8) and/or 6(5) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment must be interpreted as meaning that the disposal of 30% of the shares in a company to which the transferor supplies services that are subject to VAT does not amount to the transfer of a totality of assets or services or part thereof within the meaning of those provisions, irrespective of the fact that the other shareholders transfer all the other shares in that company to the same person at practically the same time and that that disposal is closely linked to management activities carried out for that company.”
The full judgment can be accessed by clicking here.
Editor’s comment: Interestingly, the European Court did not rule out that the fact that the transfer of 100% of a shareholding could qualify as equivalent to a TOGC, in line with SKF. However, further litigation will be needed, and we can expect continued resistance from tax authorities to this. It seems likely that the Dutch Court will rule that the VAT on costs relates to an exempt share sale and that the VAT incurred on costs is irrecoverable. However, we await the national decision in this respect. Further, the references here to pricing of the shares by reference to associated costs is also an ongoing debate that may become clearer as part of the British Airports Authority litigation.
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Poland — Various items
Polish court judgments following BGZ Leasing (C-224/11)
In its judgment in BGZ Leasing (C-224/11), delivered on 17 January 2013, the CJEU concluded that leasing services supplied together with insurance services, in general, do not constitute a composite supply from a VAT perspective. As a result, a recharge of the exact cost of an insurance service to the lessee constitutes an insurance transaction that can benefit from the VAT exemption.
Since the release of that decision, the Polish administrative courts (including the Supreme Administrative Court) have followed suit in finding that, in Poland, the recharge of insurance services in connection with the provision of leasing services is to be treated as VAT exempt.
It should be noted that this approach offers taxpayers, who previously treated insurance transactions as subject to VAT at the standard rate (23% in Poland), an opportunity to recover this overpaid VAT.
VAT exemption for fund management services – amendment to VAT legislation
Poland revoked its VAT legislation relating to the definition of exempt management services, which allowed an exemption for pension fund management, with effect from 1 April 2013.
Until the amendments came into force in April, the Polish tax authorities and administrative courts took a restrictive approach to the definition of management and, therefore, most fund-related services were treated as being subject to VAT at the standard rate (23%).
Following the enactment of the amendments, however, the Polish tax authorities appear to have adopted an approach that is in line with the CJEU case law. Therefore, the scope of activities relating to fund management services, which are now being recognized as VAT exempt, is broader (e.g., bookkeeping services provided to funds are now treated as VAT exempt).
As a result of the amendments, funds and fund managers should consider reviewing the VAT treatment of services provided in connection with the management of funds.
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Cost sharing in Poland — further developments
Provisions relating to the VAT cost-sharing exemption (CSE) were implemented into Polish VAT law on 1 January 2011. However, the Polish tax authorities have often disallowed the application of the CSE by indicating, in the majority of cases, that such an exemption would lead to distortion of competition.
However, recently, the Polish Administrative Court has ruled that, in order to deny the application of the CSE, the Polish tax authorities must specifically indicate how services provided by an independent group of persons that are subject to the CSE would distort competition.
It is expected that, as a result of this decision and other similar cases, the Polish tax authorities will relax their approach to application of the CSE.
Credit card support services
The Polish Administrative Court has recently confirmed that credit card support services provided by MasterCard (e.g., authorization requests, compliant support and card cancellation) are VAT exempt.
The tax authorities argued that only some of these types of services could benefit from VAT exemption, on the basis that the rest of the services are merely “technical” (i.e., automated) activities that should be subject to VAT. The Administrative Court did not agree with the tax authorities’ view, and found that the card support services form a single composite supply of support services for payment transactions and, as a result, are VAT exempt.
Portugal — Cash accounting introducedThe cash accounting regime came into force on 1 October 2013.
VAT taxpayers with a turnover not exceeding EUR500,000 (USD660,000 approximately) will be able to opt for a special VAT cash accounting regime, under which they would pay VAT due on sales, only upon payment of an invoice from their customer, and they will be able to claim VAT on suppliers’ invoices when they have paid them.
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Russia — Law offers 2014 Winter Olympic sponsors and broadcasters new VAT breaksRussian President Vladimir Putin signed a law granting VAT breaks to partners of the International Olympic Committee (IOC) ahead of the 2014 Winter Games in Sochi. The law amends the code to stipulate that foreign organizers of the XXII Winter Olympic Games and the XI Paralympic Games, marketing partners of the IOC and official Olympic broadcasters are not considered as withholding agents for Russian VAT purposes. IOC’s website lists corporations such as Coca-Cola Co., General Electric, McDonald’s, Procter & Gamble and Visa as members of the Olympic partner program (TOP). The stipulation covers the purchase of goods, service, and property rights in connection with the games.
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Israel — VAT rate increaseOn 29 May 2013, the Parliament approved a raise in the standard rate of VAT rate on trade and imports of goods from 17% to 18%. The new rate became effective as of 2 June 2013.
Palestine Autonomous Area — VAT rate increaseThe Palestine Authority increased the standard rate of VAT from 17% to 18% after a similar increase in the Israeli standard T rate of VAT — see above. Under the terms of the 1994 Paris Economic Agreement between the Palestinian Authority and the Israeli Government, the difference between their respective VAT rates should not be more than 2 percentage points.
South Africa — National Treasury releases VAT proposals involving ecommerceOn 4 July 2013, the South African National Treasury released proposed legislation that seeks to impose VAT for cross-border ecommerce. The proposed legislation is set to be effective from 1 January 2014, if approved by Parliament.
The main purpose of the amendment is to ensure that VAT is properly collected when ecommerce businesses (e.g., for books, music and DVDs) offer cross-border benefits to South African residents. More specifically, any foreign entity will be required to register for VAT within South Africa if that entity supplies ecommerce services to South African residents or that entity receives payments originating from a South African bank.
Unfortunately, the proposed legislation may have unintended impact consequences for foreign-owned South African entities. The rule literally applies to any “placing of an order and delivery of those services” if made “electronically.” Given the flow of electronic activities between group members, it is unclear whether these engagements would be viewed as the placing of “an order.” If so, the VAT would presumably fall on the deemed arm’s-length value of those services, triggering cash-flow issues between group members on a monthly or a bi-monthly basis. It is accordingly suggested that foreign-owned entities review their ecommerce flows and send comments to the National Treasury seeking a narrowing of the amendment.
Middle East, India and Africa
US VAT Practice Leaders:
Karen Christie New York, NY +1 212 773 5552 [email protected]
Ronnie Dassen New York, NY +1 212 773 6458 [email protected]
Anne Freden San Francisco, CA +1 415 894 8732 [email protected]
Michael Leightman Houston, TX +1 713 750 1335 [email protected]
Regional resources:
Ela Choina Chicago, IL +1 312 879 2935 [email protected]
Alex Cotopoulis New York, NY +1 212 773 8216 [email protected]
Maria Hevia Alvarez New York, NY +1 648 831 2187 [email protected]
Corin Hobbs San Jose, CA +1 408 947 6808 [email protected]
Deirdre Hogan San Francisco, CA +1 415 894 4926 [email protected]
Howard Lambert Irvine, CA +1 949 437 0461 [email protected]
Steve Patton New York, NY +1 212 773 2827 [email protected]
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