Major Legislative Changes Around the Globe · Major Legislative Changes Around the Globe ......

2017 IPT’s Value Added Tax Symposium

Major Legislative Changes Around the Globe

Réka Ökrös European VAT Director

Dover Corp.

Geneve, Switzerland [email protected]

Philippe Stephanny Senior Manager

KPMG LLP

Washington, DC [email protected]

mailto:[email protected]

mailto:[email protected]

2017 IPT’s Value Added Tax Symposium 2

Agenda — Overview of recent VAT/GST developments

— India GST reform

— VAT implementation in the Middle East

— Potential VAT consequences of Brexit

— Trends in VAT/GST compliance


Overview of

Recent VAT/GST

Developments


Recent VAT/GST developments

India:

- GST reform effective Jul. 2017

European Union:

- Single Digital Market proposal

in Dec. 2016

- Single VAT area proposed in

Sep 2017

GCC:

- Plans to introduce VAT by

2018

Russia:

- B2C ESS rules effective Jan.

2017

Australia:

- B2C ESS effective Jul. 2017

and low value import rules

effective Jul. 2018

United Kingdom:

- Referendum on leaving the

European Union (Jun. 23, 2016)

Taiwan:

- B2C ESS rules effective May

2017

Colombia:

- B2C ESS rules effective Jul.

2018

Serbia:


2017

Belarus:


2018

Thailand:

- B2C ESS rules effective May

2017

Spain:

- Introduction of “real time

reporting” effective Jul. 2017

Costa Rica:

- Proposed introduction of 15%

VAT


India GST Reform


India’s past indirect tax landscape Indirect Tax Taxing Authority Applicable on

Excise duty Federal government Manufacture of goods in India

Service tax Federal government Provision of taxable services

Central sales tax (CST) Federal government Inter-state sale of goods

VAT State governments Sale of goods within the state

Entry tax/octroi State governments/local

authorities

Entry of goods in state / local area for

consumption, use or sale

Credit set off possible No set off possible

Input VAT

Input CENVAT

(Service Tax & Excise Duty)

Input CST – Always a Cost

VAT Liability

CENVAT Liability

(Service Tax & Excise Duty)

CST liability

Input Credits


Overview of new indirect tax system

•Tax on all supplies

New GST

•Excise duty, CVD, SAD, Service tax, VAT, CST, Entry tax, Purchase tax, Entertainment Tax, Luxury Tax, Cesses

Subsumed

•Dual GST for Centre (CGST) and states (SGST), IGST on inter-state supplies

New mechanism

•Full credit of all GST paid, except cross credits between CGST and SGST

Credits

•State GST laws follow same model law approved in advance by GST Council

•Rules harmonized between Centre and states

•Streamlined administration

Streamlined approach

•Lower rates: 0%, 0.25%, 3%, 5%, and 12%

•Standard rate: 18%

•Higher rate: 28%

•Sin /demerit rate: 28% + Cess

Multiple rates


India’s dual GST system

Intra-state sale of goods Rate 100

Excise Duty 12.5

%

12.50

Value Added Tax (VAT) 5% 5.63

Total Invoice Value.. 118.1

3

Intra-state supply of

goods

Rate 100

CGST 9% 9

SGST 9% 9

Total Invoice Value.. 118

Inter-state sale of

goods

Rate 100

Excise Duty 12.5% 12.50

Central Sales Tax (CST) 2% 2.25

Total Invoice Value.. 114.75

Inter-state supply of

goods

Rate 100

IGST 18% 18

............ …. ….

Total Invoice Value.. 118

* Calculations are made assuming GST of 18% and state and Centre

share equally

Past Structure GST Structure


Place of supply – relevance

Supply of goods/service in the

course of inter-state trade or

commerce – subject to IGST

Determine the type of taxes applicable on a transaction

Supply where the location of the vendor

and the place of supply are in different

states

Supply where the location of the vendor

and the place of supply are in the

same state

Supply of goods/services in

the course of intra-state trade

or commerce – subject to

CGST and SGST

Any supply of goods or services imported in

India treated as an inter-State sale subject to

IGST


General place of supply rules Supplies of goods

— Where supply involves movement of goods

- Location where the goods arrive

— Where supply does not involve movement of goods

- Location where delivery takes place

— Where goods are assembled or installed at site

- Place of installation

— Where goods are supplied on board of means of transport

- Location at which goods are taken on board

Supplies of services

— General rules

— Made to a registered person (B2B): location of such person

— Made to a non-registered person (B2C)

- Location of the recipient where the address on record exists

- Location of the supplier in all other cases

— Law provides numerous exceptions, including

— Immovable property related services: where immovable property is located

— Restaurant, personal, and health services: place of performance

— Online information and database access or retrieval (OIDAR) services provided by a nonresident: location of recipient of services (2 of 7 conditions must be satisfied to consider a customer located in India)


Place of supply of goods – example

UP Supplier UP

Warehouse

State of Uttar Pradesh

State of Maharashtra

MH

Customer

Place of supply in UP because goods arrive in

UP

Intra-state trade (CGST + SGST) because

vendor and place of supply are in same state

Shipment

Sale


Place of supply of services – example

UP Supplier UP

Warehouse

State of Uttar Pradesh

State of Maharashtra

MH

Registered

customer

Place of supply in MH because service is

provided to a registered person in MH

Inter-state trade (IGST) because vendor state

and place of supply are different

Packaging services of goods in transit

Sale


GST credit mechanism Conditions for allowing credit

—Possession of a tax invoice, or other tax-paying document issued by a vendor

—Goods / services, on which tax credit is claimed, have been received

—Tax charged in respect of said supplies has been actually paid by the vendor to the Government

— Inward supply return has been submitted by the customer

—Payment for the invoice has been made to vendor within 180 days of date of invoice

—Credit not allowed in respect of restricted goods and services

—Credit to be allowed only upon online matching of transactions of purchase and sale

Proportionate credit allowed where a person is also engaged in non-taxable supplies


Order of utilization of GST credits

Output Liability (GST on sales)

IGST

CGST

SGST

Credit available for utilization

(1) IGST, (2) CGST, (3) SGST

(1)CGST, (2) IGST

(1) SGST, (2) IGST


GST credits – example

Order of utilization

State A State B

Inter-state purchase - 50

IGST @ 18% = 9

Local purchase - 50

CGST @ 9% = 4.5

SGST@ 9% = 4.5

Input

credits IGST 22.5

Customer

Ord

er

of

uti

liza

tio

n

Inter-state sale - 125 Company

Local sale - 150

CGST = 13.50

SGST = 13.50

Distributor

Output IGST 22.5

Less:

Input IGST 9

Input CGST 4.5

Input SGST 4.5

Net IGST

payable by

Company

4.5

CGST SGST

Output GST 13.5 13.5

Less: Input IGST 13.5

Input IGST 9

Net CGST payable by

Distributor

0

Net SGST payable by

Distributor

4.5


GST returns

File GSTR-9

—Purpose: Annual Return to be

uploaded along with Financial

Statement

—Process: Data to be fed

manually

—Due Date: By 31st Dec of next FY

File GSTR-1

—Purpose: Related to

Outward Supplies (sales)

—Process: Outward

Supplies data to be fed

manually

—Due Date: By 10th of next

month

File GSTR-2

—Purpose: Related to Inward

Supplies (purchases)

—Process: ITC data auto

populated from GSTR-1 of

the Suppliers


month

File GSTR-3

— Purpose: Final Return

— Process: Data to be auto

populated from GSTR-1 and

GSTR-2 and net tax payment

(if any) to be made

— Due Date: By 20th of next

month

File GSTR-6

—Purpose: Related to Input

Service Distribution

—Process: ITC data auto

populated from GSTR-1 of

the vendors


month

File GSTR-7

—Purpose: Related to tax

deduction at source

transactions

—Process: Data to be fed

manually


month


Post-implementation business update

– India GST Rather peculiar situation even post-GST, relying on «newspaper» communication in the absence of

official «notifications» on July 1, 2017

Many mid-size and small businesses were completely unprepared, compliance obligations are expected

to be more relaxed for them including quarterly filings etc.

Strong post-implemmentation lobbying activity to create special rules for certain sectors or regain tax

incentives,

- Transport companies are on strike to move diesel under the GST regime from excise

- Excise duty exemptions from previous regime will continue; despite that it is non-compliant with

GST-system

- Special Economic Zones are now eligible for refund but local tax officers have been creating «new

local rules» to deny refunds

- Changes of GST rates for various products and services

GST has replaced the previous tax regime but the underlying non-tax legislation and interpretation

has continued

Issues with GST refunds for export businesses

17


Post-implementation business update

– India GST Relief to exporters

Refund of IGST paid on goods exported outside India would begin to be paid as follows:

- From 10 October, 2017 for exports in July 2017,

- From 18 October, 2017 for exports in August, 2017,

- Refunds for other months would be handled expeditiously.

Refund of IGST paid on supplies made to SEZ and of input taxes on exports made under bond/ LUT

would be processed from 18 October, 2017.

Central and State GST authorities would be suitably empowered so that exporters get refunds from only

one authority.

Notification no. 37/2017, superseding notification no. 16/2017, extending the facility to export goods

under a letter of undertaking to all exporters. This amendment addresses a major issue in respect of a

blockage of funds for a number of exporters who were required to submit bonds, and bank guarantees

for exports of goods without payment of IGST.

18


VAT

Implementation in

the Middle East


Overview Gulf Cooperation Council

— Regional political organization consisting of 6 states in the Gulf

- Kingdom of Bahrain

- State of Kuwait

- Sultanate of Oman

- State of Qatar

- Kingdom of Saudi Arabia

- United Arab Emirates (UAE)

Unified Agreement for Valued Added Tax of the Cooperation Council of Arab States of the Gulf

— Published May 2017

— Establishes harmonized 5% VAT throughout the GCC with local country-specific rules

— Implementation expected in 2018

- KSA and UAE announced a Jan 1, 2018 date


Place of supply rules Place of supply of goods

— In general: where the goods are physically located at the time when the delivery to the customer begins

— Intra-GCC supplies – business-to-business (B2B): where the goods arrive

—Exceptions: intra-GCC supplies of goods – business-to-customer (B2C) above $100,000 in 12 months; supplies of oil, gas, water, and electricity

Place of supply of services

—B2B: where the customer is resident

—B2C: where the supplier is established

—Exceptions: hiring of vehicles; transportation services; real property related services; telecommunications and electronic services; and restaurant, cultural, and educational services


Zero-rated supplies The following sales are subject to VAT at 0% (i.e., no VAT is charged and VAT incurred in relation to these supplies remains deductible)

— International and intra-GCC transportation of goods and passengers

— Exports of goods, including related supplies

— Services provided to GCC nonresident that are used outside the GCC, unless a special sourcing rule applies

— Supply of investment gold, silver, and platinum

Member states may zero-rate the following supplies

— Oil sector and oil & gas derivatives sector

— Medicines and medical supplies based on a common list that is to be determined by the Committee of Health Ministers

— Basic food items based on a common list to be ratified across the GCC

— Supplies of certain vehicles, and related goods services, used for the transportation of goods and passengers


Exempt supplies The following supplies are VAT exempt (i.e., no VAT is charged

but VAT incurred in relation to these supplies is not deductible)

—Financial services carried out by authorized banks and financial

institutions

Member states may opt to exempt supplies (or refund VAT

paid) to the following persons

—Public bodies

—Charitable organizations

—Companies hosting international organizations

—Persons purchasing a residential property for personal use

—Farmers and fisherman not registered for tax


Exempt or zero-rated supplies Member states may opt to exempt or zero-rate the following

sectors

—Education

—Medical

—Real estate

—Local transport


VAT deduction Conditions

—VAT must be incurred on goods and services used in the

economic activity

—The taxpayer must hold a valid tax invoice or customs document

—Member states may adopt their own conditions (e.g., deny

deduction for certain expenses)

In case a taxpayer performs both taxable (i.e., 5% and 0%) and

exempt supplies, VAT incurred is only partially deductible

based on an apportionment method determined by member

states


Compliance Registration

— Required: annual taxable supplies above $100,000 (equivalent in local currency)

— Voluntary: annual taxable supplies between $50,000 and $100,000 (equivalent in local

currency)

— Possibility to create a VAT group between resident taxpayer

— No registration threshold applies to nonresidents

Returns

— Minimum period is 1 month, but each member state has discretion to extend it

Invoices

— Taxpayers are required to issue tax invoices for supplies of goods and services

(including deemed supplies)

— Member states determine content of tax invoices and may exempt from requirement to

issue tax invoices for VAT exempt supplies

Recordkeeping

— Tax invoices and accounting records must be kept for no less than 5 years

— For real estate properties, tax invoices and accounting records must be kept for 15

years


KSA v. UAE – Registration

Automatic registration already started for

large businesses (deadline is Dec. 20)

Small businesses with turnover of less

than SAR 1 million ($266,000) can delay

registration until January 1, 2019

Nonresidents must appoint a local tax

representative

Kingdom of Saudi Arabia

VAT registration started in September

2017

United Arab Emirates

Kingdom of Saudi Arabia & United Arab Emirates

Mandatory registration threshold will be approx. $100,000

Voluntary registration threshold will be approx. $50,000

VAT grouping (based on country specific conditions)

Businesses making zero-rated supplies are not required to register


KSA v. UAE – Zero-rated supplies

Export services conditions:

1. Services not sourced in GCC

2. Evidence that customer is resident

outside GCC

3. Benefit of services is not received in GCC

4. Services not related to tangible goods in

GCC

5. Vendor intends that services will be

consumed outside GCC


Newly constructed residential properties

(i.e., first time supply within 3 years of their

construction)

Certain education services, and relevant

goods and services

Healthcare services, and relevant goods

and services

Supplies of certain sea, air, and land

vehicles



Exports of goods and services

International transportation, and related supplies

Supplies of medicine and medical equipment

Certain investment grade precious metals


KSA v. UAE – Exempt supplies

N/A


Local passenger transport



Financial services (including life insurance and Islamic finance), excluding fee based

revenue

Residential real properties


KSA v. UAE – Miscellaneous VAT liability on imports

— In both countries VAT is due before goods are released

- Self-assessment under reverse charge mechanism for imports done by taxpayer in UAE

- Reverse charge applicable in KSA upon approval by tax authority

Compliance

— Standard VAT return filing period: quarterly

- In KSA, monthly for taxpayers with annual supplies above KSA 40,000,000 ($10,665,000)

- Other filing periods may be considered by UAE

Recordkeeping

— KSA requires tax invoices and records to be kept in Arabic in Kingdom for 6 years (15 years for immovable capital assets and 11 years for movable goods falling under the capital goods scheme)

- Electronic recordkeeping possible, but there must always be an access terminal in Kingdom

- Tax invoices must be issues for B2B and B2C supplies (simplified invoices may be issued for supplies below KSA 1,000)

- Invoices must be printed in Arabic and maintained in hard copy for 2 months


Preparing for VAT in the GCC as a

business EU type VAT model as GCC is a common economic zone. However, the EU VAT and

GCC`s VAT system are not identical

No precedent as no VAT system in place before in GCC

GCC level court of justice interpreting the GCC VAT Act and harmonizing the practice

is not forseen, while in the EU, the European Court of Jusctice is managing this

function

The local tax adminisitration may provide its views on various matters in the law but a

ruling system is not confirmed at this stage

Tax administration staff has very little previous tax experience, recruitment is on-going

Go-live

Initially, GCC countries had committed to giving businesses 18 months to achieve

compliance by 2018.

However, this time frame has now been compressed to four months or less, due to

delays in the ratification of the GCC VAT Framework Agreement.

Implementation regulations are not out yet.

Penalty regime is expected to be severe

31


Preparing for VAT in the GCC as a

business Pricing and VAT clauses

Where a contract is concluded prior to the introduction of VAT in respect of a supply

which is wholly or partly made after the introduction of VAT, and the contract does not

contain clauses relating to the VAT treatment of the supply, then consideration for the

supply will be treated as inclusive of VAT.

Uncertainity around the Free Zones VAT position

Free zones are special areas within the customs territory of each state — generally

seen as foreign territories for customs duty purposes.

Free zones established by national law and operating within a gated zone are likely to

be treated as outside the scope of GCC VAT.

Service free zones and special economic zones (SEZs) that are likely to be within the

GCC will be subject to VAT.

32


Potential VAT

Consequences of

Brexit


Brexit – Tax Consequences of EU Membership Once the UK notifies the EU of its decision to leave, a 2 year exit negotiation period will begin. The

outcome of this negotiation will potentially have a significant impact on the UK tax system, as European law

impacts UK tax law in two main ways. In a worse case scenario, the UK would cease to be a member of the

EU, if no agreement is reached during the 2 year period,

On June 23, 2016 the UK voted to leave the EU

• Means that UK domestic legislation cannot

conflict with principles of EU law, particularly

the “four fundamental freedoms”

• Direct taxes are said to be the competence

of each EU member state

• However, UK domestic tax legislation must

be in accordance with EU Treaty principles

• As such, UK direct taxation is subject to a

number of EU directives, EU principles and

the jurisdiction of the Court of Justice of the

European Union (‘CJEU’)

1 Supremacy of EU law (direct taxation)

• EU legislation & CJEU determinations are

the main sources of UK indirect tax

legislation

• Customs & excise duties as well as VAT

are all governed directly by EU legislation

• Membership of the EU gives UK

companies access to the internal market

(made up of 28 member states) and to a

wide network of preferential trade

agreements with third countries

2 Indirect taxes

Four Fundamental freedoms: Free movement of

Capital Services People

Goods

T

A

X

T

A

X


Timeline

2016

2017 2018 2019

UK completely removed

from EU membership?

Negotiations will start after the notification

Each EU regulated sector would face different

regulatory conditions

Companies benefiting from EU agreements would

see an impact on the conditions applying to their

access to the single market

Defining the terms of

the UK exit

Implementation of

changes once the

terms of agreement

are clarified

Brexit referendum

June 23 2016

2017 2018

GBP value, stock markets, GB S&P rating retrograded (AA), economic uncertainties, doubts

about the outcome of the negotiations, etc. Immediate impacts

2016 2017 2018 2019

Brexit notification

March 29, 2017


Brexit – VAT Consequences Issue Explanation Implications Post Brexit uncertainties

VAT is a tax

regulated by

consistent EU-

wide rules

• Intra-community

supplies of goods and

services will now be

treated as imports and

exports between UK

and EU

• UK rules and

interpretation may

diverge with EU over

time

• VAT leakage in certain supply

chains (import VAT v. intra-

Community acquisition)

• No EU reliefs available e.g.

triangulation relief

• Invoicing and systems

requirements would need to

change

• No more Intrastat and EC

Sales Lists

• No more data exchange via

VIES

• Unknown if UK will retain

VAT system in same form

and how it will interact with

EU counterparts

VAT is

governed by EU

legislation and

interpretation

• UK no longer subject

to challenges by

European Commission

or to the jurisdiction of

the CJEU

• UK corporates no longer

afforded protection under EU

VAT principles or a right to

appeal to ECJ

• Cannot rely on ECJ and EU

jurisprudence for VAT matters

• UK courts decide interpretation

of VAT legislation

• Greater autonomy over VAT

rates and reliefs

• Possible that UK would

simply continue to mirror

EU interpretations and take

into account EU judgments

• Value of established ECJ

case law


Brexit – VAT Consequences (Cont’d) Issue Explanation Implications Post Brexit uncertainties

Specific EU VAT

simplification

measures no

longer apply

• Should no longer apply:

• MOSS for electronic,

telecommunication

and broadcasting

services

• Simplified B2C

distance selling rules,

• Simplified cross-

border VAT refund

procedures

• Simplified

triangulation rules

• TOMS

• Any future EU wide

simplifications under

VAT Action Plan

• UK MOSS registered

businesses would fall

under Non-Union Scheme

+ non UK entities would

need to change

registration country

• Use of small value import

threshold simplification or

new system replacing it

• UK businesses will be

required to follow 13th

Directive refund

procedure

• UK intermediaries likely to

register in EU

• UK tour operators likely

be required to register in

EU

• Transition rules for MOSS

registered businesses

• Limitations to UK

businesses’ VAT refund

applications under 13th

Directive


Preparing for Brexit as a business On time delivery - Customs clearance

Non-EU customs clearance number today: 76 million p.a., estimated future transactions with EU countries: 100-300 million p.a.

- Will HMRC`s customs system be capable of handling the number of transactions?

Customs clearance system will be upgraded but upgrade was designed to faciliate current transactions flows and not a post-Brexit status

A bottleneck is expected at the borders of the UK on March 29, 2019

Authorized Economic Operator(AEO) status

- UK companies will loose this status in the EU with Brexit.

- AEO in the UK? Will I be granted one by March 29, 2019?

HS, classification, origin management of goods entering the UK from the EU or leaving for the EU

- Is your Intrastat data reliable?

- Do you have the resources capable of managing mass customs classification pre/post-Brexit?

- Do you have the systems in place to suport HS classification, origin management?

38


Preparing for Brexit as a business Pricing

Customs duty is anticipated to be levied at an average customs duty rate of 5% in case of hard Brexit

- Who will be responsible to import in the EU; in the UK?

- Incoterms agreed needs to be reviewed and renegotiated?

Example

UK company is selling on DDP EU terms: COGS is expected to increase, margin descrease.

How to compensate? Price increase?

EU company is sourcing from the EU on DAP EU terms.

How to avoid the increase? Alternative sourcing?

39


Preparing for Brexit as a business Supply chain reorganization

- Sales are managed through a UK disribution center for the EU

- UK based limited risk distributor in a central buy sell model (e.g. Swiss Principal) is also responsible for sales into Ireland

- Should a new disribution center in the EU be established?

- Should a new LRD in Ireland be established?

- Where to centralize import into the EU to avoid multiple VAT registrations? Global VAT representative schemes?

- Call of stocks held by EU entities in the UK

- VAT registration of EU established companies with call off stocks in the UK?

- After market (service and spare parts)

- Should a repair and spare parts center be located in the UK?

40


Trends in

VAT/GST

Compliance


Sistema Público de Escrituração Digital

(SPED) in Brazil

Immediate Supply of Information” (“SII”) in

Spain (Jul. 1 ,2017)

Online invoice reporting in Hungary (Ju. 1,

2018)

Use of D&A tools by tax

authorities

Requirement to provide

financial data in SAF-T and

similar file formats

Optional (e.g., EU, Canada,

Australia)

Mandatory (e.g., Latam, EU

public procurement)

Tax authority validation of e-

invoices (e.g., Latam)

Trends in VAT compliance

Real time

reporting

E-invoice

E-filing

E-audit


Other ways considered to improve VAT compliance •Purchaser pays VAT directly to a dedicated VAT bank account and not to the vendor

•e.g., Italy for public procurement and companies listed on Italian stock exchange; Romania for

VAT split payment

•Under reverse charge mechanism purchaser self-assesses VAT

•EU considering extending under certain conditions reverse charge mechanism to all B2B transactions

Generalized reverse charge

mechanism

• In addition to filing VAT returns, many jurisdictions require filing additional reports that allow a cross-check of information

•Examples include sales and purchases lists in several EU and Latam jurisdictions

Additional returns / reports

• “Blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions, but virtually everything of value”*

Use of blockchain technology

* Don & Alex Tapscott, Blockchain Revolution (2016)


Q&A

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