Country updates

“ Recent media reports indicate that the global economy is improving. This development has, however, not halted the reliance by governments around the world on indirect taxes.”

In this issue Philip Robinson Global Director — Indirect Tax

Themes and trends

32importers?

34 Trial measures for the VAT exemption of cross-border services supplied by businesses in China have been announced. What are the key features of these measures and how will they impact taxpayers?

14conducted a survey and published a guide covering over 100 countries that gives some insight into the tax treatment of the

20operate in a carbon-constrained economy? Are you aware of the tax incentives available to reduce the costs of carbon initiatives?

06

28 The introduction of cash accounting will impact many businesses. What are the impacts and how do the measures compare

Indirect tax changes:

Indirect tax legislation evolves and changes on a regular basis. We outline some of the recent and upcoming changes (agreed and proposed) from around the world.26

Country updates (contd.)

Mary O’Hare mohare@uk.ey.com +44 28 9044 5472

Ros Barr ros.barr@uk.ey.com +44 20 7980 0259

please go to www.ey.com/indirecttax.

www.ey.com/tax www.ernstyoung.mobi for mobile devices

42impact.

46terms of the agreement.

50 After much debate and an earlier postponement, Italy increased the standard VAT rate from 21% to 22% on 1 October 2013. In this article we discuss the background to this latest VAT rate increase and the VAT compliance implications for both domestic and foreign businesses operating in Italy.

54 The consumption tax rate in Japan will increase to 8% on 1 April 2014. This article outlines the details of the phased increase and some of the transitional provisions for supplies spanning the change in rate.

56

60to get ready?

64this article we set out the most relevant amendments affecting foreign trade operations.

68involved in international trade, will be affected. In this article, we look at some of the new rules relating to the time of supply and invoicing. We also look at how the changes may impact on international supply chains.

72 In this article, the second in a series focusing on Russian VAT issues, we examine the VAT treatment of services related to international trade and logistics, and outline some considerations for foreign companies doing business with Russia.

76payers to submit detailed VAT ledger reports along with their periodic VAT returns from 1 January 2014. In this article we

Recent media reports indicate that the global economy is improving. This development has not halted, however, the reliance by governments around the world on indirect taxes. Indirect tax changes continue with new VAT/

or contemplated in a number of

still being enacted and the trend for increasing rates continuing. These global trends are illustrated by many of the developments highlighted in our snapshot of indirect tax changes around the world.

In our Trends and themes section we explore a range of issues that have an impact on doing business

tax policy advisory group. Three

achievements and explain how they

can represent the views and concerns of businesses that trade in and with

Our next article focuses on the VAT/Worldwide

.1 This guide features the tax rules for cloud computing in more than 50 countries based on three common operating models. The survey shows that, in most countries, the local tax laws have not

address the taxation of cloud services, which can lead to uncertainty and risk both for service providers and their customers. To illustrate this point, the

rating for cloud service providers in incurring irrecoverable VAT costs, encountering legislative issues and having to register for VAT as non-residents.

we look at the business and tax considerations for carbon regimes. As these regimes become more prevalent and cover more industries, businesses need to prepare to operate in a low carbon environment and be aware of the tax incentives that are available to help with the cost of carbon initiatives.

In our Country updates section, we feature some of the important indirect tax issues arising in countries and

look at some of the main features of the new tax and examine what businesses

change. China continues with its VAT pilots, and it has recently set out the trial measures for the VAT exemption of cross-border services. We outline these measures and examine how they can help taxpayers and tax authorities. We also look at the planned consumption tax increase in Japan.

Welcome

1. www.ey.com/cloudtaxguide.

In this publication, we bring you a mix of articles

global trade matters and other indirect taxes, using information and insights from our global network of Indirect Tax professionals.

Welcome to edition nine of our

Our article on the introduction of cash accounting In Bulgaria sets out details of the expected reform and also features a summary of cash accounting provisions

Indirect tax compliance remains a top priority for businesses, but this is made

at very short notice. We feature articles

came into effect on the same day and from Italy where a VAT rate increase, which was expected to be postponed,

reforms and their implications for local and international businesses.

Turning to international trade, we feature articles from Canada (the

and on the free trade agreement with

Indirect Tax useful and informative. We

want this publication to continue to be relevant to you and your business,

let me know your thoughts and any suggestions for future topics that you would like us to cover.

(philip.robinson@ch.ey.com) or by telephone (+41 58 289 3197).

Best regards,

Themes and trends

conversation with three members

advisory body.

Tel: +44 207 980 0259

Tel: +31 88 40 71175

Tel: +33 25 117 5031

6

7

Ros:today and agreeing to talk about your experience of participating

Gijsbert:

a large number of ideas and plans and opened them up for

around VAT and the process of levying VAT to more technical concerns and to communication transparency and making sure that the Commission could take all relevant information on board in proposing changes.

half were asked on a personal basis as academics or as well-

wide group of people together for discussion, for soundings, and for the generation and the creation of ideas. This was put into

are very interesting and very open.

Ros:your own right. Can I ask how you got involved?

Gwenaelle: Well, I had participated in the Commission’s former expert group on invoicing, which was set up in 2008, and I think

VAT. I am there as an individual, not representing any

the issues that I hear from my clients, from the enterprises in the

these constraints to the Commission and to be able to make a difference by helping to create a strong legislation that can be

to their issues.

Ros:different from your and Audrey’s role in the group. Can you elaborate?

Gijsbert:

with Audrey, who is an Indirect Tax partner doing a lot of work in

Claudio Fischer, we prepare our viewpoints, our contribution, and we go to the meetings. If I can’t make a meeting, Audrey takes my place. I should also mention that we have discussions

8

that we all have the same goal, working on creating a more

Of course that is a long process, as consultations and reaching unanimity in Brussels always tend to take a long time. But I do

a feel for what is happening and where the consensus may be and especially how industry and how businesses look at the various proposals or initiatives that the Commission is working on.

Ros:partners and that being involved with something like this does

getting involved?

Gijsbert:

policy, including getting involved in consultations and public debate or even in political debate. We have our viewpoints and insights, and we represent our clients’ concerns and experiences. But more than that, we have a strategy to build a better working world. We take that very seriously. And we believe that doing

We take it as an honor doing this work and being active in the

we assist governments and lawmakers with the introduction of

place to be, for our clients and for ourselves. And if it means that we must invest in that, we will.

Ros:

Gwenaelle:add that I think we have an important role to play vis-à-vis the

we debate in the group, I can really attest that we are free to speak our minds, say to the Commission that we disagree on this

really represent business and the economies and be a good go-between and link between the position of the Commission and

enterprises face in applying the rules correctly.

I think it is important to see ourselves as a new body that is able to talk on a neutral basis. We are not politicians. We are not representing our country. But we can bring ideas on what could be improved.

Ros:

Gijsbert:topics; one of them, I think the most striking one, is the issue of the business-to-business supplies of goods cross-border between

four times. The Commission is very seriously looking at alternatives for the present system of intra-Community supplies

what to do with the VAT exemptions in the public interest.

broadcasting, telecom services and in fact every supply of digital content as of 1 January 2015. That’s more than a year away, but the changes in pricing, in IT systems and in customer relations are already starting to become visible, and businesses must

And then at one of the recent meetings we’ve discussed the standard VAT return,* which is a proposal that was made public a couple of weeks ago.

Ros: Audrey, I think you were at the meeting where the standard VAT return was discussed. Could tell us a little more about that?

Audrey:outset, it was clear that there were members of the group that felt that the standard VAT declaration as proposed was not “pure” enough. I use that phrase based on the fact that the

have to say it was primarily members who are working within

historically been the issue, it is the fact that the type of

proposals laid on the table were very helpful because they could set up their systems to produce all of the information that

would be needed and then they could simply choose to switch on

move for business and that it would actually help to reduce the administrative burden on them.

As the debate moved around the room, it was clear that the group moved toward a consensus. I thought it was good how the different aspects and interests represented by people in the room were given a voice and that that was taken on board as a whole. I think that the information-sharing was really helpful in that process.

Ros:

Gijsbert: Well, I think that Audrey put it right. The debate shows

experienced in doing that. One of the ways to do it is in a progressive manner, by at least making a start, making sure that

lead, and then others will follow.

And of course the date of implementation, 1 January 2017; seems like a long time away, but you sometimes feel that the

frames because they know what a great deal will be involved for the tax administrations in doing this. But eventually things will start moving. Business is sometimes a little bit more impatient, and you can really see that you have to reach a balance between the various elements.

Ros:

Could you explain what is involved in that?

Gijsbert:the business-to-business cross-border supplies of goods. One of

the existing transitional system that we already had for 20 years

feel that they should be looked at. And so the Commission

that we leave the situation as it is, but, within the existing legal

improvement.

Three areas of improvement have been mentioned: one is the whole issue of chain transactions and triangular transactions and

the VAT Forum, which is a different sounding board.

were formed that are studying the possibility of coming up with

and consignment stocks. I’m a member of the subgroup that is doing the work on consignment stocks, and we are now preparing for our fourth meeting with that group. There are a

subgroup, and representatives of business, industry

providing some facilitation and support to what we’re doing. I think that altogether there are 12 or so of us in the group. We are working in detail on this issue, and we will then present our

In the subgroup we are really discussing all the alternatives. The

group helps to make sure that what we suggest or what we discuss is also feasible and realistic in the eyes of the tax authorities.

Ros: When do you expect to have some outcome from that work?

Gijsbert:

2014.

Ros:pretty soon?

Gijsbert:

Ros: One of the things that I think you mentioned, Audrey, which I thought was really interesting, was the fact that working with

perceptions as an advisor. Could you expand on that?

Audrey: I suppose it’s purely from the perspective of what is realistically achievable and in what time frame, because often we see things that are maybe not working so well, and we ask, “Why

from our own country’s perspective or indeed from our own

made the whole process of policymaking much more transparent, certainly for me, which has given me a greater appreciation of the amount of work that it takes to effect a policy

consideration; it’s also the due care and attention that is paid in terms of the process that is followed and the fact that the Commission doesn’t think about these things in isolation. For

it’s thinking about, both through the consultation processes that it undertakes and through studies. One of the things that should also be highlighted is that the proposals that are laid on the table

being undertaken to validate the idea or identify issues, or we

carried out already. And the studies are always presented “warts and all,” so that we can debate and discuss them openly and to decide whether the problems or negative aspects are so

I certainly think that that level of transparency has really opened my eyes and given me a greater appreciation of what actually happens from a tax-policy perspective in Brussels.

Ros:

Gwenaelle: Well, I think since it’s the second time for me being involved in this sort of capacity, that is where it’s interesting. The

the legal aspect. In other words, the fact that we had to draft a

to be very secondary.

other way around, meaning that I think we can really bring our

to us and think as lawyers or VAT professionals, from a legal perspective, about what would be the effect of drafting the VAT

Aside from the fact that this is very interesting from an intellectual perspective, I think it allows us to bring our real expertise to bear by sharing it with one another and with the

being involved is a very interesting exercise.

Gijsbert:

Ros:

Gijsbert:expresses and the admiration that Audrey mentions for the

the Commission do and that we now get to witness at close

left out or are overlooked in Brussels, but from what we have

itself; that’s one thing. And in all the debates and topics that we discuss, there is constant attention and special focus on what certain measures or decisions mean for the VAT position and the

doing there.

Ros:

achieve?

Audrey: For me, it’s uniformity. I think there is a real drive now and desire within the Commission to get greater uniformity and

easier for all enterprises, and I think that the steps that the

on business, and I think that’s to be applauded.

Gwenaelle: Well, my dream would be that we can get to have real

redrafted in another way it could help everyone to reach a certain level of agreement for changing the things that go wrong. That would increase the amount of change or to make it

Gijsbert: In the short term, I expect that there will be progress in

as a group we will be able to come with a couple of improvements or suggestions for improvements that will be adopted in the present system.

In the long term, I think we may well be looking at a VAT system that is going to become much more feasible for businesses to

lower administrative costs. In fact, a better working world for

On 23 October 2013, the European Commission tabled a legislative proposal (COM(2013) 721) for a standard value-added tax (VAT) return. The Commission states that the aim of the standard VAT return is to reduce administrative burdens for business, ease tax compliance and make tax compliance across the European Union (EU) more

uniform set of information that businesses will have

returns, regardless of the Member State of submission. The standard VAT return, which will replace national VAT returns, will ensure that businesses are asked for the same basic information, within the same deadlines, across the EU.

Around 13% of VAT payers in the EU submit VAT returns in more than one Member State. Currently, although the objectives and logic behind a VAT return are the same in all Member States, the

between them. This is a source of complexity and administrative burdens for businesses. It is estimated that, if adopted, the new return could cut costs for EU businesses by up to €15 billion a year.

commitment to smart regulation and reducing administrative burdens for businesses. Another

in simplifying the process for taxpayers, it should also improve tax compliance and increase tax revenue collection.

compulsory boxes for businesses to complete — chargeable VAT, deductible VAT, net VAT amount (payable or receivable), total value of input transactions and total value of output transactions. In addition, Member States will be entitled to ask for up to 21 boxes of additional standardized information, covering, for example, the split between tax rates or details of cross-border transactions. The Commission considers that this is a vast improvement on the current situation, whereby some Member States require up to 100 information boxes to be completed.

The standard VAT return will have to be submitted in the language of the Member State of submission.

However, since the content of the information boxes will be the same in all Member States, and the description will be available in all EU languages, the Commission envisages that it will be easy to

foreign language.

a monthly basis, while smaller businesses will only

submit an additional annual VAT return, which some Member States currently demand, would be abolished.

the standard VAT return will be allowed to be submitted electronically throughout the EU.

by Member States in the European Council, after consultation with the European Parliament. On this

basis, the Commission envisages that the proposed directive should enter into force on 1 January 2017.

taxes more effectively for growth.

issues and opportunities.

to you or you can get the wider picture by listening to the whole webcast series.

www.ey.com/indirecttaxrgm

and the webcast in the on demand section at www.ey.com/webcasts

Themes and trends

Worldwide cloud computing

Cloud computing has burst onto the commercial scene, affecting many

hardware and software that supports transactions over a virtual network (i.e., the internet), cloud computing has a borderless

proactively manage tax risks for a product that is rapidly expanding on global scale.

Tel: +1 415 894 8732

Tel: +44 207 9514807

Worldwide cloud computing tax guide

The guide was created in response to

that a comprehensive summary of the tax treatment of cloud services did not exist on a global scale. Businesses that supply or receive cloud services typically grow rapidly and expand globally; many tax authorities have not kept up with advances in the technology sector and as such guidance is often unclear about how to treat cloud services from a tax perspective. To further add to the complexity, new products are coming onto the market within the cloud space that

purposes.

Although cloud-related operations are evolving and the tax issues around them are uncertain, the guide aims to show how

certain cloud-based operating models under current law, from a direct and indirect tax perspective. To accomplish this goal, we surveyed more than 140 countries, 50-plus of which are represented in this initial release, to understand the tax considerations under three separate operating models that involve a cloud service provider and a user of cloud services. These three models were selected based on their common use in practice and their simplicity:

Commissioned agent model: The commissioned agent operating model represents a disclosed agency arrangement in which the commissioned agent local entity provides services to the principal for an arm’s length agency commission and the customer deals directly with the principal. In this model, “commissioned

agent” refers to the entity that works on behalf of a principal to sell cloud-based services to customers in the local

agent neither signs contracts with customers nor delivers cloud-based

entity that assumes most if not all the risks associated with providing cloud services to customers.

Commissionaire model: The commissionaire operating model represents an arrangement in which the commissionaire local entity invoices the customer in its own name on behalf of an undisclosed principal. In this model, “commissionaire” refers to the entity that signs customer contracts on behalf of an undisclosed principal.

Buy-sell model: The buy-sell operating model represents an arrangement in which the local buy-sell/sales and marketing subsidiary performs in-country sales and marketing activities (i.e., promotional activities likely remunerated on a cost-plus basis) for the principal. This entity may also perform buy-sell activities directly with the customer, own the rights to intellectual property and content and assume the risk of loss with respect to the transactions in buy-sell agreements. In this model, the “buy-sell” entity refers to either a limited risk distributor

entity may sign customer orders and be contractually responsible, in part or in whole, for the cloud-based services rendered to customers.

contemplate transactions according to the three operating models mentioned above.

understand what drives economic, social and environmental change. It sets international standards on a wide range of issues, including tax policy.

The worldwide cloud computing tax guide

Tax teams need to have visibility and a good understanding of business operations globally to ensure

that they can respond to the introduction of new cloud products in new markets.

Within each operating model, this guide provides high-level tax considerations regarding contractual terms that indicate lease/rent/license, sale or service arrangements. The tax matters considered also include how such payments may be treated from the perspective of:

Withholding tax

Indirect tax

tax that may affect cloud computing services include:

Transfer pricing

The availability of a local ruling or advance pricing agreement

It should also be noted that this guide is generally focused on inbound taxation, not outbound taxation.

Certain trends emerged from the data upon review. In general,

as the laws often predate the technologies entirely. The tax analysis is therefore based on existing laws that seem to have general application to this area and our understanding of and experience with the practice of the countries’ tax authorities.

commissioned agent model, commissionaire model and buy-sell

transactions involving cloud services and assigned a risk rating for each of the 50-plus countries* in this initial release of the

countries. Those countries illustrated as yellow or red indicate

Those countries illustrated as green, while not risk free, indicate

on cloud computing services

issues on cloud computing services

issues on cloud computing services

on cloud computing services

issues on cloud computing services

issues on cloud computing services

on cloud computing services

issues on cloud computing services

issues on cloud computing services

Conclusionscross-border services (particularly those that are supplied electronically) are constantly evolving, and there are many open issues, such as whether the tax laws will be expanded

servers, whether establishment laws will evolve to consider so-called smart servers and whether there will be new rules around intangible

treatment of electronically supplied services supplied by a business to consumers, which are expected to come into force in 2015, will affect many businesses that operate in the sector in

3 At the time of this release in 2013, the

debating the appropriate taxation of certain

industries that perform their business across borders. Businesses must keep apprised of the state of affairs for cloud computing in the countries where they conduct business.

Businesses must also assess the impact of tax

decisions. The guide provides a high-level overview of how the three operating models are likely to be treated. Certain assumptions and local terms may be used, and the facts and circumstances surrounding a business’s involvement with cloud computing are likely to be more complex than the three operating

businesses operating in the cloud should seek

and circumstances.

From an indirect tax perspective, it is clear that many countries

treatment of cloud computing services. In some countries there

services would fall, as well as clear and consistent rules in

therefore important that businesses understand the product

As with any indirect tax analysis, it is important to understand the supply chain and who is obligated to account for local VAT/

involves cloud services rather than tangible goods, as the place of taxation can be misinterpreted or misunderstood by suppliers,

example, whether the customer has enough substance (human and technical resources) in the local country to be able to receive

obligations may arise and look to reduce the risk of exposure to

or agreed to as part of the commercial relationship, or a challenge by tax authorities when the place of taxation can be uncertain. On the other hand, the intangible nature of the

contractual relationships that businesses may want to consider

It is clear that many countries have

cloud computing services.

Businesses should consider where local VAT/

the risk of exposure.

Cloud computing has burst onto the commercial

as the hardware and software that supports transactions over a virtual network (i.e., the

investigating and writing tax laws in this area, increasing the risk that taxpayers will be caught unprepared in some countries. In a recent report

computing transactions as an area in which “international tax standards may not have kept pace with changes in global business practices.”

computing tax regimes in over 50 countries,

continues to develop at a rapid pace.

Access the guide at

ey.com/cloudtaxguide

Themes and trends

and tax considerations

As the expanding global economy continues to be reliant on fossil fuels,

release of carbon dioxide (CO 2) emissions

associated with the combustion of these fuels. While many countries continue to use incentives such as tax credits,

behavior, carbon regimes, including carbon taxes and cap-and-trade systems, are becoming more prevalent as a regulatory instrument to reduce greenhouse gas

numerous other regions have already adopted legislation or created pilot

Carbon regimes are not only growing geographically, but as they become more established, their regulations cover more industries.

Tel: +1 415 894 4275

Carbon taxes

introduction of a new tax can often face heavy political resistance.

which represent the right to release a certain amount of emissions. These allowances may then be transferred or “traded” in the

mechanism and the participants decide the price of emissions, not the governing authority.

Alberta,Canada

California,USA

Mexico

BrazilSouth Africa

Australia

India

Japan

China

South Korea

European Union

New Zealand

Finalized Proposed

As the need for, and effectiveness of, carbon

will become increasingly important for businesses to understand these carbon markets and prepare

to operate in a low-carbon economy.

commence in January 2015 and is expected to be the most ambitious emissions reduction program introduced

noncompliance are proposed at three times the market price of allowances, up

2 (ton of CO2).

ChinaChina recently initiated a pilot cap-and-trade scheme in the province of

industries and accounting for 40% of the city’s CO2exchange is one of seven pilot schemes due to be launched in 2013 to 2014. On

market, the price for allowances traded in

2.

company-level cap-and-trade system of allowances for CO2

countries and covers around 50% of the

2have historically traded in the range of

2 but are currently

2. The penalty for noncompliance is currently set at

2.

law in the state of California, aiming to

2020. The cap-and-trade program is a key element in this plan and covers industries

emissions. The program started on 1 January 2013 and encompasses approximately 350 businesses

reserve price for 2013 has been set at

2 and is set to rise by over

not meet the compliance obligations will

every allowance above the emissions cap.

carbon price regime in July 2012 to reduce carbon pollution to 80% below 2000 levels by 2050. The price per

tax, and it will increase from

2 in 2012 to

2 in 2015. In July 2015, the carbon price is expected to transition to

has recently been drafted to repeal the carbon tax by July 2014 and/or replace it

currently active, it is unclear whether this legislation will continue to be in effect in the near future.

Companies must be proactive and prepare for a carbon-constrained economy since carbon regulations will have an impact on

prepare an integrated carbon management strategy to manage the carbon footprint of their operations.

preparing a robust carbon strategy include:

Reduce energy consumption

and cost-effective opportunity to reduce the energy usage of a business and provides a direct impact on its associated

continuously assess their operations and

reduce energy use.

Switch to renewable energyuse of energy from renewable sources could also help to reduce a business’s carbon footprint. Installation of renewable energy systems is an attractive strategy to reduce emissions, control energy costs and provide increased reliability in energy

incentives.

Purchase offsets or allowancestaxpayers can meet their obligations under a carbon tax or cap-and-trade scheme through the use of carbon offsets.

can undertake these carbon-offset

Reduce:

energy consumption in operations

Switch: transitioning to low-carbon, low-emission energy sources like wind, solar, geothermal, fuel cells, biomass, combined heat and power, microturbines, waste heat recovery, alternative fuel vehicles

Offset:

carbon management strategy to manage the carbon footprint of their operations.

increasingly offering incentives to

reduce the carbon intensity of their operations. Incentives are available to

and renewable measures that encourage activities in the reduce, switch and offset categories. They include:

Tax credits for investments in, or production from, renewable and alternative energy assets

Tax deductions in the form of accelerated depreciation for energy-

energy property and infrastructure

Reduced excise taxes on alternative fuels and fueling infrastructure

entities to encourage sustainability investments

purchased by companies and energy providers to comply with government

renewable energy production

customers as mandated by government regulations

Feed-in tariffs (FITs), production-based incentives for renewable energy producers

Incentives offered by different authorities can often be “stacked” to reduce the cost of sustainability initiatives and improve

procedures to research and identify all

factor them into the evaluation of energy

European UnionGermany: Interest rate reductions and grants for

UK: Feed-in tariffs for renewable energy

France: Asset

energy

USA California: 30% tax credit for

South Africa: Tax deductions

Turkey: Feed-in tariffs with

China:

Russia: Accelerated tax

Australia: for renewable energy

world. Businesses can then use offsets toward meeting their compliance obligations under the carbon regime.

In a cap-and-trade system, taxpayers can also trade emission allowances. A certain number of allowances may be distributed free of charge or purchased from the government entity.

they obtain from the government, they must purchase additional allowances through a market system or face penalties for noncompliance.

is the treatment of offsets and allowances for accounting and tax purposes at the subnational, national or international level.

to be inventory, supplies, business expenses or intangible property?

the compliance period if that period is longer than one year? When should the tax basis of an offset or allowance be expensed?

and offsets be treated for tax purposes?

What are the tax implications of transferring offsets or

Are gains or losses associated with the trading of emission allowances considered to be capital or ordinary income?

in another country?

What are the indirect tax implications of allowances and

to develop processes and controls to accurately measure,

and tax purposes. It will be important for businesses to ensure

penalties.

Companies may have an opportunity to manage and reduce their cost of compliance through the advance purchase of offsets and

sustainability investments and the timing of purchasing offsets

price of CO2 allowances in economic analyses in order to accurately estimate the return on planned capital expenditures

ConclusionsCarbon regimes are assuming an increasingly important role as economies transition into

carbon intensity of companies’ operations. As taxpayers look to sustainability strategies to reduce their carbon emissions, they should be aware of the tax incentives that are available to help reduce the costs of these initiatives and improve the return on investment. Additionally, as taxpayers begin trading in offsets and allowances, they should be aware of the

teams in discussions around carbon regimes and sustainability initiatives will ensure that companies have a better understanding of the tax policies in place and will help drive better decision-making.

will need to consider how to develop processes and controls to accurately

emissions to governing authorities.

Global trade management: high performers move ahead

some of the world’s largest global traders exchanged ideas about how global trade management can give high performers a competitive edge.

www.ey.com/customs

www.ey.com/customs

Tradewatch — December 2013

from countries and regions around the world.

www.ey.com/vatguide

Worldwide VAT, GST and sales tax guide

Our Worldwide VAT, GST and sales tax guide helps you understand how indirect taxes will affect your

provides coverage of

Worldwide cloud computing guide

Our

rapid pace.

ey.com/cloudtax guide

Worldwide R&D incentives reference guide

Our

Recent reports suggest that the global economy is slowly

shift toward indirect taxes continues apace with the

a broadening of the tax base.

This graphic displays some of the indirect tax changes (agreed and proposed) that have taken place across the world in late 2013 and those that are due to take place in 2014 and beyond.

These changes supplement those set out in our report, Indirect Taxes in 20131 and in previous editions of Indirect

2

A more comprehensive analysis of changes due to take place in 2014 and beyond, will be provided in our annual overview, Indirect tax in 2014, due to be published in February 2014.

1. 2.

Canada

rate to 9% (from 10%), resulting in a

rate to 8% (from 9%), resulting in a

13 January 2014: standard rate will increase to 19% (from 18%), reduced rate will increase to 9% (from 8%)

increase (new rate not yet announced)

1 January 2014: VAT introduced to replace turnover tax system

1 July 2014: introduction of value-added tax

1 October 2013: new VAT cash accounting regime introduced

Reduced VAT rate of 9% on tourism related goods and services (due to expire and revert to 13.5% on

Mexico

1 January 2014: VAT rate of

Region eliminated resulting in a

1 January 2014: Cash accounting regime introduced

1 August 2013: nationwide expansion of VAT pilot scheme, affecting transportation and certain modern services sectors

Croatia

1 January 2014: reduced rate VAT increase to 13% (from 10%)

rate of 17.5% will apply

1 January 2014: France plans to increase its

India

the state and central indirect taxes currently in force, date of implementation not yet agreed

1 October 2013: standard VAT rate increased to 22% (from 21%)

1 April 2014: consumption tax rate will increase to 8% (from 5%)

1 October 2015: consumption tax rate will increase to 10% (from 8%)

1 January 2014: proposed introduction of VAT on cross border e-commerce

The VAT place of supply for B2C supplies of e-services, broadcasting and telecommunications services will be the customer’s country in all cases

1 January 2014: services performed

standard rate of 21% (previously exempt)

1 July 2013: standard VAT rate increased to 19% (from 17%)

January 2014: reduced VAT rate increased to 10% (from 8%)

(detailed VAT ledger) introduced

1 January 2014: cash accounting regime introduced

Following the example of many

Bulgarian tax authorities plan to introduce cash accounting for VAT. If the draft law amendments are accepted, they will take effect from the beginning of 2014. On the one hand, this new legislation will likely have a positive impact

other hand, the new regime

to be more disciplined in their accounting, as input tax recovery in some cases will depend on payments made. In this article we look at the proposed Bulgarian rules in more detail and how they compare with similar

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Tel: +359 2 81 77 100

Bulg

aria

measures aimed at combating intercompany indebtedness. VAT-registered suppliers of goods and services often provide credit to the state by paying the VAT due on their supplies before they have received the cash from their customers. In the

input VAT without effectively paying anything (including tax) to

Therefore, with the aim of reducing intercompany indebtedness,

measure is to shorten commercial payment terms, and another is to introduce an optional cash accounting scheme for VAT.

scheme in their national legislation from 1 January 2013.

have already introduced the VAT cash accounting scheme. For

not allow cash accounting currently, but they are both considering legislative proposals for its introduction. The newest

was already using the regime even before its accession, and it continues to do so.

According to the proposed amendments to the Bulgarian law, output VAT under the cash accounting regime will be payable by a supplier when it receives payment from its customers. The customer will, in the meantime, be allowed to claim the VAT on the invoice only after it actually pays the supplier for the goods or services bought, including the VAT due.

after consulting with the VAT Committee. The maximum

maximum threshold, as per Figure 1). In some countries, the

scheme is applied without a threshold for certain industries (e.g.,

Committee, the threshold will be €500,000 when the scheme is introduced.

Austria 2 million

Belgium

Bulgaria *

Croatia

Cyprus

2 million

Finland

France

500,000

422,000

Ireland 1.25million

Italy 2 million

100,000

500,000

2 million

1.2 million

500,000

Romania 500,000

400,000*

350,000

VAT-registered suppliers of goods and services often provide credit to the state by paying the VAT due on their supplies before they have received the cash from their customers.

*Cash accounting will be available in these countries from January 2014.

in Bulgaria will apply to all the economic activities undertaken by suppliers registered in Bulgaria whose taxable turnover is below the threshold. In some

certain types of activities or businesses such as agricultural producers, engineers

higher threshold applicable to agricultural producers and animal farmers than the general threshold applicable to all

combination of thresholds; the scheme applies to all activities if the taxable turnover is below one threshold, while the scheme applies to other activities regardless of turnover.

been suggested for businesses to apply together with cash accounting for VAT, which is the absence of administrative penalties for tax and social security violations for the last calendar year.

Also, other ideas about eligibility can be

omitted from the calculation of the

accounting, such as incidental supplies of capital goods and immovable property

measures allow the cash accounting scheme to apply more widely by not excluding otherwise eligible businesses because of one-off or incidental activities that might distort their total turnover.

application of the cash accounting scheme is voluntary, but there are exceptions. Cash accounting will be optional in Bulgaria for all suppliers that

the advantage of deferring the VAT charge, a taxable person may choose to follow the standard procedure (i.e., that VAT is due on the accruals basis), despite being eligible to apply the scheme.

there will be no deadline after which suppliers must account for VAT even if the customer has not yet paid. This means that, if the supplier never receives payment from the customer, it will never

invoiced amount. This allows a wide measure of bad debt relief, which is a welcome feature of cash accounting for

To protect the state budget, a deadline for the supplier to wait for payment could be

payment is 90 days overdue, VAT becomes chargeable regardless of the

payment is made two months after issuing the invoice, the VAT needs to be accounted for in the following month; in

is a serious compromise with the purpose of the scheme, it is hoped that any deemed chargeability is postponed for a longer term.

Commission, they make up nearly 99% of 1

economic development, employment and social integration. At the same time, they are much more vulnerable to the negative effects of intercompany indebtedness. Because of that, cash accounting is

In Bulgaria, most local businesses are highly in favor of the idea of VAT cash accounting, and they would prefer an even higher turnover threshold for eligibility. Although the threshold may be increased in future years, this cannot happen without the explicit approval of

some Bulgarian trade associations have also expressed concerns over possible complications of the scheme for business, such as VAT compliance and the short

its introduction.

1.

Cash accounting will apply to all the economic activities undertaken by suppliers registered in Bulgaria whose taxable turnover is below the threshold.

The main advantage of using the scheme is the positive impact on the supplier’s

payer as, under this regime, the supplier should not bear the burden of paying VAT on the supply before receiving the payment from customers.

consider an example of a supplier who has only one transaction during the reporting month of August 2014:

If the supplier sells goods for €100 on 20 August 2014 under the regular VAT accounting, it must pay €20 VAT by

when the customer makes a payment.

If, however, the taxable person applies VAT cash accounting and receives payment on 1 October 2014, the €20 VAT should be paid to the state by

later.

If, on the other hand, the taxable

1 October 2014, it must remit €10 VAT

Therefore, the cash accounting regime is favorable for companies that have VAT

payment on time for their supplies, and this new option could generally improve

deemed VAT payment provision were to

would not be as clear cut. In the above example, if a six-month rule were to apply and the customer did not pay by 25 February 2015, the supplier would still

Therefore, in this case, the advantage of the cash accounting regime would only be temporary, and it would not provide bad debt relief.

For purchasers, VAT recovery is delayed

accounting. Therefore, the regime will

the entities that opt to apply cash accounting by eliminating the situations

reclaim before paying the supplier. In such cases, the customer would likely prefer to pay all invoices for which the cash accounting scheme is applied instead of keeping the invoices unpaid.

Another positive side effect from the VAT cash accounting scheme is that it provides

often, VAT is drained through fraudsters reclaiming input VAT on invoices

application of the VAT cash accounting scheme should limit the number of such cases.

have stronger negotiation powers and are dictating certain contractual conditions, such as long payment terms. These

reclaim on their purchases before they actually pay the price (including the tax)

cash accounting is introduced, this will no longer be possible. The need to recover input VAT may prove an incentive for

accounting scheme may not be attractive

losing a big client who might dislike this

predict whether this is a legitimate issue.

could be mitigated over time. To a large extent, the effectiveness and attractiveness of the scheme depends much more on the practical complexity of the registration procedure and the

view, the scheme should not be

taxpayer, and its application should not depend on covering numerous conditions, such as having no outstanding tax liabilities or recent administrative violations (as currently proposed).

reviewing and voting on the proposals for introducing the VAT cash accounting

scheme is implemented may vary from the proposals. Therefore, the new rules

rules takes time for the Bulgarian tax administration. Furthermore, the secondary legislation and probably even some of the VAT standard forms will also

needs of the new scheme.

The taxable persons that are eligible to apply the scheme should consider the effectiveness of the new regime in view of their own business (such as the

on customer relationships). The introduction of cash accounting will

procedures, and probably changes in contracts and in the settings of accounting software, not only for businesses that apply the scheme but also for their customers.

The effectiveness and attractiveness of the scheme

depends on the practical complexity of the registration procedure and

Canadano “plug-and-play” solution for importers of consumer electronics.

Rarely does a Canada Border

as much attention as did

effectively reversed the

the issue at the center of the

Although the new approach of

welcome, importers are still

challenges when applying duty-free treatment under Tariff Code 9948 for consumer electronics. In this article, we report on recent developments surrounding this issue.

The “iPod tariff”

applicability of Tariff Code 99481 to certain consumer electronics stems from

9948. In this administrative policy

importers to collect and keep records of

consumer electronics imported as 9948 goods are actually being “used in” computers and video game consoles. For consumer electronics that might

typical scenario is one where importers and end users do not interact directly but through several intermediaries, including distributors, wholesalers and retailers. Clearly, the administrative burden of

from consumers, especially when the importers are several degrees removed in the supply chain from the end users, would place a serious burden on both importers and intermediaries such as distributors and retailers.

2013, and importers no longer need to worry about communicating with end

, reads as follows:

goods imported and released duty free

schedule to the Customs Tariff, it will be

importer of the goods to attest to the intended use to be made of the goods in an article listed in tariff item

signed by the user of the commercial goods attesting to their actual use.”

It is unclear whether this change resulted from lobbying pressures2 or was simply a

under existing Canadian customs law. It is importers who bear the burden of proving

computers, video game consoles and other items within the strict meaning of

Customs Tariff.

Importers bear this burden at the time of importation, where the very declaration

considered statement that the concerned consumer electronics are 9948-eligible. They continue to bear this burden for up to four years after importation, the legislative period in which those

(and even longer if the importer has applied for refunds by drawback on previously imported products where 9948

written attestation from the importer is in

provision.

responsible for diversions of goods from intended use (i.e., if the importer becomes aware that such goods are not being

that, if the importer becomes aware of any diversion of 9948 imports, it is the importer who will be held responsible for reporting the diversion and for remitting additional duties and owed taxes. The

consider the obligation as being unmet or will pursue enforcement action are

consumer electronics importers have visibility on the sale and end use of the goods they import.

Although Canadian importers will now be able to document the end use of articles imported under 9948 by attesting to their intended use, this does not amount to “plug-and- play” duty relief for consumer

records of this use? Additionally, certain imports of consumer electronics simply

remain in determining whether they

Canada, in addition to familiarity with the

become comfortable with the

Furthermore, importers remain responsible for reporting any known diversions from the end use to which they

suggests that this controversy has not been fully resolved.

Cana

da

remain responsible for diversions of goods from intended use.

China Administration of Taxation

52 (Circular 52), which sets out the trial measures for the VAT exemption of cross-border services, effective 1 August 2013. In this article, we set out the key features of Circular 52 as well as our observations on how Circular 52 would impact taxpayers.

the administrative measures that govern taxpayers engaging in the provision of cross-border services. As the VAT exemption

measures for VAT exemption on cross-border services shortly

transportation and selected modern services.

This announcement about the administrative measures, although they are of “trial” nature, is welcome news for

observed varying local practices adopted by the tax authorities in

is applied.*

Circular 52 sets out the scope of cross-border services that are eligible for VAT exemption. In addition, details aiming to clarify or provide further details for “in scope” cross-border services

A.mineral resources are outside China on cross-border transactions with regard to VAT exemption for

this item.

B. Conference and exhibition services if the conference or exhibition takes place outside China conferences or exhibitions held overseas for customers.

C. Warehousing services with storage locations outside Chinaon cross-border transactions with regard to VAT exemption for this item.

Tangible personal property leasing services with the property used outside China on cross-border transactions with regard to VAT exemption for

this item.

television programs (works) that are provided outside China

programs (works) refers to the distribution of works and the transfer of reporting or broadcasting rights of sports competitions and other recreational activities to overseas entities or individuals. The works and sports competitions and other recreational activities must be broadcasted and reported outside China.

“Broadcasting services” of works outside China refers to business activities of screening or broadcasting works in cinemas, theaters, video halls and other places outside China.

Broadcast services of works supplied overseas through cable

satellite, internet and cable TV, are not considered as distribution and broadcasting services of works that are rendered outside China.

Chin

a

* It is not uncommon for taxpayers providing the same cross-border services to be told to apply different VAT treatments. For instance, a consulting company with branches operating in different locations could have had some of its consulting services provided to its overseas clients treated as exempt from VAT at some of its operating locations and not at others. This is because only some of the tax bureaus in charge of companies were “temporarily” allowing VAT exemption before the trial administrative measures set out in Circular 52 were announced.

administrative measures for VAT exemption on cross-border services shortly after the nationwide expansion

selected modern services.

F. International transportation services that are not eligible

International transportation services undertaken by

Business license

International transportation services undertaken on land without obtaining a Road Transportation Business

include “international transportation”

International transportation services undertaken by air

the business scope does not include “international air passenger, cargo and mail transportation business”

on cross-border transactions with regard to VAT exemption for this item.

Transportation services undertaken by sea to Taiwan

Transportation services undertaken by air without

operations does not include “international and domestic

transportation business”

on cross-border transactions with regard to VAT exemption for this item.

computation method:

International transportation services

Research and development services and design services provided to overseas entities or units, excluding the design services provided for real estate located in China

on cross-border transactions with regard to VAT exemption for this item.

I. Taxable services rendered to overseas entities or units:

Research and technology services, (excluding research and development services and engineering survey services

Information technology services

Culture creativity services (excluding design services, advertising services, and conference and exhibition services)

services)

Authentication and consulting services

(works)

Time charter businesses involved in ocean transportation

Voyage charter businesses involved in ocean transportation

Wet-lease business in air transportation

Advertising services if the advertising takes place outside China

Aviation ground services, port terminal services, freight and passenger station services, salvage services, loading, unloading and carrying services rendered by taxpayers to overseas entities that 1) carry out international transportation

at domestic airports, ports, stations, airspace, inland water or sea, are considered as logistic auxiliary services rendered to overseas entities.

The following services are not considered as services rendered to overseas entities or units:

Contractual energy management services where the

Authentication and consulting services rendered to immovable properties located within the territory

Authentication and consulting services rendered with the

carrying out the services

“Advertising services if the advertising takes place outside China” refers to the advertising services related to advertisements released outside China.

VATable services rendered to entities or units in special customs supervision areas would not be considered as cross-

Taxpayers providing “in scope” services need to meet certain conditions in order for their services to be eligible for VAT exemption. We have set out these conditions in Table 2.

A service contract signed by both the service provider(s) and the service recipient(s) must be in place.

The entire service fees that correspond to the supply of services provided to an overseas recipient should be collected from overseas.

revenue and input VAT transferred outTaxpayers should separately account for their VAT-exempt service revenue and transfer out the input VAT associated with the supply of VAT-exempt services.

registrationTaxpayers must register their contracts with the tax bureaus that are responsible for

their registration.

The submission package should contain the following documents:

A registration form for VAT-exempt cross-border services

A cross-border services contract (original and photocopy)

services

For cross-border services provided to overseas entities, evidence to prove/ support that the service recipients are physically located in overseas locations

Changes/amendments made to service contracts or to the services that have already been registered

For service contracts that are already registered with the tax bureaus for VAT exemption purposes, any change(s) to the contract or change(s) to the nature or scope of the delivery of services must be re-registered with the tax bureaus.

The materials submitted for the purposes of the VAT exemption registration must be kept properly and in full.

Perform a detailed review of service contract(s)

Review all service contract(s) in accordance with the details set out in Article 2 of Circular 52. The review would include an analysis of the nature of the services provided with reference to the precise scope of VAT-exempt services set out in Circular 52. Other considerations include the location of the service recipients, details of payments and supportive evidence that could be made available to support the VAT exemption registration process.

Assess the status of the VAT exemption “temporarily” allowed by the tax authorities

Taxpayers who have adopted VAT exemption treatments based on the “temporary” VAT exemption allowed by their tax bureaus should assess whether they should be eligible for the VAT exemption based on the Circular 52 rules.

taxpayers should decide whether and how they should approach their tax bureaus.

Prepare documents to support the VAT exemption registration

been registered with their tax bureaus.

Develop plan to follow up closely on the VAT exemption registration process to understand the administrative measures and could develop some local adaptations

or interpretation of the Circular 52 rules.

It is anticipated that taxpayers will raise a high volume of VAT exemption registration

taxpayers should develop a robust plan with clear time lines, roles and responsibilities to follow up with their tax bureaus.

As Circular 52 has an effective start date of 1 August 2013, varying VAT treatments could apply to services supplied from different locations, depending on the VAT-exempt position taken or allowed to be taken by each tax bureau.

for VAT exemption, the following should be observed:

If the taxpayers have already adopted VAT exemption, the taxpayers should “make up” for the VAT exemption registration procedures now.

If the taxpayers have not yet adopted VAT exemption, they should start registering for the VAT exemption. If the registration is successful and has been accepted by the tax authorities, the taxpayers should be eligible for refund of any VAT overpaid or be allowed to offset the VAT overpaid against any future VAT payables. As the taxpayers have not yet

adopted VAT exemption and have issued special VAT invoices to their customers, the taxpayers should collect all the stubs or copies of the special VAT invoices from customers. Otherwise, the VAT exemption registration may not be processed.

For taxpayers rendering cross-border services that are not

adopted VAT exemption prior to 1 August 2013, the taxpayers

payment of the VAT to their tax bureaus.

The long-awaited Circular 52 should provide some relief to Chinese taxpayers providing cross-border services. Taxpayers can now start registering their services for VAT exemption purposes. Taxpayers may also consider taking the following actions as part of their planning for the VAT exemption registration:

Varying VAT treatments could apply to services supplied from different locations,

depending on the VAT-exempt position taken or allowed to be taken by each tax bureau.

The publication of Circular 52 is doubtless welcome news for taxpayers as it has

the circular has yet to cover the following VAT technical and practical issues:

We understand some companies, especially corporate group companies, may have entered into group or multiple-party contracts involving multiple service providers and service recipients in a “many to many” relationship. In this regard, discussions would need to be made with the tax authorities to clarify whether the

valid supporting evidence for VAT exemption purposes. Companies may consider making changes to their contractual arrangements to ensure compliance (e.g., from a “many to many” relationship to multiple “one to

contracts (e.g., services provided by consultants charged on a time-spent basis) entered into without setting out the level of service fees could also face

tax authorities.

entire service fee corresponding to the supply of services provided overseas should be collected from overseas. Although the circular has not indicated whether overseas payments must be received

from overseas service recipients, it would not be uncommon for some tax authorities to anticipate a full match between the provider of services, recipient of services and service fees payments. In this respect, arrangements would need to be made between the contractual parties and their respective banks to meet with the

by the tax authorities, if any.

provided to overseas entities do not include authentication and consulting services related to domestic goods”

to apply their own understanding on the

instance, if a China-based consultant advises his overseas clients on the Chinese export VAT implications with respect to an export sales of goods, it may not be clear whether his services could be in scope for Circular 52 and hence become eligible for VAT exemption registration.

Circular 52 has clearly set out the need for taxpayers to provide true copies and photocopies of service contracts.

problems as the service contracts can

and the taxpayers may not be able to or may not want to make the contracts available to the tax bureaus. In addition, the number of contracts to be taken to the tax bureaus for registration

VAT exemption registration could take time to go through all the contracts to be provided by the taxpayers, and it is anticipated that the contract review may be completed only at a relatively slow pace.

ConclusionsThe announcement of Circular 52 has long been anticipated, and it should help create a uniform platform for taxpayers and tax authorities to apply the VAT exemptions

circulars (i.e., Caishui [2013]

some room for further

we believe the Chinese authorities are likely to issue further circulars to provide the

businesses should keep abreast of future changes, and we will continue to report on developments in this area.

Circular 52 has answered many of the

authorities but has yet to cover certain VAT technical and practical issues.

Garrett Grennan Tel: +974 4457 4210

of Preference

duty rates granted under the

petrochemical industries will be affected by this change and these sectors will need to assess its impact on their businesses and develop strategies to mitigate the

both of which have free trade

likely to result in a competitive advantage for these countries over

Tel: +974 4457 4200

by granting preferential or 0% customs duty rates on exports of products to the

focus on nations in most need, poor developing and least developed nations. Accordingly, effective 1 January 2014,

or “upper-middle income” countries by the World Bank for three consecutive

from 1 January 2014, standard customs duty rates will apply on products from

While the importation of crude oil from

As a result, the customs duty on certain

to 4.7% and the customs duty rate on certain downstream products, including chemicals, polymers and aluminum will increase to 7.5%.

5.5%) and aluminum (up to 7.5%).

coming months. With competition from

have effective free trade agreements with

customs duty cost from customers at

markets. This point is illustrated further in Table 1 which compares the current

products with the future treatment for these produces from 1 January 2014 and contrasts the treatment of such products under the free trade agreement between

can draw some conclusions about the possible impact of the new rates on

Oil and gasproducts may become uneconomic

various customs regimes to prevent

has had several conversations with national Customs Authorities and the

possible solutions on customs duty

binding air transport agreements which

from duties and taxes, irrespective of origin. The Commission is examining

customs duty after 1 January 2014.

Chemicals and petrochemicalssimilar to oil and gas products,

origin may also become uneconomic

customs regimes available to this type of product to reduce or prevent the imposition of customs duty is greater.

the application of end-user reliefs (e.g., inward processing relief or bonded warehouses) to reduce or defer the landed cost of products at import. These reliefs are discussed in greater detail below.

From 1 January 2014, standard customs duty rates will apply on

Fertilizers

producers should give due consideration to the commercial advantage of certain competitors from

effective free trade agreement.

Aluminum

producers of aluminum wish to consider the application of certain customs

customs regimes may help to avoid or reduce customs duties on the import of

following:

Inward processing reliefallows product to be imported into the

duty, if the product is processed and

Various processing operations (e.g. such as blending within the oil and gas industry) may be considered in this respect.

Bonded warehouseswarehouse is a building or other secured area where dutiable products may be stored, manipulated or undergo manufacturing operations without the imposition of customs duty. After manipulation and within the warehouse period, the products may be exported

of customs duty. Alternatively, the products may be withdrawn from the

upon payment of customs duty at the rate applicable to the products in their manipulated condition at the time of withdrawal.

Korean and the EU

Oil and gas products

Jet fuel 0.00% 4.70% 0.00%

0.00% 3.50% 0.00%

Base oil 0.00% 3.70% 0.00%

3.00% 0.00%

3.00% 0.00%

Chemicals 2.00% 5.50% 0.00%

Ammonia1 0.00%

0.00%

Aluminum Aluminum bars (not alloyed) 4.00% 7.50% 0.00%

0.00%

understand the supply chain of their products at all stages from manufacturing through to end consumption.

gas and petrochemical industries should

impact of the new rules on their operations. Actions to consider include the following:

Assess the value of products imported

Identify the ultimate countries of destination and/or usage of the affected products

Investigate current agreements with customers to determine whether the potential increased duty charges may be passed on to them

Assess the possible use of customs regimes to reduce the commercial impact of the change

oil, gas and petrochemical industries should prepare now to

the new rules on their operations.

Tel: +974 4457 4200

A free trade agreement (referred to here as the

agreement that covers trade in goods and services, government procurement, and other areas of

sectors that are expected to

telecommunications, electrical and electronic

and steel-related industries.

Garrett Grennan Tel: +974 4457 4210

compared with other foreign exporters.

will be relaxed.

investors. In addition, the procedural

advice before seeking to apply preferential tariff treatment under the agreement.

The agreement provides for comprehensive tariff elimination that will

compared with other foreign imports

of tariff lines will gain exempt status by 2018.

Rules of origin determine the nationality of a product for customs purposes. In the

preferential treatment if at least 35% of the ex-works price (value-added percentage) can be attributed to manufacturing and other operations in the originating country. There are, however, 10 products where the origin criteria are based on a change in tariff

To determine the value-added percentage, the following formula applies:

x 100% > 35%

The ex-works price is the price paid for the product ex-works to the manufacturer in

after the production of the goods, including transportation, insurance and

of materials originating from outside the

and vice versa when determining origin. This accumulation rule should help

eliminated.

relaxed, although more legislative changes may be needed.

operating in Qatar and Bahrain.

At least 35% value must be added to the goods by manufacturing and other operations in one of the member countries, based on the ex-works price.

operations for purposes of conferring origin.

transshipment is allowed, provided certain conditions are met.

compared with other foreign exporters.

confer origin to the product. They include operations to preserve goods, simple operations such as the removal of dust, changes in packing and the breakup and assembly of consignments, placing product in bottles, simple cutting, placing marks or labels on goods or their packaging, the slaughter of animals, and any combination of the above.

products must be shipped directly from

although transshipment in third countries may be allowed, provided certain conditions are met.

The agreement provides for certain customs procedures to aid the free

Advance rulings on the eligibility of originating goods for preferential

low-value originating goods

Risk management to focus on high-risk goods and to facilitate the clearance of low-risk consignments

providers with enhanced market

limits in certain key sectors of interest to

services, distribution services and hospital

board for all sectors between 70% and 100%.

limits in certain key sectors:

construction services, distribution services, hospital services and legal advisory services.

the foreign capital investment law, but

services supplier can demonstrate it has

construction services.

seven sectors at 100%: construction; banking; insurance; information technology and software development; hospital and other health services; tourism and hotels; and culture, information and marketing.

for companies at 100%, while Oman will

companies at 70% across all sectors.

permanent residents, local companies and

to maintaining an open and transparent system of procurement to give competitive opportunities to the suppliers of both sides to penetrate each other’s markets.

same price preference of 10% that is

use of any goods or services that are

procurement of goods and services.

wishing to use the provisions under the agreement should seek advice prior to executing transactions.

ConclusionsWith increased trade between

reduce costs in their supply

trade” should more accurately be termed “conditional trade,” because in order to obtain the preferential treatment, businesses must comply with

determine whether a product

rules are complex, and terms must be fully complied with to

agreement and to avoid the risk of incorrectly claiming

maintaining an open and transparent system of procurement to give competitive opportunities to the suppliers of both sides

to penetrate each other’s markets.

Tel: +39 02 851 4458

Tel: +39 05 127 8421

In recent years, we have reported on the global rise in VAT rates, particularly in the

many countries have come to rely more and more on

budgets. This trend has continued, and as a result of the latest economic challenges and after much debate, Italy has increased the standard VAT rate from 21% to 22% effective 1 October 2013, although the 4% and 10% reduced VAT rates have remained unchanged.

In this article, we discuss the background to this latest VAT rate increase and what it implies for VAT compliance for both Italian and foreign businesses operating in Italy.

Italy

When another planned standard VAT rate

2012, it created broad debate not only

the country in general. The controversy

VAT rate increase, from 20% to 21%, took

legislation proposing the increase1 was supposed to enter into force on 1 July

postponement of the increase2 until 1 October 2013 in order to stimulate consumer spending.

Contrary to expectations, the Italian

VAT rate increase from 1 October 2013

the new 22% standard VAT rate applies to all supplies of goods and services if the tax point is triggered on or after 1 October 2013.

Issues to consider are applying the correct VAT rate, especially for activities that span the change in rate, and adapting VAT reporting processes to take account of the new rate.

The VAT rate increase may also have a

For most Italian businesses, VAT charged on purchases is recoverable in full as input tax against. Therefore, the main concern of the rate increase is to avoid penalties for undercharging VAT to customers or

businesses in VAT-exempt sectors (such as banking and insurance) suffer VAT charged on purchases and overheads as a cost, so the rate increase will add to their effective costs. Also, an increase in the

impact of delayed VAT refunds for businesses that are in a VAT repayment

3 provides the general criteria to determine when a supply is deemed to take place for VAT purposes (known as the “tax point”). If the tax point occurs before 1 October 2013, the VAT rate is 21%, but if the tax point falls on or after 1 October 2013, the VAT rate is 22%.

In theory, this seems pretty straightforward. But determining the tax point for certain transactions is not always easy, as different rules may apply for particular supplies of goods and services as well as for certain classes of taxpayers.

For supplies of movable property, the tax point generally occurs on the date of delivery or dispatch of the goods (unless title to the goods passes to the customer after delivery or dispatch, in which case the tax point is triggered when title is

delivered before 1 October 2013, the standard rate of 21% applies irrespective of the date of payment.

For supplies of immovable property, the tax point generally occurs when the parties sign the agreement transferring ownership in the property.

These basic rules have exceptions. If an invoice is issued before these events or if an advance payment is received for all or part of the consideration, the tax point is brought forward to the date of invoice or receipt of payment. For example, if payment was received in full prior to 1 October 2013, the 21% rate applies even if the goods are delivered after the change. In some cases, both rates may apply to the same transaction. For example, if an advance payment is received before 1 October 2013, the corresponding invoice must be issued with the 21% VAT rate, while the invoice for the balance of the value issued after

22% rate.

The new VAT rate at 22% implies a number of important changes for Italian businesses and multinational companies operating in Italy.

deemed to be when the transport or

do not trigger a tax point in these circumstances. This means that in the

buyer must account for Italian VAT through the reverse-charge mechanism by applying the 21% VAT rate.

The time of supply for imported goods is the date of importation (i.e., when the customs bill is accepted by the customs

declaration is accepted on or after

VAT at 22% at importation.

The tax point for domestic supplies of services is deemed to be when the consideration is paid or, if earlier, when an

services rendered after 1 October 2013 but invoiced or paid before that date are

services rendered before 1 October 2013 but invoiced or paid for on or after that

taxable persons established outside Italy

reverse-charge mechanism. The tax point for these services occurs when the service is completed. Therefore, the relevant date for determining the VAT rate depends on the whether the service was completed before or after 1 October 2013.

VAT Code, and based on general criteria

notes (i.e., credit or debit notes) related to invoices that have already been issued must be issued showing the same tax rate that was applied to the original supply. Thus, for example, irrespective of when

rate is applied if the transaction being

21% rate.

Transactions with the Italian state, regional or local authorities, and

VAT Code4 are deemed to occur when the invoice is issued, even if the tax becomes due at the time of payment by the public body (under the so-called “deferred VAT payment” scheme).

transactions carried out by taxpayers who opt for the cash accounting scheme (IVA per cassa). The cash accounting scheme can be applied by taxpayers whose annual

turnover is not higher than €2 million and other small businesses. For businesses using cash accounting, the VAT rate increase does not apply to transactions with invoices dated before 1 October 2013, even though the relevant payment is received afterward.

For businesses, a VAT rate change means an increase of the VAT compliance, especially for multinational companies that often carry out large numbers of often-complex transactions every day. As

software in an accurate and timely manner so that all changes are properly dealt with in their accounting and reporting systems.

When fundamental changes apply to VAT accounting, errors and mistakes occur

codings or confusion about the correct VAT rate to apply, for example. The Italian tax authorities seem to be aware of this, and in a press release dated

three months that the new standard VAT rate applies, no penalties will be applied to taxpayers who did not manage to issue

updating their invoicing or accounting systems.

All businesses making supplies of goods and services in Italy need to ascertain the correct VAT rate applicable to their supplies.

ConclusionsThe new Italian standard VAT rate of 22% became effective on 1 October 2013.

Taxpayers must ascertain the correct standard VAT rate applicable to each transaction by reference to the tax point rules, which differ

transactions.

An effective analysis of the main business VAT implications, including a review of contracts,

administrative burdens and prevent negative

provided that the incorrect invoices are properly amended through the issuance of debit notes (in accordance with Article

correct VAT amount (i.e., 22%) plus any interest due is paid to the Italian

table at right).

Quarterly

VAT rate applies, no penalties will be applied to taxpayers who did not manage to issue invoices

invoicing or accounting systems.

announced that, effective 1 April 2014, the consumption tax rate will increase to 8% from the current rate of 5%, in accordance with previously enacted legislation. We outline the details of the phased increase and outline some transitional provisions for supplies spanning the rate change.

Japa

n

The consumption tax rate will increase to 8% (including local consumption tax of 1.7%) effective 1 April 2014. A further increase to 10% (including local consumption tax of 2.2%) effective 1 October 2015 has also been enacted.

(enacted on 22 August 2012) included a

increase phase, as well as an “economic resiliency” clause that serves as a mechanism whereby the increase can be canceled if it is deemed necessary based on prevailing economic conditions. In making this determination, the overall economic situation is to be considered, with reference to key indicators such as

clause will not be invoked to cancel the

consumption tax rate increase (to 10%, effective 1 October 2015) also has this economic resiliency clause. Another determination of the overall economic situation will be made prior to its implementation.

A number of transitional measures provide for continued application of the current 5% rate following the effective date of the general rate increase, in certain situations. The main transactions that are affected by the transitional

that transitional measures may apply to other situations, so businesses should

the correct tax point for particular transactions.

The 5% rate applies under transitional rules to the following transactions with a key date of 1 October 2013:

made on or after 1 April 2014 pursuant to a construction contract concluded prior to 1 October 2013

on or after 1 April 2014 pursuant to a lease agreement concluded prior to 1 October 2013, the term of which begins prior to and extends beyond 1 April 2014

these items on or after 1 April 2014 pursuant to a subscription agreement concluded prior to 1 October 2013 for

members of the general public and for which payment was made before 1 April 2014

products on or after 1 April 2014 via mail order or online platforms, for which the vendor had advertised (or completed preparations to advertise) sales terms including the price prior to 1 October 2013, the order was received prior to 1 April 2014 and the sale is made in accordance with those advertised terms

The 5% rate applies under transitional rules to the following transactions with a key date of 1 April 2014:

transport of passengers or admission of customers to movies, theaters, horse races, bicycle races, art galleries, amusement parks or similar entertainment venues, on or after 1 April 2014, for which fees were paid prior to 1 April 2014

continuous provision of electricity, gas, water or telecommunications pursuant to an agreement with a term beginning prior to and extending beyond 1 April 2014, for which the right to receive payment is established between 1 April and 30 April 2014

sale of certain newspapers or

prior to 1 April 2014, and for which delivery to the general public occurs at

monthly

installment payments with a due date on or after 1 April 2014 pursuant to sales that occurred prior to 1 April 2014

ConclusionsBusinesses operating in Japan must make detailed preparations for the consumption tax increases, including assessing their impact on existing contracts, prices, and IT and invoicing systems, particularly if they provide any goods or services

transitional provisions.

The consumption tax rate will increase to 8% effective 1 April 2014. A further increase to 10% effective 1 October 2015 has also been enacted.

reaching changes to its VAT

surprisingly, the new rules have caused concern and

businesses and consumers in a wide variety of sectors. In

their possible impact on the

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and other the media have been full of comments, especially complaints about an expected general rise in prices of

from the countryside who deliver their supplies in the wee hours of the

This is one tax law that affects everyone

the population can read and interpret the VAT law?

act continue to bother me and other parties affected by the changes, especially how any omissions and errors under the new rules will be dealt with. The new rules have affected manufacturing, oil and gas, media and publications, the health sector, tourism and many other sectors in one way or another.

and exempt goods from over 300 items to

incentives to investors have been scrapped, and the 12% VAT rate has been abolished.

of the provisions in VAT Act 2013 likely to

The biggest motivation behind most of the changes in the VAT Act 2013 is to

especially if the revenues are eventually put to good use.

A critical look at the provisions in the VAT Act 2013 makes me optimistically

yield is an underestimation. For exemption, as a result of the exemption of VAT on supplies made to oil and gas and geothermal companies, more VAT

from oil and gas suppliers. Charging

consumed by consumers and businesses that are not VAT-registered also implies that the corresponding

VAT remission on capital investments has always been a big incentive for

ground. The repeal of the VAT remission incentive may discourage

example, the removal of the incentive would mean incurring an extra

remissions granted under the repealed

The new act does not provide for as

previously. As such, fewer claims for tax refunds are expected (as fewer businesses will have an excess of input

the economy not only by raising VAT on new areas that were previously not taxed, but also by allowing for the

an increased revenue enforcement.

will be needed to process and audit refunds, so they will be able to concentrate on more critical areas of revenue collection.

woke to the news that the VAT Act

supplies and inputs. This has made

less expensive and has also encouraged

VAT cost since donors normally do not agree to have the funds used for tax

the VAT cost, this hits deeper into the current budget. With extra spending, the economy is negatively affected, as some sectors’ allocations are reduced.

In the new VAT Act, animal feeds are taxable, whereas unprocessed milk is exempt from VAT. This implies that people who deal in the supply of unprocessed milk will incur VAT on the animal feeds used for their cattle, but they will not be able to reclaim the VAT as their milk sales are exempt from VAT. On the other hand, a buyer of the unprocessed milk who processes it to

milk and yogurt will need to be VAT-registered and to charge VAT to the next person in the supply chain.

Therefore, the VAT charged on the feed will be trapped in the supply chain. The costs for farmers who produce unprocessed milk and incur

VAT on animal feeds will go up, and they may be forced to sell their product at a higher price to the milk processor, who will again push the extra cost to

distorts the economy as a whole.

The new VAT exemption for taxable supplies imported or purchased for use in geothermal, oil or mining prospecting or exploration implies that a large part of the input tax incurred on services or goods provided to these

of the suppliers in this sector are foreign investors who may be

receipts from other taxes, such as income taxes.

businesses source from nonresidents

service providers who do not have a

appoint a local tax representative implies that nonresidents will face

discourage some nonresidents from

to take their businesses to other

a less-attractive investment destination.

of revenue in the hands of irresponsible, careless or even corrupt

introduction of penalties and

collections, which will go toward the provision of basic services.

This change in VAT rate for fuel will increase the cost of doing business and

the economy rely heavily on either electricity or heavy diesel oil.

funds to refund taxpayers’ input VAT paid in excess of output tax, and some taxpayers have sought the intervention of the courts to have their refunds paid. The new act has not given an undertaking on fast tracking of VAT refunds. This does not solve the current challenges and will continue to

businesses that will have a negative

The new rules have affected manufacturing, oil and gas, media and publications, the health sector, tourism, and many other sectors in one way or another.

ConclusionsThe new VAT Act has both positive and negative

ensure that all stakeholders fully understand how to implement the VAT Act 2013 and how it will affect their businesses. For instance, more

tax representative and what their responsibilities will be, as well as that of the principal they are representing. Will the tax representatives be appointed on application, or can anyone act in

expected to proactively issue public rulings to correct some obvious errors or ambiguities that exist in the VAT law, especially in the listings of

For businesses, it is to be hoped that they “do not let the tax tail wag the commercial dog,” as the saying goes. In other words, businesses should not be discouraged from doing business

any extra tax that comes with the VAT Act 2013.

how the changes affect their activities and pay extra attention to their compliance and accounting for goods and services supplied in

transparent, keep good records and make investment plans using available incentives.

personal hope is that the measures raise the

In a budget announcement on

announced the implementation of the long-awaited goods and services

on 1 April 2015 with a tax

is similar in conception to many other value-added tax (VAT) systems around the world. This change represents a total reform of the country’s single-stage consumption tax system, which will have far-reaching effects for individuals and businesses alike. In this article we set out some of the main features of the new tax and some actions that you may want to take now if you do business in

applied at each stage of the supply chain.

supplies it makes. This credit mechanism

added at each stage of production, and it can be cost-neutral to a business, with the full burden of the tax falling on the

due when a sale is made and not necessarily when payment is received. This aspect of the tax can create negative

pay late or do not pay (as the supplier must account for the VAT charged in a period even if no payment has been received).

goods and services made in the furtherance of any business by a

also charged on the importation of goods

standard rate by default unless a provision states that a supply can be treated differently. This approach means there is no list of what is treated as standard-rated (unlike in the current system). Instead, the

Zero-rated suppliesis a taxable supply, but the tax rate is 0%.

supply can be recovered, although the

purchases is likely to exceed your output

supplies include certain agricultural products, foodstuffs, water supplied to domestic consumers, electricity supply (with limits) for domestic users, exports of goods and international services.

Exempt supplies

to the sale, but the supplier has no right

exempt supplies, you will not be able to

cost to your business. If you supply goods

exempt supplies include residential property, private health care and private

Out-of-scope activities

and the supplier is not obliged to register

activity (although the supplier may be

limited but include a transfer of a business as a going concern and supplies made by

passports and licenses, except some supplies of services prescribed by the

radical nature of the changes, complying

businesses to start planning and acting now to be fully prepared in 2015.

be excluded from the obligation to

rolling 12-month period. A business will also be obliged to register at any time if this registration threshold is expected to be breached. Therefore, for large

most businesses to start planning and acting now to be fully prepared in 2015.

the current single-stage consumption taxes (sales tax levied at 5% and 10% and

2014. Businesses will need to take particular care over transactions that span the change from sales or service tax

following measures to help individuals and businesses to adapt to the change. These measures will be effective from 2015:

There will be one-off cash assistance of

households that receive the Bantuan

paid to lower-income households.

Individual income tax rates are to be reduced by 1% to 3%.

The income tax structure for individuals is to be reviewed to ensure a more progressive tax structure, including increasing the chargeable income

Corporate income tax will be reduced from 25% to 24%. At the same time, the income tax rate for small and medium

20% to 19%. Both reductions will take

The cooperative income tax rate will be reduced by 1% to 2% from the year of assessment 2015.

limits) will be allowed as tax-deductible expenditures from the year of assessment 2015.

Accelerated capital allowances on the cost of information and communications technology (ICT)

to be given a further tax deduction for the years of assessment 2014 and 2015.

of employees in 2013 and 2014, and

software in 2014 and 2015.

system. Therefore, implementation of the

practical issues still need to be worked out fully, and we will continue to report on developments as more detailed guidance

Businesses will need to take particular care over transactions that span the change from sales

business, accounting and reporting systems, staff, suppliers and customers for the new regime:

accounting systems, training expenses, hiring of additional

basis

deal with the new tax

Review accounts payable processes to ensure tracking and posting of expenses are done in a timely manner

expense claims

documentation to comply with the new tax

2015 and April 2015)

accounting and reporting processes

Identify the legal implications of existing long-term

contracts for services to be supplied throughout 2015)

Mexico important amendments to the

31 October 2013. These

foreign trade operations in

changes will come into force on 1 January 2014, some will be deferred for a limited period. In this article, we set out the most relevant amendments affecting foreign trade operations.

Rocio Mejia

Importers and exporters are no longer

export entries and customs declarations (pedimento).

While importers/exporters may opt to continue using a customs broker to perform their customs clearance procedures, they also may choose to perform such procedures on their own behalf by designating a legal representative or “customs representative” who will be responsible

documentation.

It is important to note that the “customs

the importer/exporter for the payment of duties and other taxes due upon the import/export of goods.

authorities will establish the mechanisms to be used by importers/exporters performing customs clearance procedures on their own behalf.

allow for the establishment of a strategic bonded warehouse (Recinto Fiscalizado

country. While these amendments will

establishing a strategic bonded warehouse, goods that are imported

electronic foreign trade platform, commonly referred to as the “Ventanilla

mandatory in order to perform the

Customs law merge the former Ventanilla

clearance process will be performed electronically and through digital documents, including the import/export declaration and supporting documentation (commercial invoice, bill of

electronic declaration with information on the value of imported goods. The amendments to the Customs law establish

may be imposed on importers if they declare inexact or false data in their electronic value declarations.

Also, in order to expedite the customs clearance process, the secondary review of goods during the import customs clearance process is eliminated.

importer’s ability to make post-entry amendments to customs declarations. For

importer is generally limited to correcting the information on declarations up to two

declaration, such as the country of origin or the description of the goods, cannot be amended.

The amendments to the Customs law allow for changes to be made regarding the information contained in the customs declaration at any time and as many times

determined the scenarios for which prior

acknowledge the possibility for importers

expired temporary imports, limiting the importer’s exposure to the payment of omitted duties, if any, and VAT.

extended

allowed a change of regime from temporary to permanent importation only for goods that were temporarily imported for manufacturing, transformation or repair purposes (for example, goods

now make it possible to change the customs regime for other goods (e.g., that

be temporarily imported, such as samples and goods imported by foreign residents.

Importers and exporters are no longer

entries and customs declarations.

66

The VAT is currently waived when goods are temporarily

other customs regimes (i.e., bonded warehouse for the auto industry, bonded warehouse for transformation and strategic bonded warehouse). In accordance with the amendments to the

imports under these customs regimes when the import

recovered through a credit or refund, the recovery process may

obligation.

controls of their temporary or in-bond imports. While these

against the VAT that has to be paid for the temporary

and must be renewed 30 days prior to its expiration date.

Alternatively, companies that choose not to obtain the

temporary or in-bond imports as long as they guarantee the VAT

The obligation to pay the VAT upon the temporary or in-bond importation of goods will become effective one year after the

credit will be applied.

buyer of the goods). This VAT should be recoverable by the

will be in force across the country.

customs regimes

The excise tax, which applies to the importation of beverages with alcohol content, beer, cigarettes, gasoline and diesel, was usually waived when such goods were temporarily imported into

bonded warehouse for the auto industry, bonded warehouse for transformation and strategic bonded warehouse). In accordance with the recently approved amendment, the excise tax will now have to be paid on imports of excisable products under these

excise tax that has to be paid for the temporary or in-bond importation of goods or guarantee the excise tax payments

The obligation to pay the excise tax upon the temporary or in-bond importation of goods will become effective one year

which the tax credit will be applied.

The VAT rate of 11% that currently applies

will be in force across the country.

67

Conclusions

Although the addition of VAT and excise taxes to temporary and in-bond imports may create cash

the Customs law will mostly be welcomed, especially the ability for importers to change their customs declarations.

effect on 1 January 2014. These changes affect fundamental aspects of the

the rules relating to the time of supply, the time when input VAT can be claimed, the invoicing process and the taxable amount.

affected to some extent by these far-reaching changes. But, along with the changes already in force since April 2013, they will be

businesses involved in international trade. In this article, we set out some of the new rules relating to the time of supply and invoicing,

VAT changes may have a

supply chains.

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68

One of the main VAT changes coming in 2014 relates to the general time of supply (or tax point). The tax point determines when a taxable supply of goods or services takes place. It decides which tax period a supply falls into (and therefore when the tax charged must be paid to the tax authorities).

the date of delivery of goods or the provision of services. This means that in many cases the tax point will be

than before.

rules, covering situations where the basic tax point rule is not considered appropriate (e.g., for telecommunications, energy, transport, construction, rental and many others sectors). In some cases, these special rules will be removed and the basic tax point rule will apply instead (e.g., in transport services), while in other

triggered by different events.

Implications for business:taxpayers should identify and track the necessary tax point events for their

rules (for example, when goods are

information and documents to ensure the tax is captured at the right time, which is

not in relation to any invoice issued by the system. In addition, commercial contracts concluded in the past may not to accommodate the new rules properly and should be reviewed to avoid any adverse effects once the law is changed.

Businesses that are registered for VAT are entitled to offset VAT paid by them on purchases (input tax) against VAT charged on sales (output tax). The new rules have an impact on input tax deduction in a number of ways.

Time of deduction: According to the new provisions, the taxpayer’s right to deduct input VAT will depend on two dates:

1) The date when the tax point arose for the supplier

2) The date when the invoice documenting the supply was received

been the crucial date for deduction in most cases. Therefore, the deduction could happen if an invoice has been issued before the service is completed or the transfer of the right to the goods has been allowed (assuming that it took place

claim was made, with certain exceptions). Also, in general, the recipient has not been obliged to track when the supplier

issue invoices before and after the supply,

correctly determine when to deduct input VAT. In particular, implementing the

between different departments within the company and awareness of what information is needed.

Goods and services supplied to Poland: A further complication related to input tax deduction concerns international

are taxed using the reverse-charge mechanism. For these transactions, the

must account for the output tax and

law allows the taxpayer to deduct input tax only if the output tax was reported in the correct VAT return.

Further restrictions have been also introduced with respect to the intra-

the right to deduct the input VAT on an

collects commercial invoices issued by his

allow a three-month waiting period). Thus, the timely collection and processing of foreign commercial invoices will be

right to deduct the input VAT on these transactions.

system are being changed, affecting all

invoices will also change on 1 January 2014. In particular, it will be possible to issue a VAT invoice 30 days before the actual delivery date of goods. It will also be possible to issue an invoice much later than is currently allowed. The general invoicing deadline will be extended from seven days after the supply to the 15th day of the month following the month of the supply (which could extend the issue date by more than a month in some

choosing when to issue an invoice.

may allow them to align their invoicing practices more closely to other commercial processes. And this trend

VAT invoicing in general (e.g., allowing invoices to be issued on behalf of another

and archive tax documents electronically

combined with changes in the input VAT deduction rules, will not only affect

impact on invoice recipients.

chains in the following areas:

Reverse charge: governing the reverse-charge mechanism

charge mechanism is not applicable if a foreign supplier is registered for VAT

the reverse-charge conditions might have an impact on international supply chains that involve sales made by a nonresident principal. Changes may apply to the

principal and to those imposed on any entity registered for VAT purposes in

Chain transactions: The rules concerning the allocation of transport in chain transactions where three or more parties

an intermediary (e.g., party B in the example) is responsible for the transport, the “default” transaction that is treated as an intra-Community supply is no longer clearly indicated. Therefore, chain transactions involving multiple parties should be looked at carefully to ensure

intra-Community supplies.

Restrictions on input tax for intra-Community acquisitions of goods: The introduction of conditions for deducting

recovery will be lost if businesses do not introduce effective controls and

point and the receipt of the supplier’s invoice documenting. Furthermore, input

number is given to the supplier but the

country. Therefore, taxpayers need to review their processes to ensure the

supplied in all chain transactions involving

on your tablet. With information on more

or

In the modern world, international trading plays an important role in most types of business, and every day millions of cross-border trade transactions take place

in value. Transportation and logistics are often important cost factors in these transactions. In Russia, international logistics plays a particularly important role as the country is still very dependent on imported goods.

In this article, the second in a series focusing on Russian VAT issues, we look at the VAT treatment of services related to international trade and logistics, and we outline some considerations for foreign companies doing business with Russia.

In most countries around the world, international transport and international

purposes. This is also the case in Russia; however, in Russia, there is a catch. According to the Russian VAT place-of-supply rules, transportation services or transportation-related services are

supplied by a Russian company and the departure point and/or the destination point of the transportation is located in Russia. For these purposes, the term “international transportation” should be

departure point or the destination point is outside the Russian territory.

As we have said, international transportation and certain related

Russia. The advantages of applying the

The supplier does not charge VAT with respect to the services, but it can still

and wait for a refund of input VAT.

A non-Russian buyer does not incur non-recoverable Russian VAT.

In Russia, the VAT treatment of the cross-border transport of goods generally hasn’t been discussed (but is generally

complication lies in the treatment of

logistics services connected to the cross-border transport. The Russian Tax Code provides a list of certain logistic

if they are provided in the context of arranging international carriage and if they are provided under a “freight-forwarding agreement.”

A freight-forwarding agreement is a

the Russian civil legislation. In particular, under a freight-forwarding agreement a forwarding agent agrees to perform or arrange for the performance of certain services connected with the transportation of the goods for a fee. In Russia, federal law regulates freight-forwarding services. There are, however,

the law with respect to logistic services (such as licensing, a special registration or the necessity to own transportation means). As a result, any company can provide freight-forwarding services.

In practice, therefore, there may be uncertainty as to whether the 0% rate or the 18% VAT rate should be applied to certain types of logistic services. For example, doubts may arise for logistic services that are not provided under a freight-forwarding agreement or for services where a forwarding agent does

transportation itself. In these cases, service providers often prefer to apply the 18% VAT rate instead of the 0% VAT rate. As a result, VAT risks are transferred to the buyer of the services, as the tax authorities could argue that such services

the recovery of such VAT by the buyer.

Recent court practice with respect to the VAT treatment of logistic services related to international transportation shows the following trends:

The court applies a “substance over form” approach to freight-forwarding services. This means that the court supports the application of the 0% VAT rate even if the agreement under which the services are provided is not formally called a freight-forwarding agreement.

in substance should match the key features of a freight-forwarding agreement. As a result, application of

The court supports the position that a freight forwarder should apply the 0% VAT rate even if the freight forwarder neither transported the goods itself nor arranged such transportation. In particular, this approach could be applied to loading, unloading, warehousing, the execution of documents, customs clearance and many more services. This conclusion is based on the fact that the services rendered by the freight forwarder are performed for the purposes of transporting the goods from Russia,

the 0% VAT rate.

Russ

ia

Transportation and related services are

Russian company and the departure point and/or the destination point is located in Russia.

There may be uncertainty as to whether the 0% rate or the 18% VAT rate should be

applied to certain types of logistic services.

These court decisions are very important because they raise the following issues:

A broader range of services rendered during international

logistics support services supplied during the export or import

costs related to the transportation of goods. Russian buyers

There is increased risk that the tax authorities may successfully challenge the deduction of input VAT charged on international logistics support services, making it more likely that clients will refuse to pay VAT charged by logistics service providers.

ConclusionsIn view of the above it is important to carefully review any Russian VAT being charged by logistics service providers in relation to cross-border logistics support. We believe there is no black-or-white solution to dealing with some of these issues, so a balanced approach should be

services where possible and including protective clauses in the agreement in case the tax authorities challenge the related input VAT deduction.

fraud, the tax administration

(which was recently approved

submit detailed VAT ledger reports along with their periodic VAT returns, effective 1 January 2014.

In this article, we set out details of the new reporting obligation and how it may affect businesses operating in

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76

77

The VAT ledger report will provide the

information on virtually every business

payers. As a result, the volume of audits

increase after the introduction of the new

ready to meet this increased level of scrutiny.

payers to submit detailed information about the transactions they undertake each month. Reports will include the information for every invoice received or issued by the VAT payer, including

invoices and cash register receipts.

exempt supplies are excluded. The transaction values declared in the VAT ledger report should generally match the data declared in the VAT return for the

exceptions for certain transaction types).

Items to be declared for each invoice

document number (and a reference to the original invoice number in the case of an

transaction values, and the amount of deducted VAT. For supplies of certain

charge, additional information will be

issued (e.g., cash register receipts) are to be reported in aggregate for the tax period net of tax declared separately for each VAT rate applied.

A supplementary VAT ledger report should be submitted to declare any changes or additions to the transactions reported.

VAT payers will be obliged to submit VAT ledger reports together with each VAT return. This obligation will arise for each

are carried out). The proposals have no de minimis threshold below which a ledger is

In accordance with the approved legislative bill setting out the change, the

January 2014.

The VAT payer must compile all the

template for the VAT ledger form, which has recently been passed to the

providing more detailed information on the VAT ledger form are also expected shortly.

electronically within 25 days after the end of the VAT period, but not later than the

by the end of the month following the tax

such as failing to submit the VAT ledger report, submitting the VAT ledger report late, or declaring incomplete or incorrect information. The penalty may go up to

of repeated omissions, the penalty range extends up to €100,000.

The current wording of the legislation suggests that penalties will also apply to

the character of the change.

A draft ledger report has been published for comment by VAT payers and stakeholders. In the absence of clear guidelines for completion of the VAT ledger template, we believe that some of

The obligation to mention customs tariff numbers according to the Common Custom Tariff, as well as the type and amount of certain types of

charge, has stayed in the bill, but this

that may need to be collected externally or be extracted from their IT systems.

VAT payers to submit detailed information about the transactions they undertake each month.

noncompliance, such as failing to submit the VAT

ledger report, submitting the VAT ledger report late or

declaring incomplete or incorrect information.

78

The obligation to report data for each individual invoice has

automotive or utilities sectors).

Transactions that did not lead to an obligation to issue an

include those made with employees or deliveries that are taxable prior to the invoice being issued. These items may be

reporting purposes.

It is sometimes not clear which transaction properties or which types of transactions should be reported in which columns and rows of the VAT ledger form, as currently proposed. There are

transactions may thus be easily misreported. This may cause

review purposes and result in harsh penalties being levied on VAT payers, even when there is no effective tax loss.

report is planned to be implemented in January 2014.

Through information declared in the VAT ledger report, the

virtually every business transaction performed by a VAT payer. This will likely serve as a basis for the selection of VAT payers for VAT inspections and cross audits. As a result, the number of

seamless reporting and compliance with this new statutory

VAT payers have minimal time to incorporate the new reporting

their IT systems.

obligation from its date of introduction. Questions that will need to be addressed include:

received from our suppliers and issued to our customers

If not, can this be easily extracted from the documents and

where VAT is to be declared based on documents other than invoices?

situations where VAT is to be declared based on documents other than invoices (e.g., down payments,

supplied cross-border for which no VAT invoice is available,

notes and debit notes formally issued)? Can the information for such transactions be extracted easily from contracts, purchase orders, warehouse receipts or delivery

for each transaction separately?

Could there be cases when certain transactions reported correctly in our VAT return might be declared incorrectly in the VAT return by our supplier or customers (e.g., different tax period reporting, different values and different VAT treatments)?

return? Are penalties likely to apply?

The following actions may also help to prepare for the new

differences arising between transactions reported in VAT returns and VAT ledger reports:

prepare the VAT ledger

time

Convert available data into the VAT ledger template (once the electronic form is published), e.g., by mapping the VAT

sections of the VAT ledger form

Carry out a simulated in-house tax audit with a focus on the correct implementation of VAT ledger processes to identify gaps and weaknesses

in advance to ensure seamless reporting and compliance with this new statutory obligation from its date of introduction.

Contacts

+1 514 874 4345

robert.smith@cn.ey.com

philip.robinson@ch.ey.com

+31 88 40 71175

william.methenitis@ey.com

+353 1 221 2370neil.byrne@ie.ey.com

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