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April 2018

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An agreement boosting VAT cooperation and providing a legal framework for the prevention of VAT fraud between the EU and Norway was signed in Sofia, Bulgaria on 6 February 2018. Following the same structure that is currently used between the 28 member states, with the same instruments, this agreement marks the first of its kind with a non-member state that forms part of the European Economic Area.

Norway has a similar VAT system to the EU and this agreement seeks to eliminate weaknesses in the way VAT transaction chains are controlled that can be exploited by fraud schemes.

This spring sees more movement in the ongoing international progression toward automated VAT compliance. Three trends are currently of note:

1. SAF-T: Standardised Digital Record Keeping and Audit.

SAF-T stands for “Standard Audit File – Tax”. It is a standard set of data file requirements published by the OECD, allowing tax authorities to access data in a standard format for the purpose of digital auditing. Several countries already require that VAT taxpayers submit SAF-T files in addition to VAT returns. These are:

  • Austria
  • France
  • Lithuania
  • Luxembourg
  • Poland

They will be joined by Norway on 1 January 2018. We can expect the list to lengthen further. The requirement to submit standardised files has systems and process implications for taxpayers as audits will increasingly focus on this data so it must be right. You can read more about the SAF-T concept here:

http://www.oecd.org/tax/administration/45045602.pdf

And about the technicalities of SAF-T files here:

https://www.oecd.org/tax/administration/45167181.pdf

2. Real-Time Reporting

Since 2017, Spain has required “real-time reporting” of sales and purchase invoices and intra-community transactions from businesses with turnover above EUR 6 million. The system is called SII (“Suministro Inmediato de Información”) and requires reporting data to be submitted within 4 days of transactions that are made. More details about SII can be found here:

https://www.agenciatributaria.es/AEAT.internet/en_gb/Inicio/La_Agencia_Tributaria/Campanas/Suministro_Inmediato_de_Informacion_en_el_IVA__SII_/Suministro_Inmediato_de_Informacion_en_el_IVA__SII_.shtml

From 1 July, Hungary will also implement a new real-time reporting regime for invoices above HUF 100k (about EUR 320/USD 395/GBP 280).

Standard data sets are required for each reporting regime and we expect that more countries will follow suit.

3. Digital Interaction with Tax Authorities

The UK has published guidance on how its initiative for 2019, “Making Tax Digital” will work. VAT registered businesses will be obliged to keep digital records and will need to submit their VAT returns via software compatible with HMRC requirements. This means that businesses will have to review their processes and if necessary update their software in advance of the go-live date of 1 April next year. For more detail on Making Tax Digital see here:

https://www.gov.uk/government/publications/making-tax-digital-changing-the-scope-and-pace-technical-note/making-tax-digital-for-business

Taken together, one can see that these trends will eventually converge at some point in the future in a world where indirect tax is reported real time rather than via periodic returns, is reported in an automated manner, is recorded in standard data formats, and is audited digitally rather than manually. That road will take some years to travel, and in the meantime businesses can expect a string of incremental changes as each trend advances.

A notice to all stakeholders entitled “Withdrawal of the United Kingdom and EU Rules in the Field of Customs and Indirect Taxation” has been published by the European Commission. The notice seeks to examine the implications for Customs and Indirect Taxation when the UK withdraws from the EU and becomes a ‘third country’ on March 30th, 2019.

As expected the notice confirms that goods imported from the UK into the EU and vice-versa, as well as goods in transit, will be treated as importation or exportation of excise goods. Subject to customs formalities and controls, unless there is a transition period stating otherwise, from March 30th, 2019 onwards.

Companies established in the United Kingdom that are carrying out taxable transactions in a Member State of the EU may be required by that Member State to designate a tax representative as the person liable for payment of the VAT in accordance with the VAT Directive.

Taxable persons established in the United Kingdom purchasing goods and services or importing goods subject to VAT in a Member State of the EU who wish to claim a refund of that VAT will no longer be able to file electronically but will instead have to claim in accordance with the previous Council Directive which allows Member States to issue VAT refunds only where there is reciprocity.

A review of VAT refund procedures for businesses located in the European Union has been launched to assess if they are compliant with EU law and Court of Justice of the European Union case law. The review, which began on the 8th March, will run for 8 months and will scrutinise the ease with which businesses are able to recover VAT credits both in their own country and in other EU countries.

The European Commission has identified that a lack of access to a simple and fast VAT refund procedure has a major impact on cash flows (especially for small businesses) and on the competitiveness of those businesses.The tax provisions in each member state will be assessed and non-compliance with the rules could well launch infringement procedures against member states for breaking the rules.

Of particular interest to the study will be the length of time necessary to finalise refund procedures in each country as well as any unwarranted burdens in the system that may create financial risks for business. Currently, there are no uniform arrangements within the EU, with some states refunding on a month by month basis and other states forcing businesses to wait for 21 months before being able to actually submit a claim – and waiting 12 months or longer for the money to be refunded.

The review forms part of the EU Commission’s plan for a single VAT area which aims to provide a consistent approach to VAT refunds throughout the 28 member states in order to reduce administrative burdens for micro-businesses and SMEs.

 

Following the implementation of the Value Added Tax (VAT) starting from January 1 st 2018 VAT came into effect for the first time in the United Arab Emirates and Saudi Arabia at a rate of 5%.
There was a lot of nervousness about the introduction but overall things have gone well. Due to the stresses of the introductory period, the Federal Tax Authority in the UAE has been flexible in its penalty impositions, most notably waiving Late Registration Penalties until April 30, 2018.

The systems in each country are broadly EU-style, so should be recognisable to most foreign businesses. So far, however, the following areas have been ones in which businesses can suffer surprises:

  • VAT registration for a foreign business in Saudi Arabia carries with it the need to register for Zakat (an Islamic levy on Saudi entities that can lead to costs of up to 45% of profits). This is not the case in the UAE, where VAT-only registration is possible
  • The UAE has a number of very active “Free Zones” into which VAT-free importation exists in theory. However, businesses have struggled with obtaining this right in practice due to bureaucratic requirements
  • There has been inclarity over whether a foreign entity with several branches in the UAE (a multi-branch structure is common due to the attractions of establishing separately in different Emirates or Free Zones) is a single taxpayer or several. This controversy is ongoing.

Based on an analysis conducted by Essentia Middle East, there have been implications for systems, infrastructure, skills and training among many other industries and some slowing of economic growth has been reported.