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Non-resident digital service providers: Obligation to VAT Register: New countries from January 2020

Forcing non-resident suppliers of digital services to register for VAT is a relatively easy way for tax authorities to generate windfall revenue. As a result, this provision, trailblazed by the EU, continues to spread across the world. Regular VATLife readers will know that we’ve covered many states as they have this measure. For January 2020, the new states are:

  • Uzbekistan – 15% VAT chargeable
  • Malaysia – 6% of digital service tax chargeable
  • Singapore – 7% GST chargeable, but subject to a limit of B2C digital sales into Singapore exceeding SGD 100k (EUR 66.5k; USD 74k; GBP 56,5k) and global sales exceeding SGD 1mln (EUR 665k; USD 740k; GBP 565k)

Paraguay and Ecuador are also introducing provisions to tax digital downloads locally, but they will do this via a withholding obligation on the payment provider. Suppliers will therefore need to factor this cost into gross sales figures.

UK: Digital ‘Newspaper’ Can Enjoy Zero Rating

The UK applies a VAT zero rating for books, newspapers and magazines. As these sectors have rapidly digitalised over the last years, the authorities have sought to strictly limit that privilege to the printed hard copy products originally envisaged when the law was drafted. A recent court case, however (News Corp UK & Ireland Ltd v HMRC Commissioners) has found in favour of the taxpayer that their digital ‘newspaper’ edition does, in fact qualify for zero rating. This could open up the prospect of significant VAT refund claims by similar providers. However, it is a ruling or relatively junior court (The Upper Tax Tribunal) and could be the subject of appeal. For the full ruling see here: http://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j10349/TC06385.pdf

The EU has introduced four measures as of 1 January 2020 to help standardise and (allegedly!) simplify cross-border transactions in the Single Market. They are commonly called Quick Fixes as they are intended to be interim measures before a long-planned review of the entire intra-EU trade regime later in the 2020’s.

Fix 1 – call-off stock simplification

Cross-border call-off stock (where a supplier sends goods to a customer’s location but sells them to the customer only as and when the customer needs them) has long been a difficult area. Under basic EU VAT law logic, the supplier would be required to treat the sales as local sales in the customer’s country and register for VAT there. However, to avoid unnecessary registrations, some Member States have long applied a simplification of treating these as intra-Eusales by the supplier and acquisitions by the customer. This simplication is now mandatory throughout the Union. It should be noted that this applies only to call-off stocks, where one customer is involved, not consignment stocks, where are shipped abroad and then allocated to multiple cusomers’ orders.

Fix 2 – chain transactions

Intra-EU chain transactions refer to successive supplies of the same goods with the goods being dispatched from the first supplier in the chain in one EU country directly to the last customer in the chain in another EU country. Therefore there are two or more consecutive supplies however there is just one intra-EU movement of those goods, leading to the question of which should enjoy the zero rating available for a trasaction involving an intra-EU movement. There has been a certain level of uncertainty in the legislation as to this matter, leading to frequent litigation and complex case law.

As of 1 January, it is now stipulated that the transport of goods should be ascribed to the first supply in the chain, that made to the intermediary operator, unless the intermediary operator is VAT registered in the country of dispatch of the goods and he communicates this number to the supplier, in which case the transport of goods should be allocated to the supply made by the intermediary operator (i.e. the first supply will be domestic one taxable in the country of dispatch and the second supply will be the exempt intra-Community one).

Fix 3 – mandatory VAT identification number of the customer for intra-Community supply

Currently in most EU countries it is already a requirement for the supplier to obtain and quote the customer’s valid EU VAT number on the invoice in order to exempt/zero-rate an intra-Community supply. However, even the European Court of Justice ruled it a merely ‘formal’ requirement, which has led to relaxed enforcement in some Member States.

As of 1 January 2020it will be a ‘substantive’ requirement in all Member States that a valid EU VAT number of a customer is obtained and quoted on the invoice. This means that, without it, the zero rating is legally lost and the supplier becomes liable to account for VAT on the supply. Furthermore, the transaction must also be reported on the recapitulative statement (European Sales List) in order to qualify for the exemption.

Fix 4 – proof of intra-Community transport

Currently there is no pan-EU criteria for the documentary evidence required to claim an exemption for intra-Community supplies. Each Member State can determine which documents are acceptable and sufficient as a proof of delivery of goods from one EU country to another. Consequently, the evidence is open to interpretation by different fiscal authorities (or even individual tax inspectors).

From 1 January 2020 there will be a ‘rebuttable presumption’ that the condition regarding the documentary evidence required to claim an exemption for intra-Community supplies of goods has been fulfilled if:

 

  • The supplier is responsible for the and holds two non-contradictory pieces of evidence, such as:
    • – Customer-managed relationship documents, bills of lading, or airfreight or carrier invoices;

Or:

  • One piece of evidence such as that above, plus:
    • – An insurance policy in relation to the transport of the goods; Or
    • – Banking documents in relation to the movement of goods
    • – Official documents issued by a public authority confirming arrival of goods in the Member State of destination, or
    • – A receipt from a warehouse

Or:

  • the customer is responsible for the shipment of the goods and the supplier holds:
    • – Two non-contradictory pieces of evidence as above (but not the alternatives, only the non-contradictory pieces of evidence) and:
    • – A written statement from the customer that it has acquired the goods into another Member State keeper for storage of goods in the Member State of destination.

As can be seen from the complexity of the list, this ‘simplification’ may be a double-edged sword. While bringing taxpayers certainty in some Member States where inspectors have been making excessive or even vexatious demands for documentation, it is likely to raise the bar for compliance in those Member States that have had a more relaxed enforcement of this matter.

If you would like to read more on the Quick Fixes, you can access a detailed EU summary here: https://ec.europa.eu/taxation_customs/sites/taxation/files/explanatory_notes_2020_quick_fixes_en.pdf

There are always VAT rate changes at New Year. 2020 is not a ‘bumper’ year for these, but there are a few:

Croatia

A reduced 13% VAT rate is to apply in Croatia in the hospitality sector (i.e. preparating and serving of meals, including desserts, in and outside a catering facilities) from 1 January 2020.

Hungary

With effect from 1 January 2020 Hungary will reduce its VAT rate for accommodation services from 18% to 5%.

Slovenia

As of 1 January 2020 a new reduced VAT rate of 5% will be introduced in Slovenia and it will apply to publications (both printed and e-books).

UK

Brexit

Brexit is now set to go ahead on 31 January, with the terms of the Withdrawal Agreement of 17 October 2019 applying (although, as at publication, the European Parliament has not yet formally ratified this). The agreement stipulates a transition period up to 31 December 2020, during which the UK will remain in the EU VAT zone and VAT impacts for business should be minimal. The post-transition regime is yet to be laid out in detail. For a full copy of the agreement see here: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/840655/Agreement_on_the_withdrawal_of_the_United_Kingdom_of_Great_Britain_and_Northern_Ireland_from_the_European_Union_and_the_European_Atomic_Energy_Community.pdf

Poland

Split payment mechanism on certain supplies in place from November 2019

As of November 2019 taxpayers in Poland are obliged to apply a split payment mechanism when making the bank transfer payments to their suppliers in respect of supplies above PLN 15k (GBP 3,5k; EUR 4k; USD 4.5k) in value, or all supplies in certain high risk sectors.

For supplies falling under the mandatory split payment mechanism, the supplier should have included a statement ‘Split payment mechanism’ on the invoice.

Under the split payment mechanism the purchaser splits the payment when making the bank transfer to the supplier, with the net amount being paid to the supplier’s regular account and the VAT amount being paid to a special ‘VAT account’ of the supplier held by his bank.

Funds held by a taxpayer in its ‘VAT account’ can be used to make the payments of VAT, corporate income tax, excise, customs and social security liabilities. A taxpayer can also apply to the Polish tax authorities for the funds gathered on the ‘VAT account’ to be transferred to its regular bank account.

You can read more about the system (in Polish) on the Polish government website here https://www.gov.pl/web/rozwoj/bezpieczna-transakcja-mechanizm-podzielonej-platnosci-split-payment-w-praktyce

New obligation from January 2020 to verify suppliers in ‘White List’ of taxpayers

Starting from 1 January 2020, businesses registered for VAT in Poland making bank transfers to their suppliers in respect of invoices documenting transactions of supplies exceeding PLN 15k (GBP 3,5k; EUR 4k; USD 4.5k) should verify whether the bank account of the supplier is listed in the so-called ‘White List’ of verified taxpayers.

The ‘White List’ is an online database run by the Polish tax authorities allowing companies to verify the VAT status (e.g. VAT registered vs. unregistered), as well as certain other information, about their business counterparties.

Penalties for paying to a non-White list account can be avoided if, within 3 days from ordering such a payment, he notifies the local tax office of the supplier of the bank account details, to which the payment was made. Alternatively, a company can pay the invoice using the split payment mechanism to avoid the joint and several liability for VAT purposes.

According to the recently published by the Polish Ministry of Finance ‘Explanatory Notes’ of 20 December 2019 concerning these new obligations, the foreign bank accounts will not be displayed within the ‘White List’ database.

You can access the White List search page here https://www.podatki.gov.pl/wykaz-podatnikow-vat-wyszukiwarka

 

In a recent state appeal court case the authorities found that an SSC provider that involved itself in customer documentation and contract processing for its client was involved in intermediary services with respect to its client’s supply of goods, rather than classic office support services.  This caused it to lose its zero ratings for back-office services charged abroad and an 18% GST charge to apply.

This case may turn out to be a significant landmark as it opens a new door for inspectors to look into the details of what Indian SSC’s do for their clients and to apply GST in some cases. This GST would currently be an irrecoverable cost for a foreign client.

 

The UAE has published the decision that official participants of Expo 2020 will be allowed VAT refunds even if they are not UAE VAT registered.

Expo 2020 is a registered exhibition due to take place in Dubai from October 2020 to April 2021. Official participants of the Expo are countries and intergovernmental organisations that have accepted the official invitation from the UAE to participate as an exhibitor.

The decision differentiates between operating expenses and the expenses incurred in relation to the exhibition space. Participants are eligible to claim VAT on supplies relating to the operations of the participant’s office and imports of goods for the personal use of the representative, staff and beneficiaries.  VAT-registered official participants may also be able to recover input tax incurred on making a taxable supply.

If the participant isn’t VAT registered, a refund entitlement certificate must be obtained from the Bureau Expo 2020 Dubai office to be audited and approved which will then allow them to claim input tax on supplies relating to the construction and dismantlement of the exhibition space and the operations and presentations within the space in addition to the operating expenses.  The VAT refund will be paid directly to the participant from the Federal Tax Authority (FTA) once approved.

If participants are UAE VAT registered, their process for recovery of VAT on operating and commercial activities will be through their VAT return submitted directly to the UAE Federal Tax Authority (FTA).

As of 1 October 2019, B2B supplies of most building and construction services will no longer require the supplier to charge UK VAT but will be reverse chargeable for the customer (see here for the rules).

The application of the law is complex as it applies to services covered by the UK’s “CIS” scheme for personal and corporate taxation in the construction sector, which has its own complex set of rules as to which activities are caught within its application. We recommend that suppliers or recipients of construction sector services in the UK confirm the application of the new rules to their transactions.

Input VAT recovery is possible on vehicles and mobile phones within Bahrain and the National Bureau for Revenue (NBR) where there is both business and personal use.

The NBR has released guidance on how to determine a fair and reasonable allocation as well as a simplified method that can be applied to make the calculation.  Under the simplified method, a fixed percentage is used to determine business and personal use; 40% fixed on all costs for motor vehicles and 60% fixed costs for mobile phones.

It has been confirmed that the Polish Authorities are planning on enforcing split payments for industries vulnerable to VAT fraud, in particular scrap metal, electronics, precious metals, steel and car parts for B2B transactions will come into force some time later this year.

The impact on foreign businesses who currently settle by bank transfers which are subject to VAT in Poland will also be required to open a bank account in Poland. However it is not clear how this will be enforced.