New European wide approach to tackling VAT fraud
Legislative reform in VAT has focussed on changing the VAT rules in response to fraudsters’ activity. For example, the UK changed the VAT accounting rules for selling mobile phones when carousel fraud was detected in the sector. The launch of the Transaction Network Analysis (TNA) tool recently marks a change in approach which will boost governments’ ability to detect fraud using data collected by all EU Member States’ tax authorities.
The TNA tool has been developed to give the EU’s network of anti-fraud experts (Eurofisc) more information in their efforts to combat carousel fraud. With the introduction of the TNA tool, Eurofisc will have access to EU-wide tax data, criminal records, information held by Europol as well as the European Anti-Fraud Office. It is intended to increase the effectiveness and efficiency of participating countries’ cross-border investigations.
What this means
Businesses trading in the EU are likely to experience greater scrutiny on transactions as a result of the development of the TNA tool, which is the latest in a continuing trend of driving out fraud and reducing the VAT gap between theoretical and actual tax receipts.
Philip Munn, RSM UK
Virtual currency GST/HST exemption
In order to keep pace with developments in the Canadian economy, the Department of Finance has recently moved to include ‘a virtual payment instrument’ to the definition of ‘financial instrument’ in Canadian law. Effectively, this proposal confirms that supplies of virtual currency will be exempt from the Goods and Services Tax and Harmonised Services Tax that operate there as indirect taxes (‘GST/HST’).
Furthermore, ‘virtual payment instrument’ will be added to the legal definition to mean:
‘Property that is a digital representation of value, that functions as a medium of exchange and that only exists at a digital address of a publicly distributed ledger, other than property that:
- Confers a right, whether immediate or future and whether absolute or contingent, to be exchanged or redeemed for money or specific property or services or to be converted into money or specific property or services.
- Is primarily for use within, or as part of, a gaming platform, an affinity or rewards program or a similar platform or program.
- Is prescribed property (Note: currently, no property is proposed to be prescribed).’
What this means
Given the global growth of such virtual currency, those dealing in such currencies should take note of the Canadian changes and ensure systems are configured to deal with this correctly.
Rob Dew, RSM Canada
Potential use of the general reverse charge mechanism
The EU Commission has approved the Czech Republic’s request to consider the potential to use of a general reverse charge mechanism to combat VAT fraud. If adopted, the reverse charge application would apply to all domestic transactions above EUR 17,500, or equivalent CZK 450,000. Until now the local reverse charge mechanism was permitted as a derogation from the EU VAT Directive only in specific sectors vulnerable to tax fraud, i.e. in IT sphere – laptops, computer chips, mobile phones or carbon credits; then precious metals, cereals, specific delivery of gas or electricity etc, but the Czech authorities are looking to broaden its use.
What this means
The Czech Ministry of Finance expects that the general reverse charge could be in effect from 1 July 2020 if the proposal is approved at all levels without any major delays. The timelines for approvals are not however confirmed and it may therefore be postponed.
The use of the generalised reverse charge is however limited by time as it should last only until 2022 at which point the planned entry of the definitive EU VAT system comes into force.
Kateřina Provodová, RSM Czech Republic
VAT Treatment of Fuel Card Schemes
A recent decision of the CJEU following a referral from the Polish tax authority analyses the VAT treatment of a charge made to manage a series of fuel card schemes.
An Austrian company Vega International (‘VI’) provided fuel cards to subsidiary operations established in a number of EU countries who engage in transporting commercial vehicles from manufacturers to their customers. VI were invoiced by fuel providers in the local jurisdictions for fuel and VI would then in turn recharge the costs to the local subsidiaries along with a 2% uplift.
VI had sought to recover input VAT incurred in Poland on the supply of fuel on the grounds that it was making an onward supply of the fuel to its subsidiary in Poland. The Polish authorities rejected the claim arguing that whilst the invoice was issued to VI, the supply was in fact made to the local subsidiary as it was the local subsidiary that determined the quality, quantity, type of fuel and time and location of the supply.
Considering this matter, the court concluded that as VI was not physically able to dispose or deliver the goods (fuel) as owner, the supplies which it makes to its subsidiary businesses must constitute a supply of services. The Court then had to determine the nature of the service provided.
The court ruled that VI was providing a service to its subsidiaries of the financing of fuel in advance and not the provision of the fuel itself. For VAT purposes therefore this service was deemed to fall within the VAT exemption under the Principal VAT Directive as this constituted a financial service i.e. the granting of 'credit'.
What this means
VI did not regard itself as fulfilling the normal role of a bank or financial institution, but this case reiterates an important point that it is not the status of the provider, but the nature of the services provided which determines the VAT liability of the service.
Businesses which manage fuel card schemes may want to review their arrangements to ensure that they are not recovering input VAT on supplies of fuel which are in fact made to the relevant subsidiaries. To the extent that an uplift is applied on recharges which should be VAT exempt following this decision, this may result in the company losing a right to recover VAT on its running costs.
Przemysław Powierza, RSM Poland
Obligatory split payment mechanism:
The Polish Ministry of Finance has published a draft act introducing an obligatory split payment mechanism for certain goods and services, aiming to be effective from 1 November 2019 – this will mean that businesses operating in Poland will be required to open and operate a second bank account specifically to handle VAT payments.
The split payment mechanism was introduced to the Polish legal system on 1 July 2018. At present it is entirely voluntary. However, the presented draft act provides for the obligatory split payment regime for any supply of goods and provision of services listed in proposed amendments to the Polish VAT Act.
The new regulations are likely to apply to the following:
- Electronic equipment
- Steel products and scrap
- Base metals, precious metals and jewellery
- Waste and recyclables
- Fuels and oils
- Chemical products and plastics
- Automobile and motorcycle parts
- Services of transferring greenhouse emissions allowances
- Construction services
The introduced obligatory split payment regime shall apply to transactions of supply of goods and provision of services only between taxpayers (B2B), provided that the value of such transactions exceeds PLN 15,000 gross. These provisions, as currently, will cover only online bank transfers; hence, it shall not apply to other forms of payment.
As a result, taxpayers who supply goods and perform services set out above will be obliged to hold a settlement account with a bank operating in the territory of Poland. Only such banks are subject to the Polish jurisdiction and are technologically prepared to handle split payments.
Under the split payment mechanism, tax payments shall be made only in Polish zloty.
What this means
Businesses with activities and VAT registrations in Poland are highly recommended to ensure that the requisite bank accounts are set up in time for the changes becoming effective and that accounting systems, are reviewed and re-configured to deal with the new provisions, as well as procedures for issuing correct invoices with a note on the obligatory split payment regime.
Daniel Wieckowski, RSM Poland
8th directive claim - delay in answering additional requests from tax authorities
EU businesses that incur VAT in other EU member states can claim for a refund of this VAT through a procedure known as the ‘8th Directive process’. The claim is made electronically by the company directly on its national tax authorities’ website and is automatically forwarded to tax authorities of the member state where VAT was paid (hereafter ‘local tax authorities’).
Local tax authorities can ask for additional documents and / or information electronically. Due to EU legislation the claiming entity must answer within 30 days from the receipt of local tax authorities’ request.
When the entity answers after this delay, local tax authorities reject the refund claim and VAT cannot be refunded.
In a recent judgement of the CJEU (in a French case), it has concluded that the 30 days delay allowed by EU legislation to companies to answer to local tax authorities additional request does not have any basis in law. Thus, if the company fails to answer within this delay, it can provide requested information before the court.
What this means
This is an encouraging decision for foreign businesses that do not respond in time to local tax authorities’ additional requests for information. In such cases, local tax authorities may have unlawfully denied the rights of the foreign company to obtain a refund of VAT paid in the country in which it was incurred.
This decision means that foreign businesses may now be able to dispute a local tax authorities’ refusal for VAT refund claim.
With this decision, they can dispute local tax authorities’ refusal and provide the requested information, at least before the Court when local tax authorities do not want to consider information provided after the 30 days delay.
This decision does not affect other requirements such as the requirement to make the claim (30 September of the year following VAT payment) and so businesses do need to assess, in good time, whether claims are appropriate, and can be submitted on a timely basis, particularly where these involve the UK given the ongoing Brexit negotiations.
Alexandre Soumaille, RSM France
Taxation of e-commerce businesses - Wayfair update
We are approaching the one-year anniversary of the South Dakota versus Wayfair decision when the U.S. Supreme Court ruled that physical presence is no longer the constitutional standard for establishing sales/use tax nexus. Taxing jurisdictions are now applying specific ‘bright-line’ thresholds to a remote seller’s transaction count and total revenue (gross sales / exempt + taxable sales). Every state with a general sales tax has adopted an enforcement date for economic sales tax nexus except for Florida, Kansas and Missouri. Those state legislatures have adjourned for the year and, pending any special sessions, appear unlikely to address a remote seller sales tax threshold in 2019. Louisiana, the only other state pending adoption, has recently cleared the way to enforce economic sales tax nexus within the next 12 months.
In response to budget shortfalls and concerns about the rapid growth of the digital economy, the states have been pressured to extend interpretations of the term ‘physical presence.’ As such, in Wayfair, the Court ruled that physical presence is no longer the constitutional standard for establishing sales/use tax nexus; therefore, it is lawful for states to require the out-of-state sellers to collect sales tax, despite the fact the seller does not maintain physical presence in the taxing jurisdiction (ship-to or consumer’s state).
An out-of-state seller may be required to collect a state’s sales/use tax if it has a virtual or, ‘economic presence’ with the state, meaning the seller meets certain economic thresholds in the taxing state. Through this decision, the economic presence requirement creates a bright line test for entities to use to determine if they have nexus with a state. In Wayfair, the court did not, however, define the economic presence necessary to establish nexus in each state jurisdiction. As such, the threshold standards for establishing sufficient economic nexus will also be the result of the outgrowth of judicial decisions.
Approximately 40 states currently impose (or have proposed) legislation relating to economic nexus. Although every state interprets Wayfair in accordance with its individual state law, the following activities will generally establish economic sales/use tax nexus (not all-inclusive):
- Sales in excess of a particular revenue threshold (e.g., $100,000 or $250,000) for the prior 12-month period
- 200 or more transactions for the prior 12-month period
What this means
Note that revenue thresholds and transactions counts are not solely met based on taxable transactions but are comprised of all wholesale, retail and service transactions. Therefore, sales tax registration and filing obligations may exist in states where an entity has no tax liability.
Embracing these new sales and use tax law changes and keeping an eye on the future could ultimately help streamline reporting processes, avoid unnecessary penalties, and counteract troubles during an audit or future process improvement, thereby assisting in managing cash flow.
Andrienne Albritton, RSM US
Deadline for 2018 VAT refunds extended
The Norwegian tax authorities have recently announced that the deadline for foreign businesses incurring VAT in Norway in 2018, to seek to reclaim this VAT, has been extended from 30 June 2019 to 30 September 2019.
What this means
For businesses that did not get an opportunity to consider and submit a refund request in time, this extended deadline is welcome. It is not clear however, as to whether this extension is a sole occurance or will also be applied in future years.
Marianne Brockmann Bugge, RSM Norway.
Change in VAT rate of foodstuffs
The Romanian authorities have defined a new type of food products, ‘high quality’ food products, for the purposes of qualifying for the lower reduced VAT rate of 5%. The Romanian legislation now defines two kind of food products from a VAT perspective: ‘normal’ food products and ‘high quality’ food products. The applicable VAT rate for supply of ‘normal’ food products is the reduced VAT rate of 9% while the VAT rate for delivery of ‘high quality’ food products is the reduced VAT rate of 5%.
This brings yet another level of complexity to determining the VAT treatment of supplies related to food products as Romania already had a 5% reduced rate for restaurant and catering services.
What this means
‘High quality’ food products are defined as products of mountain origin, eco or traditional products, authorised by the Ministry of Agriculture and Rural Development. In order to apply the 5% reduced VAT rate, the seller needs to have the certification document issued by the Ministry of Agriculture and Rural Development, except if the supply is made to the final consumer. The 5% VAT rate is applicable across the entire supply chain and Finance Ministry officials hope it will contribute to a reduction of the price paid by the final consumer, although past experience with VAT rate reductions shows this not to be the case.
Adrian Serban, RSM Romania