Options for reforming Goods and Services Tax (GST) in light of the COVID-19 pandemic
Due to Australia’s federation system of government, any changes to either the base or rate of GST requires the unanimous support of the federal and all six state governments. With the exception of the expansion of GST to inbound ‘business to consumer’ intangible supplies and low value goods, there has been practically no changes to the base on which GST is applied and there has been no change to the GST rate, set at 10%, since GST was implemented in 2000.
While the COVID-19 pandemic has not resulted in any immediate changes to Australia’s GST regime, the relative stability and efficiency of GST as a revenue raiser has led to growing calls for Australia’s relatively low rate of GST to be raised and for GST to be imposed on exempt and zero-rated supplies such as fresh food, education, health and certain financial supplies.
The expectation is that any GST reform would lead to the removal of inefficient and volatile taxes such as state stamp duties and payroll taxes and may also lead to income tax rate reductions. However, various options are currently being debated and it is likely that any reform will not be implemented in the short-term.
Taxation authority GST reviews to recommence
At the height of the COVID-19 pandemic, the Australian Taxation Office (ATO) paused much of its review and audit activities and diverted its resources towards the urgent delivery of significant economic stimulus measures.
As the bulk of the stimulus measures have now been rolled out, the ATO has announced that it will be recommencing its GST-related review and audit activities. Predominantly, these reviews are focussing on ensuring that the ATO has ‘justified trust’ in the people, processes and technology that businesses are using to comply with their GST obligations.
Our experience is that these reviews can be quite invasive (lasting over 12 months) and that they can result in substantial GST liabilities being uncovered. Further, if the ATO determines that it has a low level of assurance or trust in a business, it may put that business under continuous scrutiny and take an aggressive approach towards penalties and interest should it uncover any further underpayments of GST. In light of this, businesses need to be sufficiently prepared by having undertaken their own GST ‘health check’ or prudential reviews.
Sam Mohammed, RSM Australia
Extension granted for zero-rating of exported goods
In light of the Covid-19 pandemic, the New Zealand Inland Revenue Department (IRD) has offered a discretion for exporters to request a 3-month extension to extend the 28 day export timeframe.
Generally, the sale of exported goods can be GST zero-rated if the below criteria is met:
- The goods have physically been exported within 28 days of the time of supply (triggered at the earlier of invoice or payment)
- The supplier is an exporter and it is documented on the relevant export documentation
Thus, if the goods are not exported within the 28-day timeframe, the zero-rating of GST/VAT cannot apply.
Many NZ exporters could not meet the 28-day timeframe due to the NZ lock-down in mid-March. Some had received deposits or invoiced for the orders in early April but could not however ship the goods overseas.
As a result of this, the IRD had the discretion to extend the 28-day period for 3 months, if requested. The 3 month extension starts on the day the 28-day period expires and applies to supplies of goods up to and including 31 July 2020. It will not apply for any supplies occurring after 31 July 2020. Further extensions may be considered; however this will be at the IRD’s discretion.
This is great news to our exporters as if their goods were unable to be exported within 28 days, GST zero-rating could not apply. This means, those with a contract with the wording of ‘plus GST, if any’ would be suffering from returning either 15% GST to the government or re-negotiating with their purchaser which is not ideal from a commercial perspective.
Extension for application of change of GST taxable period
GST registered taxpayers who wish to amend their GST reporting period to a one monthly return basis are required to apply to IRD prior to the end of their taxable period.
The IRD has given discretion to accept a change from a six month to one-month taxable period. The variation applies to taxpayers who had a six-monthly taxable period ended 31 March 2020, but who did not apply for the change to a one-month taxable period before 31 March 2020. Generally, taxpayers are required to make an application for change prior to 31 March 2020. The IRD has now extended the time to make the application for the change to 30 June 2020.
How does this benefit them?
This could benefit some businesses whose taxable period is six monthly and suffered from a lack of cash flow with reduced or limited income streams of revenue because of the COVID-19 lockdown in NZ prior to April. The change may enable them to receive a GST refund (if any) in the next month period rather than in the next six-month period.
Extended period to make election for GST-ratio method
The GST ratio method allows provisional taxpayers to base their provisional tax payments on a percentage of their GST taxable supplies. Under this method, provisional tax for an income year is based on the level of GST taxable supplies and spread over 6 payments, rather than the 3 currently payable under the existing standard or estimation methods. This may be helpful in better aligning your provisional tax payments with your cash flow throughout the year. Businesses who suffer from a decline of income or whose income fluctuates during the year may benefit from applying the GST-ratio method.
Taxpayers who wishes to use the GST ratio method for calculating their provisional tax payments are required to elect the method prior to the start of their income year, to use the method for the following income year. Thus for the 2021 tax year, they are required to inform the IRD of the election on or before 31 March 2020 (under a standard balance date).
Similarly, the timeframe to elect into this method has been extended to 19 August 2020 or the day before the start of the 2021 income year, whichever is later. This is to help those businesses who are affected by COVID-19 to allow them additional time to inform the Inland Revenue.
Furthermore, businesses also have an additional 10 working days to make the provisional tax payment once they notify the IRD of their GST ratio without any penalties and interest charged.
Lisa Murphy, RSM New Zealand
Reactions and developments amidst the Coronavirus pandemic
The European Union is considering a co-ordinated approach to revenue raising as it puts in place its strategy to rebuild its 27 member economies, to repair the damage done to its respective economies by the Coronavirus pandemic. Given that VAT receipts are a significant part of the EU budget, it is likely that VAT and other indirect tax measures will be a key part of any proposals in that area.
Several announcements have also been made, by member states, on indirect tax measures, by way of an individual response to the crisis and businesses should ensure they are well positioned to take advantage where possible. The measures introduced in Germany and the Netherlands are strong examples of effective responses.
Temporary reduction in VAT rates in Germany
The German government has recently agreed on an extensive economic stimulus package to overcome the Coronavirus crisis. To boost local consumption, it has been decided (amongst other measures) to temporarily reduce the standard VAT rate from 19 to 16 percent and the reduced VAT rate from 7% to 5%. This change should be effective as of 1 July 2020 until 31 December 2020. The approval of the German Federal Council (Bundesrat) is still pending.
Separate VAT rate reduction for restaurant and catering services
For restaurant and catering services, the German Federal Ministry of Finance had already agreed on a reduction of the VAT rate from 19 to 7 percent from 1 July 2020 to 30 June 2021 as part of the “Corona Tax Assistance Act”. The reduced tax rate applies not only to traditional catering businesses, but also to all providers of so-called “restaurant and catering services” (e.g. bakeries, butchers, catering providers, canteens, etc.). However, the sale of beverages is explicitly excluded. As a result of the now announced general VAT rate reduction, the VAT rate for the sale of food could be reduced to 5% and for the sale of beverages to 16%
What this means
The temporary reduction of the VAT rates will result in a number of practical challenges with accounting systems that will need to be addressed. From 1 July 2020, the new VAT rates must be properly implemented in all ERP and Point of Sale (POS) systems. From this date to 31 December 2020, sales invoices (except cancellation invoices) for all supplies provided within this period must be issued with the new VAT rates (16 or 5 percent). Adjustments are also required in particular for so-called permanent invoices already issued (e.g. permanent rental invoices), insofar as these also relate to the period between July and December 2020, as well as for the preparation of final invoices.
If the lower rate is not reported correctly between 1 July 2020 and 31 December 2020, businesses can still be made liable to pay over the higher VAT liablitiy as shown on the invoice albeit that the recipient will not be able to recover it if incorrectly charged, leading to reporting issues and difficulties for the customer.
Tim Zumbach, RSM Germany
VAT Exemption for supplies in the healthcare sector
The Netherlands has announced that the outsourcing of healthcare personnel will currently become VAT exempt in all circumstances and, importantly, will not negatively impact on the supplier’s right to recover VAT. However, there are strict conditions attaching as follows:
- The hirer must be a healthcare institution or a healthcare organisation that applies the VAT exemption for medical care.
- The outsourcer may only charge the gross salary costs to the hirer, possibly increased by a maximum reimbursement of 5%.
- The outsourcer should make a reference to the special scheme on the invoice.
- No profit may be intended or made with the outsourcing of staff
What this means
This is an important change in the sector and should be welcomed by those impacted but given the strict conditions that apply, impacted businesses should take care to ensure proper application of the rules to maximise the opportunity
Jaouad Bantal, RSM Netherlands
Delayed introduction of new e-commerce rules
The European Commission has also announced the postponement of the introduction of the VAT e-commerce package by 6 months, to take account of the difficulties that businesses and Member States are facing currently with the Coronavirus crisis. These rules involve a fundamental change in approach where businesses sell to private individuals on e-commerce platforms and were scheduled to take effect from 1 January 2021. The postponement to 1 July 2021 gives Member States and businesses more time to prepare for the new VAT e-commerce rules.
The key proposed changes are as follows:
The introduction of a single VAT return for all EU obligations outside the country of establishment for distance sellers – All reporting will be done through an electronic platform: OSS (“One Stop Shop”). This means no more registrations in other EU Members States for distance selling but also that such sales will be taxed from the first transaction as the thresholds will also be abolished
Abolishing the low-value import VAT exemption – all imports in the EU will be taxed regardless of value but for imports with a value of less than EUR 150 VAT will not be paid to customs but reported and paid through a new electronic platform: IOSS (Import One Stop Shop).
Specific changes to make marketplaces liable for VAT on goods sold by their vendors will be made – Sales made through marketplaces will be reported and paid by the marketplace, not the individual vendors.
What this means
The growth of e-commerce in the past few years has been significant. Amidst the current pandemic as businesses see this as an alternative route to market. Businesses selling through such platforms should note the changes and ensure their systems and supply chains are set up to deal adequately with the changes as well as examining their supply chain, commercial arrangements and offering to customers to ensure they are fully compliant.
Andy Ilsley, RSM UK
Input VAT recovery by holding company on costs of abortive acquisition – diversion to another supply
The recent Advocate General’s (AG) opinion in case of Sonaecom appears to suggest that a holding company cannot recover VAT on fundraising costs on an abortive transaction, where those funds are diverted to another, exempt supply in the same partial exemption year. However, it confirms previous case law in favour of VAT recovery on acquisition costs by holding companies who supply, or intend to supply, management services to their subsidiaries.
Sonaecom, established in Portugal, is a holding company, which acquires, holds and manages shares. It also manages and provides strategic co-ordination to companies operating in the telecoms, media, software and systems integration markets, charging VAT on those services.
In 2005, Soneacom considered investing in businesses offering Triple Play, a technology that combines internet, TV and telephone services over a single broadband connection. While planning an investment in telecoms company Cabovisaos, it incurred VAT of €212,000 on two market studies it commissioned on Triple Play from specialist consultants. It also incurred VAT of €769,000 on commission paid to an investment bank to organise and guarantee the placement of a private issue of bonds. Sonaecom planned to use that capital to acquire shares in Cabovisaos, and then provided management services and technical support services to that company. However, it did not ultimately go ahead with the acquisition of Cabovisaos and instead loaned the funds to its parent company. Sonaecom claims that it did this to ‘park’ the funds for a period and that it had used them later to acquire shares in other businesses.
The AG is of the opinion that:
- a holding company has the right to full deduction in respect of expenditure for the acquisition of shares in a company to which it intended to supply taxable services (it is for the referring court to examine objective evidence to determine whether Sonaecom held that intention).
- The right to deduct also arises if that acquisition ultimately did not materialise and applies irrespective of the amount of VAT payable in respect of the planned services.
- However, the VAT exempt loan of the capital raised from the holding company to the parent company of the group precludes recovery. The direct link with the exempt service actually provided takes precedence over the original intention to supply taxable services to a subsidiary to be acquired with that capital.
What this means
The VAT recovery position of deal costs is a complex area, typically involving large amounts of VAT, so should be considered carefully in the light of proposed transactions, particularly where initial intentions change and funds raised for abortive acquisitions are diverted to another activity . For Sonaecom, this opinion appears to mean that, while it may be entitled to recover VAT on the market studies as abortive deal costs, it is likely to lose its VAT recovery on a separate bond commission because it used the funds raised to make a different supply (i.e. an exempt loan) with no recovery of input tax.
The opinion is otherwise positive for those engaged in M&A activity as it reconfirms a number of points already decided in favour of the taxpayer by the CJEU in earlier cases ( Larentia + Minerva and RyanAir. ). We now await the CJEU’s final judgment on this case later in the year.
Sarah Halsted RSM UK
Dong Yang: CJEU rules on VAT fixed establishment
For the vast majority of transactions between businesses, services are subject to VAT in the place where the recipient belongs or is established. The concept of ‘establishment’ for these purposes, particularly when recipients have establishments in different locations has exercised the VAT courts on many occasions, the Court of Justice of the European Union (‘CJEU’) has analysed the concept of fixed establishment in a number of its verdicts. Unfortunately, in the most recent of these, Dong Yang Electronics (C-547/18) there does not appear to be as much clarification as it was expected.
The question raised by the Polish Administrative Court concerned the case where the Polish VAT taxpayer supplied services to a non-EU company but with its subsidiary in Poland. The facts of the case indicated that the services were related to the economic activity of a non-EU resident in Poland. In such circumstances, the question was whether an EU subsidiary of that non-EU entity could be regarded as a fixed establishment (FE) of its non-EU parent company. The CJEU stated that the service supplier is not required to investigate any contractual relationships between the subsidiary in Poland and its non-EU parent company in order to determine where the latter is established. For these purposes, the service provider should examine the nature and use of service provided. Unfortunately, the CJEU did not fully follow the AG’s opinion and has not fully clarified the nature of obligation on the supplier to establish where the recipient belongs for this service.
What this means
The proper identification of the place of supply is crucial for VAT treatment of services. As a rule, for B2B service transactions, a service supplier may apply reverse charge mechanism if the customer is seated in other country. However, if the customer may be recognized as a one having a fixed establishment where the supplier is seated, a supplier is obliged to levy domestic VAT.
To mitigate any potential VAT risk it is important to analyse and be clear as to whether an economic presence of an enterprise in another country may result in having a fixed establishment for VAT purposes.
Daniel Więckowski, RSM Poland