Breaking VAT news from RSM's experts around the world, including updates from Portugal, Norway, UK, Italy, Australia, Canada, South Africa and Malaysia.
Court of Justice of the European Union (‘CJEU’) Update
C-672/16 - Imofloresmira - Investimentos Imobiliários
The CJEU has ruled that the Portuguese VAT law implementing and administering the Capital Goods Scheme is inconsistent with the EU’s Principal VAT Directive (‘PVD’).
Under Portuguese rules, it seeks an adjustment of initial VAT recovered where a property, subject to an option to tax, remains unoccupied for a number of years. In this particular case, Imofloresmira had opted to tax, and following the initial tenants vacating of the properties, these properties lay vacant and unoccupied for over two years. Under Portuguese VAT law, the tax authorities could seek an adjustment of initial input tax recovery on the basis that the property was not being used for a taxable purpose, even when, as in Imofloresmira’s case, the taxpayer actively marketed and advertised the vacant property.
What this means
The CJEU has reminded the tax authority that the existence and right of deduction arises at the time the input tax is incurred. Once the tax authority has accepted that status as a taxable person, then subject to establishing fraud or evasion, that status cannot, in principle, subsequently be withdrawn retroactively on account of the fact that certain events have or have not occurred. Although the PVD provides member states with a wide discretionary power to determine the rules governing the exercise of the option to tax, and even withdraw its application, member states could not use that power by revoking a right of deduction which has already been acquired. Nor could the Portuguese Government in this instance argue that due to the termination of the leases, ‘some change occurs in the factors used to determine the amount to be deducted’ and thereby requiring it necessary to carry out a proportional adjustment of input tax deducted.
C-8/17 - Biosafe . Flexiposo
The CJEU has ruled that the PVD and the principle of fiscal neutrality precluded Portuguese VAT legislation refusing the recipient of a supply the right to deduct additional VAT charged several years after the supply on the basis that the original invoice issued was outside the ‘capping’ limitation period for VAT recovery.
The case before the CJEU relates to a civil dispute between two parties where the purchaser refused to pay an additional amount of VAT on the basis that it cannot recover such as input tax because of capping provisions.
Following a tax inspection in 2011, the Portuguese tax authorities issued adjusted VAT notices concerning supplies of goods which had taken place between February 2008 and May 2010 in respect of which Biosafe (the supplier) had incorrectly applied VAT at the reduced-rate of 5 percent, instead of the normal standard rate of 21 percent. Biosafe made a VAT adjustment by paying the additional VAT to the tax authorities and, in late 2012, issued debit notes to Flexipiso (the purchaser), which constituted, according to the referring court, documents rectifying the initial invoices.
The CJEU says that the right to deduct VAT is subject to compliance with both substantive requirements and formal requirements. As to those formal requirements the PVD provides that a taxable person must hold an invoice drawn up in accordance with its relevant articles.
Where therefore, as in this case, the tax authority has, some several years after the event, determined that a reduced rate of VAT (and therefore the VAT element identified within the original invoice) had been incorrectly applied to the transaction, and the supplier subsequently issues a new VAT invoice identifying the correct rate and amount of VAT, it is only as a result of receipt of the new invoice that the substantive and formal conditions giving rise to a right to deduct VAT are met in accordance with the PVD and the principle of fiscal neutrality. Consequently, in such circumstances, the purchaser’s right to deduct can only be at the date of the newly issued invoice, not the original invoice.
It followed that, in such circumstances, subject to objective evidence establishing the existence of a fraud or abuse, a taxable person may not be refused the right to deduct additional VAT chargeable to a supply solely on the ground that the ‘capping’ limitation period had expired.
What this means
This ruling will provide comfort to those who receive invoices late, often because the VAT was incorrectly omitted in the first place. The date of the new invoice is therefore relevant for the purposes of assessing the recovery rules (particularly as regards time limits).
The Norwegian Government is in the process of a consultation exercise on the introduction of proposed new reporting requirements for online platforms in the ‘sharing’ economy.
The proposal, which follows up the publication of recommendations by the Government's sharing economy committee in 2017, would require online platforms enabling the provision of sharing economy services and the rental of property to provide "tax relevant" information about the service provider or landlord to the tax administration.
What this means
The proposed measures would apply across the entire sharing economy, and not just to platforms that provide short-term property rentals as was originally envisaged.
According to the Norwegian Finance Minister, the proposal “will make it easier for service providers and landlords in the sharing economy to pay the right tax, and will contribute to a level playing field for business.”
Restriction of VAT cost-sharing exemption
Following recent decisions of the CJEU regarding the extent to which the cost sharing exemption can apply (Luxembourg, Germany, Aviva, DNB Banka), HMRC has announced a change in policy in how the cost-sharing exemption will be applied in the UK. The change in policy will be effective immediately, albeit there will be a transitional period to 31 May 2018, for those businesses directly affected and which have relied on HMRC’s published guidance.
What this means
Under the new interpretation, only those businesses engaged in ‘relevant exempt’ and non-businesses activities will fall within the scope of the cost-sharing exemption which helps partly exempt entities reduce the impact of VAT on bought-in services by sharing these with other members of a cost-sharing group. Relevant exempt activities are as follows:
- postal services
- health and welfare
- subscriptions to trade unions and professional bodies
- fund raising by charities
- cultural services
Notably, activities relating to land and property, Insurance, Betting and gaming, and Finance are now excluded from the cost-sharing exemption and will not be able to benefit from it going forward.
Housing associations and social housing providers can continue to be members of a cost-sharing group until HMRC gives more guidance later in the year. Any subsequent changes to the application of the cost-sharing exemption by housing associations will include transitional arrangements, but these may be applied, if necessary, to the period from the date of this brief.
For now, the ‘85%’ test will continue to apply, but HMRC is considering the impact of the successful infraction proceedings against Luxembourg (which allowed the CSG to exempt its supplies when the member’s taxable transactions were up to 30% (or in some cases 45%) of its total turnover).
HMRC’s new policy will also mean that the cost-sharing exemption will be restricted to UK members only, and that the cost-sharing exemption will not be permitted where an uplift has been charged on transactions for transfer pricing purposes.
EU proposals for reform and the implications of Brexit
A Committee of the UK Parliament has issued a report asking for further details about the government’s desired VAT arrangements for trade between the UK and the EU post-Brexit, and expresses concerns about ‘the inability, or unwillingness, of the government to share a detailed proposition for the mitigation of VAT-related barriers to trade flows between the UK and the EU as and when the UK leaves the single EU VAT area.
In light of repeated refusals by the UK government to confirm whether it wants to stay in, remain aligned with, or fully exit the single EU VAT area after Brexit, the committee concludes that the Treasury is considering seeking some form of continued participation in the EU’s VAT system to minimise any new frictions in trade with the remaining Member States.
However, in highlighting the European Commission’s four main legislative proposals for the implementation of the ‘definitive’ VAT system by 2022, (single EU VAT area; flexibility for member states to reduce VAT rates; small business exemptions; and increased co-operation to combat VAT fraud), the committee identifies that, if the UK is to be bound by EU VAT rules (which it might be to maintain the ‘freest and most frictionless trade possible’), it is not clear how the UK could, for example unilaterally reject the eventual abolition of the VAT reverse charge mechanism, use of the One Stop Shop for cross-border sales, or refuse to apply an EU-wide VAT registration threshold, while it remains part of the single EU VAT area, without a veto, if the EC’s proposals are agreed and implemented by the EU-27.
Noting for example that the EC’s proposals on the new VAT rates system will not take effect until at least 2022 the committee asks why, if the post-Brexit ‘transitional’ period is to 31 December 2020, the Treasury is currently undertaking a ‘mapping exercise’ to identify how the proposal could impact on the UK’s current VAT reduced-rates or zero-rates. Similarly, the committee asks why the Government is making assumptions that the EC’s proposals on small business exemptions may apply in the UK from 2022 onwards.
In the committee’s view, based upon the content of Explanatory Memorandums which it has received from the Treasury and other Government departments, the implication is that the Government is operating, even if only provisionally, under the assumption that the UK might still be in the common EU VAT area when the new ‘definitive’ VAT rules take effect.
What this means
The impact of a post-Brexit UK on businesses is still very much in doubt and this report has hardly served to clarify the position. Businesses should take the opportunity to consider their own position and supply chain in light of potential changes.
E-invoicing to Become Mandatory in Italy in 2019
Italy is the first E.U. member state to make e-invoicing mandatory with real-time VAT controls, in new regulations to be effective from 1 January 2019.
Specifically, the supply of petrol or diesel fuel as motor fuels and the provision of services provided by subcontractors where they are providing a contract for works or services to a public administration, will be subject to the electronic invoicing obligation from July 1st 2018, while, for tax free shopping sector, it will be compulsory to issue the invoices in electronic format from September 1st 2018 on for the purchases of goods by non EU-based private customers where the value exceeds Euro 154,94.
What this means
Starting from January 1st 2019 persons established or resident in Italy, foreign entities with Italian permanent establishments, and non-established taxable persons with an Italian VAT number (with or without VAT representative) will be required to issue their B2B and B2C (if asked by the customer/client) invoices only in electronic format.
The e-invoicing obligation is aimed at encouraging digitalisation by companies and, also, or course, to prevent tax evasion and VAT fraud. There are a number of specific rules governing the format of such invoices and supplies exempted from the provisions but those impacted do need to be familiar with the provisions as harsh penalties have been announced – potentially up to 180% of the VAT incorrectly declared as a result where invoices have not been issued correctly.
Australian GST - Low value goods
Currently, Australian consumers can purchase low value goods (those with a value of less than $1,000AUD) without the importation being subject to GST if they themselves bring the goods into Australia.
New legislation, effective from 1 July 2018, amends the GST Act to ensure that GST is payable on certain supplies of low value goods that are purchased by consumers and brought to Australia.
These reforms treat the operator of an electronic distribution platform as the supplier of low value goods if the goods are purchased through the platform by consumers and brought to Australia with the assistance of either the supplier or the operator.
What this means
Determining whether or not the operator of the electronic distribution platform is the “supplier” for Australian GST purposes is quite complex. The practical implications of this change are as follows:
- Registration is only required where sales into Australia exceed $75,000AUD in any 12-month period.
- The GST liability for the operator of the electronic distribution platform is 10% of the sale price of the goods (that is, 1/11th of the total GST inclusive price).
- There is a simplified GST registration system available.
- GST must be reported and remitted by the supplier (or deemed supplier) to the Australian Taxation Office (“ATO”).
Many commentators believe that the ATO will struggle to enforce the legislation because it applies principally to foreign suppliers, which are beyond the Australian legal system’s direct reach. The Government’s revenue estimates are based on an assumed collection rate that reaches 27 per cent after the first three years and a maximum of 54 per cent after six years. The Government has considered a number of ways to “encourage” compliance, but nothing has been implemented yet.
A number of countries will no doubt be looking at the Australian proposals with keen interest as ways of addressing the phenomenal growth of the digital economy to ensure that they dos not prejudice the efficient collection of VAT in those jurisdictions.
Quebec 2018 Budget Targets E-commerce Activities
As announced in the 2018 budget, the Quebec government will be implementing a mandatory Quebec sales tax registration system for non-resident suppliers that do not have a physical or significant presence in Quebec.
Where taxable supplies made in Quebec to specified Quebec consumers exceed $30,000 a year, non-resident suppliers outside Canada will be required to register, collect, and remit tax on supplies of services and intangible personal property (e.g., software and digital content such as music, on-line gaming or movies). Specified Quebec consumers are generally non-registered consumers located in Quebec.
Non-resident suppliers located in Canada will also be required to collect and remit tax on supplies of tangible personal property (goods).
The registration requirement also extends to providers of digital property and services distribution platforms (e.g., on-line sales portals that are responsible for billing etc.) that provide their services to non-residents selling services and intangible personal property to specified Quebec consumers.
The mandatory registration requirements become effective on January 1, 2019 for non-resident suppliers located outside Canada (and any related digital distribution platforms), and September 1, 2019 for non-resident suppliers located in Canada (and any related digital distribution platforms).
What this means
Revenue Quebec is looking at ensuring tax fairness between non-resident suppliers of Québec and local businesses, which are required to collect and remit the Quebec Sales Tax (“QST”).
For non-resident suppliers outside Canada, these measures will add a compliance requirement in Quebec including QST registration, collection, reporting and remittance of QST on sales of digital products to residents of Quebec.
Increase in Standard Rate
The South African government has increased the standard rate of VAT to 15%, effective from 1April 2018.
This is the first time the VAT rate has increased in South Africa since 1993 and the increase has sparked outrage in certain sectors and a calm resignation in others. The economy is in dire straits and this is perhaps the “least” controversial way for South Africa to recover from the cost of corruption, drought and other economic and political factors.
South Africans should consider themselves fortunate as some of the highest VAT rates are in excess of a global average of around 17-20% with countries like Bhutan reaching a staggering 50% VAT rate.
What this means
A number of transitional provisions that businesses need to be familiar with have also been announced – these principally concern the treatment of transactions spanning the effective date for the rate change.
Taxpayers will also need to pay particular attention to the transactions spanning the rate change and ensure that their accounting system, invoice templates and contracts going forward are corrected to reflect the correct VAT rate.
It is important to make the necessary changes and ensure the correct rate is being used before processing a transaction, as small errors can compound easily, making the transition unnecessarily complicated.
The Malaysian Government has recently made the following announcements: -
- That the Goods and Services Tax (GST) which was introduced on 1 April 2015 is to be withdrawn. With effect from 1 June 2018, the GST rate on standard rated supplies has been reduced from 6% to 0%.
- That a replacement Sales and Service Tax (SST) will be introduced in September 2018.
What this means
The zero rating of GST enables businesses time to prepare for the upcoming SST regime while allowing consumers to opportunity to enjoy a temporary “tax holiday”.
GST registered companies are required to comply with the GST compliance requirements such as the filing of returns and issuance of tax invoice until the point when the Act is formally repealed.
During this transitional period, the Ministry of Finance and Royal Malaysian Customs Department has continued to provide guidance on the transitional issues. However, businesses have raised concerns over preparation for changes which includes tax software.
In general, with the GST zero-rated, consumers are better off as there are tax savings for them. This is expected to improve the overall business outlook and customer sentiments.
However, at this point we await further information from the Malaysian Government as to the precise SST framework and the rates to be applied, so businesses with activities in Malaysia should monitor the position closely.