VAT Newsletter, Issue 5, 2013 - Ernst & Young

Issue No. 5, 2013

VAT newsletter

Introduction Welcome to the fifth issue of Ernst & Young LLP’s 2013 VAT Newsletter for the US. These newsletters cover a variety of topics, as VAT can impact businesses in many ways. Approximately 150 countries around the world now have a VAT, goods and services tax (GST), consumption tax, service tax or similar VAT, and the laws and regulations are constantly changing. We use this newsletter as a way of informing you of significant changes taking place.

At the end of this newsletter, you will find contact details for the senior members of our team who can help answer any questions you may have about the articles in this newsletter, or any other VAT questions. We are interested in your feedback on the items covered and what topics you would like to see covered in the future. Please provide any feedback to Howard Lambert at [email protected].

Summary of items included in this newsletter Americas

EU — Taxation trends in the EU: 2013 edition

Chile — Bill submitted to Congress on electronic invoicing

EU — European Commission/Council: implications of Croatia’s accession to the EU

US — The Marketplace Fairness Act of 2013

Luxembourg — Increase of standard VAT rate from 2015

Asia-Pacific

Poland — VAT rates will not be decreased

Indonesia — Lower effective VAT rates

Europe EU — European Court of Justice Judgments: infringement cases and VAT grouping EU — European Commission/Council: Commission publishes results of consultation on reduced rates

Middle East, India and Africa Kenya — VAT Appeals Tribunal rules on the need to self-assess for VAT on part of a building used by a taxpayer for VAT-exempt purposes

Americas Chile — Bill submitted to Congress on electronic invoicing

US — The Marketplace Fairness Act of 2013

A bill that introduces amendments to the present tax regulations in relation to invoicing was sent to Congress on 9 April 2013.

On 6 May 2013, the Senate passed the Marketplace Fairness Act of 2013 (S. 743) (the Act) in a final vote of 69 to 27. A last-minute amendment changed the time period before which a Streamlined Sales and Use Tax Agreement member state would be allowed to exercise its authority to 180 days (from 90 days) after the state publishes notice of its intent to exercise this authority, but no earlier than the first day of the calendar quarter that is at least 180 days (from 90 days) after the date of enactment of the Act. The bill now goes to the House, where it likely will face a tougher challenge.

The bill enforcement dates differ depending on the matter they deal with; some are effective from 1 January 2013. Among other issues, the bill proposes mandatory electronic invoicing. This obligation will extend not only to invoices, but also to waybills, credit notes and debit notes. The Internal Revenue Service will be able to require taxpayers to maintain accounting ledgers and sub-ledgers using electronic means. This will be the taxing authority’s exclusive right. According to Transitory Article 1, the obligation to issue electronic invoices should be effective on the date the Law is published in the Official Gazette. Notwithstanding the above, the Internal Revenue Service has the authority to postpone this obligation for some taxpayers or groups of taxpayers so that they can implement this amendment gradually within a two-year period.

If enacted, the Act would allow eligible states to require all sellers (except those qualifying for the small seller exception) to collect and remit sales and use tax on remote sales into the state without regard to the location of the seller. A state would be eligible to require collection by remote retailers either by: • Being a Streamlined Sales and Use Tax Agreement member state (associate states are not included in this category)

Or

• Adopting and implementing the minimum simplification requirements set forth by the Act At this point, it is difficult to predict whether the Act will ultimately be enacted. However, the fact that the Act is set for final vote in one chamber of Congress is significant, given that similar bills have been introduced since 2000, and none have made it out of committee. Accordingly, even if the Act does not become law, the Senate’s action will serve to keep the issue of sales and use tax collection at the center of the overall national tax debate.

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VAT Newsletter

Asia-Pacific Indonesia — Lower effective VAT rates On 27 February 2013, Ministry of Finance Regulation No. 38/PMK.011/2013 (PMK-38) was introduced. This regulation imposes new lower effective VAT rates on certain supplies of goods and services. These new rates became effective from 1 March 2013. The new effective VAT rates are as follows: • Transfer of gold jewelry, including repair and modification services by a manufacturer of gold jewelry: 2% • Freight forwarding services: 1% PMK-38 amended Ministry of Finance Regulation No. 75/PMK.03/2010 (PMK-75) dated 31 March 2010. Previously, based on PMK-75, lower effective VAT rates applied only to the supply of the following services: • One percent of the billing value for travel agency services

• The selling price or compensation after gross profit for free-of-charge granting of taxable goods and/or taxable services • The estimated average selling price for delivery of audio or visual recording media • The estimated average proceeds per film title for delivery of a motion picture • The retail selling price for delivery of tobacco products • The fair market price for taxable goods in the form of supplies and/or assets that according to the initial purpose are not for sale but are still left at the time of dissolution of company • The basic selling price or gained price for delivery of taxable goods from the head office to a branch or vice versa and/or delivery of taxable goods between branches

• One percent of the billing value for package courier services

• The price agreed upon by the broker and the purchaser for delivery of taxable goods through a broker

PMK-75, as amended by PMK-38, also stipulates other values that should be used as a VAT base. These are as follows:

• The auction price for delivery of taxable goods through an auctioneer

• The selling price or compensation after gross profit for goods or services used for a taxpayer’s own purposes

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Europe EU — European Court of Justice Judgments: infringement cases and VAT grouping On 25 April 2013 the European Court released its Judgments in the following infringement proceedings brought by the Commission: • C-480/10 European Commission v Sweden • C-65/11 European Commission v Netherlands • C-74/11 European Commission v Finland • C-86/11 European Commission v UK • C-95/11 European Commission v Denmark • C-109/11 European Commission v Czech Republic Proceedings were brought against the Netherlands, Finland, the UK, Denmark and the Czech Republic for allowing non-taxable persons (e.g., holding companies) to join a VAT group, and proceedings were brought against Sweden and Finland for restricting the availability of VAT grouping to providers of financial and insurance services. Regarding the inclusion of non-taxable persons in VAT groups, the European Court followed the Opinion of Advocate General Niilo Jääskinen (released on 27 November 2012) and its earlier judgment (released on 9 April 2013) in similar infringement proceedings against Ireland (C-85/11), holding that the Commission’s action should be dismissed (i.e., non-taxable persons can be included in VAT groups). This was to be expected given that the same point of principle arises in each case.

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Specifically, the Commission submitted that the inclusion of non-taxable persons in VAT groups is incompatible with Articles 9 and 11 of the VAT Directive, which respectively define the concept of a taxable person for VAT purposes and lay down the rules concerning VAT group treatment. Even though Article 11 refers to “any persons” (rather than “any taxable persons”), it is implicit that this provision encompasses only “taxable persons” as defined in Article 9. In response, the various Member States concerned submitted that Article 11 must be interpreted literally and if this provision had intended to refer to taxable persons, it would have said so explicitly. In finding for the Member States, and without addressing the issue of input tax recovery by nontaxable persons included in VAT groups, the European Court held that the Commission’s position (that non-taxable persons cannot be included in VAT groups) was not supported by the wording, context and objectives of Article 11. The Commission’s action was therefore dismissed. Regarding the restriction of the availability of VAT grouping to providers of financial and insurance services, the European Court similarly held (contrary to the Opinion of Advocate General Jääskinen) that the Commission’s action should be dismissed. Specifically, the Commission submitted that restricting the availability of VAT grouping to the financial and insurance sector is incompatible with Article 11, as any national VAT grouping system provided by a Member State must be available to all economic operators established in that Member State, regardless of their line of business. In response, the two Member States concerned submitted that in the absence of more precise wording in Article 11, Member States have discretion to decide to which persons established in their territory VAT grouping should be made available. The European Court held that Article 11 is an optional provision.

VAT Newsletter

However, if a Member State decides to make VAT grouping available, the national conditions applied must be consistent with EU law. In this regard, the first paragraph of Article 11 provides that VAT grouping is available to “any persons” established within the territory of the Member States, provided that these persons have close financial, economic and organizational links. There are no other limitations in this provision. The use of the expression “any persons” prevents Member States from imposing other conditions on undertakings in order to form a VAT group, such as carrying out a certain type of activity or being part of a particular sector of activity. However, the second paragraph of Article 11 permits Member States to restrict the availability of VAT grouping in order to combat tax evasion or avoidance, which formed the basis for Sweden’s and Finland’s decision to restrict VAT grouping to suppliers of financial and insurance services. Against this background (i.e., the need to combat tax evasion and avoidance), the European Court held that the Commission failed to show that the countries’ restriction was contrary to EU law. The Commission’s action was therefore dismissed.

EU — European Commission/ Council: Commission publishes results of consultation on reduced rates On 29 April 2013, the European Commission published the results of the public consultation (launched on 8 October 2012) on the review of existing legislation on reduced VAT rates. The review of the current VAT rates structure was one of the Commission’s priority actions as part of the wider work being done to make the EU VAT system simpler, more efficient and more robust. The Commission specified that this review should be based on the following guiding principles: • Abolition of those reduced rates that constitute an obstacle to the proper functioning of the internal market. Reduced rates that were justified in the past can have distortive effects today because the economic, business and legal environments have changed in the meantime.

• Abolition of reduced rates on goods and services whose consumption is discouraged by other EU policies. This could notably be the case for goods and services harmful to the environment, health and welfare. • Similar goods and services should be subject to the same VAT rate, and progress in technology should be taken into account in this respect so that the challenge of convergence between the online and the physical environment is addressed (e.g., online publications compared to paper publications). The Commission made a first evaluation of the current VAT rates structure in light of the guiding principles referred to above. This formed the basis of the consultation document inviting stakeholders to reply to nine specific questions. Comments were invited by 4 January 2013. A summary report of the outcome of the consultation (where the Commission advises that a total of 333 contributions were received) can be accessed by clicking here.

The full judgments in the cases involving the UK and Sweden can be accessed by clicking here and here respectively. As indicated above, the European Court reached the same conclusions in the other cases involving the Netherlands, Finland, Denmark and the Czech Republic. However, the judgments in these cases are only available in the respective local language and French.

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EU — Taxation trends in the EU: 2013 edition

Luxembourg — Increase of standard VAT rate from 2015 announced

The 2013 edition of Taxation trends in the EU, issued by Eurostat, the Statistical Office of the EU and the European Commission’s Directorate-General for Taxation and Customs Union, gives an overview of the tax system in the EU Member States, Iceland and Norway. This report gives an overview of the tax system in the 29 countries covered, the revenue trends and the main recent policy changes. Detailed tables allow comparison between the individual countries for different tax categories.

The Prime Minister announced in his 10 April 2014 State of the Nation speech that Luxembourg intends to increase the current standard VAT rate of 15% from 2015.

The full report contains a statistical annex presenting the main data by country and for the EU as a whole. The report can be accessed by clicking here.

Poland — VAT rates will not be decreased On 30 April 2013 during a Government press conference, the Minister of Finance announced that the VAT rates that were temporarily increased in 2011 for three years will not be decreased from 2014. It is expected that the increased rate of 23% will remain in force until the end of 2016.

EU — European Commission/Council: implications of Croatia’s accession to the EU The European Commission published a document on the accession of Croatia to the EU on 1 July 2013. It provides useful information on the EU enlargement for customs administrations, economic operators and other interested parties. The information mainly relates to the customs union. In addition, the annex contains information on VAT and excise duties. The document can be accessed by clicking here.

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VAT Newsletter

Middle East, India and Africa Kenya — VAT Appeals Tribunal rules on the need to self-assess for VAT on part of a building used by a taxpayer for VATexempt purposes The VAT Appeals Tribunal gave its decision on 30 April 2013 in the case of National Bank of Kenya Ltd v. Commissioner of Domestic Taxes [Case No. 17 of 2012]. Details of the decision are summarized below.

Facts By way of background, when a taxpayer provides banking and financial services, such services are generally exempt from VAT, with the consequence that the taxpayer cannot claim VAT on costs associated with such activities. The Appellant, National Bank of Kenya Ltd. (NBK), provides such services.

The issue

Tribunal decision

The VAT Appeals Tribunal considered whether, by occupying part of its own building to provide exempt services, NBK is making a taxable self-supply according to Section 2(h) of the VAT Act.

The VAT Appeals Tribunal held that the occupation of the building did not meet the criteria for a taxable self-supply as defined in Section 2(h). In reaching its decision, the VAT Appeals Tribunal stated that the VAT that would have been charged on the occupation of the commercial building is not excluded from recovery within the meaning of the VAT Act. Instead, the VAT is restricted within the meaning of paragraph 17 of the VAT Regulations, which restricts from recovery the VAT incurred in providing exempt services.

Section 2(h) defines a “taxable supply” as the appropriation of taxable goods or services by a taxable person that are used or consumed by the taxable person in his or her business where, if supplied by another registered person, the VAT incurred on such goods or services should be excluded from any deduction.

Because NBK provides VAT-exempt financial services, the VAT would have been restricted and not excluded. Therefore, the self-supply does not meet the definition of a taxable self-supply, and NBK does not need to account for VAT on the self-supply.

NBK owns a commercial building in Nairobi. The company occupies and uses part of the building for its banking activities and leases out the rest of the building. Under Kenyan VAT Law, the rent received from the leased part is taxable. NBK accounts for VAT on the rent it receives from the part of the building that is leased to a third party. It does not account for VAT on the part of the building it occupies for its banking business. The Kenya Revenue Authority (KRA) believed NBK should treat its own occupation of the property as a self-supply and that such self-supply is subject to VAT, which would not be recoverable by NBK. KRA issued a VAT assessment to NBK in respect of this self-supply, which NBK contested at the VAT Appeals Tribunal Hearing.

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Ernst & Young LLP US VAT Team leaders Michael Leightman. . . . . +1 713 750 1335 Karen Christie. . . . . . . . . +1 212 773 5552 Anne Freden . . . . . . . . . . +1 415 894 4411 Ronnie Dassen. . . . . . . . . +1 212 773 6458 Northeast Alex Cotopoulis. . . . . . . . +1 212 773 8216 Louisa Hately . . . . . . . . . +1 312 879 3251

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Southwest Ana Santana. . . . . . . . . . +1 713 750 1326

Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.

West Corin Hobbs. . . . . . . . . . . +1 408 947 6808 Howard Lambert. . . . . . . +1 949 437 0461

East Central Maria Hevia Alvarez . . . . +1 305 415 1781 Midwest Ela Choina-Lucjan. . . . . . +1 312 879 2935

Southeast Maria Hevia Alvarez . . . . +1 305 415 1781 Financial Services/Private Equity Alex Cotopoulis. . . . . . . . +1 212 773 8216 EMEIA Please contact one of the Ernst & Young LLP professionals listed previously. Americas Ana Santana. . . . . . . . . . +1 949 437 0461 Howard Lambert. . . . . . . +1 949 437 0461 Maria Hevia Alvarez . . . . +1 305 415 1781 Asia-Pacific Louisa Hately . . . . . . . . . +1 312 879 3251

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This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

If you would like a copy of a green paper, newsletter or alert covering some of the topics mentioned below, please contact Howard Lambert at [email protected].

ED 1401

Hungary — Tax Express, April 2013

Belgium — Alert — CJEU Judgment in Petromas Transports SA China — Alert — China is ready for the next wave of VAT pilot expansion. Are you? Czech Republic — Tax News, April 2013 Malta — VAT treatment of aircraft leasing Slovakia — Tax News, April 2013 UK — VAT News, weeks ending 12, 19 and 26 April and 3 May 2013 UK — Alert — European Court of Justice judgment on VAT grouping for holding companies