Author Archives: James

Will the EU’s vision for a Digital Economy include the necessary VAT requirements for success?

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Yesterday, the European Commission announced their vision for reshaping the Digital Economy in the European Union. There are a total of 16 areas that are in the firing line for improvements.

EC Proposal

There are a number of good initiatives in the proposals that all aim to enhance the experience for consumers, businesses and presumably the Member States themselves. With not much in the way of detail at this point in time – and that’s understandable – I wanted to highlight and make some initial comments on some of the 16 points.

1. Simplification of Cross Border EU VAT Compliance

There is certainly a ray of hope for many small, medium and large businesses who for years have been tied up in the complex, contradictory and costly requirements for selling goods and services across the EU. This is especially true in the B2C realm and despite the good efforts of the 2010 & onward B2B VAT reforms, still remains challenging in the B2B environment as well.

The EC press release talks about common VAT thresholds and the removal of the antiquated Distance Selling Regime. These are indeed excellent ideas and ones I have brought up time and time again. (See here). However, if we are going to do this right then the Commission needs to take a significant look at the wider cross border EU VAT rules in the same wide ranging approach that it has for the Digital Economy. Without this comprehensive review, I predict businesses will still be unwilling to expand and contribute to the EUR415bn growth target the Commission is predicting.

2. Geo-blocking

The specific quote from the press release is reproduced below.

“to end unjustified geo-blocking – a discriminatory practice used for commercial reasons, when online sellers either deny consumers access to a website based on their location, or re-route them to a local store with different prices. Such blocking means that, for example, car rental customers in one particular Member State may end up paying more for an identical car rental in the same destination.”

As others have noted, geo-blocking has been a thorn in the side of the Commission for many years. However, it is a perfectly legal and justifiable means for businesses to ensure that products and services are not provided to individuals or businesses in certain jurisdictions. Denying consumers access to their goods or services is a fundamental right of businesses. It may be that regulatory, commercial or other legally enforceable agreements prohibitively state that the goods or services cannot be sold to certain people or jurisdictions and that violating those laws or agreements could bring financial or criminal harm to the business.

The Commission’s comment on referring consumers to a local store (with different prices) is often as a direct result of their own rules and regulations. If as a seller, I am required to account for Swedish VAT on a consumer sale (having breached the Distance Selling threshold in Sweden) then I’m not going to allow a Swedish consumer to try and buy that product from a UK e-store that has pricing at a different VAT rate. Geo-blocking is therefore wholly necessary to ensure that businesses can trade identical items across multiple jurisdictions and show appropriate pricing for consumers in certain locations while maintaining profit margins.

The car rental example clearly doesn’t take into account the commercial facts that car rental companies face when dealing with consumers in a different country. The different pricing may be as a result of increased insurance costs, business risk relating to loss and difficulties in pursuing consumers cross border to recover expenses. The example is a poor one and so let’s hope the team looking at this realizes that geo-blocking is a relevant and needed business tool in the digital world.

3. E-commerce Sector Anti-trust Investigation

It’s moves like this that wonder if the Commission secretly wants to be the Good Cop/Bad Cop character from the Lego Movie. The inquiry is looking at whether businesses have been deliberately putting up barriers that deny consumers access to goods or services.

Given the EU just flagged a whole host of reasons as to why cross border growth in the digital economy isn’t as good as it should be, I just don’t get why this needs to be a focus right now?

Perhaps the Commission should ask nicely first and get businesses on their side before using the following words:

“Under EU antitrust rules the Commission can require companies and trade associations to supply information, documents or statements as part of a sector inquiry.”

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As always, comments are welcome here or via email.

Year End VAT Considerations

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With the Holiday Season nearly upon us, we look at some of the key points that businesses with 12/31 year ends should be considering before the punch and silly hats take over our lives. Indirect Tax has often taken a backseat during the year end process and that may need to change as these taxes become more and more important.

1. Transfer Pricing Adjustments

As Q4 comes towards a close, many businesses may be thinking of making adjustments to inter-company pricing in order to meet targeted profitably levels around the world. Businesses should be aware that there can be significant challenges for retrospective pricing adjustments and that even prospective changes in import values may trigger questions from a Tax Authority. Residual Profit Split Methodologies also carry significant risks and the true underlying valuation of services can be hidden. Adjustments made after 12/31 that are booked in that final year end must also have the indirect tax impact assessed and reported. Too often we see inter-company adjustments be unreported for VAT purposes.

2. Balance Sheet Reconciliations

Large balance sheet VAT values (DR or CR) should be appropriately cleared down and any material unreconciled items clarified. Judgment calls may need to be made in respect of large VAT assets that have not been recovered to determine if a write down of the asset due to impairment is required. Any balance sheet item over 6 months old that has not been settled or recovered needs review.

3. Accruals

Many countries allow for VAT to be recovered prior to payment of an AP invoice. Business should consider whether an accrual for VAT incurred in Q4 but not posted until Q1 needs to be undertaken in order to present a true and fair year end representation. Accruals often need pre-approval or may not be allowed at all, however, businesses should examine the process for recovering VAT on purchases to ensure it is as efficient as possible and minimizes cash flow impact.

4. Auditor Interaction

US audit firms are becoming savvier when it comes to their reviews of balance sheet VAT accounts. Errors or omissions in VAT accounts are often as a result of a flawed or weak process in another part of the business. Being able to proactively address VAT adjustments or issues with your external audit team will give them comfort on what can be a large working capital item.

5. Upcoming Year Priorities

Finally, look ahead now to start determining indirect tax priorities. With all that goes on at year end, you’ll suddenly find that it’s February and the year is 1/12th complete. Have a plan and work it effectively over the year.

The infamous “What will they do” question

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Many times a year, I get the same question that all relate to businesses that have a VAT liability (or potential one) in a country where they have no presence. These typically fall into three common categories:

1. Sales to the 32 countries that currently have taxing requirements for non-residents on sales of digitized goods or services to private individuals or non-business customers.

2. Sales of goods with installation as part of the contractual terms where no simplification exists.

3. Drop shipment, intra-EU tri-party sales, DDP Incoterms and similar where one or more people have the VAT treatment incorrect.

In virtually all cases, the answer means that a Tax Authority somewhere has not received or had reported, VAT on domestic transactions. The fact that the customer in some cases would have been able to recover the missing VAT in full is no longer a rationale for not reporting, but this still seems to be a reason offered as to why appropriate compliance steps were not undertaken. In some instances, the business may actually be owed VAT by the Tax Authority due to a mix of rules and rates coming into play, but these are usually in the minority.

Common statements often include, “they can’t get me”, “how will they know”, “they have no collection powers over me”. While these statements may be factually true, we don’t and cannot use them as defense against proper compliance and accurate accounting.

Many of the folks I speak with are based in the United States and here it is often domestic legislation and regulation that begins to unwind the issue. Formerly known as FAS5, ASC450 (Accounting Standards Codification Topic 450) are  the rules that require SEC registrants to manage potential liabilities and the impact of these events on the balance sheet. Even where the accounting standards are not mandatory (public entities or those with public debt for example should fall into the mandatory category), many privately held businesses have through the Board of Directors decided to implement the same standards. This is very much the case for companies who are intending to IPO in the near term. The same concepts in ASC 450 are to be found in IAS/IFRS 37.

As such, I generally point out that unrecorded liabilities (those that are Probable and those that are Possible & Material) should be reflected in the accounting records of the business. Often, businesses have already undertaken this exercise before I become involved. It is my personal view that businesses who continue to accrue any VAT liability where it is Probable (in the VAT world it is usually relatively easy to determine whether you owe or not) and Estimable (again, usually relatively easy to calculate a VAT liability) has reached the line in the sand between legal and illegal. All Tax Advisers have their internal and external rules about clients who will not settle a known tax liability – here at ITP, we would no longer be able to work with businesses who have clearly committed tax evasion and continue to not remedy the situation.

So in summary, I don’t believe the “they can’t get me” argument has any place in today’s business and accounting world. At some point, the position will be discovered and the cost of dealing with extended non-compliance would massively outweigh the cost had actions been taken earlier.

 

The ever changing world of VAT?

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With the GMAC ECJ case wrapping up on the windfall question (law 1 and law 2 working together against the Tax Authority) and Bookit Limited out of the UK’s First Tier Tribunal answering what seemed like to me to be the same 2006 CoA question, this week’s discussion looks at what has really changed in the world of VAT over the last decade or so. It’s almost like asking what your top 3 favorite films are – no one is going to agree and we will all have wildly different opinions – but here are mine.

  1. Halifax – The VAT abuse tests from Halifax put VAT planning where the only purpose was to gain a VAT advantage into the spot light. Now with BEPS, AEoI and a whole host of holier than thou reporting mechanisms in place that aren’t quite 1984 in terms of intrusion in a taxpayers life, it seems that undertaking any sort of VAT planning is going to get us all in as much trouble Winston & Julia, there do seem to be more O’Brien’s in the VAT world than I would care to imagine.
  2. Technology – “Enhance 224 to 176” isn’t quite the reality of the VAT compliance world yet, but perhaps one day we’ll be able to use technology in an even more powerful way than we can today. Big Data, dedicated VAT compliance solutions, enhanced ERP and bolt-on solutions enabling earlier identification and analysis of potentially troublesome transactions, dashboards running live on our screens and no more excel are all here or soon will be. The drive to deploy indirect tax technology  and the suite of service offerings from full install to cloud based on-demand have materially increased accuracy.
  3. The VAT professional – as a profession we have moved even further out of the weird closet and almost seem to be in the main stream of normality amongst others in our organizations. We all have to remind ourselves that some birds aren’t meant to be caged, and the VAT professionals I have worked with over the last few years are now driving significant changes inside their organizations as well as being included in changes, projects and planning way earlier. VAT always seemed to be the outcast in the tax world, but we have shown how much VAT impacts are own businesses and our clients businesses in the right way.

So any thoughts on three of my favorite movies?

Indirect Tax throughout the Organization

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Given the tax advisory profession hasn’t been chastised this week by any world leaders, I’m returning to the less political subject of End-To-End processes.

The excellent survey performed by the folks at KPMG each year highlights many of the critical issues raised by industry leaders. Having spent many hours, days and weeks looking “under the hood” of global businesses, it was fairly clear to all that indirect tax touched virtually every part of that organizations operations, processes and controls. As one CFO once said to me, “the day we get VAT right means I have some faith that we are getting nearly everything right”.

Indirect tax can be a major indicator of the overall operational health of a business. Over a beer last week with one of my neighbors, we tried to find where transactional taxes didn’t need to be considered, or have a role, in day to day operations. With the exception of Human Resources (and even then we thought about Expat issues, recharges of salaries etc), all the other major business operations – Logistics, F&A, IA, AP/AR, Sales, Procurement, IT, Risk/Legal and C Suite to name some of the main ones – had medium to heavy needs to ensure indirect tax was working.

Most businesses fail to recognize that indirect tax is often the third or fourth largest item of working capital. This combined with the perception that indirect tax belongs somewhere else in the organization creates a great degree of risk and lost opportunities for businesses. My version of the End to End Process is here – I’m sure there are different words or views out there. The way I have summarized it is:

“Great people using relevant processes, supported by appropriate technology, turning big data into world class compliance.”

End To End Process Website

2015 EU VAT Changes – a big bang or a damp squid for EU businesses?

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Just finished reading up a good piece written by the folks at Taxamo who had been discussing the upcoming changes to the VAT reporting rules that will take affect from 1 January 2015. It only seems like yesterday that we had the changes for non-EU suppliers of most digitized products come into effect, but it was a lengthy 12 years ago on 1 July 2003. Those 2003 changes really only helped one EU country – Luxembourg – as all of the larger retailers (Amazon, Apple etc) simply moved their sales operations to the country with the lowest standard rate of VAT in the EU (15%). It was the VAT mecca in the same way Ireland was for income tax.

With other reduced rates and the ability to work with a very friendly tax authority, this created a lot of VAT wealth in Luxembourg, but not really anywhere else in the EU. With the huge level of non-compliance for those companies who stayed outside of the EU, I never really saw that the 2003 changes could have been classified as a success in terms of what the EU had originally set out to achieve.

As such, I look at the changes for 2015 and the still relative uncertainty around some of the specific rules and wonder if this change should really have been implemented back in 2003 so that all sellers (EU and non-EU) used the customers country location for calculating the VAT due. We have had 12 years of relatively low VAT rates (3% for example on some Kindle books) that come 1 January 2015 will mean EU consumers paying up to 25% more for the same products – products that are a huge part of people’s day to day lives compared to 2003.

The recent news out of Japan who went from a 5% to 8% JCT rate shows the dramatic effect that tax driven, consumer price rises can have on the totality of an economy. The rate changes EU consumers will be forced to accept in higher pricing (assuming the full rate is passed along) will be significantly higher that those faced in Japan – which I will admit was for all goods and services. However, I believe it is right to ask that by February or March of 2015, sales of e-books, games and other similar items may have taken a sharp knock back as consumers see prices increase.

Automatic Exchange of Information – too much, too late

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Going off topic today from VAT specific points, but a worthy subject none the less.

So the OECD has been working on its master plan to fix all the problems it created in conjunction with tax authorities the world over. It seems that following the tax law of the land and actually daring to benefit from rules that you neither wrote, passed in to law or administer is now taboo. Angel Gurria has stated that “today’s commitment by so many countries to implement the new global standard, and to do so quickly, is another step towards ensuring that tax cheats have nowhere left to hide.” – from 6 May of this year.

Well I think the proverbial horse has left the ramshackle barn and will continue to roam the fields doing whatever he or she likes. Simply building a new barn and leaving numerous doors open again isn’t going to do you, the uncaring individual taxpayer (who pays for all of your so called efforts) and tax authorities any good whatsoever. However, I’m sure their will be much more grandstanding and parading of those deemed to have broken a set of reporting rules that serve no purpose than to make a difficult issue more cloudy and murky.

If tax authorities do not want want forward thinking and innovative businesses like Google, Apple, Microsoft, HP, Caterpillar and Amazon to use current tax law in a legal and appropriate manner then I would suggest that you change the law rather than getting the OECD to build some new big stick and wave it around with the menace of a 4 yr girl dressed as Goldilocks. And just so I can be fair and balanced here, I am part of the profession that spends a huge amount of time and effort (and being rewarded for that effort handsomely) in minimizing taxes that corporations and individuals pay. So as someone who has been deeply involved in the global operating structures we see in use today, I can tell you from the inside that we always operated within the law. Additionally, nearly everything that we did was discussed, disclosed or approved by the tax authorities beforehand.

They knew what we were doing and we knew they knew this – but the law is the law and to treat companies that generate billions of dollars of wealth for the people they employ, their shareholders, their vendors and customers in the same way as a business or individual who deliberately and illegally doesn’t pay their taxes due is the crime here. Perhaps all of these companies should simply stop providing their goods and services to anyone employed by the IRS, OECD, HMRC and other tax authorities around the world. Suddenly, not having their morning latte, researching their investment portfolio and reading the new best seller all from the comfort of their tablet would let them look at what these folks have really achieved over the years.

The issue whether you are a tax evader (illegal 50 years ago and still illegal tomorrow) or a tax avoider will never end if laws remain unchanged and governments choose to manipulate figures on successes to bolster their public image of some crime fighting good guy. However, penalties are simply not a deterrent and successful criminal prosecutions are so low that no one is sacred by the downside of actually breaking the law.

Perhaps getting the various tax codes knocked in to shape first would be a better use of the OECD’s time and let tax authorities go after people who really break the law. 20 years for tax evasion – that would focus the mind of folks who are actually breaking the law. Going after those who are, in the view of the publicity seeking politicians, “tax cheats” will just mean more work for people like me and less jobs for those same politicians when they leave public office. I cannot think of a nicer world to live in!

Bitcoins – to tax or not to tax, that is the question

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Here at Indirect Tax Partners, the most complex and difficult indirect tax matters are often considered over a beer and a dip in the pool. As we see main stream companies such as Expedia start to adopt the Bitcoin as a payment option, the question of how they should be treated for tax purposes has been front and center of my mind during those pool thinking moments.

I’ll start with my conclusion – Bitcoins should be treated in the same way as other forms of currency from an indirect tax perspective.

Why I hear you ask. That is not the easiest of questions to answer in a blog post, so I have built out a lengthy paper that is going to address all the areas of contention, namely:

  • History of non-traditional payment options
  • Characteristics, similarities and differences
  • Indirect, Direct and Other Tax considerations
  • Double & Non Taxation issues
  • Taxpayer and User Certainty
  • Accounting rules
  • Fiscal Neutrality
  • Regulatory, Fraud, Security and Competition

The EBA recently set out there views on Bitcoins – not surprised by their position -but I would point out that even with massive regulation (mortgage and banking folks sit up please), there is still no certainty that any financial transaction will be safe or secure. Bitcoins are here to stay unless a large government buys them all and refuses to resell.

 

I’ll post a link to the paper once it has been completed. Feel free to chime in here with any thoughts from your experiences.