By Lowtax Editorial
08 May, 2014
This feature summarises key developments in value-added tax (VAT) law internationally since the turn of the year.
As usual, the European Union (EU) has been a hotbed of activity in the world of VAT. While there has been no news on the European Commissions proposal to lower rates of VAT in the EU as part of its VAT Strategy, which aims to simplify the Sixth VAT Directive, there have been plenty of other developments in recent months on the administrative, compliance and legislative fronts. Major changes to the way VAT is charged on electronic, telecommunications and broadcast services are also now just a few months away with the place of supply rules due to change in January 2015.
New EU VAT Guide
In January, the European Commission updated its report comprehensively charting EU member states' headline rates, concessionary rates, super-reduced rates (below five percent), and exceptional value-added tax rates across all categories of goods and services, current to January 13, 2014.
Several rate changes have occurred since the previous July 2013 update. Most recently, on January 13, 2014, Cyprus's headline and intermediate VAT rate were increased by one percent, to 19 percent and 9 percent, respectively.
The document, "VAT Rates Applied in the Member States of the European Union," provides a thorough overview of the differing VAT regimes across the EU. As well as providing detail on positive rates, it comprehensively lists the application of zero-rates and exemptions in each member state.
It is said that the report will prove useful for international traders seeking to overcome the compliance hurdles of operating in the EU's single market, and will also inform businesses and individuals of the rates applicable to certain economic activities across the EU, with the competitive advantage of operating from each territory being immediately clear in table format.
In the latest update, Hungary retains the EU's highest VAT rate (unchanged at 27 percent), but levies its reduced five percent rate on a wider range of essential goods than many European states. Following the hike to Cyprus's headline rate, Malta secures the second lowest standard VAT rate in the EU, unchanged at 18 percent, behind Luxembourg with its 15 percent standard rate (although Luxembourgs standard rate of VAT is due to rise by 2% in 2015 see below) .
Standard VAT Return
Algirdas emeta, EU Commissioner for Taxation, has welcomed the European Parliament's strong support, expressed on February 26, 2014, for a Standard VAT Return.
The Standard VAT Return is one of the Commission's key proposals to cut red tape for business and improve tax compliance in the EU. The standard return would replace national VAT returns, requiring businesses to provide the same basic information with the same deadlines regardless of their location within the European Union.
emeta commented: "This proposal is about making life simpler and cheaper for businesses. With the Standard VAT Return, it will be as easy to declare VAT abroad as it is at home. As such, it will remove a major tax obstacle in our single market and cut compliance costs by up to EUR15bn (USD20.5bn) a year. Moreover, simpler rules are easier to follow and enforce. So the Standard VAT Return should also boost tax compliance throughout the EU, bringing new revenues to the member states. I am very pleased but not surprised that the European Parliament has shown such backing for this growth-friendly, business-friendly proposal."
The Standard VAT Return is to have only five compulsory boxes for taxpayers to fill in. Member states would be allowed to request a number of additional standardized elements, up to a maximum of 26 information boxes. This is a vast improvement on the current situation, whereby some member states require up to 100 information boxes to be completed.
In February, the European Commission published two reports shedding light on the problems associated with tackling VAT fraud in the EU, and suggesting possible solutions.
The first report looks at how existing VAT collection and control procedures in member states can be employed to better mitigate VAT fraud. In its conclusions, the report identifies that member states should modernize their VAT administration to reduce the VAT gap - the amount of VAT that slips through the net each year, which amounted to about EUR193bn (USD264.5bn) in 2011. Recommendations are addressed to individual member states on how they could improve their procedures.
The second report reviews the efficacy of existing administrative cooperation and other tools that are being used to combat VAT fraud in the EU. The reports concludes with a recommendation that cross border cooperation should be enhanced, and recommends a number of solutions, such as joint audits, administrative cooperation with third countries, more resources for inquiries and controls, and the automatic exchange of information among all member states in VAT matters.
Both reports, which are part of the Commission Action Plan to fight against tax fraud and evasion, have been published on the European Commission's Taxation and Customs Union website.
The publication of the reports followed the release by the Commission of a question and answer document providing additional details concerning its newly announced agenda to sign agreements with non-EU states. The pacts would enable the pooling of administrative capabilities among EU and non-EU states to empower tax authorities to more effectively tackle VAT fraud.
On February 6, 2014, the Commission announced proposals to begin negotiations with Russia and Norway on administrative cooperation agreements in the area of value added tax, and to continue negotiations with a number of other states, including Canada, Turkey and China.
The broad goal of these agreements would be to establish a framework of mutual assistance in combating cross-border VAT fraud to assist in the recovery of VAT dues. The Commission believes that cooperation agreements with the EU's neighbours and trading partners would improve member states' chances of identifying and clamping down on VAT fraud, and would mitigate financial losses. It has therefore requested that member states mandate to start these negotiations.
Published alongside the proposal, the Commission's question and answer document discusses: the scale of VAT fraud in the EU, and in particular the role that operators in other countries play; the current cooperation framework within the EU to combat VAT fraud; and what role the new agreements will play in countering VAT fraud.
Currently the EU does not have VAT administrative cooperation agreements with any other countries. The EU has an agreement with Switzerland to counter fraud and all other illegal activities affecting their financial interests, which covers VAT too. Alongside the five nations that have so far expressed their interest in signing agreements, the Commission is particularly interested in entering into an enhanced cooperation pact with the US on sales tax-VAT cooperation.
EU Member State Developments
With many EU member states continuing to face budgetary constraints, upward pressure remains on standard and lower rates of VAT in many countries. This has allowed some countries to ease the income tax burden on individuals and businesses, but VATs and similar taxes are now major sources of revenue for Governments, alongside income tax.
In March, Luxembourg's Prime Minister Xavier Bettel confirmed the Government's decision to increase three of the nation's VAT rates by 2 percent from January 1, 2015.
From the beginning of next year, the standard rate of VAT will rise from 15 percent to 17 percent. The 2 percent hike will also apply to the reduced rates of VAT, from 12 percent and 6 percent, to 14 percent and 8 percent, respectively.
Prime Minister Bettel explained that the VAT hikes are necessary to partially offset the VAT shortfall anticipated after changes to EU place of supply rules from January 1, 2015.
In January, France's Directorate of Legal and Administrative Information published guidance following the increase to the intermediate rate of VAT from 7 percent to 10 percent, applicable to home renovations for works completed from January 1, 2014.
In general, the increased rate applies to all work completed after January 1, 2014, regardless of when an invoice is issued or paid.
A concession has been allowed in Article 21 of the 2013 amendment to the Finance Law, published in the Official Journal on December 30, 2013 to permit the application of the 7 percent rate if the renovation work was completed by March 1, 2014; 30 percent of the total bill was paid during 2013; and the remaining balance was paid by March 1, 2014, and was received by March 15, 2014 (these deadlines were later extended to April 1, 2014 and April 15, 2014, respectively, as a result of bad weather in the first few weeks of the year).
Article 9 of the Finance Act 2014 provides for a reduced VAT rate of 5.5 percent from January 1, 2014, on contracts for energy improvements for houses that are more than two years old.
Other changes, from January 1, 2014, included an increase to the headline VAT rate from 19.6 percent to 20 percent.
A number of amendments to Hungary's Value Added Tax Act entered into force on January 1, 2014, easing VAT registration rules, rules concerning the appointment of a VAT representative, the fees and processing times for advance tax rulings, and permitting manufacturers to make a post-supply adjustment in relation to VAT on goods that are subsequently refunded.
Foreign companies that do not make taxable supplies in Hungary will no longer be obligated to register for VAT in certain cases, where:
- The foreign company's activities are exclusively limited to the importation of VAT-exempt products to Hungary from another state within the EU VAT area that are facilitated by an indirect customs representative; or,
- Where the foreign business not established in Hungary is engaged solely in the sale of products that remain under tax warehousing proceedings in Hungary, or in the sale of products that are exported outside the Community by the customs authority on the company's behalf.
From January 1, 2014, foreign business may appoint a non-resident VAT representative, who may be a foreign individual, legal person or other organization, to process VAT refund requests in Hungary.
The advance tax ruling regime is amended to introduce a new methodology for the calculation of fees, which now range between HUF5m (USD23,000) and HUF11m. The deadline placed on the authority to respond to a request has been extended to 45 days for fast-tracked requests, and 75 days for standard requests, up from 30 days and 60 days, respectively.
Amendments provide that the tax authority may now inspect the administrative software or IT system used by a taxpayer to process and store relevant VAT documentation.
In January 2014, the Cypriot Government set out, in a report published by the International Monetary Fund, the VAT reform policies the country intends to implement during 2014.
Cyprus has committed to continue the restructuring of its tax administration to amalgamate the operations of the Inland Revenue Department and VAT services.
Cyprus committed to a number of measures by the end of 2013, including strengthening the enforcement powers of the tax authority to ensure the payment of outstanding tax dues, including through the seizure of company assets, and to improve e-filing and e-payment services.
This year the Government is to develop an effective audit program for large taxpayers, and introduce measures to boost voluntary compliance among high-risk groups of taxpayers.
Additionally, on January 13, 2014, the standard VAT rate increased to 19 percent, from 18 percent, and the reduced rate of 8 percent rose to 9 percent.
The Irish tax authority, the Revenue Commissioners, has confirmed that Ireland's 9 percent reduced rate of VAT, introduced on July 1, 2011, is to be extended indefinitely.
The rate was previously scheduled to expire from December 31, 2013. The 9 percent reduced rate applies to supplies listed in paragraphs 3(1) to (3), 7, 8, 11, 12, and 13(3) of Schedule 3 of the VAT Consolidation Act 2010, namely:
- The supply of food and drink (excluding alcohol, soft drinks and bottled water) in the course of catering;
- The supply, by means of a vending machine, of food and drink that would otherwise be zero-rated;
- Hot take-away food and hot drinks;
- Hotel lettings, including in guest houses, caravan parks, camping sites, etc.;
- Admissions to cinemas, theaters, certain musical performances, museums, and art gallery exhibitions;
- Amusement services of the kind normally supplied in fairgrounds or amusement parks;
- The provision, by a person other than a non-profit making organization, of facilities for taking part in sport;
- Printed matter, e.g. newspapers, magazines, brochures, leaflets, programmes, maps, catalogues, and printed music (excluding books); and
- Hairdressing services.
Beauty treatments, such as facials, nail treatments, tanning, sunbed services, remain liable to VAT at the 13.5 percent reduced rate.
The Belgian Government has publicised how it has significantly simplified VAT reporting requirements for businesses over the course of the past year within the framework of its administrative simplification action plan.
Since the plan was first announced in March 2014, the Government has raised the VAT exemption threshold for small businesses and associations from EUR5,580 (USD7,705) to EUR15,000, and has increased the annual turnover threshold for quarterly VAT returns from EUR1m to EUR2.5m. The Government has also extended the validity period for electronic identification cards, used for e-VAT filing, from five to ten years.
However, in an interview with Het Belang van Limburg in March 2014, Finance Minister Koen Geens said that VAT rates will rise to pay for cuts in tax on labour.
There has been speculation for a number of months that Spain will increase its VAT rates, and in March 2014, the Chairman of Spain's Expert Committee on Tax Reform, Manuel Lagares, strengthened arguments in favour by insisting that VAT must rise to create jobs and to reduce "unacceptable" levels of unemployment in Spain.
Leading international tax experts have recommended hiking VAT to finance direct tax cuts and to boost growth, and have said this could be achieved on a revenue-neutral basis. The committee recommended reducing employers' social security contributions by 4 or 5 percent, funded through a 2 percent rise in the standard rate of VAT.
Lagares explained that the reform could boost employment rates, and thereby boost economic growth by 0.7 percent of gross domestic product (GDP) during the first year, and contribute to deficit reduction efforts.
In March 2014, the UK Government published The Value Added Tax (Increase of Registration Limits) Order 2014, which will raise VAT registration and deregistration thresholds with effect from April 1, 2014.
The Order amends Schedules 1 and 3 of the Value Added Tax Act 1994, to require persons who make taxable supplies or acquisitions from other member states to register if the value of the taxable supplies or acquisitions that they make exceeds a prescribed value, which was raised in the Order from GBP79,000 to GBP81,000.
The Order also increases the deregistration values, for taxable supplies from GBP77,000 to GBP79,000, and for acquisitions from GBP79,000 to GBP81,000. Persons registered in relation to taxable supplies or acquisitions may not de-register unless the value of the taxable supplies or acquisitions that they make falls below these prescribed values.
HM Revenue and Customs (HMRC) also has updated two forms used for claiming duty and VAT relief on inherited goods and decorations and awards.
Both forms C920 and C1421 have been updated and rebranded. The completion notes have also been revised and are published on the back of the relevant forms.
Other Jurisdictional Developments
The Chinese Ministry of Finance (MOF) on March 13, 2014, provided an update on the roll out of VAT nationwide, announcing plans to expand the tax's coverage to the telecommunications, construction, real estate, finance, and 'living services' sectors.
The MOF said that it is holding negotiations with different government departments to finalize the plans. A number of services are covered by the term living services, including those involved in the provision of basic essentials, such as food, catering, and accommodation, as well as services such as hairdressing. An earlier announcement from the Government had confirmed only that the telecommunications sector would soon face VAT.
The addition of the telecoms industry to the VAT base had been expected from April 1, but an announcement was reportedly delayed due to ongoing consultations between the Government and the industry concerning the rate of VAT that would be applied to the sector. The Government was said to be considering a rate as high as 11 percent, which would be substantially higher than the 3 percent sales tax rate the sector currently faces. It is now widely anticipated that a 6 percent rate will be announced.
Under a pilot scheme begun in January 2012, VAT is replacing business tax in Chinas services sector. The imposition of VAT reduces the tax burden on the services sector because, as business tax is calculated on a firm's gross revenues, rather than only on added value, the new tax avoids double taxation issues in services whereby some products have been subject to VAT after manufacture, and then business tax when sold. The Ministry of Finance and State Administration of Taxation have jointly released a notice containing guidelines and regulations for the nationwide extension of the pilot scheme in June 2013. The extension of VAT across the whole country is expected to cut a further RMB120bn in taxes for companies in the selected service sectors in 2013.
The Egyptian Government is planning to replace the nation's general sales tax with a value-added tax.
Egypt's interim Government hopes to install a broad-based VAT with a headline rate of between 10 to 12 percent. As under the current sales tax regime, a higher VAT rate would be levied on sales of motor vehicles, and also cigarettes and alcohol. A limited number of exemptions are proposed for a small number of basic foodstuffs.
Under the current regime, goods and services are typically taxed at 10 percent, but additional rates range from 1.2 percent to 45 percent. The highest rate applies to powerful imported cars.
Morocco has set out plans for a comprehensive reform of the structure of its VAT regime in its recently-approved Finance Bill for 2014.
The Finance Bill includes provisions to transition to a double-rate regime with a 20 percent headline rate and 10 percent reduced rate. The Bill also proposes faster VAT refunds, and a new reverse charge rule to tackle avoidance and evasion.
A number of items previously subject to VAT rates of 7 and 14 percent have been added to the scope of the nation's headline or 10 percent reduced rate. Effective January 1, 2014, the 10 percent reduced rate has been broadened.
South Africa's National Treasury on March 28, 2014, announced that it would postpone significant changes to the nation's VAT regime aimed at adding overseas digital companies to the nation's tax base. The changes, which were scheduled to take effect from April 1, 2014, will now be introduced from June 1, 2014.
Although the regime was postponed, the Treasury published final Regulations defining the scope of the regime with certain amendments. The National Treasury said: "The Regulation was published in the Government Gazette No. 37489 today, and its implementation has been postponed by two months to June 1, 2014, to allow businesses sufficient time to get their systems ready. However, the South Africa Revenue Services (SARS) is ready to start registering foreign based supplies of electronic services from April 7, 2014."
South Africa's reform aims to ensure that electronically-supplied services from overseas businesses to South African consumers are subject to value-added tax, in line with the treatment of domestic supplies. The plans were first announced in South Africa's 2013 Budget, released on February 27, 2013.
In addition to the newly adopted final regulations, the draft Taxation Laws Amendment Bill 2013 (TLAB 2013) and the draft Tax Administration Laws Amendment Bill 2013 were published by the Government on July 4, 2013.
Under the current regime, both taxable and non-taxable persons resident in South Africa are required to account for 14 percent VAT on goods and electronically-supplied services purchased from foreign suppliers under a reverse charge regime, establishing an obligation that they self-assess and remit VAT on online overseas purchases. The Government, in its 2013 Budget, acknowledged that the current framework to tax electronically-supplied services is ineffective.
Under the new regime, foreign suppliers of electronically-supplied services will newly be required to register for VAT once the value of their sales to South African businesses and consumers exceeds ZAR50,000 (USD4,495) during any twelve-month period. To ease the burden on the cash flow of these companies, foreign suppliers will be allowed to account for VAT on a cash basis, enabling them to defer accounting for VAT until a consideration is received in respect of a supply. However, deduction is only permitted once the supplier is paid for inputs.
For the purpose of calculating the value of electronically-supplied services to South African recipients, in view of the fact that customer location is often unknown in the case of e-commerce, a proxy for customer location is to be used. This proxy has been confirmed in the regulations. VAT will cover supplies of electronic services to a recipient that is a resident of South Africa, or where any payment originates from a bank registered or authorized in terms of the Banks Act, 1990.
The regulations confirm that electronically-supplied services subject to VAT will include: educational services; games and games of chance; information system services; internet-based auction services; maintenance services, set out in regulation 7; and miscellaneous services, set out in regulation 8, where such services are supplied by means of an "electronic agent, electronic communication or the internet for any consideration," as defined in the regulations. Miscellaneous services include the provision of e-books, films, images, music, and software as well as software updates.
Indonesia significantly increased its VAT registration threshold from the beginning of this year.
Businesses with turnover exceeding IDR4.8bn (USD395,350) per year are required to register. This is up from IDR600m previously. VAT registration is not permitted for non-resident companies in Indonesia, however.
The change was implemented through Minister of Finance Regulation Number 197/PMK.03/2013, which became effective on January 1, 2014.
The OECD has confirmed that the second meeting of the Global Forum on VAT will take place in Tokyo, Japan, on April 17-18, 2014.
The Global Forum on VAT is a platform for global dialogue on international VAT standards and key issues of VAT policy and operation. The OECD said the event is a unique opportunity for tax officials and other stakeholders from around the world to identify common standards and best practices, share policy analysis and experience, and strengthen international co-operation.
A number of meeting topics are planned, including:
- Global VAT policy trends and developments;
- OECD International VAT/GST Guidelines: Setting the right standards and identifying options for their implementation;
- Applying VAT to cross-border services and digital supplies;
- Tackling VAT fraud; and
- The economics of VAT reform.
The OECD has also confirmed that it will soon launch new International VAT/GST Guidelines, which will provide a new global standard for the application of these taxes to international trade.
Announcing that the guidelines will be released at the Second Meeting of the OECD Global Forum on VAT in Tokyo, the OECD said: "Value-added tax is a key source of revenue for more than 150 countries worldwide, but the uncoordinated application of national VATs to international trade remains problematic. Governments are losing out on tax revenues due to under-taxation, while the risk of double taxation poses increasing obstacles to international trade, particularly in the booming international services trade."
"To address these concerns, the OECD has worked with countries worldwide on a new set of International VAT/GST Guidelines, which should become the global standard for the application of this tax to international trade. The Guidelines provide standards on key aspects of international VAT design and operation that will ensure neutrality in cross-border trade and the coherent allocation of countries' taxing rights on business-to-business trade in services."
« Go Back to Articles