SAF-T: online tax reporting forces transparency

A number of countries have finally begun implementing a process for submitting transaction data to taxing authorities. This “Standard Audit File for Tax” was initially agreed upon by the 38 member states of the OECD in 2005. On July 1, 2016, Poland was the first country to mandate monthly online VAT filings using the SAF-T protocol.

The idea behind SAF-T is that companies provide governments with full transparency towards the company’s business transactions. This will enable tax inspectors to audit companies on an ongoing basis, and have line-item transaction data available at any time. For example, if Company A makes a taxable supply to Company B, Company B’s tax inspector will be able to confirm whether Company A has paid over the VAT, before he allows the VAT refund to Company B.

This is an unprecedented level of line-item data submission, which is in line with the broader global trend towards eliminating and strictly policing tax avoidance, BEPS and similar government initiatives.

The mandatory transparency has an upside for companies as well: because compliance is largely automated, eventually compliance costs and demands on staff resources will decrease, as will internal audit costs. It is even expected that the SAF-T extraction and analyses tools may at some point void the need of separate VAT and income tax returns.

However, companies will likely require more resources to deal with the expected increase of authorities’ queries and potential cash flow disadvantages connected to VAT credits that are being held up as a result of the ongoing audits. In addition, IT resources will have to be freed to develop and maintain connectors and extraction software, as well as periodically oversee the actual data submission.

In the SAF-T protocol, authorities require more than just all transactional data. There are six reporting requirements:
  1. The full general ledger and journals,
  2. Accounts payable, with vendor master data, payment ledgers and softcopy vendor invoices;
  3. Accounts receivable with client master data, payment ledgers and copies of customer invoices
  4. Warehouse inventory product master files, inventory movements
  5. Inbound and outbound flow of goods
  6. Fixed assets ledgers, depreciation, amortizations

Obviously companies must demonstrate the relationship between these six categories, particularly the Accounts Payable and Receivable in connection with the flows of goods.

Interestingly, Portugal and Austria have already announced that they won’t require reporting details of all six of these categories, but that a simplified structure will be acceptable.

In addition, The Netherlands and Belgium have already developed a different submission format alongside of SAF-T. Similar to SAF-T, this “Transaction Network Analysis” focuses on identifying VAT fraud, but authorities apply different tests and require a different submission format. The way that it looks now, the two approaches to analyzing transactional data may continue to exist in parallel, even though the expectation is that in the future only the SAF-T framework will prevail.

With Poland having implemented their national SAF-T requirements earlier this year, it is expected that other European countries will follow quickly. France, for example, has already announced that they will introduce a different format that aligns with the French “Plan Comptable General”, which is France’s framework of accounting principles. It should be noted that SAF-T not only put the onus on resident businesses to submit transactional data, but also non-resident companies that file VAT returns in a SAF-T country must comply. The OECD SAF-T protocol mandates a monthly submission; it is expected that some countries may require the largest businesses to keep data available on a real-time basis.

Companies now need to get ready for SAF-T, and tax, finance and IT staff need to be prepared to implement the data extraction frameworks. Businesses that currently have a Tax Control Framework (“TCF”), which supports and maintains a detailed overview of all business activities in an organization, will use the TCF to help identify the data sources on a country-by-country basis. In particular, TCF will be helpful with mapping of the data flow from the ERP or other resources towards the data extractor. At the time of the mapping it will be clear where data gaps exist. This will materialize, for example, if not all transactions are routed through a single ERP or for example if assets are managed in a separate accounting platform. Multiple ERPs and accounting platforms will require

As we mentioned earlier, not all countries have the same data submission requirements, and the mapping or extraction should be tailor-made on an individual country basis. There is no prescribed method of data extraction, but it is clear that the final submission should be in XML-format, following the specific country’s framework.

Finally, companies should develop their SAF-T strategy with an eye to the data analyses that the authorities will perform. For example, where a company normally has vast timing differences between dispatch, invoicing and payment collection, these should be explained beforehand to the authorities to avoid significant disruption of the compliance process. Also, avoiding estimates / accruals will be an important part of the SAF-T strategy. For some companies the data submissions will be massive, and testing the extractions immediately prior to the online filing will minimize audit queries.



EUROPEAN UNION

European Commission Publishes National VAT Rules for Electronically-Supplied Services
The European Commission has published on its website an updated collection of national laws related to use of the Mini One-Stop Shop (MOSS) for supplies of telecommunication, broadcasting, and electronic services. The report for each Member State includes the following key points of information:
  • applicable use and enjoyment rules;
  • time of supply or chargeability;
  • applicable VAT rates;
  • exemptions;
  • VAT registration processes;
  • invoicing obligations;
  • penalties for non-compliance.
The national reports are now valid through July 27, 2016.

Austria: VAT Rules for Resale Rights on Works of Art
The European Commission has requested that Austria change its VAT rules regarding the taxation of resale rights on works of art. Royalties obtained by an artist at the time his work of art is resold by a third party are currently taxable in Austria, even if there is no contractual relation between the artist and the buyer. The EU Commission has requested Austria to change the rules that request non-resident taxpayers to appoint a fiscal representative and to pay VAT on these transactions, since these cases constitute a violation to Article 2 of the EU VAT Directive (Council Directive 2006/112/EC). If no change is made or no reasoned opinion is provided by the Austrian government, the EU Commission has stated that a procedure of infringement may be opened against Austria at the Court of Justice of the EU.

Belgium: Summer Filing Deadlines Extended
The Belgian Federal Public Service Finance has extended several filing deadlines for both VAT Returns and EC Sales Listings, to accommodate summer holiday plans. In particular, VAT returns and EC Sales Listings that would normally be due on August 20, 2016 must now be filed by September 9. Advance payment, however, must still be remitted by August 22, 2016, to avoid interest penalties. Moreover, the deadlines for filing Mini One-Stop Shop (MOSS) Returns are still in force, as required by European regulations.

Bulgaria: Collateral for Liquid Fuel Sales
The State Gazette of August 2, 2016 included amendments to the VAT Act requiring entities trading in liquid fuels to provide collateral to the revenue authorities. VAT Bill No. 602-01-30, previously described in the July 2016 Newsletter, has passed Parliament, and there is now an obligation for taxpayers to provide the Bulgarian tax authorities with collateral when the value of their liquid fuel supplies exceeds BGN 25,000. Acceptable forms of collateral include cash or an unconditional bank guarantee.

Additionally, collateral must be provided by entities that acquire fuels not intended for internal use as part of intra-Community acquisitions or supplies exceeding BGN 25,000, as well as entities that receive supplies of liquid fuels of at least BGN 25,000 released for end use under the Excise Duties Act. The collateral must equal 20% of the VAT base of the suppliers, but not less than BGN 50,000.

Estonia: New Periodic VAT Return Effective January 1, 2017
The Estonian Tax Authority has issued an updated version of the periodic VAT return. The new return will be effective January 1, 2017. The primary difference concerns a rewording of Annexes 1 and 2. The new forms are available for viewing on the Tax Authority website: https://www.riigiteataja.ee/akt/106072016006

France: EU Recommends Improvements to France's “Inefficient” VAT System
The European Commission has recently released ECONOMIC BRIEF 015 recommending improvements to France's "inefficient" value-added tax system, including a recommendation that the country do away with broadly applying reduced VAT rates. The report notes that France faces important fiscal challenges as its tax burden is among the highest in the European Union (EU), while its high labor tax burden, despite reforms, is hampering the nation's competitiveness.

The report highlights that the VAT standard rate in France (20%) is below the average standard rate in the EU and only four countries (Luxembourg, Malta, Cyprus and Germany) have a lower standard rate than France. In addition, France applies lower VAT rates than other EU member states on average for most categories of goods and services subject to reduced VAT rates (2.1%, 5.5%, and 10%).

The Commission has recommended comprehensive reform of the French VAT system that could help fund growth-enhancing tax cuts and reduce complexity for taxpayers. The following specific recommendations were outlined in the report:
  • Increasing the reduced rate rather than the standard rate to generate extra revenue
  • Reducing the number of rates
  • Re-assessing whether there is a clear rationale for applying the reduced rate for certain goods and services
  • Using part of the revenue from increased reduced rates to account for the redistributive effects of removing reduced VAT rates
  • Broadening the VAT base by limiting the extent of mandatory exemptions and the use of VAT optional exemptions
  • Ensuring that a reform of the VAT system is accompanied by sufficient control of compliance.

Greece: New Penalties for VAT Laws Violations / Deferral of VAT on Imports
A new set of penalties have been approved for violators of certain VAT regulations in Greece. Article 51 of Law 4410/2016 states that taxpayers issuing inaccurate documentation or failing to issue proper tax records (invoices, bills, etc.), as described by the VAT law, will be subject to new fines whose amount will depend on the gravity of the violation. Repeat violations will be punished with fines that will vary from 100% to 200% of the unpaid VAT resulting from the violation. In these cases the applicable sanction will never be less than 500 Euros for second time offenders or 1000 Euros for those that have used double booking for committing the VAT fraud.

Law 4410/2016 has also changed certain rules applicable to foreign businesses that import goods into Greece. Under the previous rules, businesses importing goods with a statistical value of at least EUR 300 million a year were allowed to defer the VAT due at customs, and instead pay it at the end of the VAT period. The same treatment was granted to businesses that in the last 5 years had average imports of EUR 120 million. Law 4410 has lowered these thresholds to EUR 250 million and EUR 100 million respectively.

Ireland: Guidance on Management of Special Investment Funds
The Irish Tax & Customs department has issued guidance on Ireland’s position on the “management of special funds” following the Court of Justice of the European Union’s (CJEU) decision in Case C-275/11, Gesellschaft für Börsenkommunikation mbH v Finanzamt Bayreuth (“GfBk”). In GfBk, the CJEU held that advisory services concerning investment in transferable securities, provided by a third party to an investment management company which managed a special investment fund, fell within the concept of “management of special investment funds” for the purposes of the exemption laid down in Article 135.1(g) of the EU VAT Directive (Council Directive 2006/112/EC). The Court reasoned that such an activity is intrinsically connected to an activity characteristic of an investment management company, so that it has the effect of performing the specific and essential functions of management of a special investment fund.

Currently, under Irish law, the management of an undertaking specified in paragraph 6(2) of Schedule 1 of the VAT Consolidation Act 2010 (VAT Act), as amended, is an exempt activity. Under paragraph 6(2) of Schedule 1 of the VAT Act, the “management” of a specified undertaking can consist of “any one or more of the 3 functions listed in Annex II of Directive No. 85/611/EEC of the European Parliament and Council (being the functions included in the activity of collective portfolio management) where the relevant function is supplied by the person who has responsibility for carrying out that function in respect of the undertaking.” In GfBk, the CJEU noted that advisory and information services are not precluded from falling within the activity of “management” of a special investment fund simply because they are not specifically listed in Annex II to Directive 85/611, because the list is described as being “not exhaustive” in Article 5(2) of that Directive.

The CJEU also noted that in order to determine whether services provided by a third party to an investment management company fall within the concept of “management of special investment funds” for the purposes of the exemption, it is necessary to consider whether the service is “intrinsically connected” to the activity characteristic of an investment management company. The CJEU held that the making of recommendations for purchase and sale of assets by a third party to an investment management company falls within the exemption.

Based on CJEU jurisprudence, Irish Tax and Customs will consider the following in determining if services outsourced to a third party constitute activities of “management” of a specified fund for the purposes of the exemption:
  • the services must, viewed broadly, form a distinct whole, and be specific to, and essential for the management of special investment funds;
  • the services must be intrinsically connected to the activity characteristic of an investment management company i.e. the services concerned must be eminently characteristic of the activities of a special investment fund;
  • mere support or technical supplies, such as the making available of IT systems, provision of software, general legal and accountancy services etc. are not covered by the scope of the exemption;
  • it is not essential that the outsourced services lead to a change in the legal or financial situation, rather the services should constitute “an outsourcing, in substantive terms, of the activity of management”.

Italy: New Laws for VAT on Certain Food Supplies / New MOSS Regulations
The Italian Congress has enacted a new law intended to bring the tax laws of Italy into compliance with the EU, in view of infringement proceedings that the European Commission has started against the country. Law 122/2016 has several provisions regarding the taxability of supplies of vegetables, and some cereals, that will be subject to the reduced rates of 5% and 10% respectively. The revenue agency of Italy (Agencia delle Entrate) has also issued Protocol 118987, which specifies that effective October 1, 2016, the Pescara Operational Centre (Centro Operativo di Pescara) will be the Italian office of that agency authorized to evaluate, process and monitor the requests for registration for relevant activities related to the Mini One-Stop Shop (MOSS) scheme, available to taxpayers that provide qualifying electronically supplied services as well as telecommunications or broadcasting services.

Lithuania: Proposal to reduce VAT on Meat
Lithuania is considering a reduction in the VAT rate on fresh and chilled meat in order to stimulate domestic demand. Currently, a 21% VAT rate is applied to supplies of meat. The Lithuanian Finance Ministry is considering reducing the VAT rate to either 9% or 5%. The Ministry hopes that lower VAT rates, and therefore lower prices, will lead to an increase in demand for fresh and chilled meat. If the measure is implemented, it is expected to become effective on October 1, 2016.

Malta: Economic Minister Speaks on 2017 EU Presidency
Dr. Christian Cardona, the Maltese Minister for Economy, Investment & Small Business, recently set out the country’s aims for its 2017 EU Presidency in an online interview. Dr. Cardona noted that “many European citizens feel disconnected from EU institutions,” and stressed the importance of reconnecting the EU with its citizens. He also noted that “Malta is in a unique position to be a bridge between the EU and the United Kingdom” in any forthcoming Brexit negotiations. Finally, Dr. Cardona stated that Malta is committed to achieving the aims set out in its TRIO program for the EU Presidency, developed in concert with the Netherlands and Slovakia. These aims include improving cyber-security, fighting terrorism, and ensuring full access to the labor market.

Poland
Ministry of Justice to Introduce New Penalties for VAT Fraud
According to recent reports, Poland’s Ministry of Justice is preparing a draft amendment to the Penal Code that would introduce harsh new penalties for VAT fraud, including false invoicing. Under the amendment, large-scale extortion of VAT could be punishable by up to 25 years in prison. Poland has recently been hit hard by VAT fraud – by 2012, the country’s losses were somewhere between 36.5 and 58.5 billion PLN according to a PwC study.

Poland to Increase Spending Based on Higher Tax Revenue
Poland’s Finance Ministry has laid out a plan to increase spending by more than 10 billion zloty in 2017, with the majority of funding coming from improved collection of VAT and corporate-income taxes. Although Poland has not announced plans to raise its VAT rate, the government believes that additional revenue will become available once better tax collection practices are implemented. This plan has drawn criticism from national economists, one of whom called the increased revenue forecast “another risky assumption.”

First Standard Audit File Reports Due for Large Entrepreneurs
As previously mentioned, Poland has recently introduced a new reporting requirement for businesses in the form of a Standard Audit File for Tax (SAF-T). The SAF-T must be filed electronically for purposes of purchase and sale VAT reporting, and may be expanded in the future to report accounting books, bank account statements, and storage and revenue information. The first set of SAF-Ts are now being filed, with a due date of August 25, 2016 for “Large Entrepreneurs.” Such businesses are defined as having 250 or more employees and either: i) annual sales of 50 million Euros or more, or ii) year-end balance sheet assets of 43 million Euros or more. The filing period for “Small” and “Medium” Entrepreneurs will not begin until January 1, 2017.

Extension of Derogation on Input VAT for Certain Vehicles Likely
On August 5, 2016, the European Commission sent a proposal to the Council of the European Union that would authorize Poland’s request to continue derogating from articles 26.1(a) and 168 of the EU VAT Directive (Council Directive 2006/112/EC). Under these articles, taxable persons are entitled to deduct input VAT on the use of goods forming part of the assets of a business, when those goods are used for non-business purposes. Member States, however, are allowed to derogate from this practice, unless a distortion of competition results.

Currently, Poland is allowed to limit the right to deduct input VAT incurred on the purchase, hire, lease, intra-Community acquisition, and importation of certain motor vehicles to 50% where the vehicles are not used exclusively for business purposes. This derogation does not apply to vehicles with more than 9 seats, nor to passenger cars. If the European Commission’s proposal is approved, Poland will be able to keep this derogation in place until December 31, 2019.

Romania: Derogation from EU VAT Directive Extended
According to Implementing Decision (EU) 2016/1206 of July 18, 2016, amending Implementing Decision 2013/676/EU, Romania may continue to apply a special measure that derogates from Article 193 of the EU VAT Directive (Council Directive 2006/112/EC). Article 193 states that VAT shall be payable by any taxable person carrying out a taxable supply of goods or services, except where it is payable by another person in the cases referred to in Articles 194 to 199b and Article 202.

Implementing Decision 2013/676/EU authorized Romania to apply a derogating measure to supplies of wood by taxable persons, with the recipient being liable to pay the VAT, i.e. a reverse charge mechanism. This arrangement has been extended until December 31, 2019.

Sweden
Tax Agency Issues Guidance on Food Additives
On August 22, 2016, the Swedish Tax Agency (Skatteverket) published guidance on the VAT rate applicable to food additives. According to the Tax Agency, food additives fall under the definition of “food” in the VAT Act, despite the fact that they are not normally consumed as food in and of themselves. Because food additives are taxed as food, they are subject to the same 12% reduced VAT rate. As an example, the Tax Agency states that carbon dioxide cartridges used in beverage machines are subject to the 12% reduced rate.

Tax Agency Clarifies Scope of Exemption for Brokerage Services
On August 10, 2016, the Swedish Tax Agency published guidance on the scope of a VAT exemption for brokerage services. The Tax Agency clarified that the provider of financial services must act as an intermediary in order for brokerage exemption to apply – in order to meet this requirement, the provider must know both the seller’s and the buyer’s identity, and an actual major transaction must take place. The Tax Agency also stated that fixed fees and open contracts could be eligible for the exemption provided they are linked to an actual delivery of securities.

United Kingdom
Consultations Opened for Tax Collection Reforms
On August 15, 2016, HM Revenue & Customs (HMRC) opened a series of six consultations on an ambitious tax collection reform plan entitled “Making Tax Digital.” The government first set out its vision for a transformed tax system in its 2015 Budget, with a roadmap published in December of 2015. The short-term goal is for HMRC to move to a fully digital tax system by 2020, with digital accounts available to all taxpayers. This will allow HMRC to “collect and process information affecting tax in as close to real time as possible.” HMRC predicts that digitalizing the tax system will ultimately eliminate the need for tax returns.

The open consultations range from overviews for small businesses, to simplified taxation for unincorporated businesses, to voluntary “pay-as-you-go” systems. The consultation period for all topics will run until November 7, 2016.

HMRC Budget Proposals Draw Criticism
On July 27, 2016, the U.K. House of Commons Public Accounts Committee released a report criticizing HMRC’s plans to reduce personal tax service costs by 34% over the next five years. The Committee noted that “customer service levels collapsed” following prior budget cuts in 2014-15 and early 2015-16, with average call waiting times tripling for most taxpayers. The Committee believes that new budget cuts could cause a similar collapse, and recommends instead that HMRC develop “a clear understanding of customer behavior… before it releases further staff.” HMRC has consistently moved towards a “digital strategy” in customer service – see entry above – and plans to move to a fully digital tax system by 2020.

HMRC Explains Proposed Use and Enjoyment Rules on Insurance Repairs
On August 10, 2016, HMRC published a tax information and impact note on proposed new use and enjoyment rules for repair services, which, if passed, would take effect on October 1. As previously reported, the new rules would affect repairs made under an insurance contract to a relevant business person who is not the insured party. Such repairs would be supplied (and taxed) where used and enjoyed in two distinct situations: first, when the repair services would normally be considered a supply within the UK, but are used and enjoyed outside of the EU; and secondly, when the repair services would normally be considered a supply outside of the EU, but are used and enjoyed within the UK.

The HMRC tax note explains that a small number of insurers had previously avoided incurring irrecoverable VAT by using offshore entities to repair insured goods. This practice drew complaints from other insurers, who claimed it was a form of unfair competition. The new use and enjoyment rules target this practice by ensuring that repair services carried out in the UK for UK policyholders are subject to UK VAT, regardless of whether the insurer technically belongs outside of the EU. HMRC believes this measure will not have any significant macroeconomic impacts if passed.

HMRC Explains Reverse Domestic Charge for Telecommunications Services
On August 18, 2016, HMRC published guidance on the application of a reverse charge to domestic supplies of telecommunications services. The reverse charge applies to wholesale supplies of telecommunications involving speech and associated services, which includes “Over The Top” telecommunications messages, SMS hubbing, and SMS and voice aggregator services. Certain exclusions apply, including an exclusion for data-transmission-only services such as broadband. However, companies making wholesale supplies of both reverse-charge and non-reverse-charge services may treat all of their supplies as subject to the reverse charge if separating the services for VAT purposes is impracticable.


COUNTRIES OUTSIDE THE EUROPEAN UNION

Switzerland: Federal Council Seeks Extension of Authorization to Levy VAT
Switzerland’s Parliament is currently debating a draft bill, prepared by the Swiss Federal Council, which would authorize the government to levy both the direct federal tax (DBST) and VAT until 2035. The regulations now in force authorize the collection of both taxes only until the end of 2020.

Because the two taxes contribute to more than 60 percent of the federal budget, their collection is vitally important to the government. However, extending the authorization to levy the taxes will require a Constitutional amendment, even if the draft bill is passed. The Federal Council has therefore limited the scope of the bill to provide a temporary extension of authorization – which is relatively non-controversial – while retaining the right to seek permanent authorization in the future.
 

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