In the “Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalization of the Economy” issued on 1 July 2021, members of the G20 Inclusive Framework on Base Erosion and Profit Shifting (“BEPS”) have agreed upon a framework to move forward with a global tax reform deal.
This will address the tax challenges of an increasingly digital worldwide economy. As of 9 July 2021, 132 of the 139 OECD/G20 member jurisdictions have agreed to the Inclusive Framework on BEPS.
Pillar 1 gives a new taxing right, Amount A, to market countries to ensure companies pay tax on a portion of residual profits earned from activities in those jurisdictions, regardless of physical presence. Pillar 1 will apply to multinational enterprises (“MNEs”) with global turnover above 20 billion euros and profitability above 10%.
There will be a new nexus rule permitting allocation of Amount A to a market jurisdiction when the in-scope multinational enterprise derives at least 1 million euros in revenue from that jurisdiction. For jurisdictions with a GDP less than 40 billion euros, the nexus will instead be set at 250,000 euros.
The “special purpose nexus rule” determines if a jurisdiction qualifies for the Amount A allocation. Furthermore, countries have agreed on an allocation of 20-30% of in-scope MNE residual profits to market jurisdictions, with nexus using a revenue-based allocation key.
Revenue will be sourced to the end market jurisdictions where goods or services are consumed, with detailed source rules still to come.
More details on segmentation are still in the works, as is the final design of a marketing and distribution profits safe harbour that will cap the residual profits allowed to the market jurisdiction through Amount A.
Lastly, countries have agreed to streamline and simplify Amount B with a particular focus on the needs of low-capacity countries. The finalised details are expected to be completed by the end of 2022.
Pillar 2 consists of Global anti-Base Erosion (“GloBE”) Rules that will ensure MNEs that meet the 750 million euros threshold pay a minimum tax rate of at least 15%. The GloBE Rules consist of an Income Inclusion Rule and an Undertaxed Payment Rule, the latter of which still needs to be finalised.
Pillar 2 also includes a Subject to tax rule, which is a treaty-based rule, allowing source jurisdictions to impose limited source taxation on certain related party payments subject to tax below a minimum rate. The rate will range from 7.5 to 9 percent.
There is currently a commitment to continue discussion, in order to finalise the design elements of the plan within the agreed framework by October 2021. Inclusive Framework members will agree and release an implementation plan.
The current timeline is that the multilateral instrument through which Amount A is implemented will be developed and opened for signature in 2022, with Amount A coming into effect in 2021. Similarly, Pillar Two should be brought into law in 2022, to be effective in 2023.
Although the key components of the Two-Pillar Solution have been agreed upon, a detailed implementation plan that includes resolving remaining issues is still to come.
As many countries could be implementing these changes in the near future, it is important for businesses active in the digital economy to carefully track and understand the developments surrounding the OECD/G20 Base Erosion and Profit Shifting Project.
Need to ensure compliance with the latest e-document regulations? Get in touch with our tax experts.
Intrastat is a reporting regime relating to the intra-community trade of goods within the EU.
Under Regulation (EC) No. 638/2004, VAT taxpayers who are making intra-community sales and purchases of goods are required to complete Intrastat declarations when the reporting threshold is breached.
Intrastat declarations must be completed in both the country of dispatch (by the seller) and the country of arrival (by the purchaser). The format and data elements of Intrastat declarations vary from country to country, though some data elements are required in all Member States. Reporting thresholds also vary by Member State.
In an effort to improve data collection and ease the administrative burden on businesses an ‘Intrastat Modernisation’ project was launched in 2017. As a result of this project Regulation (EU) 2019/2152 (the Regulation on European business statistics) was adopted.
The practical effects of these changes are two-fold:
Currently Member States are required to collect the following information as part of Intrastat:
To ease compliance burdens on small businesses, EU Member States are allowed to set thresholds, under which businesses are relieved of their obligations to complete Intrastat. Thresholds are set annually by Member States, and threshold amounts for arrivals and dispatches are set separately.
Under the current regulations, Member States cannot set thresholds at a level that results in less than 97% of dispatches from the Member State being reported and cannot set thresholds at a level that results in less than 93% of intra-community arrivals to the Member State being reported.
Under current regulations Member States are allowed to let certain small businesses report simplified information, so long as the value of trade subject to simplified reporting does not exceed 6% of total trade.
Under the upcoming new regulation, Member States need only ensure that 95% of dispatches are reported and the exchange of data on intra-community arrivals between Member States is optional.
Need to ensure compliance with the latest Intrastat requirements? Get in touch with our tax experts.
Progress has been made in the roll-out of the Polish CTC (continuous transaction control) system, Krajowy System of e-Faktur. Earlier this year, the Ministry of Finance published a draft act, which is still awaiting adoption by parliament to become law. Draft e-invoice specifications have been released and there has been a public consultation on the CTC system.
In June, the Ministry of Finance announced it had reviewed all comments submitted by the public and Polish ministers on the CTC system and decided to take the following actions:
In the announcement, the Minister outlined the benefits of adopting the CTC system for taxpayers. These include: quicker VAT refunds; security of the stored invoice in the tax authority’s database until the end of the mandatory storage period; certainty about the invoice delivery to the recipient through the CTC platform and therefore quicker invoice payments; automation of the invoice processing and exchange due to the adoption of a standardized e-invoice format.
In addition, as a result of the new e-invoicing rules upcoming changes in the SLIM VAT 2 package will trigger further relief measures, e.g. around the handling of duplicates and corrective invoices.
The Polish authorities are making good progress in the implementation of the Krajowy System e-Faktur. It is positive to see that the public consultation has proven useful in defining next steps and the authorities’ intent for transparency and timely documentation will hopefully continue throughout the entire CTC roll-out.
To find out more about what we believe the future holds, download Trends: Towards Continuous Transaction Controls.
Italy postpones e-document legislation until 2022. In September 2020, Italy introduced major changes to the country’s rules on the creation and preservation of electronic documents. These new requirements were expected to be enforced on 7 June 2021 however the Agency for Digital Italy (AGID) has now decided to postpone the introduction of the new rules until 1 January 2022.
The new ‘Guidelines for the creation, management, and preservation of electronic documents’ (“Guidelines”) regulate different aspects of an electronic document. By following the Guidelines, businesses benefit from the presumption that their electronic documents will provide full evidence in court.
The postponement of the introduction of the Guidelines is a reaction from the AGID to claims of local organizations who have particularly expressed concern about the obligation to associate metadata with e-documents. The Guidelines set forth an extensive list of metadata fields for keeping alongside e-documents in a way that will enable interoperability.
In addition to delaying the introduction of the new e-document legislation, the AGID has also modified metadata requirements. They included new pieces of metadata and changing the description of some fields. The AGID has also corrected references – especially to standards – and rephrased statements to clarify some obligations.
The updated Guidelines and their corresponding Appendices are available on the AGID website.
On 22 March 2021 the EU Council approved DAC7, which establishes EU-wide rules meant to improve administrative cooperation in taxation. In addition, the Directive addresses additional challenges posed by a growing digital platform economy.
In 2011, the EU adopted Directive 2011/16/EU on administrative cooperation in the field of taxation in the EU (‘DAC’). The aim of the Directive is to establish a system for secure cooperation between EU countries’ national tax authorities. The Directive also sets out the rules and procedures EU countries must apply when exchanging information for tax purposes. DAC7 is the seventh set of amendments to the Directive.
The new DAC7 tax rules will require digital platforms to report the income earned by sellers on their platforms to EU tax authorities. As a result, reportable activities will include:
Reportable information will include tax identification numbers, VAT registration numbers, in addition to other demographic information for sellers. The new rules extend the scope of automatic exchange of information among EU tax officials to the information reported by the digital platform operators.
The object of these new rules is to address the challenges posed by an ever-expanding global digital platform economy. Each year, more and more individuals and businesses use digital platforms to sell goods or provide services. Sales made online have become an even larger share of total global sales in the last year due to the COVID-19 pandemic.
Income earned through these digital platforms is often unreported and tax is not paid, which causes loss of tax revenue for Member States and gives an unfair advantage to suppliers on digital platforms over their traditional business competitors. The new amendments should address these issues, enabling national tax authorities to detect income earned through digital platforms and determine the relevant tax obligations.
Other rules included within the amendments will improve the exchange of information and cooperation between Member States’ tax authorities. It will now be easier than ever to obtain information on groups of taxpayers. Lastly, the new rules set up a framework for authorities of two or more Member States to conduct joint audits.
The new DAC7 tax rules will apply to digital platforms operating both inside and outside the EU from 1 January 2023. The framework for authorities of two or more Member States to conduct joint audits will be operational by 2024 at the latest.
Get in touch with our experts to discuss your EU tax requirements. To find out more about what we believe the future holds, download VAT Trends: Toward Continuous Transaction Controls.
The European Union’s VAT E-Commerce Package has been delayed until 1 July 2021. Consequently, in the New Year businesses will have to contend with both Brexit related VAT changes and the impact of the One Stop Shop – amounting to two new set of rules for VAT reporting in 2021.
From 1 July 2021, the EU introduces new rules extending the Mini One Stop Shop (MOSS) to B2C supplies. The rules apply where VAT is due in a Member State other than that in which the supplier is established and intra-EU B2C supplies of goods. These rules are currently available for VAT accounting on B2C sales of Telecommunications, Broadcasting and Electronic Services (TBES). The new system, known as the One Stop Shop (OSS), had an original launch date of 1 January 2021.
OSS will abolish current distance selling thresholds. In addition, all intra-EU supplies of B2C TBES services plus intra-EU distance sales of goods will operate under the same €10,000 limit. When this limit is exceeded, VAT will be due in the Member State of delivery. This is regardless of the level of sales in that country. Important to note is that this threshold applies to EU established companies and will not apply to UK businesses.
A single VAT return accounts for Any VAT due can be accounted for via a single VAT return, submitted in the Member State of Identification – the country in which the business is registered for OSS. Any company established in the EU will use the country in which they operate as the Member State of Identification. If there is no business establishment in the EU, then a Member State can be chosen. Provisions also apply to non-EU businesses supplying services in the form of the non-union OSS scheme. OSS is not compulsory – businesses can choose to have a registration in all Member States where VAT is due.
The dispatch of goods from physical locations, such as warehouses in the EU, will continue to be treated as distance selling. If any thresholds are exceeded, VAT will be due in the Member State of delivery.
Consequently, OSS will be available to all sales of goods, regardless of their value. OSS accounts for VAT in the Member State of Identification at the rate in place in the country where VAT is due. That is the Member State of Consumption. Any VAT owed will be paid to the Member State of Identification, and OSS returns must be submitted.
If the UK is not treated as a Member State at the time in which goods are dispatched from its territory, the sale will not fall under the Distance Selling regime. The goods will be treated in line with their intrinsic value, with differences above and below €150.
Goods imported from third countries or territories to customers in the EU up to an intrinsic value of €150 will be covered by an import scheme. Like the system being implemented in the UK from 1 January 2021. This import scheme accompanies the abolition of the current VAT exemption for goods in small consignments of a value of up to €22. However, if goods have a value above €150, VAT cannot be accounted for under IOSS and a full customs declaration will be needed.
Goods imported from third territories or third countries in consignments with an intrinsic value of less than €150 using an electronic interface such as a marketplace, platform, portal or similar means, will also be treated differently. This applies to sales via platforms such as Amazon. Under the changes, the platform will be deemed to have received and supplied goods in their own right. Interestingly, it’s irrelevant whether the goods are supplied by EU or non-EU suppliers. The marketplace rules also apply to non-EU sellers supplying goods via a marketplace where the goods are already located in the EU at the time of sale.
Until the application of the new rules, Member States must transpose the new rules of the VAT Directive. The Directive is already in place into their national legislation. Some Member States already are doing this. Though as yet unconfirmed, many believe OSS could be further delayed. Both the Netherlands and Germany have concerns about preparedness for the July 2021 start date.
For UK businesses, Brexit makes things particularly complex. After the implementation of OSS, UK businesses can make use of the e-commerce package changes. However, during the 6-month delay in 2021, registrations and fiscal representatives could be necessary for a short time. It’s essential businesses plan their supply chain with all the upcoming changes in mind.
Get in touch to find out how we can help your business with the new rules.
Keen to know more the EU E-Commerce VAT package and One Stop Shop and impact on your business? Download our recent webinar A Practical Deep Dive into the New EU E-Commerce VAT Rules.
Find out why it makes sense to invest in tech and automation to streamline tax processes and alleviate the burdens finance teams face.
The shift towards digitisation necessitates a radical adaption and shift in existing tech for industries across the board. As this occurs, tensions and anxieties rise around automation and job losses. With Oxford Economics predicting that 12.5 million manufacturing jobs will be automated in China by 2030, a partially automated workforce is indeed on the horizon.
But human expertise and technology can go hand in hand, with tech supporting teams and boosting productivity tenfold. As a result, for businesses, the only way to thrive in an increasingly digital world is to invest in the right technology.
For organisations operating globally, this is of particular importance as an extensive knowledge of governmental financial legislation in many countries is needed. Financial frameworks are complex to navigate and are constantly changing. Real-time VAT reporting is increasingly prevalent worldwide, with continuous transaction controls (CTCs) tightly constricting many different jurisdictions. Without automation, the hours required to manually keep pace with new rules would far exceed realistic human capacity.
For global companies, manually submitting the paperwork for audits and reports is neither sustainable nor sensible. But an additional problem for those operating in multiple jurisdictions is how to keep pace with ever changing rules and government regulations required for business transactions.
Global governments are reviewing how they measure and collect tax returns. The aim is to improve economic standards in their countries. Digitising return processes gives way for a much more forensic and accurate view of a nation’s economic health. So it’s unsurprising that automated invoicing and reporting has pushed its way to the top of the agenda in recent years.
How the approach is taken to upgrading many transactions and interactions is contingent on specific country viewpoints – certain jurisdictions enforce varying levels of CTCs, real-time invoicing, archiving and reporting of trade documentation. Therefore those operating internationally will feel the additional pressure to accurately track and comply with multiple and complex laws with threatening hefty non-compliance fines. Trading and operating within the law now requires intelligent technology and infrastructure.
Approaches across the globe differ; Latin America pioneered mandatory B2B clearance of e-invoices, and Brazil requires full clearance through a government platform. In Europe, the EU-VAT directive prohibits countries from introducing full e-invoicing – though Italy bucked this trend in 2019, following a lengthy derogation process. As economies shift to a data-driven business model, the move towards a digital tax regime is inevitable.
The VAT gap continues to confound governments across the globe. Therefore to combat it, many nations have created their own systems. In turn, this makes a patchwork of mechanisms unable to communicate with each other. To add to this, the slow adoption of e-invoices in many countries has caused a completely fractured picture – VAT information is still being reported periodically in many countries, with each jurisdiction setting its own standard. We’re a long way from consistency in global digitisation.
As more countries develop their own specific take on digitising invoicing, things look increasingly complex. New regulatory legislation continues to surface and keeping track can cause headaches and accidental noncompliance. Global firms must maintain a keen eye on developments as they happen in all the countries where they operate and its essential they apply systems which can track and update new legislation as it happens.
But tech also needs to give an accurate reflection of an entire business’ finances. It needs to link together all the different systems to accurately report tax. This is why flexible APIs are the first order of priority. Programmes with sophisticated APIs enable tax systems to ‘plug in’ to a business and gather vital information. In turn allowing firms to showcase the necessary data, display accurate results and avoid government penalties. It’s essential that technology can integrate with a number of billing systems, ERPs, and procure-to-pay platforms when approaching sensitive government interactions. The volumes of data created and handled are enormous, and increasingly out of the realms of human possibility.
Likewise, tech can assist in formatting information as per the requests of each country, which is essential for digital reporting. Technology exists to monitor and adjust invoice formats. For example, to suit the country a business is operating in and avoid non-compliance penalties. With time usually of the essence and in short supply, tools that automate admin and free up time for strategic elements of business finance pay for themselves in dividends. Effectively, as machines are increasingly ingrained in operations, manual analytics become more challenging. Both governments and businesses are leaning on automation and advanced technology to ease the resulting administrative burdens.
A truly digital future is in the grasp of many economies, but it comes at a price. To capitalise on the rapid wave of digital transformation, businesses must arm themselves with technology. It’s time to manage the increasing realm of complex and data-driven regulations. It makes sense to invest in tech and automation to handle labour-intensive analysis and research, streamline processes, and alleviate the burdens faced by finance teams. That is without the need for costly expert staff or outsourced support. On the verge of a fully digital way of working, manually submitting the paperwork for audits and reports is no longer practical.
It is important to carefully select technology to synchronise and communicate vital information across a business’ IT infrastructure. In the current recession driven context, the pressure on finance teams is intense. The pressure to perform at their best, safeguard against any financial leaks and strictly monitor expenses and outgoings. In the face of adversity, tech can guide and support us – and could become business critical.
Investing in automation and tech doesn’t have to cost finance jobs. It can instead go hand in hand with human expertise. It can manage arduous and complex tasks. While also freeing up time and energy so businesses can concentrate on what they do best.
Find out how Sovos can help you central, standardize and automate your VAT and fiscal reporting obligations.
Anyone predicting Italy’s clearance model e-invoicing system, FatturaPA, would undergo further reform would be right. Agenzia delle Entrate – AdE, the Italian tax authority, has issued new technical specifications and schemas for Italian B2B and B2G e-invoices. But – what do these changes really mean? And what impact do they have on business processes?
Over recent weeks, three updates have been introduced:
The inclusion of withholding taxes (especially social contributions) is one of the new content requirements for the B2B and B2G XML formats. There are also 12 new document types (including self-billed invoices and integration documents) and a further 17 new nature of transactions options (such as reasons for exemptions and reverse charges).
These content updates now require Italian companies to have a deeper understanding of the Italian tax system. The changes impact the moment taxpayers classify their supplies: under the current model, Italian companies don’t have to worry about this until the submission of their VAT returns but under the new schema this classification will be performed in real-time. These updates are likely to impact business processes. They are a necessary next step in paving the way ahead of the upcoming introduction of pre-completed VAT returns, an initiative largely considered to eliminate administrative burden and make life easier for most Italian businesses.
In parallel, further changes resulting from the new versions of the FatturaPA formats have a technical impact on businesses, demanding IT implementation readiness. Among the technical updates are the inclusion of additional fields, length of content, permitted characters, shifting from optional to mandatory field fulfillment and vice-versa, and how often a field can be repeated.
The new technical specifications also introduced new validations that will be performed by the Sistema di Interscambio – SDI, the Italian government-platform responsible for clearance of e-invoices. Most of the new validations check the content of the e-invoice against document types and the indicated nature of the transactions and require taxpayers to eventually be able to understand, process and react accordingly to new errors.
The SDI platform will start processing B2B invoices in the new FatturaPA format from 4 May 2020, but the AdE will enforce use of the new schema on 1 October 2020, triggering new validations and errors only after this date as per the Provvedimento from 28 February 2020. Different deadlines apply to B2G invoices, unless of course the AdE publishes new transition rules for these invoices before that date. The enforcement of the new schema for B2G invoices is set to begin on 1 May 2020.
In practice, the effect of these deadlines mean that while the schemas for B2B and B2G invoices are indeed the same from a technical perspective, taxpayers will must be ready for different deadlines and be prepared to work with two different invoice schemas from 1 May until 4 May.
To find out more about what we believe the future holds, download Trends in Continuous VAT Compliance.
In Turkey, the Revenue Administration (TRA) published the long-awaited e-Delivery Note Application Manual. The manual clarifies how the electronic delivery process will work in addition to answering frequently asked questions. It addresses the application as well as its scope and structure, outlines important scenarios and provides clarity for companies who are unclear about the adoption of e-delivery notes.
The e-delivery note is the electronic version of the “delivery note,” currently printed on paper. As a result, it allows the TRA to regularly monitor the movements of delivered merchandise in the electronic environment.
Electronic delivery has the same legal qualifications as the delivery note but is issued, forwarded, retained, and submitted digitally.
According to the circular published by the TRA at the end of February, taxpayers in scope of the e-delivery note application are;
Taxpayers engaged in fruit and vegetable trade as brokers or merchants completed their transitions of January 1, 2020. Other taxpayers covered by the mandate must be ready by July 1, 2020.
Taxpayers deemed to be risky or at low levels of tax compliance by the TRA must complete their transition to the e-delivery note application within three months after being notified.
Besides explaining the basic concepts, the manual also details the previously announced scenarios providing answers to many areas that were confusing for taxpayers.
The main scenarios are:
In addition, other topics covered include:
Full details on the Turkey E-Delivery Application Manual are available in Turkish from the TRA e-Document website.
Sovos has more than a decade of experience keeping clients up to date with e-invoicing mandates all over the world.
Split payments is one of the methods that European countries with a considerable VAT gap use to tackle it. Across the EU, the VAT gap in the EU in 2016 was reported to be €147.1bn.
Poland introduced voluntary VAT split payments in July 2018. Since then around 25% of taxpayers have adopted this payment method. This equates to 400,000 out of 1.6 million taxpayers currently active on the Polish market. However, only 9% of the total amount of VAT has been paid using this mechanism since last year.
The VAT split payment mechanism means that the amount of commodities or supplies for consideration is being paid to the taxable person into one account, while the VAT amount charged in the underline transaction is deposited in a different bank account designated for this purpose.
On May 16, 2019 the Ministry of Finance published draft legislation which intends to introduce mandatory split payments from September 1, 2019. Poland received temporary approval, valid until 2022, from the European Commission on February 18, 2019, subject to introducing some limitations to the mandate. Consequently, split payments will apply to (and substitute) reverse charge transactions and those with purchaser tax liability; it will also apply to 150 selected goods and services, such as car parts, coal, fuel, waste and some electronic equipment. In addition, to comply with the mandate, the value of the transaction must exceed the threshold of PLN 15,000 (approximately €3,500). The Ministry of Finance reported that the selected industries are those where state tax administration observes the highest tax avoidance.
Since July 2018, taxpayers complained that the way in which split payment is regulated influences their financial liquidity. The bank account to which VAT is paid belongs to the taxpayer, however, its freedom to spend this money is currently limited to paying VAT. With the planned amendments, taxpayers will be able to pay other state charges from the VAT accounts, such as social security charges and other tax liabilities including income tax, excise and customs duties.
Split payments will also apply to non-resident companies subject to VAT in Poland, who are settling transactions by means of bank transfers, and are otherwise in scope of the mandate as per the general rules. Based on the Ministry of Finance estimates, there are around 550 such companies, 150 of which do not even have a local bank account. Complying with the local split payment regime will be more of a challenge for these companies.
Sanctions for non-compliance may affect both the supplier and buyer. Suppliers may be charged with 100% of the VAT due for not including a mandatory statement on the invoice which is subject to split payment (in Polish: "mechanizm podzielonej płatności"). Buyers may be penalised in the same way for not paying VAT to the VAT account, alternatively they may be deprived of the right for tax deduction.
Split payment was either introduced or is being considered in three other European countries. Italy and Romania both introduced a split payment mandate for certain businesses from 2015 and 2018 respectively. In the UK, public consultations were held throughout 2018 with a view to introducing split payments. From April 2019 Romania withdrew mandatory split payments, following the November 2018 order of the European Commission which concluded that the mandate is disproportionate. It will now maintain a voluntary split payment regime.
The Danish government has introduced new law creating a state-owned insurance scheme for compensation for losses arising from a terrorist attack using chemical, biological, nuclear and radioactive (CBNR) weapons. The scheme comes into effect on 1 July 2019. There had been concerns that CBNR terror coverage available in the market was limited and, as it is not a mandatory cover, many insurers were considering whether to continue to offer it at all.
In basic terms, under the new scheme, the financial risk of a CBNR attack in Denmark will initially be borne by the State, but those costs are subsequently recovered from policyholders. It is the way those amounts are recovered, however, which will be of interest to tax managers. Following a CBNR attack and the State paying claims, a 5% levy will be applied to policies covering fire risks in relation to buildings, land, moveable property, railway vehicles, motor vehicles and ships.
Insurers will be required to collect the additional amount from their policyholders along with the first premium of the next calendar year. This will then be remitted in to a fund on a quarterly basis until the cost of the claims are fully recovered by the State, at which point the contributions will cease and any excess amounts held by the fund will be refunded to policyholders proportionally.
This way of funding terrorism cover is a less common approach. Additional (re)insurance pools, such as Pool Re in the UK or ongoing charges including the Victim of Terrorism Contributions to the Fonds de Garantie in France, are more frequently used forms of funding.
This ‘after the event’ method of collection means that hopefully the levy will never need to be collected. However, insurers writing risks in Denmark should be aware of their potential obligations under the new law.