In a recent blog, we considered the upcoming changes to the VAT treatment of virtual events. Today, we will consider some of the issues that may arise.
Many hosts currently use the available educational or fundraising exemptions, especially where the delegates are private individuals without the right of deduction, e.g., doctors. For events with physical attendance the host must consider the rules of the Member State where the event is held since that is where the VAT is due.
Under the new rules, a VAT exemption will be less relevant for B2B virtual events where the reverse charge applies as the attendee assesses the charge to tax themselves. However, it will remain relevant where delegates are unable to apply the reverse charge and unable to deduct the VAT charged – e.g. doctors. In such circumstances VAT is due where the doctor normally resides and that is where the exemption must be considered.
These new rules may require the host to assess the availability of the exemption in several Member States and may also require multiple ruling requests to be submitted. This is likely to increase operating costs substantially, and the (unintended) consequence could be that exemptions are not considered to the detriment of delegates.
Many future events are likely to include virtual attendees since it increases overall attendance at an event, requiring the host to manage two invoicing regimes. There could be issues where one taxpayer has both physical and virtual attendees. In this case, the host will need to issue two invoices – one with local VAT for the physical attendance (and where the exemption may apply) and one where VAT is due in the customer’s Member State and the general reverse charge may apply. The attendance of B2C delegates will further increase this complexity for the host.
What happens if a delegate is invoiced for physical attendance, but changes to virtual attendance at the last minute?
When the host provides the login details for virtual attendance, this may change the place of supply. If the place of supply changes, the host must cancel the original invoice and issue a new invoice with the amended VAT treatment.
Where a host currently holds an event with virtual admission for non-taxable EU delegates (e.g. doctors) then the place of supply is where the supplier is established. For a host established outside the EU, no EU VAT is due (ignoring the possibility of use and enjoyment), and it is also likely that no local VAT is due in the host’s own country.
Implementation of the new rules will mean that the host must charge VAT in the Member State where the doctor normally resides. This will not only result in unrecoverable VAT for the doctor but will also increase the compliance costs of the host. Virtually attending such an event in 2025 may become significantly more expensive than in previous years.
The article governing the transposition of these changes requires Member States to “adopt and publish” the necessary laws, regulations etc., by 31 December 2024. The changes will then apply from 1 January 2025.
Member States must not break rank and apply these rules before this date. A situation where some Member States adopt and apply the rules early could lead to double taxation, particularly in B2C transactions.
Once the rules are in force on 1 January 2025, several issues could arise. What happens for an event in January 2025 where delegates must pay for admission ahead of time in 2024? Where is VAT accounted for, and under which rules?
For B2B, there should be no issue since the service remains a general rule, but there is a real issue for non-taxable delegates, e.g. doctors.
For example, a US host holds an event where a German doctor will attend virtually. The event is in January 2025, but the delegate must pay the admission fee by 30 November 2024 to secure a place. Under current rules, applicable in 2024, the place of supply is where the supplier is established, so no VAT is due on the invoice. But when the event happens in January 2025, the new rules say that German VAT is due.
The time of supply rules are not affected by these changes but could a tax authority seek to change these to increase its tax revenue? For example, Greek VAT law says that the tax point is when the event takes place – not when the invoice is issued/payment received. So, in the above example, Greek VAT would be due for a Greek B2C delegate.
When considering the taxation of virtual events, the new rules state that in view of the digital transformation of the economy, it should be possible for Member States to provide the same treatment of live-streamed activities, including events, as those which are eligible for reduced rates when attended in person. To enable this, the annex detailing which services can benefit from a reduced rate will be amended to include admission to:
This change means that events that are live streamed can benefit from a reduced VAT rate. Though the changes to the place of supply rules refer to “virtual attendance” for B2B and “streamed or made virtually available” for B2C.
Are we to assume that “virtual attendance” = “live streamed”? But “streaming” can be live or recorded. Do these changes also cause an issue for VAT rate determination?
If a delegate watches an event live, then a reduced rate is possible. If the same event is watched via downloading a recording later, then the reduced rate is not possible. If one fee gives a delegate the right to attend the event virtually and download the event for future reference, then the concept of a mixed supply may be relevant.
A recent report released by the European Commission has stressed the need for Member States to increase the number of audits they undertake, particularly in e-commerce businesses. The European Commission specifically highlighted the need for Malta, Austria and France to make additional efforts to improve their value-added tax audit practices. They highlighted the seriousness of the issue and that the consequences of inaccurate VAT reporting can be severe. VAT audits, therefore, promote accurate reporting and mitigate fraud, and as such, they are being encouraged by the Commission.
The European Commission specifically stated that tax authorities should have a strategic approach which must observe multiple elements, including:
The report notes some of the positive actions taken by Member States. Generally, they pay close attention to the audit process, with Finland and Sweden highlighted as particularly good. Furthermore, the report notes that some Member States have established special “VAT task forces” to deal with audits.
Following this report, the European Commission also announced that Norway should be authorised to participate in joint audits with their counterparts in the EU as a further measure to crack down on fraud.
E-commerce is a good example of an area that continues to grow, with the VAT stake ever increasing. With tax authorities globally struggling to keep pace with new technology and consumer offerings, local tax authorities are implementing further measures to ensure that fraud is combatted at an EU-wide level. Whether further changes occur through a difference in how VAT is reported or new forms of reporting such as continuous transaction controls (CTCs) that are in place in some Member States already, VAT audits are at the heart of this strategic plan. In this report, the European Commission has clarified that the approach and scope of audits should be extended.
With increased Member States co-operation and new measures adopted by the European Commission, such as the implementing regulation that provides details on how payment providers should start providing harmonised data to tax authorities from 2024, businesses should ensure that they have adequate controls in place to be able to handle any audit request. Future blogs in this series will focus on the audit trends we’ve noticed at Sovos and how businesses should prepare for an audit.
For more information about how Sovos’ VAT Managed Services can help ease your business’s VAT compliance burden, contact our team today.
Events and conferences typically take a long time to organise and in the early part of 2020 several events that were scheduled to take place were impossible because of the various Covid-19 restrictions. Looking at a loss of revenue, and not knowing how long restrictions would last, many hosts went online and hosted virtual events. This changed both the nature and the place of the supply.
Where there is physical attendance at an event then the place of supply is the place where the event takes place for all delegates.
For B2B delegates the current rules mean that virtual admission will be classified as a general rule service so VAT is due where the customer is established.
For B2C delegates the current rules depend on whether the virtual attendance can be considered an electronically delivered service or a general rule service. For electronically delivered services supplied the place of supply is where the customer normally resides and for other services the place of supply is where the supplier is established.
An electronically delivered service is one which can be delivered without any human intervention such as downloading and watching a pre-recorded presentation. Where a service requires human intervention, this is not considered to be electronically delivered.
Online conferences and events typically have a host or compere and will normally also allow delegates to ask questions in real-time via live chat or similar. The human dimension excludes the possibility of this being classified as an electronically delivered service which means that for B2B the place of supply is where the customer is established and for B2C the place of supply is where the host is established.
The changes are being introduced to ensure taxation in the Member State of consumption. To achieve this, it is necessary for all services that can be supplied to a customer by electronic means to be taxable at the place where the customer is established, has his permanent address or usually resides. This means that it is necessary to modify the rules governing the place of supply of services relating to such activities.
The changes apply to “services that can be supplied by electronic means” but this is not defined. It would appear, from the following to be wider than “electronically delivered”.
To achieve this the current law governing attendance by B2B delegates which results in VAT being due where the event is held will specifically exclude admission where the attendance is virtual.
This suggests that “supplied to a customer by electronic means” occurs when attendance is virtual and has the effect of removing the distinction of “human intervention” in respect of electronically delivered services.
The law governing B2C sales will state that where activities are “streamed or otherwise made virtually available”, the place of supply is where the customer is established.
These changes suggest that “supplied to a customer by electronic means” occurs when the service is streamed or made virtually available. The possibility of streaming (which can be live or recorded) does not appear in the amendment to the B2B rule.
The law governing Use and Enjoyment has also been updated to reflect these additions.
For events that are attended virtually the place of supply for both B2B and B2C will be where the customer is established, although this can be amended by application of the Use and Enjoyment rules.
For B2B attendees, the host will not charge local VAT as the reverse charge will apply unless the host and attendee are established in the same Member State.
For B2C attendees the host will charge local VAT according to the location of the attendee. The Union and non-Union OSS will be available to assist reporting where the attendee is in the EU.
Member States are required to adopt and publish the required laws, regulations and administrative provisions by 31 December 2024 and must apply these from 1 January 2025.
In our next blog we will consider some practical issues that may arise from these changes and how they impact VAT compliance.
Over the past decade, the Middle East region has undergone impactful financial and fiscal changes. VAT was introduced as one of the solutions to prevent the impact of decreasing oil prices on the economy after the region’s economic performance started to slow down.
After realising the benefits of VAT to the economy, the next step for most governments is to increase the effectiveness of VAT controls. Currently, most Middle Eastern countries have VAT regimes in place. Like many countries, Middle Eastern countries are paving the way to introduce continuous transaction controls (CTC) regimes to achieve an efficient VAT control mechanism.
Saudi Arabia is leading the way, introducing its e-invoicing system in 2021. This e-invoicing framework, in its current form, doesn’t require taxpayers to submit VAT relevant data to the tax authority in real-time. However, that is about to change, as the Saudi tax authority will enforce CTC e-invoicing requirements from 1 January 2023. This means that taxpayers will be required to transmit their invoices to the tax authority platform in real-time. More details on the upcoming CTC regime are expected to be published by the ZATCA.
The introduction of the CTC concept in Saudi Arabia is expected to create a domino effect in the region; some signs already indicate this. Recently, the Omani tax authority issued a request for information that revealed their plans to introduce an e-invoicing system. The tax authority’s invitation to interested parties stated that the timelines for implementing the system have not been set yet and could involve a gradual rollout. The objective is to roll out the e-invoicing system in a phased manner. The e-invoicing system is expected to go live in 2023 on a voluntary basis and later on a compulsory basis.
The Bahrainian National Bureau for Revenue (NBR) has made similar efforts. The NBR requested taxpayers to take part in a survey asking the number of invoices generated annually and whether taxpayers currently generate invoices electronically. This development signals upcoming e-invoicing plans – or at least a first step in that direction.
In Jordan, the Ministry of Digital Economy and Entrepreneurship (MODEE) published a “Prequalification Document for Selection of System Provider for E-Invoicing & Integrated Tax Administration Solution” that was, in fact, a request for information. The tax authority in Jordan previously communicated its goal to introduce e-invoicing. As the recent developments suggest, Jordan is moving closer to having an up and running platform for e-invoicing which will likely be followed by legal changes in the current legislation concerning invoicing rules.
The overall global trend is clearly toward various forms of CTCs. In recent years, VAT controls and their importance and the advantages presented by technology have changed the tax authorities’ approach to the digitization of VAT control mechanisms. As governments in the Middle East countries are also noticing the benefits that the adoption of CTCs could unlock, it’s reasonable to expect a challenging VAT landscape in the region.
E-businesses have recently been dealing with the change of rules within the EU with the introduction of the E-Commerce VAT Package but it’s also important to ensure compliance requirements are being met globally. In this blog we look at some of the low value goods regimes that have been introduced over the last few years together with those on the horizon.
Switzerland was one of the first countries outside the EU to introduce a low value goods regime when it revised the Swiss VAT law with effect from 1 January 2018. Previously, import of goods below CHF 62.50 were exempt from Swiss customs duty and import VAT. However, from 1 January 2018 any overseas sellers importing low value goods below CHF62.50 (standard-rated goods) or CHF 200 (reduced rated goods) that breach the CHF 100,000 threshold are required to register for and charge Swiss VAT on the sales of those goods.
On 1 April 2020, Norway introduced the VAT on E-Commerce (VOEC) scheme for foreign sellers and online marketplaces selling low value goods. These low value goods include those with a value below NOK 3,000 exclusive of shipping and insurance costs. The threshold applies per item and not per invoice, although doesn’t include sales of foodstuffs, alcohol and tobacco as these goods continue to be subject to border collection of VAT, excise duties and customs duties. Any foreign seller that exceeds the threshold of NOK 50,000 has an obligation to register for Norwegian VAT and apply this at the point of sale if they’re registered under the VOEC scheme.
Australia and New Zealand introduced very similar schemes to collect GST on low value goods being sold by overseas sellers. Australia introduced its scheme on 1 July 2018 for all goods with a customs value of less than AUD 1,000 and a turnover threshold of AUD 75,000 which once breached means the overseas seller must register for Australian GST and charge this at the point of sale.
New Zealand introduced a low value goods scheme on 1 October 2019 and applied this to low value goods valued at less than NZD 1,000. The turnover threshold in New Zealand is NZD 60,000 which once breached requires the overseas seller to register and charge New Zealand GST.
Following Brexit, the UK abolished the low value goods consignment relief of GBP 15 and introduced a new regime on 1 January 2021 covering imports of goods from outside the UK in consignments not exceeding GBP 135 in value (which aligns with the threshold for customs duty liability). Under these new rules, the point at which VAT is collected moves from the point of importation to the point of sale. This has meant that UK supply VAT, rather than import VAT, will be due on these consignments. Making these supplies requires registration for VAT in the UK from the first sale.
Singapore is the latest country to announce it will introduce new rules for low value goods. Effective 1 January 2023, private consumers in Singapore will be required to pay 7% GST on goods valued at SGD 400 or below that are imported into Singapore via air or post (the GST rate will rise to 9% sometime between 2022 to 2025).
An overseas vendor (i.e., supplier, electronic marketplace operator or re-deliverer) will be liable for GST registration where their global turnover and value of B2C supplies of low value goods made to non-GST-registered customers in Singapore exceeds SGD 1 million at the end of any calendar year. It may also be possible to register voluntarily if required.
On 5 April 2022, the EU Council formally adopted changes to the current rules governing reduced VAT rates for goods and services. These amendments to the VAT Directive were published in the Official Journal of the EU on 6 April 2022 through Council (EU) Directive 2022/542 of 5 April 2022 and are effective immediately.
The EU Council approval follows the EU Parliament’s official review of the amendments in March 2022.
The Council Directive grants Member States more rate options they can apply and ensures equal treatment between Member States. Article 98 of the VAT Directive is amended to provide the application of a maximum of two reduced rates of at least 5% that may be applied to up to 24 supplies listed in the revised Annex III.
Member States may apply a reduced rate of less than 5% and an exemption with the right to deduct VAT (zero-rate) to a maximum of seven supplies from Annex III. The reduced and zero-rates application is limited to goods and services considered to cover basic needs, such as water, foodstuffs, medicines, pharmaceutical products, health and hygiene products, transport of persons and cultural items like books, newspapers and periodicals. It’s the first time Member States can exempt such necessities.
All Member States now have equal access to existing derogations to apply reduced rates for specific products previously granted on a country-specific basis. Taxpayers must exercise the option to apply the derogations by 6 October 2023.
Annex III contains notable new supplies and revisions to support green and digital transitions: supply and installation of solar panels, supply of electricity and district heating and cooling, bicycles and electric bicycles, admission to live-streaming events (from 1 January 2025), live plants and floricultural products, and others. Environmentally harmful goods such as fossil fuels and chemical fertilizers/pesticides have also been added but will be excluded from 1 January 2030 and 2032.
Member States must adopt and publish, by 31 December 2024, the requisite laws and compliance measures to comply with the new rules scheduled to apply from 1 January 2025.
Member States have begun enacting legislation in response to the new reduced rate Directive since its approval in December 2021. Poland and Croatia reduced the VAT rate on basic foodstuffs to the zero-rate and Bulgaria and Romania are considering the same. Belgium, Croatia, Cyprus, Ireland, Italy, Netherlands, Poland, Romania and Spain have announced VAT reductions on energy supplies (e.g., electricity, heating/cooling, natural gas) and Greece is considering the reduction.
These rate changes have already been proposed or enacted before the 6 April 2022 effective date of the Council Directive. While world events and energy price spikes also contribute to these changes, the long-anticipated reduced rate amendments now allow Member States to do so within the bounds of the VAT Directive.
It‘s expected that more Member States will review their VAT rate structure in response to these new reduced rate opportunities.
For more on these amendments, please refer to our previous blog.
The Norwegian Ministry of Finance has proposed to amend the Norwegian Value Added Tax (VAT) Act regarding cross-border business to consumer sales of non-digital services. The proposal would require purchases of remotely deliverable services from suppliers established outside of Norway to consumers located in Norway to be subject to VAT.
Since 2011, Norway has operated a simplified VAT compliance regime for foreign suppliers of digital services to consumers. Non-resident suppliers who sell e-books, streaming media, software, or other digital services to Norwegian consumers and meet the NOK 50,000 VAT registration threshold must register and collect VAT on these sales, the same as resident businesses.
Non-resident suppliers not established in Norway may use the simplified VAT On E-Commerce (VOEC) scheme for registration and reporting. Additionally, suppliers in Norway must pay VAT on all purchases of remotely deliverable services from businesses located abroad. Currently, however, foreign suppliers of remotely deliverable services, which are not digital, are not required to register and pay VAT on their sales of such services.
The Norwegian tax authority is concerned about the competitive advantage of non-resident suppliers over resident suppliers when providing deliverable services to Norwegian consumers. The Norwegian Ministry of Finance has presented a proposal to amend the Norwegian VAT Act to require non-resident suppliers to collect and report VAT on remotely deliverable services to consumers.
Under the proposal, foreign providers of traditional services would have to charge VAT for consulting services, accounting services, and other cross-border services provided to consumers located in Norway. When the customer is a business or a public authority, or when the transaction is considered a B2B sale, the VAT would still be charged and collected by the customer via the reverse charge mechanism. Suppliers that are not established in Norway would be able to use the existing VOEC scheme.
The Norwegian Ministry of Finance has submitted the proposal for amendments to the Norwegian VAT Act regarding selling remotely deliverable services from abroad to recipients in Norway for consultation. The deadline for submitting comments on the proposal is 8 July 2022. Please stay tuned for updates on if the proposed amendments are adopted in Norway and when the amendments will take effect should they be adopted.
The global trend in the e-invoicing sphere for the past decade has shown that legislators and local tax authorities worldwide are rethinking the invoice creation process. By introducing technologically sophisticated continuous transaction control (CTC) platforms tax authorities get immediate and detailed control over VAT, which has proven a very efficient way to reduce the VAT gap.
However, many common law countries, that don’t have a VAT system, including the United States, Australia and New Zealand, haven’t followed the same path. They have stood out in international comparisons by providing little regulation in the field of e-invoicing. The reason why there is no need to have control over the invoices is the lack of a VAT tax regime. Recent developments, however, indicate that also common law countries try to spur e-invoicing, driven by the business process efficiencies rather than the need for tax control. Accordingly, the upcoming developments will be addressed in this blog, focusing on the Unites States e-invoicing pilot program and the Australian and New Zealand initiatives to promote e-invoicing.
E-invoicing has been permitted for a very long time in the United States but is still not widespread business practice. According to some sources, e-invoicing currently only amounts to 25% of all invoices exchanged in the country. With the introduction of the Business Payments Coalition (BPC) e-invoicing pilot program in cooperation with the Federal Reserve, this may be about to change.
The BPC’s e-Invoice Exchange Market Pilot aims to promote faster B2B communication and provide an opportunity for all kinds of businesses to exchange e-invoices in the US.
The pilot program is a standardised e-invoicing network across which structured e-invoices can be exchanged between counterparties using various interoperable invoicing systems to connect and exchange documents. It’s intended to drive efficiency and productivity while reducing data errors. A federated registry services model enables authorised administrators or registrars to register and onboard participants into the e-invoice exchange framework.
The e-invoice exchange framework operates similarly to the email ecosystem. Users can sign up with an email provider to send and receive emails. The provider serves as an access point to email exchanges for their users and delivers emails between them over the internet. It allows multiple registrars to register participants within the e-invoice exchange framework. This is reminiscent of the globally established PEPPOL model, which standardizes the structure of an invoice as well as provides a framework for interoperability.
The US is following the European e-invoicing model based on open interoperability functionality. It enables parties using various invoicing systems to connect and exchange documents through the e-invoicing network easily. The digitization process in the e-invoicing sphere will enable large and small organisations in the US to save resources, promote sustainability and provide business efficiency.
Similarly, to the US, the move towards e-invoicing in Australia and New Zealand is not primarily driven by tax issues but process efficiency. Neither country has any plans concerning a traditional B2B e-invoicing mandate. However, the New Zealand and Australian governments have committed to a joint approach to e-invoicing, and the first steps are ensuring that all government entities can receive e-invoices.
In Australia, all commonwealth government agencies must be able to receive PEPPOL e-invoices from 1 July 2022. Moreover, the government also seeks to boost e-invoicing in the B2B space without the traditional mandate for businesses to invoice electronically. Instead, the proposal is to implement what is referred to as Business e-Invoicing Right (BER).
Under the government’s proposal, businesses would have the right to request that their trading parties send an e-invoice over the PEPPOL network instead of traditional paper invoices. Businesses need to set up their systems to be able to receive PEPPOL e-invoices. Once a business has this capability, it would be able to exercise its ‘right’ and request other companies to send them PEPPOL e-invoices.
This reform is expected to be introduced in July 2023, by which businesses will be able to request to receive PEPPOL e-invoices only from large businesses, followed by a staged roll-out to eventually cover all businesses by 1 July 2025.
Following the Australian e-invoicing reform from July 2022 for the B2G sector, the New Zealand Government is encouraging businesses and government agencies to adopt e-invoicing. One step in this direction is the possibility for all central government agencies to be able to receive e-invoices based on PEPPOL BIS Billing 3.0 since 31 March 2022.
Outside of these B2G requirements, there are currently no published plans to move the full economy to mandatory e-invoicing.
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Need help ensuring your business stays updated on the changes in the US, Australia and New Zealand e-invoicing systems? Get in touch with our team of experts to learn how Sovos’ solutions can help.
The Italian government has taken important steps to broaden the scope of its e-invoicing mandate, more specifically by widening the scope of taxpayers subject to electronic invoice issuance and clearance obligations, starting 1 July 2022.
On 13 April 2022, the draft Law-Decree, known as the second part of the National Recovery and Resilience Plan (Decreto Legge PNRR 2 – Piano Nazionale di Ripresa e Resilienza), was approved by the Italian Council of Ministers (Consiglio dei ministri).
The Italian government-approved National Recovery Plan is part of the European Union’s Recovery and Resilience Facility (RRF), an instrument created to assist Member States financially in recovering from the economic and social challenges raised by the Covid-19 pandemic.
The expansion of Italy’s e-invoicing mandate is one element of the government’s anti-tax evasion package and addresses, in particular, the advancement of digital transformation, one of the six pillars of the RRF.
The draft Law-Decree PNRR 2 expands the obligation to issue and clear electronic invoices through the Italian clearance platform Sistema di Intercambio (SDI) to certain VAT taxpayers exempt from the mandate thus far. This means that from 1 July 2022, the following additional taxpayers are obliged to comply with the Italian e-invoicing mandate:
The regime forfettario is available to taxpayers who fulfil specific requirements, allowing them to adopt a reduced flat-rate VAT regime of 15%, decreased to 5% for new businesses during the first five years. These taxpayers have, up until now, been exempt from the obligation to issue e-invoices and clear them through the SDI, according to Legislative Decree 127 of 5 August 2015.
Additionally, amateur sports associations and third sector entities with revenue up to EUR 65,000 who have also been exempt from the e-invoicing mandate, are included as new subjects. Starting 1 July 2022, e-invoicing will also become mandatory for them.
The mandate still excludes microenterprises with revenues or fees up to EUR 25,000 per year, which instead will be required to issue and clear e-invoices with the SDI starting in 2024.
The draft decree also established a short transitional grace period from 1 July 2022 until 30 September 2022. During this time taxpayers subject to the new mandate are allowed to issue e-invoices within the following month when the transaction was carried out, without being subject to any penalties. This gives the new subjects time to conform to the general rule stating electronic invoices must be issued within 12 days from the transaction date.
The definitive text of the decree has not yet been published in the Italian Official Gazette; only once this final step is taken will the decree formally become law, and the extended scope become binding. The start of the second semester of this year brings additional significant changes in Italy concerning the mandatory reporting of cross-border invoices through FatturaPA, also set to begin on 1 July 2022.
Need help ensuring your business stays compliant with evolving e-invoicing obligations in Italy? Contact our team of experts to learn how Sovos’ solutions for changing e-invoicing obligations can help you stay compliant.
It’s been just over nine months since the introduction of one of the biggest changes in EU VAT rules for e-commerce retailers, the E-Commerce VAT Package extending the One Stop Shop (OSS) and introducing the Import One Stop Shop (IOSS).
The goal of the EU E-commerce VAT Package is to simplify cross-border B2C trade in the EU, easing the burden on businesses, reducing the administrative costs of VAT compliance and ensuring that VAT is correctly charged on such sales.
Under the new rules, the country specific distance selling thresholds for goods were removed and replaced with an EU wide threshold of €10,000 for EU established businesses and non-EU established businesses now have no threshold. For many businesses this means VAT is due in all countries they sell to, requiring them to be VAT registered in many more countries than pre-July 2021. However, the introduction of the Union OSS allowed them to simplify their VAT obligations by allowing them to report VAT on all EU sales under the one OSS return.
Whilst for many businesses the thought of having to charge VAT in all countries they sell to may have been overwhelming to begin with, they are now seeing the many benefits that the introduction of OSS was meant to achieve. The biggest benefit for businesses is the simplification of VAT compliance requirements with one quarterly VAT return as opposed to meeting many filing and payment deadlines in different EU Member States.
Businesses who outsource their VAT compliance have been able to reduce their costs significantly by deregistering from the VAT regime in many Member States where they were previously VAT registered. Although some additional registrations may be required depending on specific supply chains and location of stock around the EU. Businesses also receive a cash flow benefit under the OSS regime as VAT is due on a quarterly basis as opposed to a monthly or bi-monthly basis as was the case previously in many Member States. As part of the implementation of the EU E-Commerce VAT Package we also saw the removal of low value consignment relief, which meant import VAT was due on all goods coming into the EU. This has brought many non-EU suppliers into the EU’s VAT regime with the European Commission (EC) announcing that there are currently over 8,000 registered traders.
We have seen some early hiccups with EU Member States not recognizing IOSS numbers upon import, leading to double taxation for some sellers. But for the majority of businesses IOSS has enabled them to streamline the sale of goods to EU customers for orders below €150. The EC has also recently hailed the initial success of this scheme by releasing preliminary figures which show that €1.9 billion in VAT revenues has been collected to date.
The EC is currently undergoing a consultation, gathering feedback from stakeholders on how the new schemes have performed with a view to making potential changes. Some of the changes being discussed include making the IOSS scheme mandatory for all businesses, which would significantly widen its use as it brings significantly more traders into scope. There has also been talk of increasing the current €150 threshold which would allow more consignments to be eligible for IOSS, although with the current customs duties threshold also being €150 it would be interesting to see how they align these rules. The EC will also be publishing proposals later in the year on the possible extension of the OSS to include B2B goods transactions, with a view to implementing this by 2024.
Get in touch with our team to find out how we can help your business understand the new OSS requirements.
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E-commerce continues to grow, and tax authorities globally have struggled to keep pace. Tax authorities developed many VAT systems before the advent of e-commerce in its current format and the evolution of the internet. Around the world this has resulted in changes to ensure that taxation occurs in the way that the government wants, removing distortions of competition between local and non-resident businesses.
The European Commission made changes on 1 July 2021 with the E-commerce VAT Package, which modernised how VAT applies to e-commerce sales and also how the VAT is collected. As the previous system had been in place since 1 July 1993, change was well overdue.
The principle of the taxation of e-commerce in the European Union (EU) is that it should occur in the place of consumption – this normally means where the final consumer makes use of the goods and services. For goods, this means where the goods are delivered to and for services, where the consumer is resident – although there are some exceptions.
Where the VAT is due in a different Member State than where the supplier is established, this requires the supplier to account for VAT in a different country. Micro-businesses are relieved of the requirement to account for VAT in the place of consumption. Though, most e-commerce businesses selling across the EU will have to account for VAT in many other Member States which would be administratively burdensome.
To overcome this problem, the European Commission decided to significantly expand the Mini One Stop Shop (MOSS), which was previously in place for B2C supplies of telecoms, broadcasting and electronically supplied services. Three new schemes allow businesses to register for VAT in a single Member State and use that OSS registration to account for VAT in all other Member States where VAT is due.
Union OSS allows both EU and non-EU businesses to account for VAT on intra-EU distance sales of goods. It also allows EU businesses to account for VAT on intra-EU supplies of B2C services.
Non-Union OSS allows non-EU businesses to account for VAT on all supplies of B2C services where EU VAT is due.
Import OSS allows both EU and non-EU businesses to account for VAT on imports of goods in packages with an intrinsic value of less than €150.
Currently, none of the OSS schemes are compulsory, and businesses can choose to be registered for VAT in the Member State where the VAT is due. The European Commission is currently consulting on the success of the OSS schemes, and one of the proposals is that the use of Import OSS would become compulsory. There are also questions about whether the threshold should be increased, although that would require consideration of how to deal with customs duty as the €150 threshold is the point at which customs duty can become chargeable.
The use of the Union and non-Union OSS schemes can provide a valuable alternative to registering for VAT in multiple Member States. However, there can be other reasons why a business will need to maintain VAT registrations in other countries. Businesses should carry out a full supply chain review to identify the VAT obligations.
There are also many benefits to using the Import OSS, including the ability to recover VAT on returned goods and a simplified delivery process for both the supplier and customer.
Any businesses using any OSS schemes should fully understand the scheme’s requirements. Non-compliance can result in exclusion with the requirement to register for VAT in those countries where it is due. This will remove the benefit of the OSS schemes, increasing costs and administrative burden for the business.
Get in touch with our team to find out how we can help your business understand the new OSS requirements.
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The Philippines continues in constant advance towards implementing its continuous transaction controls (CTC) system, which consists of near real-time reporting of electronically issued invoices and receipts. On 4 April, testing began in the Electronic Invoicing System (EIS), the government’s platform, with six companies selected as pilots for this project.
The initial move toward a CTC system in the Philippines started in 2018 with the introduction of the Tax Reform for Acceleration and Inclusion Act, known as TRAIN law, which has the primary objective of simplifying the country’s tax system by making it more progressive, fair, and efficient. The project for implementing a mandatory nationwide electronic invoicing and reporting system has been developed in close collaboration with the South Korean government, considered a successful model with its comprehensive and seasoned CTC system.
Electronic invoicing and reporting are among many components set forth by the TRAIN law as part of the country’s DX Vision 2030 Digital Transformation Program. With this, the Philippines is making headway toward modernising its tax system.
The Philippines CTC system requires the issuance of invoices (B2B) and receipts (B2C) in electronic form and their near real-time reporting to the Bureau of Internal Revenue (BIR), the national tax authority. The EIS offers different possibilities in terms of submission, meaning that transmission can be done in real-time or near real-time. Documents that must be electronically issued and reported include sales invoices, receipts, and credit/debit notes.
According to the Philippines Tax Code, the following taxpayers are covered by the upcoming mandate:
However, taxpayers not covered by the obligation may opt to enroll with the EIS for e-invoice/e-receipt reporting purposes
The Philippines introduced somewhat unusual requirements in this period of digitization, when it comes to e-invoice archiving. The preservation period is ten years and consists of a system in which taxpayers are obliged to retain hard copies for the first five years. After this first period, hard copies are no longer required, and exclusive storage of electronic copies in an e-archive is permitted for the remaining five years.
With tests officially underway, the next phase should begin on 1 July 2022, with the go-live for 100 pilot taxpayers selected by the government, including the six initial ones. After that, the government plans to advance a phased roll-out in 2023 for all taxpayers under the system’s scope. Meanwhile, taxpayers can take advantage of this interim period to conform with the Philippines CTC reporting requirements.
Need to ensure compliance with the latest e-invoice requirements in the Philippines? Speak to our team.
In our earlier article, Optimising Supply Chain Management: Key B2B Import Considerations, we looked at the possibility of UK suppliers establishing an EU warehouse to facilitate easier deliveries to customers. In this article, we look at this one solution in more depth – again from the perspective of B2B transactions.
When looking to set up a warehouse facility in the EU, the first consideration should be whether the warehouse will create a permanent establishment (PE) or not. Permanent establishment is a direct tax concept, but creating one can have VAT consequences if that permanent establishment is also considered a fixed establishment.
The OECD defines a permanent establishment as a fixed place of business through which the business of an enterprise is wholly or partly carried on.
The EU defines a fixed establishment as the permanent presence of the human and technical resources necessary to facilitate a supply.
However, the trend towards local warehousing, ‘just in time deliveries’, the gig economy with local contractors and other developments are causing tax authorities to adapt these definitions.
For example, with regards to warehousing, the traditional view is that a taxpayer would need to own or lease a warehouse and employ the staff for it to be considered a fixed establishment for VAT purposes. However, one tax authority has ruled that a fixed establishment can also be created where a warehouse keeper makes a defined area within a warehouse exclusively available to a taxpayer and also provides the warehouse staff.
Creating such a permanent establishment that is also considered to be a fixed establishment will have both advantages and disadvantages. On the plus side, the supplier will be required to charge VAT on local sales involving the fixed establishment, and VAT registration can be used to deduct import VAT paid. Additionally, the supplier may not be required to appoint an indirect customs agent to act as the declarant for imports. On the negative side, the business will incur local VAT on some supplies that would otherwise attract a reverse charge in the UK and may be a liability to direct tax.
As this is a blog on VAT, we will not dwell on the above, but clearly the possible use of a warehouse is one consideration in the supply chain setup.
In deciding whether and where to establish an EU warehouse there are several considerations. For the purposes of this blog, we will first consider a UK supplier looking to set up a warehouse to service customers in Spain.
Spain considers that a third-party warehouse can constitute a permanent establishment where the supplier has exclusive access to a defined area of the warehouse. Therefore it will be important to carefully review the warehouse contract for VAT consequences before signing it.
Spain has a reverse charge for domestic B2B sales. Therefore, a UK supplier importing goods into Spain and making only domestic B2B sales will not be required to charge local VAT. There will also be no requirement to submit a local VAT return, and therefore import VAT will be recovered via the 13th Directive. This will potentially be a significant negative cash flow.
To avoid this, the UK supplier could change where the goods are imported as follows:
When sending the goods to Spain, the import occurs in France. The UK supplier will declare the goods for import into France and then report a transfer of own goods from France to Spain when the goods arrive in the Spanish warehouse. Where the goods are moving by lorry, this should not be too much of an issue.
Since 1 January 2022, France has a compulsory reverse charge for import VAT, and therefore there is no issue with recovering the import VAT paid so long as the conditions are met. The supplier will need a French VAT number to report a dispatch from France and report an acquisition in Spain. The supplier will also require a Spanish VAT number to report acquisitions, but will not be required to submit a VAT declaration since all sales from the Spanish warehouse are under the extended reverse charge.
Alternatively, the goods could be imported into a French warehouse from which the UK supplier can make intra-EU deliveries to its Spanish customers, thereby avoiding the need for a Spanish VAT number and the need for SII reporting should the threshold be breached.
VAT is a transactional tax, and once a transaction has happened, it cannot be undone. Therefore, it is important to fully understand the VAT consequences of a proposed transaction before a contract is signed. Once a contract is signed, the parties are committed to the VAT consequences unless the contract can be renegotiated before the goods are shipped. Once the goods are shipped, the VAT consequence is crystallised and cannot be changed.
In the European Union, the VAT rules around supplies of goods, as well as ’traditional’ two-party supplies of services, are well-defined and established. Peer-to-peer services facilitated by a platform, however, do not always fit neatly into the categories set out under the EU VAT Directive (Council Directive 2006/112/EC). There are ambiguities around both the nature of the service provided by the platform operator, and the status, for tax purposes, of the individual service provider (i.e., a driver for a ride-sharing service, or an individual offering their property for rent on an online marketplace). This creates a unique challenge for VAT policymakers.
The EU Commission has recently opened a public consultation on VAT and the platform economy to address these issues. We have previously discussed other initiatives proposed by the Commission including a single EU VAT registration and VAT reporting and e-invoicing. This blog will discuss the underlying challenges policymakers face and the specific proposals set out in the consultation, which could significantly impact digital platform operators and users.
A threshold question for the VAT treatment of digital platforms is whether the platform merely connects individual sellers with individual customers – i.e., acts as an intermediary – or whether it actively provides a separate service to the customer. This question is significant because services rendered to a non-taxable person by an intermediary, under Article 46 of the VAT Directive, are sourced to the location of the underlying transaction.
In contrast, services provided to a non-taxable person under a taxpayer’s name are sourced either to the supplier’s location or, in certain circumstances, to the customer’s location. Whether a particular platform is acting as an intermediary can be very fact-specific and can depend, for example, on the level of control exercised by the platform over pricing or user conduct.
To further muddy the waters, there are potential ambiguities for VAT involving:
A final source of ambiguity is whether an individual service provider qualifies as a taxable person when making only occasional supplies; this could raise the question of whether said supplies would attract VAT.
These ambiguities present an obvious challenge to the consistent VAT treatment of platforms across the Member States.
As part of its public consultation on “VAT in the Digital Age”, the EU Commission has proposed several solutions to the challenges listed above. Of these, three proposals directly address the ambiguous nature of services provided via platforms:
These proposals aim to provide clear guidelines to Member States on how platform services should be categorised, and, therefore, which VAT rules should apply under the Directive. Perhaps the most direct is the “deemed supplier” proposal, which would attach VAT liability to platform operators under defined circumstances.
A “deemed supplier regime” already exists for platforms that facilitate sales of low-value goods in the EU, so it is likely the Commission will seriously consider this option. Notably, the public consultation solicited comments on three different permutations of the deemed supplier regime, differing only in the scope of services covered.
Whichever direction the EU ultimately goes in, it is clear that a significant change is on the horizon for digital platforms. Platform operators and platform users should pay close attention to these ongoing consultations in the coming months.
The electronic invoicing system in Paraguay has been in development since 2017 according to the plan carried out by the Undersecretary of State for Taxation (SET) to modernise and improve tax collection and minimise the incidence of tax fraud.
The introduction of the Integrated National Electronic Invoicing System (Es. Sistema Integrado de Facturación Electrónica Nacional -SIFEN –) meant the introduction of a new e-invoicing regime in the country. The adoption of this new system is currently in its voluntary adhesion phase, which began in 2019, and has allowed entrepreneurs, merchants, and companies to issue e-invoices optionally. However, from July 2022, the use of the system will gradually become mandatory for certain taxable persons.
Taxpayers in Paraguay can use the SIFEN to issue Electronic Tax Documents (Es. Documento Tributario Electrónico – DTE). The DTE is a digital version of the invoice and other traditional documents, which has tax and legal validity. The DTE has become a modern, effective, secure and transparent form to issue and manage e-invoices for distinct types of business operations.
The DTEs are validated upon issuance by the SAT to support the VAT deductions and transactions related to income tax. Among the distinct types of DTE in Paraguay, we find:
The e-invoices issued by the taxable persons that have adhered to the SIFEN are generated in XML format. The authenticity and integrity of each document are guaranteed through the digital signature and the control code that DTEs include. Each document must be sent electronically to the tax administration for its clearance.
The SIFEN is responsible for verifying and validating each document. Once it is established that the DTE meets all the requirements, it becomes a legal e-invoice. The taxable persons issuing the e-invoice then receive the verification results through the web service system.
After the e-invoice is cleared, suppliers can send the DTE to their buyers via email, data messaging or other means.
The Paraguayan Undersecretary of State for Taxation recently published a General Resolution providing administrative measures for the issuance of DTEs. This resolution also established a phased schedule of implementation, in which certain taxable persons will be required to issue e-invoices and other DTEs using the SIFEN.
The implementation schedule consists of ten stages starting on 1 July 2022 with all taxpayers who joined the pilot program to adopt the SIFEN. From January 2023, the mandate will include more taxpayers. However, it is not yet defined which companies will start in that stage. The SET aims to cover all taxpayers carrying out economic activities in the country by October 2024.
Companies in Paraguay must get ready to issue e-invoices under the requirements of the SIFEN. From 1 July 2022, all companies in the country will be able to use this system voluntarily. The list of taxpayers required to comply with the mandate will be available on the SIFEN website and on the SET website (www.set.gov.py). The SET will notify affected taxpayers via the Paraguayan Tax Mailbox known as “Marandu.”
Get in touch with our team of experts today to ensure compliance with the latest Paraguayan e-invoicing regulations.
Governments throughout the world are introducing continuous transaction control (CTC) systems to improve and strengthen VAT collection while combating tax evasion. Romania, with the largest VAT gap in the EU (34.9% in 2019), is one of the countries moving the fastest when it comes to introducing CTCs. In December 2021 the country announced mandatory usage of the RO e-Factura system for high-fiscal risk products in B2B transactions starting from 1 July 2022, and already now they are taking the next step.
The Ministry of Finance recently published a draft Emergency Ordinance (Ordinance) introducing a mandatory e-transport system for monitoring certain goods on the national territory starting from 1 July 2022. The RO e-Transport system will be interconnected with existing IT systems at the level of the Ministry of Finance, the National Agency for Fiscal Administration (ANAF) or the Romanian Customs Authority.
According to the draft Ordinance, the transportation of high-fiscal risk products will be declared in the e-transport system a maximum of three calendar days before the start of the transport, in advance of the movement of goods from one location to another.
The declaration will include the following:
The system will generate a unique code (ITU code) following the declaration. This code must accompany the goods that are being transported, in physical or electronic format with the transport document. Competent authorities will verify the declaration and the goods on the transport routes.
The first question that comes to mind is what the definition of high-fiscal risk products is. The Romanian Ministry of Finance had already established a list of high-fiscal risk products for mandatory usage of the RO e-Factura system. However, it is still unknown if the high-fiscal risk product list will be the same. The Ministry of Finance will establish a subsequent order defining the high-fiscal risk products in the coming days.
If the transportation includes both goods with high-fiscal risk and other goods that are not in the category of high-fiscal risk, the whole transportation must be declared in the RO e-Transport system.
The RO e-Transport system is established to monitor the transportation of high-risk goods on the national territory.
This includes the following:
The carriage of goods intended for diplomatic missions, consular posts, international organisations, the armed forces of foreign NATO Member States or as a result of the execution of contracts, are not in the scope of the RO e-Transport system.
The draft Ordinance is expected to be published in the official gazette in the coming days. Following the publication, the Ministry of Finance will establish subsequent orders to define the categories of road vehicles and the list of high-fiscal risk products for the RO e-Transport system. Moreover, as of 1 July 2022, using the RO e-Transport system will become mandatory for transporting high-fiscal risk products.
Noncompliance with the rules relating to the e-Transport system will result in a fine reaching LEI 50,000 (approx. EUR 10,000) for individuals and LEI 100,000 (approx. EUR 20,000) for legal persons. In addition, the value of undeclared goods will be confiscated.
The European Commission’s “VAT in the Digital Age” initiative reflects on how tax authorities can use technology to fight tax fraud and, at the same time, modernise processes to the benefit of businesses.
A public consultation was launched earlier this year, in which the Commission welcomes feedback on policy options for VAT rules and processes in a digitized economic EU. In an earlier blog post, Sovos explored the aspects of a single EU VAT registration. It’s one of the main initiatives proposed by the Commission to adapt the EU VAT framework to the digital age. Another critical issue is VAT reporting obligations and e-invoicing, discussed in this blog.
The Commission sees a need for modernising VAT reporting obligations and is considering the possibility of further extending e-invoicing. The term Digital Reporting Requirements was introduced by the Commission for any obligation to report transactional data other than the obligation to submit a VAT return, i.e. reporting transaction by transaction. This means that Digital Reporting Requirements include various types of transactional reporting requirements (e.g. VAT listing, Standard Audit File/SAF-T, real-time reporting) and mandatory e-invoicing requirements.
These measures have been implemented in various fashions in different EU Member States over the past couple of years resulting in diverse rules and requirements for VAT reporting and e-invoicing across the EU. The current Commission initiative is an opportunity for the EU to obtain harmonisation in this area. Its public consultation is asking for input as to which road to take.
The public consultation contains several policy options to consider. One would be to leave things as they currently stand with no harmonisation and the continued need for Member States to request a derogation if they wanted to introduce mandatory e-invoicing. At the other end of the scale, a further option would be to introduce full harmonisation of transactional reporting for VAT for both intra-EU and all domestic transactions.
And sitting between these extremes, are several other routes. Instead of making a harmonised solution mandatory such a solution could be simply recommended and voluntary, coupled with the removal of the need to request a derogation ahead of introducing B2B e-invoicing mandates. Another way is to have taxpayers keep all transactional data and make it available on request by the authorities. And one final option could be to adopt partial harmonisation where the VAT reporting for all intra-EU supplies is aligned and mandatory but where domestically it remains optional.
While these policy options formally remain open to public consultation until 5 May here, they must now be viewed in the light of the European Parliament resolution of 10 March 2022 with recommendations to the Commission on fair and simple taxation supporting the recovery strategy.
In its resolution, the European Parliament calls upon the Commission to take actions regarding e-invoicing and reporting, to reduce the tax gap and compliance costs. Among the measures recommended are to set up a harmonised common standard for e-invoicing across the EU without delay and establish the role of e-invoicing in real-time reporting. Furthermore, the European Parliament proposes that the Commission explore the possibility of a gradual introduction of obligatory e-invoicing by 2023, where state-operated or certified systems should administrate the invoice issuance. In both cases focus should be on a significant reduction of costs of compliance, especially for SMEs.
It remains to be seen how the Commission will manage to align the European Parliament’s recommendations with their policy options and Member States where in several cases solutions have already been implemented.
Making Tax Digital for VAT – Expansion
Beginning in April 2022, the requirements for Making Tax Digital (MTD) for VAT will be expanded to all VAT registered businesses. MTD for VAT has been mandatory for all companies with annual turnover above the VAT registration threshold of £85,000 since April 2019. As a result, this year’s expansion is expected to impact smaller businesses whose turnover is below the threshold but who are nonetheless registered for UK VAT.
What is MTD for VAT – A refresher
Under MTD, businesses must digitally file VAT returns using “functional compatible software” which can connect to HMRC’s API. Companies must also use software to keep digital records of specified VAT-related documents. Stored records must include “designatory data,” such as the business name and VAT number, details on sales and purchases, and summary VAT data for the period. The use of multiple pieces of software is permitted. For example, companies can use accounting software to store digital records. Additionally, “bridging software” can be used to establish the connection with HMRC’s API and to submit the VAT returns.
Since April 2021, businesses must also comply with the digital links requirement. Under this requirement, a digital link is required whenever a business uses multiple pieces of software to store and transmit its VAT records and returns under MTD requirements. A digital link occurs when a transfer or exchange of data can be made electronically between software programs, products, or applications without the need for or involvement of any manual intervention.
Hospitality reduced rate expiration
In 2020, in response to the COVID-19 pandemic, the British government introduced a 5% reduced rate on specified hospitality services. This reduced rate was increased to 12.5% starting 1 October 2021. The reduced rate is currently scheduled to expire at the end of March. As a result, the following services will return to being taxed at the standard rate beginning in April:
The expiration of this reduced rate will impact businesses in both the UK and the Isle of Man.