The recent popularity of non-fungible tokens (NFTs) has captivated investors, governments and tax authorities. An NFT is a digital asset that represents real-world objects such as a piece of digital art, an audio clip, an online game or anything else. NFTs are purchased and sold online and are typically encoded with the same software as cryptocurrencies. They are stored in the blockchain to authenticate and track ownership of the NFT.
NFTs are generally one of a kind and can fetch tens of millions of dollars for a single NFT. The total market value of NFT sales skyrocketed into the billions in 2021. The high values and increase in sales have inspired several governments to introduce VAT legislation to define and tax these digital assets.
Multiple countries have announced specific VAT measures for the treatment of NFTs:
Spain: Spain is the first country in the EU to apply VAT to NFTs. The General Directorate of Taxes in Spain issued a ruling stating the supply of NFTs is an electronically supplied service subject to the standard VAT rate of 21%.
Belgium: The Belgian Finance Minister confirmed that the supply of NFTs is an electronically supplied service subject to the standard VAT rate of 21%.
Norway: The Norwegian tax administration defines the supply of NFTs as an electronically supplied service. It’s important to note that the creation or mining of an NFT will not attract VAT in contrast to a sale.
Washington State (U.S.): The Washington Department of Revenue is expected to announce that NFTs are subject to the state’s sales and business taxes as a digital product. This ruling will make Washington the first state to issue sales tax policies on NFTs.
In other countries, such as Switzerland, the supply of NFTs is generally considered an electronic service; however, there is a Swiss VAT exemption for electronic works of art directly sold by a creator that may apply to NFTs. VAT treatment of works of art may create implications for tax authorities when classifying NFTs.
Another area of VAT concern surrounding NFT transactions is the place of supply. Place of supply for VAT purposes typically requires buyers and sellers to exchange domicile information such as a billing address. NFT transactions conducted through blockchain can avoid sharing personal information with intermediaries via an anonymous ‘wallet,’ which may lead to privacy concerns and other issues for tax authorities as they attempt to bring these transactions within the scope of VAT.
The VAT treatment of NFTs is still in its infancy and will continue to evolve alongside the digital asset industry. More insight into the classification of NFTs and the determination of the place of supply of such transactions will come as more tax authorities issue rulings analysing these unique digital assets.
To find out more about what the future holds, download the 13th Annual VAT Trends whitepaper. Follow us on LinkedIn and Twitter to keep up to date with regulatory news and updates.
Sovos recently hosted an online webinar on VAT recovery where we covered reciprocity agreements between the UK and EU Member States when making 13th Directive VAT refund claims. One of the questions that kept coming up is what are reciprocity agreements and why do they matter?
When making 13th Directive refund claims, each EU Member State has different rules or conditions to meet before agreeing to a VAT refund. One of the conditions that EU Member States may require is a reciprocity agreement. A reciprocity agreement is a deal to reciprocate VAT refunds between two countries.
Therefore, VAT is only refundable when a similar tax is refundable for local businesses in the applicant’s country. For example, suppose a Spanish business was allowed to obtain a VAT refund in Norway through a similar scheme to the 13 Directive. In that case, Spain would likely have reciprocity with Norway and will allow the Norwegian businesses to make a 13th Directive Refund Claim in Spain.
There are currently around 19 EU Member States that require reciprocity agreements for non-EU businesses to make VAT refund claims. Of those, Greece and Slovenia currently only have reciprocity agreements with two countries (Norway and Switzerland), whilst Italy has three (Norway, Switzerland and Israel). When making EU VAT refund claims, businesses should review reciprocity and not assume they will automatically be approved.
Before Brexit, UK businesses could make VAT refund claims through the EU VAT Refund Directive (also known as the 8th Directive) which was built to allow reciprocity freedom for all EU Member States. However, post-Brexit, this mechanism for VAT refund claims no longer applied, and the UK fell within the 13th Directive Refund Scheme as a non-EU business.
Whilst the UK and EU have a Free Trade and Cooperation Agreement in place, there was no specific mention of reciprocity in VAT refund claims as these should be agreed between those particular EU Member States and the UK. Therefore, it may be more difficult for UK businesses, that make refund claims around the EU, to recover VAT incurred in some countries.
Regarding current reciprocity agreements with the UK, the only official announcements we have seen to date have been from Germany, Spain and Hungary. However, we are aware of ongoing discussions between the UK and other EU Member States.
HMRC states they will only refuse a claim if the reciprocal country has a scheme for refunding taxes but refuses to allow UK traders a refund. Therefore, HMRC is willing to allow VAT recovery in the UK for EU businesses providing UK businesses receive the same treatment as the EU. It would therefore be in the interests of EU Member States to allow VAT recovery for UK businesses for businesses in their own country to benefit from the same treatment.
Most EU Member States require reciprocity when making VAT refund claims. Therefore, the law of reciprocity is an integral factor when looking to make a VAT refund claim in any jurisdiction. It’s important to understand these reciprocity laws to prevent wasting time and money on making a VAT refund claim from a country that doesn’t allow it.
To find out more about what we believe the future holds, download the 13th Annual VAT Trends whitepaper. Follow us on LinkedIn and Twitter to keep up to date with regulatory news and updates.
Our previous articles covered audit trends we have noticed at Sovos and common triggers of a VAT audit. This article discusses the best practices on how to prepare for a VAT audit.
Each country and jurisdiction may have different laws and requirements related to the VAT audit process. Tax authorities can carry out audits in person or by correspondence, the latter often being the case for non-established businesses in the country in question.
A business may be audited at random or because there are reasons for the tax authority to believe that there is a problem with the company’s VAT return.
Generally speaking, authorities use audits and inspections to verify the accuracy of taxpayers’ declarations, identify possible errors or underpayments, and approve refunds.
As discussed in our previous article, to understand how to best prepare for a VAT audit, it’s essential to identify the reason why the audit was initiated.
Although specific checklists are available depending on the country of the audit, there are several actions that a business can carry out to prepare for an VAT audit. The most important of which is to collect documents and answers in advance. Frequently requested items during an audit include:
It is important that records of the above-listed documents, where applicable, are kept in line with local record keeping requirements. The need to prepare these documents in advance and the ability to produce them quickly becomes essential when a company is, for example, due to request the refund of VAT credits, to submit a de-registration or has, in general, any reason to expect for an audit to be initiated.
Authorities can open a cross check of activities with the company’s customers and suppliers, which will be initiated in parallel to the audit to verify that the information provided from both sides is consistent. Therefore, it is recommended to inform suppliers about any ongoing audit, communicate any questions or clarify outstanding queries. If, for example, a correction of invoices appears to be necessary, these should be finalised already in preparation for the VAT audit.
The tax authorities may impose very short and strict deadlines once an audit is initiated. Although it may be possible to request an extension, it is not necessarily guaranteed to be granted. In certain circumstances, authorities may impose penalties for late responses. Providing a clear and understandable set of documents to the tax office queries is essential to avoid any detrimental effects.
The advantages of preparing for a VAT audit can be summarised as follows:
Whether a business decides to handle the audit in-house or request the support of an external advisor, it is essential to consider the consequences of the audit, especially if high amounts of VAT to recover are at stake. In the event of an audit, the main objective should be to resolve it successfully and quickly, limiting as much as possible any detrimental impact to the business.
Get in touch about the benefits a managed service provider can offer to help ease your VAT compliance burden.
It’s no surprise that inflation is on the forefront of everyone’s mind, with prices continuing to sky-rocket month by month. Data from the United Kingdom shows that the Consumer Prices Index (CPI) inflation jumped to a 40-year high of 9% in the past 12 months. Governments around the world are looking for ways to reduce the burden for consumers to keep global economies afloat. One method – implementing VAT rate cuts to certain goods and services – looks to be coming out on top as multiple countries around the world announced emergency budget sessions or introduced proposals to temporarily cut VAT rates.
Temporary VAT rate cuts are generally quick and easy to implement, which is why they are favored by governments globally. These cuts essentially allow for a boost to the economy by providing consumers with an overall higher amount to spend, incentivizing consumers to spend now while rates are lower.
As expected, many countries have already announced VAT rate cuts or measures to stimulate their economies:
Additional countries such as Estonia, Netherlands, Latvia, Greece, and Turkey are also taking measures to implement VAT rate cuts to fight the ever-rising costs for consumers.
These VAT rate cuts coincide with new measures passed recently by the European Commission allowing Member States to apply reduced rates to more items, including food. Though many Member States seem to be moving towards taking advantage of this new flexibility on VAT rate reductions, it’s expected that as costs continue to rise more Member States and countries around the world will introduce VAT rate cuts to ensure consumer spending doesn’t continue to trend downward.
To find out more about what we believe the future holds, download the 13th Annual Trends. Follow us on LinkedIn and Twitter to keep up-to-date with regulatory news and updates.
Since many audits seem to occur at random, it’s not always possible to identify the reason why a tax office would decide to initiate one.
We’ve previously spoken about an increased interest in audits from the EU and audits for e-commerce. This article covers the most common reasons behind a VAT audit to help businesses anticipate and prepare for one when possible.
There are specific “trigger” events among the most common reasons that could cause further queries from the tax office. Generally speaking, these are changes in the company’s status such as a new registration, a de-registration, or structural changes within the company.
VAT refund requests also fall into this category. In some countries (Italy and Spain, for example) a refund request is almost certainly a reason for an audit to be initiated since the local tax office cannot release the funds before checks are completed. In this case, the likelihood of an audit increases when a refund is particularly substantial and the business requesting it is newly VAT registered. However, it doesn’t mean that the tax authority will not initiate an audit if the amount requested in a refund is relatively small.
Certain types of businesses are naturally more subject to audits due to their structure and business model. Groups commonly selected for scrutiny include, for example, large companies, exporters, retailers and dealers in high-volume goods. Therefore, elements such as a high number of transactions, high amounts involved and complexity of the business structure could be another common reason for an investigation to be initiated by the local tax authorities.
Tax authorities often identify individual taxpayers based on past compliance and how their information compares with specific risk parameters. This would include comparing previous data and trading patterns with other businesses in the same sector. Therefore, unusual patterns of trading, discrepancies between input and output VAT reported, and many refund requests may appear unusual from the tax office perspective and give rise to questions.
Another common reason for the tax authorities to request further information from taxpayers is the so-called “cross check of activities”. In this case, either a business supplier or client is likely to be subjected to an audit. The tax office will contact their counterparts to verify that the information provided is consistent on both sides. For example, if a business is being audited following its refund request, the tax office will likely contact the suppliers to verify the audited company didn’t cancel the purchase invoices and that they have been paid.
This category also includes cross checking activities on Intra-Community transactions reported by a business. In this scenario, the cross check would be based on information exchanges between local tax authorities through the VAT information exchange system (VIES). The tax authorities can check Intra-Community transactions reported to and from specific VAT numbers in each EU Member State and then cross check this information with what has been reported by a business on their respective VAT return. If any discrepancy arises, the tax office will likely contact the business to ask why they have (or haven’t) reported the transactions declared by their counterparts.
As we’ve already seen in an earlier article, audit triggers are also influenced by changes in legislation or shifts in the tax authorities’ attention to specific business sectors.
Regardless of whether it’s possible to identify the actual reason the tax authority initiated an audit, a business can undertake several actions in preparation for a check of activities, which will be covered in the next article of this series.
Get in touch about the benefits a managed service provider can offer to ease your VAT compliance burden.
Continuing our series on VAT audits, we take a closer look at the trends we’ve seen emerging in the activities of the EU Member States’ independent tax administrations throughout the European Union.
In a recent report from the European Commission (EC) specific guidelines were published not only on best practices but also on how EU Member States can harmonise the focus of their VAT audit projects. We’ve seen a significant shift away from scrutiny of historically complex businesses in sectors such as automotive and chemicals to the other sectors such as online retailers and distance selling.
The report released by the EC in April noted that there should be a conscious effort from the local tax authorities to increase the efficiency of audit practices and outcomes, by indicating how complex projects can be directed to solve industry specific issues.
Speaking about EU Member States they noted:
“They should also put in place more complex audit projects (for specific groups of taxpayers, an industry or a line of business such as retail, to address a particular risk or to establish the degree of non-compliance in a particular sector) and perform comprehensive audits and fraud investigations.”
We’ve seen this already happening in some countries, such as the Netherlands and Germany, with a greater shift towards auditing of previously neglected companies in the e-commerce industry as a result of Brexit and the E-commerce VAT Package implemented in July 2021. Our own audit team here at Sovos has seen a 45% increase in audits opened on our e-commerce clients in the second half of the year – driven both by changing activity post-Brexit and the One-Stop-Shop (OSS) regime commencing.
Looking in more detail at different tax administrations’ approach to auditing, we’ve observed a greater focus in VAT refund audits in the Netherlands, whilst Germany has scrutinised e-commerce retailers on more specific matters. These polarisations both reflect the individual interests of EU Member States and also the activities of the businesses operating across the EU, but it’s clear that the tax administrations in all countries are taking note of the importance of conducting audits to close the VAT gap.
It’s recommended to involve administrative agencies and governmental bodies to assist with the more complex audit projects embarked upon by EU Member States. With changes to how goods move cross-border between the United Kingdom and the EU taking centre stage in 2021 there has been an increased importance placed on the information transfer between customs offices and their tax administration counterparts. As mentioned earlier, the implementation of the OSS regime has led to a greater shift in the reporting of e-commerce businesses operating in the EU and the impact on the audit process is yet to be revealed.
It’s clear that the major shifts in the VAT landscape in 2021 created a different set of challenges for businesses and tax administrations but encouraging accurate record keeping is still a central goal of most EU Member States. In our next article in this VAT audit series we’ll explore the common triggers of a VAT audit.
Need help ensuring compliance ahead of a VAT audit? Get in touch to discuss your VAT compliance needs.
Update: 21 June 2023
Changes are coming to VAT on virtual events. To ensure taxation in the Member State of consumption, all services supplied to a customer electronically will be taxable where the customer is established, has his permanent address or usually resides.
Member States must adopt and publish the required laws, regulations and administrative provisions by 31 December 2024 and must apply these from 1 January 2025. This blog will consider some of the issues that may arise from the impending changes.
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.
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. This 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 available virtually. The possibility of streaming (which can be live or recorded) does not appear in the amendment to the B2B rule.
An update to the law governing use and enjoyment reflects these additions.
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 request submissions. 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 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, amendments to the annex detailing which services can benefit from a reduced rate will 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.
For events 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 One-Stop Shop (OSS) will be available to assist reporting where the attendee is in the EU.
Get in touch to discuss your VAT compliance needs or download our guide, Understanding VAT Obligations: European Events.
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.
Get in touch to discuss your VAT compliance needs or download our guide, Understanding VAT Obligations: European Events.
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.
To find out more about what we believe the future holds, download Trends 13th Edition. Follow us on LinkedIn and Twitter to keep up-to-date with regulatory news and updates.
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.
Want to ensure compliance with the latest e-commerce VAT requirements across the globe? Get in touch with Sovos’ team of experts today or download Trends Edition 13 to learn about global VAT trends.
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.
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Update: 31 January 2023 by Lorenza Barone
Norway’s Ministry of Finance has updated legislation involving remotely deliverable services by foreign suppliers. This is effective from 1 January 2023.
In 2022, the Ministry proposed to amend the Norwegian VAT Act regarding cross-border business-to-consumer (B2C) sales of non-digital services.
The proposal concerns purchases of remotely deliverable services from non-resident suppliers to Norwegian consumers.
Foreign providers of traditional services would need to register for VAT in Norway and account for Norwegian VAT for the following services for resident consumers:
VAT would still be charged and collected when the customer is a business or a public authority or when the transaction is considered a B2B sale. The customer would do this in Norway via the reverse charge mechanism. Suppliers not established in Norway could still use the existing VAT On E-Commerce (VOEC) scheme.
The motivation behind the proposal was to eliminate a competitive advantage for non-resident suppliers.
In fact, until the recent change, no VAT was charged when a business provided such services to Norwegian consumers.
Effective 1 January 2023, non-resident suppliers of remote non-digital services who make supplies to consumers in Norway are required to collect and remit Norwegian VAT.
In light of this, the VOEC scheme – the simplified scheme for online sales of goods and services to Norwegian consumers – has been expanded. Previously it only applied to low value goods and electronic services, but now it also includes all services capable of delivery from a remote location.
Subsequently, all foreign companies that sell such services to Norwegian consumers must register through the VOEC scheme – or register ordinarily for Norwegian VAT when they reach the NOK 50,000 threshold in sales over 12 months.
The VAT treatment for providing such services to a business in Norway remains unchanged, with the local company collecting and remitting the VAT under the reverse charge mechanism.
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Update: 25 April 2022 by Sam Wichman
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.
VAT in Norway is constantly changing. Speak to one of our Norway VAT experts for answers to all your questions.
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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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
E-invoices must be issued in JSON (JavaScript Object Notation) format and contain an electronic signature. After issuance, taxpayers can present their invoices and receipts to their customers. The tax authority´s approval is not needed to proceed. However, electronic documents must be transmitted to the EIS platform in real-time or near real-time.
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.
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