Part III of V – Eric Lefebvre, chief technology officer, Sovos
Click here to read part II of the series.
Government-mandated e-invoicing laws are making their way across nearly every region of the globe, bringing more stringent mandates and expectations on businesses. Inserted into every aspect of your operation, governments are now an omni-present influence in your data stack reviewing every transaction in real time as it traverses your network. Real-time monitoring has also brought about real-time enforcement that can range in severity from significant fines to shutting your business down completely. All of this has created a new reality for IT leaders who need a strategy to deal with these global changes. We asked our chief technology officer, Eric Lefebvre to offer his guidance on how this will affect IT departments and how they can best prepare.
Q: With government authorities now in companies’ data and demanding real or near real-time reporting, what impact will this have on IT departments?
Eric Lefebvre: Centralization is the key, but there is a process that needs to be followed to execute correctly. At the outset, centralization needs to start with business processes, practices, tools and standardization on data push/pull technologies across the organization. Next, IT needs to consider data based on SLA-based needs. Starting with:
Delivery Data:
Once this has been solidified, IT can then focus on operational data, which contains:
IT departments need to focus on availability of data by adding multiple replicated sources of that data. Location of data is another critical need driven by mandates mostly shifting to keeping data local, as we are seeing in countries such as Saudi Arabia and many other East Asian nations. IT departments need to ensure that satellite data stores can be provided, which are critical to countries with those specifications. Centralization of processes and tools for delivery of data is step one. For step two, data needs to be split, moving away from storing data for years in a single data store, making it impossible to move/replicate and make it available.
Q: To meet government mandates and ensure operations continue uninterrupted, what should IT prioritize? What approach would you recommend?
Eric Lefebvre: As organizations make the move to a centralized approach, they need to be aware that the blast radius of “failure” affects more than a single country. To combat this, IT organizations need to have strong procedures and plans in place that help to both avoid these situations and quickly limit the damage if a problem does occur. I view it as three distinct focus areas:
Change control procedures. Strengthen impact controls not just for code changes or operational updates, but also include regulatory changes and configuration changes.
Testing procedures. Step away from just regional scope testing and incorporate global end-to-end synthetic testing, starting from the edge service to all the backend servers and back.
Incident management. Pivot from backend monitoring to a central monitoring and outage single pane view, supported by a global operations center in a follow the sun style model.
A lot has changed in the world of government mandated e-invoicing. Continued investment in technology by government authorities has put regulators in the position to demand greater transparency along with more detailed and real-time reporting. To meet these demands, companies are looking to their IT organizations. The good news is you don’t need to go it alone. Sovos has the expertise to guide you through this global evolution based on our experience working with many of the world’s leading brands.
A recent preliminary ruling request to the European Court of Justice, Case C-664/21, NEC PLUS ULTRA COSMETICS, has re-emphasised the importance of collecting documentation when carrying out a zero-rated supply in the EU. The 2017 NEC PLUS ULTRA COSMETICS case involved a company established in Switzerland selling cosmetics products under the Ex Works clause from their warehouse in Slovenia to business customers established in Romania and Croatia. Ex Works (EXW) is an Incoterms rule, a set of definitions outlining the responsibilities of buyers and sellers in international transactions. With Ex Works the transport obligations, costs and risks are the buyer’s responsibility.
The tax administration of the Republic of Slovenia inspected NEC PLUS ULTRA COSMETICS and requested evidence and supporting documentation relating to these supplies to verify that goods had been transported to another EU Member State.
NEC PLUS ULTRA COSMETICS provided copies of the invoices and of the ‘Convention relative au contrat de transport international de marchansises par route’ (CMR) consignment notes. The company failed to provide the evidence requested by tax officers to prove the right to tax exempt the supplies to their customers (delivery notes and other documents mentioned in the CMRs).
The company clarified that the reason for the late submission was that the Hamburg office responsible for supplies to Croatia ceased its activities in August 2018, making it more difficult to find the documents asked for by the tax officers.
Consequently, the Slovenian tax authorities provided the company with an additional VAT assessment notice and ordered it to pay the relevant amount.
In the implementation of the Quick Fix related to the proof of transport in 2020, the European Commission has clarified that where the supplier arranges transportation of the goods, it must be in possession of either:
If the acquirer is responsible for transport of goods (i.e. under the Ex Works clause), they must provide the vendor with a written statement by the 10th of the month following the date of supply that the goods have been transported by the acquirer or on the acquirer’s behalf. The written statement must include the following:
In the case of the Ex Works clause:
If you don’t feel reassured by your customer, change the agreement and Incoterms clause before the supply takes place.
Still have questions about VAT exempt supplies and the Incoterms Ex Works clause? Speak to our tax experts.
Part II of V – Oscar Caicedo, Vice president of product management for VAT Americas, Sovos
Click here to read part I of the series.
Government-mandated e-invoicing laws are making their way across nearly every region of the globe, bringing more stringent mandates and expectations on businesses. Inserted into every aspect of your operation, governments are now an omni-present influence in your data stack reviewing every transaction in real time as it traverses your network. Real-time monitoring has also brought about real-time enforcement that can range in severity from significant fines to shutting your business down completely. All of this has created a new reality for IT leaders who need a strategy to deal with these global changes. We asked our vice president of product management for VAT, Oscar Caicedo to offer his guidance on how this will affect IT departments and how they can best prepare.
Q: With government authorities now in companies’ data and demanding real or near real-time reporting, what impact will this have on IT departments?
Oscar Caicedo: For me, this breaks down into four distinct categories:
1. Business Process Architecture – As regulatory entities become more advanced, it is important to look at the overall functional business process, not only the technical mechanism to report. Many business processes were solidified much before current capabilities were readily available. It is important to revisit the business process to be able to determine the best technical path forward.
2. Source of Truth – With the complex environment IT departments must navigate, you need to redefine the expectations of data/process source of truth. Back-end system ecosystems were not built with current compliance/regulatory needs in mind. In mature markets, where governments continue to advance technical capabilities, it is critical to have a clear strategy to protect against source-of-truth risks. Otherwise, local regulatory entities tend to become the ultimate source of truth.
3. Data Aggregation/Reconciliation – A lack of clarity on the source of truth for each functional business process can lead to major risks. Registering data in real time with local regulators was the initial challenge. The current challenge is ensuring all systems involved are maintained in sync and are always fully harmonized. IT departments must recognize it is now a must-have to navigate the current environment.
4. Master Data – Data in back-end systems was already complicated enough to support in a centralized manner. Once real-time regulatory needs were introduced, the data issue got exponentially larger. Data structures, data libraries and extraction programs are all attempts to solve the problem, but normally these attempts fail due to gaps in understanding what is mandatory vs. optional. Clear guidance on the local needs is critical before deciding on a technical strategy.
Q: To meet government mandates and ensure operations continue uninterrupted, what should IT prioritize? What approach would you recommend?
Oscar Caicedo: I would prioritize a clear regulatory understanding of the markets/geographies in which you operate. This seems obvious, but it is not always the case. Ninety-nine percent of the time when I speak with a large multinational organization, they are not clear on the needs of the local market. Efforts to centralize or take a cohesive approach fail because key IT decision makers didn’t understand the regulation.
In addition, you need to focus on business processes and the data requirements to make them successful and solve the problem end to end. The challenge does not end with registering data. The problem ends when you have the proper visibility, maintenance, support, reconciliation and intelligence to be fully prepared.
Don’t take chances. The regulatory environment is very dynamic, so it is important to ensure the proper testing of all business scenarios needed to operate. Failure to have clear testing scripts can lead to surprises in production environments, which can carry large implications for the operation.
Finally, consolidate as much as possible. This means simplifying end points, communication protocols, data structures, etc. This will allow for a more efficient way to manage the mandated processes in the different jurisdictions.
A lot has changed in the world of government mandated e-invoicing. Continued investment in technology by government authorities has put regulators in the position to demand greater transparency along with more detailed and real-time reporting. To meet these demands, companies are looking to their IT organizations. The good news is you don’t need to go it alone. Sovos has the expertise to guide you through this global evolution based on our experience working with many of the world’s leading brands.
Need help keeping up with global mandates? Get in touch with Sovos’ team of tax experts.
Imagine this scenario.
Your business partner changes the rules on you mid-stream and your ability to conduct business with them is now contingent on changing your entire reporting structure to meet their new demands.
Oh yeah, I should also mention the time frame to meet these demands is extremely tight and if you don’t, you can forget about doing business in their region until you get it right. And if at any point moving forward you fail to live up to these standards, they can fine you or shut you down.
Sound farfetched? It isn’t. It’s exactly what is playing out in major economic markets from Brazil to Italy and parts of Asia and Africa. You see, governments have caught up to businesses when it comes to technology, and in many ways, they have moved past them when it comes to digitization.
It means that governments have now taken on a more proactive approach to reviewing financial transactions and are demanding real-time reporting. As part of that, they have implemented real-time enforcement to ensure that it’s meeting the proper mandated specifications. To accomplish this, they have taken up permanent residence within your data stack. And make no mistake, when it comes to e-invoicing, they are calling the shots.
Governments throughout the world are implementing mandated e-invoicing for its ability to facilitate compliance and track fraud quickly and efficiently. After the fact reporting, which had been the norm until now, was more difficult to enforce and took lengthy and costly audits to recoup what was rightfully owed. Many organizations didn’t take the penalties seriously and would simply set aside some money to deal with these inconveniences as they emerged.
This approach resulted in a tax gap that is continuing to grow. In 2019, the VAT gap of the European Union’s 28 member states was over 134.4 billion euros for all member states combined. This had become unsustainable and unacceptable to many governments and thus a new technology that focused on digitization was made to ensure that all legally owed revenue was being collected timely and in full. Failure to comply would lead to faster and more impactful enforcement measures.
This trend is growing rapidly with countries across the globe adopting new mandates and methodologies for tracking and enforcing the rules. In the next five years nearly every country that employs the VAT system of taxation is expected to update their systems to some degree.
Make no mistake. Due to the demands for real-time information, this is an IT problem, not a tax issue. For multinational companies that do business in dozens of countries, there could be some painful moments along the way if they don’t plan early and develop a sound strategy for each of the locations in which they have operations.
IT should focus on the end goal: implementing a centralized approach to managing these government mandated e-invoicing laws to ensure a globally consistent approach to all digital filings. I can’t overstate the importance of implementation synergies as requirements increase and expand. This is only going to get more complex as time goes on.
And perhaps most importantly, don’t be afraid to ask for help. This is complicated stuff that is changing by the day. This is not the time or the issue to try going it on your own.
Reach out to our experts for more help and information.
France is implementing a decentralised continuous transaction control (CTC) system where domestic B2B e-invoicing constitutes the foundation of the system, adding e-reporting requirements for data relating to B2C and cross-border B2B transactions (sales and purchases).
Under this upcoming regime, data or invoices can be directly sent to the Invoicing Public Portal ‘PPF’ (Portail Public de Facturation, so far known as Chorus Pro) or to a Partner Dematerialization Platform ‘PDP’ (Plateformes de Dématerialisation Partenaires). In addition, there are also Dematerializing Operators (Operateurs de dématérialisation) that are connected to either the PPF or a PDP.
Requirements for these portal and platforms have been published.
The Ministry of Economy published Decree No. 2022-1299 and Order of 7 October 2022 on the generalisation of e-invoicing in transactions between taxable persons for VAT and the transmission of transaction data (together known as ‘new legislation’), providing long-awaited details for PDP operators and PPF.
The new legislation introduces rules concerning the application process for PDP operators. Although French establishment isn’t required, PDP operators must fulfill a number of requirements, such as operating their IT systems in the EU.
France is implementing a model where third-party service providers are authorised to transmit invoices between the transacting parties. With the mandatory use of the PPF or PDPs for exchanging e-invoices, trading parties cannot exchange invoices between them directly. Therefore, PDPs must be able to receive and send invoices in structured formats, whether the ones supported by the PPF (CII, UBL, or FACTUR-X) or any other required by their clients. Also, to ensure interoperability, PDPs are expected to connect with at least one other PDP. Besides this requirement, it’s stated by the new decree that PDPs must be able to send e-invoices to PDPs chosen by their recipients which implies a complete interoperability between PDPs.
It was previously announced that taxpayers could submit PDF invoices for a transitional period. The new legislation outlines the transitional period as until the end of 2027. During this period PDPs and PPF must be able to convert the PDF into one of the structured formats.
The new legislation also provides information about the content of e-invoices, which has new mandatory fields, and the content of transaction and payment data to be transmitted to the tax authority.
It also announced frequencies and dates of data transmission. Deadlines for transaction and payment data transmission are based on the tax regimes of taxpayers. For example, taxpayers subject to the normal monthly regime should transmit payment data within ten days after the end of the month.
With the aim of having traceability over documents, the lifecycle statuses of the domestic B2B e-invoices are exchanged between the parties and transmitted to the PPF. Lifecycle statuses that are mandatory (“Deposited”, “Rejected”, “Refused” and “Payment Received”) are listed in the new legislation.
Further details regarding the Central Directory, which consists of data to properly identify the recipient of the e-invoice and its platform, are provided within the Order.
PDP operator candidates can apply for registration as of Spring 2023 (precise date still to be confirmed), instead of September 2023 as previously set. From January 2024, a six-month test run is expected to be conducted for enterprises and PDPs before the implementation in July 2024.
Still have questions about France’s upcoming continuous transaction control mandate? Get in touch with our tax experts.
For the UK and other non-EU businesses it’s vital to determine the importer of the goods into the EU as this will impact the VAT treatment.
For goods under €150 there are simplified options such as the Import One Stop Shop (IOSS) or special arrangements through the postal operator. However, when supplying goods over €150, businesses need to consider how they want to import the goods.
One option is for businesses to deliver on a Delivered Duty Paid (DDP) basis and be the importer of the goods into the EU. This improves the customer experience for B2C transactions but creates a liability to be registered in the county of import and to charge local VAT, along with additional compliance requirements. If goods are moved from that country to other EU countries, then depending on the supply chain, the One Stop Shop (OSS) could be used to avoid further VAT registration requirements.
Due to increased compliance costs many businesses have chosen not to be the importer and pass this obligation to the end customer. If a business chooses this route, options are still available.
The business could simply place the full obligation on the customer., The customer would be sent a payment request for the VAT and any duty by the carrier before delivery., There could also be a handling fee passed on to the customer. Once paid the goods would be delivered This approach doesn’t provide the best customer experience.
This is why many businesses have opted for a ’landed cost method’ offered by many couriers. The customer is still the importer on the import documentation, but the business collects the VAT and duty from the customer at the time of sale and settles the carrier’s invoice on their behalf. In theory, this avoids the need for the business to register in the EU and still offers the customer a seamless experience. However, this raises the question: is the customer actually the importer?
Some tax authorities are beginning to take a different view of arrangements for goods with a value above €150 where goods are imported directly into the Member State of delivery. A law change on 1 July 2021 included the concept “where the supplier intervenes indirectly in the transport or dispatch of the goods”. This is to counter arrangements that allowed the seller to argue they were not distance selling but making a local sale, so only had to account for VAT in the Member State of dispatch of the goods.
Following the law change some tax authorities are arguing this concept means if a seller sells to a private individual in their country and the seller arranges for the goods to be delivered from a non-EU country and customs cleared in their EU Member State, the place of supply is the Member State as the supplier has indirectly intervened in the transport.
As a result, the supplier must register and account for VAT in the Member State even if the customer is the importer of the goods. This argument could result in double taxation and can create additional compliance obligations along with tax authority audits – all of which add additional costs and time for businesses.
It’s important that businesses adopting a method where the customer is the importer put correct arrangements in place. This includes ensuring website terms and conditions reflect the fact the customer is the importer and giving the company the power to appoint a customs declarant on their behalf. It’s also important that customs documentation is completed correctly. Avoiding terms such as DDP on the website is also key as this implies that the business is the importer.
For help with EU import queries or if your company needs VAT compliance assistance get in touch to speak with one of our tax experts.
It seems such a short time since HMRC sent a reminder letter in March 2022 recalling the upcoming changes to the UK’s customs systems and explaining what to do to prepare for these changes.
With the deadline rapidly approaching, here’s a brief recap.
The Customs Handling of Import and Export Freight (CHIEF) system, which is now nearly 30 years old (it was introduced in 1994), will close in two phases:
The Customs Declaration Service will serve as the UK’s single customs platform, with all businesses needing to declare all imported and exported goods through the Customs Declaration Service (CDS) after 31 March 2023.
As mentioned on the HMRC website, the Customs Declaration Service toolkit gives traders access to the many benefits of the upcoming changes. In summary:
To be able to use CDS and import goods into the UK from 1 October 2022 and to export from 1 April 2023, businesses are required to have the following:
Want to know more about how changes to the UK’s customs systems will impact your business and its compliance? Contact us to find out more.
In Italy, the discipline of transfer pricing states that in intra-group transactions between entities from different countries, where one is resident in Italy, transactions must take place on an arm’s length basis. In other words, transactions are based on freely competitive prices and under comparable circumstances.
Companies carefully treat the transfer pricing adjustments from a corporate income tax perspective. However, less attention is paid from a VAT perspective.
It’s worth mentioning that in most cases, the transfer price adjustments are profitability adjustments (rather than price) of the transactions carried out between associated companies.
However, treating the transfer pricing adjustments as outside the scope of VAT might cause problems in case of a tax authority audit and re-qualification of the transactions.
The issue of transfer pricing adjustments for VAT purposes is not expressly regulated by the Italian legislator, other EU Member State legislators or from an EU VAT legislative point of view. In the absence of an ad hoc provision, reference is made to EU and local legislation, and private and public rulings on a case-by-case analysis.
Regarding public rulings, Italian tax authorities published several responses in 2021.
With the last response to ruling no. 884 of 30 December 2021, inspired by EU Commission Working Paper n. 923 and VAT Expert Group document n. 071, Italian tax authorities clarified that to establish whether transfer pricing adjustments represent the consideration for a transaction relevant for VAT:
In the 30 December 2021 ruling (no. 884), Italian tax authorities confirmed the adjustments in question were outside the scope of VAT following the transfer pricing adjustments. It stated for subsidiaries “the recognition of an extra cost aimed at lowering their operating margin“, wasn’t “directly related to the original supplies of finished products“.
The same outcome didn’t apply to ruling no. 529 of August 6, 2021.
In this case, at the time of the sale of the goods, the seller applied a provisional price.
That provisional price was then subject to adjustment on a quarterly basis, through the so-called “Profit True Up“. The result could consist either of a claim by the transferor against the transferee or, conversely, transferor’s debt.
In this specific case, Italian tax authorities found a “direct link between the sums determined in the final balance and the supplies” and concluded by determining the relevance of the transfer price adjustments made by the taxpayer for VAT purposes.
Whether or not your business is operating in Italy, the above shows how important the potential VAT implications of transfer pricing adjustments are and the confusion for businesses on how to proceed in different scenarios.
At Sovos we’ve seen more local tax authority audits focused on clarifying if the treatment is valid from a corporate income tax and a VAT perspective.
After a review of the contracts and agreements between the companies and subsidiaries involved, it’s essential to understand whether the transfer pricing adjustments are:
Speak to our team if you have questions about the latest approach from a VAT perspective on transfer pricing adjustments in Italy, the EU and the UK and the potential solutions to mitigate any risk of audit and penalties.
The Italian Customs Authorities recently updated their national import system by applying the new European Union Customs Data Model (EUCDM). These new changes came into effect on 9 June 2022.
According to the new procedure, the old model of paper import declarations has been abolished. The import declarations are now transmitted to the Italian Customs Authorities’ information system with a digital signature.
The acceptance of a customs declaration is notified to the economic operator (that can be the importer, the Customs Agent, etc.) through a Master Reference Number (MRN), an alphanumeric string of 18 characters.
The old IM message (telematic track to be submitted at the time of the import to the Italian Customs Authorities through the Customs Telematic Service (i.e. Servizio telematico doganale (STD)) has been replaced by the following paths as defined by EU legislation:
At the time of the release of the goods, Italian Customs Authorities make available the “summary statement for accounting purposes of the customs declaration” (prospetto di riepilogo ai fini contabili della dichiarazione doganale). The summary includes all data necessary to detect customs duties, import VAT and any other charges due.
The summary mentioned above is made available to the importer and the declarant/representative in the reserved area of the single portal of Italian Customs Authorities through the “Document management – customs declarations” service.
We recommend that importers contact their Customs Agent to receive a copy of this summary for their accounting purposes.
As per Italian VAT Law, possessing a Single Administrative Document (SAD) is needed to exercise the right to recover import VAT in Italy. As the SAD is now unavailable, Italian Customs Authorities, in agreement with the Italian Revenue Agency, agreed that the new accounting summary is sufficient to allow the importer to exercise the right to recover the import VAT.
Therefore, the new accounting summary is needed to exercise your right to recover the import VAT paid to the Italian tax authorities.
Moreover, the right to recover import VAT is exercised only once the summary is reported in the Purchase VAT Ledger as per art. 25 of Italian VAT Law.
Finally, the import document must be included in your quarterly VAT return and your annual VAT return which must mirror your Italian VAT Ledgers.
To ensure your import VAT is not lost, we recommend considering that the last day to recover the import VAT, related to an import of goods carried out in 2022, is 30 April 2023.
In addition to the Summary Prospetto di riepilogo ai fini contabili della dichiarazione doganale, discussed above, economic operators will be able to receive:
Italian Customs Authorities advise customs operators to provide the Prospetto di svincolo to transporters as proof of the fulfilment of customs formalities in the case of checks.
Speak to our team if you have any questions about the latest Italian importing requirements and their impact on your business’s compliance.
On 22 July, the EU Commission opened four new infringement proceedings against the United Kingdom for allegedly breaching the 2021 Northern Ireland Protocol on conditions related to customs requirements, excise tax and VAT. The EU has brought seven proceedings against the UK over the Protocol since 2021.
Following the UK’s departure from the EU in 2020, the parties agreed that customs checkpoints on the land border between Northern Ireland and the Republic of Ireland could lead to political instability. The Protocol was an attempt to avoid border posts between the two countries.
Instead, the Protocol ensures customs checks are done in Northern Irish ports before goods are released into the Republic of Ireland. This process effectively created a customs border on the Irish Sea. In addition, the Protocol allows Northern Ireland to follow EU rules on product standards and VAT rules related to goods.
The Protocol has been controversial in the UK, as it creates special rules for Northern Ireland that don’t apply in England, Scotland or Wales. Members of the UK’s governing Conservative Party – including Liz Truss, a frontrunner to replace Boris Johnson as UK Prime Minister – have recently introduced a Northern Ireland Protocol Bill that would allow the UK to amend the terms of the Protocol.
Among other things, the draft legislation seeks to remove dispute settlement from the jurisdiction of the Court of Justice of the European Union, authorises “green [fast track] channels” for goods staying within the UK, and allows for UK-wide policies on VAT. Proponents of the bill claim it is necessary to protect the “essential interest” of peace in Northern Ireland.
However, European Union Representatives have condemned this draft legislation as a potential violation of international law. In its most recent infringement proceedings, the EU alleges that the UK has not substantively implemented parts of the Protocol at all.
In particular, the EU claims that:
The last point is particularly interesting for VAT purposes, as the IOSS scheme is a signature piece of the EU’s “VAT in the Digital Age” initiative.
At the time of writing the Northern Ireland Protocol Bill has not yet been adopted by the UK Parliament. It awaits review in the House of Lords. The UK and the EU have stated that further negotiations over the Protocol would be the preferred option. The parties, however, remain far apart on the details.
The EU has set out two months for the UK to respond to the infringement action. Failing any new agreements, the action could lead to possible fines and/or trading sanctions between the parties. Taxpayers conducting cross-border trade between the UK and EU should ensure they stay on top of future developments.
Need more information on IOSS and how it could impact your business’s compliance? Get in touch with our team.
The Philippines continuous transaction controls (CTC) Electronic Invoicing/Receipting System (EIS) has been officially kicked off for the 100 large taxpayers selected by the government to inaugurate the mandate. Although taxpayers were still struggling to meet the new e-invoicing system’s technical requirements just before the go-live date, the Philippines upheld its planned deadline and went live with this pilot on 1 July 2022.
The Philippines roll-out has once again highlighted the challenges of complying with new mandates and shown that readiness is vital.
Together with one of the six initial pilot companies, which started testing early this year, Sovos has developed the first software solution to obtain approval by the EIS to operate e-invoice transmission through the government’s transmission platform. Sovos’ solution is up and running in the Philippines.
One day before the EIS go-live, the Philippines tax authority, BIR (Bureau of Internal Revenue), published Revenue Regulations n. 6-2022, 8-2022, and 9-2022, containing the new system’s policies and guidelines and documenting the rules and procedures adopted by the EIS.
While the regulations do not represent news for pilot taxpayers who have successfully implemented their CTC e-invoice reporting systems, the same might not be accurate for those preparing to comply with the new mandate. The legislation officially establishes the country’s e-invoice/receipt issuance and reporting initiative, first introduced in 2018 by the Tax Reform for Acceleration and Inclusion Act (TRAIN), and documents relevant information.
As of 1 July 2022, 100 selected pilot taxpayers have been obliged to issue and transmit e-invoices and e-receipts through the EIS. The BIR is planning a phased roll-out for other taxpayers within the scope of the mandate, starting in 2023, but no official calendar has been announced yet.
Taxpayers covered by the mandate are:
The mandate requires electronic issuance of invoices (B2B), receipts (B2C), debit and credit notes and transmission through the EIS platform in near real-time, that is, in up to three (3) calendar days counted from issuance date. Documents must be transmitted using the JSON (JavaScript Object Notation) file format.
Issuance and transmission can be done through the EIS taxpayer portal or using API (Application Programming Interface), in which taxpayers must develop a Sales Data Transmission System and secure certification before operating through the EIS. This entails the application for the EIS Certification and a Permit to Transmit (PTT) by submitting documentation with detailed information about the taxpayer’s system.
Although the regulations state that the submission of printed invoices and receipts is no longer required for taxpayers operating under the EIS, archiving requirements have not been modified. This means that during the 10-year archiving period, taxpayers must retain hard copies of transmitted documents for the first five (5) years, after which exclusive electronic storage is allowed for the remaining time.
Additionally, the legislation states that only the invoices successfully transmitted through the EIS will be accepted for VAT deduction purposes.
Many of the 100 pilot taxpayers struggled to comply with the country’s deadline. For this reason, the EIS has allowed alternations to the deadline for certain taxpayers, provided they submit a Sworn Statement detailing the reasons why they are not able to meet the requirement on time and a schedule with the date they intend to comply by, which are subject to the EIS’ approval.
Regarding non-compliance, the regulations state that the tax authority shall impose a penalty for delayed or non-transmission of e-invoices/receipts to the EIS and that unreported sales will be subject to further investigation.
After the pilot program kick-off and legally establishing the CTC framework, the government plans to gradually roll out the mandate to all taxpayers included in the scope in 2023. However, taxpayers who are not in the mandatory scope of the EIS may already opt to enrol in the system and be ready to comply beforehand.
Sovos was the first software provider to become certified, in conjunction with one of the pilot taxpayers, to transmit through the EIS, and is ready to comply with the Philippines CTC e-invoice reporting. Our powerful software combined with our extensive knowledge of the Philippines tax landscape helps companies solve tax for good.
Need to ensure compliance with the latest e-invoicing requirements in the Philippines? Speak with a member of Sovos’ team of tax experts
The EU and the UK use the Economic Operators Registration and Identification System (EORI) to identify traders.
Businesses and people wishing to trade in the EU and the UK must use the EORI number as an identification number in all customs procedures when exchanging information with customs administrations. The EU has one standard identification number across the EU, while the UK requires a separate GB EORI number for trade in the UK post-Brexit.
The purpose of having one standard ID in the EU is that it creates efficiency for both traders and the customs authorities. However, it’s vital to ensure all aspects of the system are considered.
The primary need for an EORI number is to be able to lodge a customs declaration for both imports and exports. Guidance is that a trader should obtain an EORI number in the first country of import or export. Carriers will also require an EORI number.
The EORI number exists in two parts:
The UK has also adopted this format, with both GB EORI numbers for trade into Great Britain (GB) and an XI EORI number for trade via the Northern Ireland protocol. The UK and EU have online databases where it is possible to check the status of an EORI number.
Since the UK left the EU, it is now required to have a separate GB EORI number to import and export from GB. This number will not be valid in the EU. However, should businesses be trading from Northern Ireland, then due to the Northern Ireland protocol, it is possible to apply for an XI EORI number to import into the EU.
Initially, after the introduction of the XI prefix, there were several reported issues. They included tax authorities being unable to recognise XI EORI numbers or link them to existing EU VAT numbers. Often it is the case that businesses have found it simpler to cancel an XI EORI number and apply for an EU EORI number in a Member State, particularly if that Member State is the main point of entry for imports into the EU.
Some of the most common issues we see at Sovos include:
Sovos provides an EORI registration service for traders who must apply for an EORI number. We can also link any existing EU VAT numbers to the EORI to ensure that customs declarations can be logged correctly, ensuring a smooth process and avoiding delays. You can find more information about EU VAT and the EU VAT e-commerce package here.
Contact us if you need help with VAT compliance.
According to European Customs Law, non-EU established businesses must appoint a representative for customs purposes when importing goods into the EU. In particular, the Union Customs Code establishes that non-EU resident businesses must appoint an indirect representative.
At the end of the Brexit transitionary period, many UK businesses suddenly needed to appoint an indirect representative to clear goods into the EU. In this article, we will look in further detail at this requirement’s challenges.
Indirect representation implies that agents are jointly and severally liable for any customs debt (import or export duties), which is why it’s harder for businesses to find freight companies and customs brokers willing to act on their behalf than for direct representation imports.
The conditions to be an indirect representative are that the customs agent must have a registered office or permanent establishment in the EU. An agent would require a Power of Attorney that enables them to act for the company. The main characteristic of indirect representation is that the agent will act in their own name but on behalf of the company that appointed them, essentially transferring the rights and obligations of customs procedures to the representative.
On the other hand, agents act in the name and on behalf of the company in direct representation.
In addition to the customs implications, agents acting as the importer of record or declarant may also be considered liable for complying with regulatory requirements. For example, any error in the declarations (ex. Article 77 paragraph 3 Union Customs Code (UCC), if the agent was aware of incorrect information or if they “should have known better”).
The European Court of Justice recently expressed its opinion on this matter with the ruling on the case C-714/20, UI Srl. This ruling determined that the indirect representative is jointly and severally liable from a customs law perspective, but not for VAT (contrary to a previous interpretation of Article 77 (3) UCC). The court specified that it’s up to the Member States to expressly determine if other persons, such as indirect representatives, may be considered jointly and severally liable for VAT of their importer clients. However, according to the principle of legal certainty, this should be clearly expressed in the local legislation before courts can enforce said responsibility.
For these options, each alternative solution will have economic and administrative implications to be considered. It is recommended that businesses carefully review their overall strategy before deciding what can be adjusted to comply with customs formalities.
Contact Sovos’ team of VAT experts for help with meeting VAT compliance obligations.
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.