Insurance Premium Tax in Germany is complex. From IPT rates to law changes, this quick guide will help you navigate the challenges of IPT in Germany. For an overview about IPT in general, read our Insurance Premium Tax guide.
Last update: 24.01.2023
What is the filing frequency for IPT declarations in Germany?
Based on IPT declarations made for the year 2022:
Below €1,000.00 – annually
Between €1,000.00 and €6,000.00 – quarterly
Above €6,000.00 – monthly
What is the filing frequency for Fire Brigade Charge declarations in Germany?
Based on FBC declarations made for the year 2022:
Below €400 – annually
Between €400 and €2,400.00 – Quarterly
Above €2,400.00 – monthly
Last update: 07.12.2022
What is the IPT rate in Germany?
Different IPT rates are applicable in Germany, depending on the type of insured risk provided to the policyholder. Sovos’ IPT Managed Services ensures your company complies with the latest Insurance Premium Tax requirements in Germany.
Are life and sickness policies exempt from German IPT?
Yes. Life and sickness policies are exempt from German IPT.
What is the basis of a German IPT calculation?
German IPT is a charge to the policyholder in addition to the premium. The taxable premium is the total amount paid by the policyholder to obtain the cover. The Insurance Tax Act specifically includes charges and other ancillary costs within the scope of the definition.
What are the IPT challenges in Germany?
The main challenges in Germany regarding IPT relate to two areas:
For policies classified under regulatory insurance class 8 Fire and natural forces: it’s important insurers and policyholders understand the risks covered and apply the correct IPT rates and Fire Protection Tax (FPT) rates to the premium, so they can be settled with the authorities. There are different IPT and FPT rates depending upon the type of insured risk. As FPT is an insurer-borne parafiscal charge deducted from the premium paid by the policyholder to them, it’s important to use the correct tax rates.
The changes to the Insurance Tax Act in 2020 has led to uncertainty over how to tax some global policies where there is a German policyholder. This has increased the possibility of double taxation taking place, which we will explain in more detail.
Updates on German IPT
Insurance Tax Act reforms in Germany, effective from 10 December 2020, have continued to cause some uncertainty in the insurance market.
The main area of concern relates to the location of risk for Insurance Premium Tax (IPT) purposes. The reform can impact a policy taken out with either an EEA or non-EEA insurer where the policyholder is established in Germany, i.e., a German enterprise, permanent establishment, or corresponding institution, or an individual habitually resident in Germany, where the policy covers non-EEA risks.
These changesaffect all classes of business and are irrespective of the physical location of any insured risk.
Double taxation in Germany with policies written by EEA insurers
If a policy for the German policyholder includes non-EEA countries, then German IPT is due on the premium allocated to Germany and to premiums allocated to non-EEA countries. This could be in addition to any applicable premium taxes due in non-EEA countries.
Therefore, double taxation is a possibility. However, if the policy includes other EEA countries, then German IPT cannot be charged on premiums allocated in these EEA countries.
Double taxation in Germany with policies written by non-EEA insurers
If a policy for the German policyholder includes both other EEA and non-EEA countries, then German IPT is due on the premium allocated to Germany and to 100% of the premiums allocated to all the other countries. This could be in addition to any applicable premium taxes due in all these countries. Therefore, again, double taxation is a possibility.
What is a ‘permanent establishment’ or ‘corresponding institution’ for German IPT purposes?
The law reforms did not specifically clarify at the time what a ‘permanent establishment’ or ‘corresponding institution’ was that would bring a non-EEA risk within the scope of German IPT. The primary concern related to global policies such as liability and miscellaneous financial loss risks that are not considered ‘special risks’ (i.e., don’t relate to fixed property, vehicles and travel). These types of global programmes for German policyholders, in particular financial institutions, are common in the insurance market.
4 March 2021
Guidance from the Federal Ministry of Finance (BMF) published confirmed that a non-EEA branch of a German policyholder would be deemed to constitute a permanent establishment. But it was silent on whether the same applied to a non-EEA subsidiary. Also included in this guidance were several scenarios to aid insurers and brokers with taxing policies correctly, but unfortunately there wasn’t one for this subsidiary scenario.
20 July 2021
The BMF issued a new version of their general leaflet on insurance tax and fire protection tax for EU/EEA insurers. This included a flowchart showing the changes in taxability of policies as a result of IPT law reforms, but the non-EEA subsidiary question was not specifically answered here.
28 April 2021
The German Insurance Association (GDV) issued a Frequently Asked Questions (FAQs) document to help insurers understand the reforms in several areas, including answering some questions around the treatment of non-EEA subsidiaries.
Whilst the answers appeared to provide hope that these subsidiaries did not constitute a permanent establishment, there was a caveat at the beginning of the FAQs document. It said it was non-binding, and that every insurer could interpret and apply the statutory provisions (and the associated BMF letter from 4 March 2021) at their discretion.
This meant if insurers decided not to tax non-EEA subsidiaries based solely on this guidance, they could be subject to tax assessments later, where German IPT has not been charged.
7 September 2021
The BMF subsequently resolved this matter. They published a further decree confirming that for policies taken out by a German policyholder with an EEA insurer not relating to ‘special risks’, any premium apportioned to a non-EEA subsidiary is not subject to German IPT. This is because the Fiscal Code of Germany does not consider a subsidiary to be within their definition of a permanent establishment for tax purposes.
Need to learn more about IPT?
Guides: Read more about Insurance Premium Tax in our Guide to IPT
In our recent webinar, Sovos covered the new French e-invoicing and e-reporting mandate, and what this means for businesses and their tax obligations.
We are witnessing a global move towards Continuous Transaction Controls (CTCs), where tax authorities are demanding transactional data in real-time or near real-time, affecting e-invoicing and e-reporting obligations.
The pace towards this mandate has been accelerating lately with the adoption of the Finance law for 2021, followed by a number of workshops organised by the Ministry of Finance — namely the Direction Générale des Finances Publiques (DGFIP).
In the first of two blogs on the mandate, we answer some of your most pressing questions asked during our webinar.
In part one, we focus on setting the scene in terms of scope, and cover questions around e-invoicing specifically, invoicing file formats, processes and controls, and archiving.
The second blog covers questions around e-reporting obligations.
Scope of the regulation
In this section, we answer questions on the scope of the regulation, such as which companies must comply with the mandate and how.
Are non-resident companies (foreign companies with only a French VAT-registration) obliged to fulfil this new regulation? Are foreign legal entities with a French VAT number in scope?
The Budget Laws for 2020 and 2021 introduced the CTC scheme from a legal perspective. Both include “persons subject to VAT” in the scope.
VAT registration is a strong indication that a company is subject to VAT, but classification as a VAT “taxable person” also depends on other factors.
Therefore, it is not as simple as just looking at whether a company has a local VAT registration, to decide whether it is subject to VAT and therefore targeted by the mentioned budget laws.
However, the scope cannot be unilaterally decided by France as the French CTC scheme is dependent on a derogation from the EU Council.
As a comparison, Italy initially included all taxable persons in the scope of its e-invoicing clearance mandate, including those with a mere VAT registration but no establishment. But in this case, the EU Council limited the scope (of its derogation) to persons established in Italy.
From an e-invoicing perspective, we can therefore expect that France will need to follow the Italian path (due to its reliance on a derogation from the EU Council), limiting the scope to established persons.
DGFIP has however suggested that companies that are non-established but VAT registered will be in scope of the reporting obligation.
Is import of goods in the scope of e-reporting? What about import of services?
Only imports (supplies from outside of the EU) of services are in the scope of the current proposal.
E-invoice formats
In this section, we discuss permitted e-invoice formats.
The fact that the new regime creates a specific process for domestic B2B e-invoicing does not change the need for businesses to demonstrate the integrity and authenticity of each invoice.
This can be done through one of the 3 legal methods defined by the existing regulations:
EDI
Qualified electronic signature or seal
The Business Controls option using Audit trail
To ensure there’s no impact of the reform on integrity and authenticity demonstration methods, one can still apply any of them.
However, with the new regime, e-invoicing data sent to the DGFIP does need to be in a structured format.
Will digital signatures be required?
Digital signatures are not strictly required today and will not be strictly required in the new scheme. Integrity and authenticity will still need to be ensured though, irrespective of invoice format, as is the case today.
The options remain the same; use of digital signatures, use of EDI with security measures, or the BCAT option whereby the audit trail should prove the transaction and its authenticity and integrity.
Are PDF and XML invoice file formats still possible to receive from 2023-2025?
The legal invoice format can be anything, as long as the supplier and buyer agree on it and the integrity and authenticity are guaranteed. Also, a human readable version (normally a PDF) is required upon audit as part of the general EU requirements.
What e-invoicing formats are permitted?
This is not fully defined yet, but DGFIP has indicated the following syntax, based on the EN16931 standard:
Submission of invoicing data to Chorus Pro by suppliers who don’t go through a partner platform
Issuing of legal invoice by Chorus Pro to buyers who don’t use a partner platform
Reporting of clearance data (out of the legal e-invoice) to Chorus Pro by the supplier’s partner platform
Exchange of legal invoices by the supplier and buyer partner platforms unless they agreed to some other format (NB: for this last case, partner platforms should be able to process those formats at a minimum level by default. But nothing would prevent them from deciding to use any other format if both the supplier and the buyer agree, e.g. EDIFACT).
E-invoicing process and controls
In this section, we answer questions around the processes for sending and receiving e-invoices, what information they need to include, and the Chorus Pro platform.
Will the e-invoice need to be sent real-time?
Yes, it can be considered a “real-time clearance system”. As part of the e-invoicing obligation, the reporting of mandatory data to the tax authorities and the issuance of the original invoice to the buyer by the supplier’s partner platform should happen right after receiving the invoicing data from the supplier.
If the invoice doesn’t have all the mandatory information like the SIRET number of a customer, will the Chorus Pro platform clear it?
It will be mandatory to mention the SIRET number (ID) of the French trading parties.
For non-French EU parties, the VAT intracom number will need to be mentioned.
For non-EU parties, some local ID will be expected.
If the applicable ID is missing, the data will be rejected by Chorus.
If the ID is wrong, the invoice will be addressed to the wrong buyer and will eventually have to be cancelled (if e-invoicing) or may be penalised by tax authorities if audited.
Will Chorus Pro also be validating the VAT rates used?
No, or at least not on the fly when submitting the invoicing data to Chorus Pro. Our understanding is that those verifications will be done by the tax authorities after the fact, using data analytics / AI algorithms.
Are there common data, connection and bridges with the current SAF-T?
The French version of SAF-T (FEC) must still be available on demand from the tax authorities.
Archiving
In this section, we answer questions around compliant archiving of e-invoices.
Does the Chorus Pro/Tax Authority portal provide a compliant electronic archive for AP/AR invoices in France?
Yes. However, in our experience, even though a tax authority’s archiving solution would be available for taxable persons, few larger companies choose to solely rely on it for evidence purposes and instead continue to use their compliant internal or third-party archiving solutions.
This decision is ultimately based on the fact that the tax authority’s archiving solution poses a conflict of interest: it is maintained by the tax authority, which, from a legal perspective, is not an independent party but rather the counterparty in a fiscal claim.
In fact, from discussions with many experts and customers over that past year, we see that the market request for third-party archiving services is even stronger after the introduction of clearance, especially as customers see a need to store not only the invoice but also response messages from the CTC portal to further maintain evidence of compliance.
Take Action
Still have questions about the e-invoicing mandate? Access our webinar on-demand for more information and advice on how to comply.
This will address the tax challenges of an increasingly digital worldwide economy. As of 9 July 2021, 132 of the 139 OECD/G20 member jurisdictions have agreed to the Inclusive Framework on BEPS.
Pillar Details
Pillar 1
Pillar 1 gives a new taxing right, Amount A, to market countries to ensure companies pay tax on a portion of residual profits earned from activities in those jurisdictions, regardless of physical presence. Pillar 1 will apply to multinational enterprises (“MNEs”) with global turnover above 20 billion euros and profitability above 10%.
There will be a new nexus rule permitting allocation of Amount A to a market jurisdiction when the in-scope multinational enterprise derives at least 1 million euros in revenue from that jurisdiction. For jurisdictions with a GDP less than 40 billion euros, the nexus will instead be set at 250,000 euros.
The “special purpose nexus rule” determines if a jurisdiction qualifies for the Amount A allocation. Furthermore, countries have agreed on an allocation of 20-30% of in-scope MNE residual profits to market jurisdictions, with nexus using a revenue-based allocation key.
Revenue will be sourced to the end market jurisdictions where goods or services are consumed, with detailed source rules still to come.
More details on segmentation are still in the works, as is the final design of a marketing and distribution profits safe harbour that will cap the residual profits allowed to the market jurisdiction through Amount A.
Lastly, countries have agreed to streamline and simplify Amount B with a particular focus on the needs of low-capacity countries. The finalised details are expected to be completed by the end of 2022.
Pillar 2
Pillar 2 consists of Global anti-Base Erosion (“GloBE”) Rules that will ensure MNEs that meet the 750 million euros threshold pay a minimum tax rate of at least 15%. The GloBE Rules consist of an Income Inclusion Rule and an Undertaxed Payment Rule, the latter of which still needs to be finalised.
Pillar 2 also includes a Subject to tax rule, which is a treaty-based rule, allowing source jurisdictions to impose limited source taxation on certain related party payments subject to tax below a minimum rate. The rate will range from 7.5 to 9 percent.
When Will the Plan be Implemented?
There is currently a commitment to continue discussion, in order to finalise the design elements of the plan within the agreed framework by October 2021. Inclusive Framework members will agree and release an implementation plan.
The current timeline is that the multilateral instrument through which Amount A is implemented will be developed and opened for signature in 2022, with Amount A coming into effect in 2021. Similarly, Pillar Two should be brought into law in 2022, to be effective in 2023.
More Details to Come
Although the key components of the Two-Pillar Solution have been agreed upon, a detailed implementation plan that includes resolving remaining issues is still to come.
As many countries could be implementing these changes in the near future, it is important for businesses active in the digital economy to carefully track and understand the developments surrounding the OECD/G20 Base Erosion and Profit Shifting Project.
For anyone relatively new or unfamiliar with insurance premium tax (IPT), an understanding of each of the core components is key to ensuring compliance. They also sit in a logical sequence of five distinct areas.
Location of risk
Class of business
Applicable taxes and tax rates
Declaration and payment
Additional reporting
1.Location of risk rules
This essentially is having a clear understanding of where the risk lies to determine in which jurisdiction the premium taxes should be declared. The rules can be complex and vary across different territories but having a clear process will help.
You’ll need to determine:
Is the policy insurance or reinsurance?
What is the nature of the risk?
Who is insured and where are they located?
Next, check which rules apply. The EU’s four rules determine the correct jurisdiction depending on the nature of the risk:
Location of property
Registration of vehicles
Country of residence in which you took out the travel policy
Anything else that doesn’t fall into the above categories
A class of business is basically the category the risk falls under. Within the EU there are 18 classes of non-life business, ranging from accident and motor to miscellaneous financial loss and general liability.
Local rules vary so it’s important to understand your insurance policies to ensure the correct and relevant class of business is applied. Some policies may include more than one class of business which will affect the proportions of the premium that relate to each business class.
Having determined the location of risk and the correct class of business the next step is to determine the taxes that apply and need settling.
Tax rates across the EU are fragmented and there are even more variations when you look at the varying tax rates within a jurisdiction. For example, in Spain you have an IPT rate applied at 6% yet you might also have some extraordinary risks surcharges calculated at 0.0003%.
Also consider who must carry the cost of these taxes. Is it the insured or the insurer? In most cases it’s the insurer’s responsibility, however it can fall to the policyholder.
Insurer borne taxes generally can’t be shown to the policyholder and are therefore a cost to the insurer
Taxes borne by the insured must be shown on policy documents, so the policyholder knows what taxes they are liable for.
Key to being able to determine which taxes and what rate to apply is having access to reliable software.
Here again the rules vary country by country around the frequency for declaring and settling liabilities. They can be monthly, quarterly, bi-annually and annually. Failure to declare within the deadline will result in penalties and/or interest so knowing the deadlines for each return and when payment must be made are crucial.
Some tax authorities have strict rules and are quick to enforce them. Others are more lenient dealing with penalties on a case by case basis, and some (such as the UK) take a behaviour led approach where full disclosure and cooperation could lead to a far reduced penalty.
5.Additional reporting – will IPT follow where VAT leads?
Tax authorities across the world are taking a more granular approach to tax reporting to prevent fraud and reduce the tax gap. With VAT mandates in place across Latin America and more recently spreading into Europe and Asia, the VAT gap is reducing. So as governments transition to digital tax compliance wanting more data and faster, you can expect IPT will in time follow. The Spanish authorities, for example, have already started on this journey with the introduction last year of new digital reporting requirements for Extraordinary Risk Surcharges.
To stay ahead of the curve, the more prepared you are today the easier it will be to face the challenges that lie ahead as the pace of change in digitising tax compliance increases.
Take Action
Keep up to date with ever changing rules by subscribing to our blogs and following us on LinkedIn and Twitter. We also host regular webinars with our in-house specialists who are on hand to help.
What is Intrastat?
Intrastat is a reporting regime relating to the intra-community trade of goods within the EU.
Under Regulation (EC) No. 638/2004, VAT taxpayers who are making intra-community sales and purchases of goods are required to complete Intrastat declarations when the reporting threshold is breached.
Intrastat declarations must be completed in both the country of dispatch (by the seller) and the country of arrival (by the purchaser). The format and data elements of Intrastat declarations vary from country to country, though some data elements are required in all Member States. Reporting thresholds also vary by Member State.
How is Intrastat being modernised?
In an effort to improve data collection and ease the administrative burden on businesses an ‘Intrastat Modernisation’ project was launched in 2017. As a result of this project Regulation (EU) 2019/2152 (the Regulation on European business statistics) was adopted.
The repeal of Regulation (EC) No 638/2004, effective from 1 January 2022.
The implementation of a new mandatory data exchange program between EU Member States relating to intra-community deliveries.
Making data exchange of data on intra-community arrivals in EU Member States optional.
The practical effects of these changes are two-fold:
Member States are required to collect additional data as part of the Intrastat Dispatch reports. This means that taxpayers making intra-community deliveries will need to record and report this additional information.
The regulation paves the way for Member States to potentially phase out Intrastat arrival reports, as the mandatory exchange of dispatch data makes separate arrivals reporting redundant. Reporting thresholds for arrivals tend to be lower than for dispatches and it’s expected that removing the need to report arrivals will eventually lead to less businesses having to participate in Intrastat reporting – unless the reporting threshold is reduced. Additionally, business who are involved in both intra-community dispatches and arrivals will halve their reporting obligation.
What information are Member States currently required to collect as part of Intrastat?
Currently Member States are required to collect the following information as part of Intrastat:
VAT Number of reporting party
The reference period
The flow of goods (arrival, dispatch)
The 8-digit commodity code (Combined Nomenclature)
The Member State goods are dispatched to or from
The value of the goods
The quantity of the goods
The nature of the transaction
What additional information will Member States need to collect from intra-community exporters by 1 January 1 2022?
The VAT number of the recipient of goods
The country of origin of the dispatched goods
What additional information are Member States currently allowed to collect as part of Intrastat?
The identification of the goods, at a more detailed level than the Combined Nomenclature
The country of origin, on arrival
The region of origin, on dispatch, and the region of destination, on arrival
The delivery terms
The mode of transport
The statistical procedure
What optional information can Member States provide mandatory exchange of intra-community exports?
The delivery terms
The mode of transport
Exceptions to Intrastat requirements
To ease compliance burdens on small businesses, EU Member States are allowed to set thresholds, under which businesses are relieved of their obligations to complete Intrastat. Thresholds are set annually by Member States, and threshold amounts for arrivals and dispatches are set separately.
Under the current regulations, Member States cannot set thresholds at a level that results in less than 97% of dispatches from the Member State being reported and cannot set thresholds at a level that results in less than 93% of intra-community arrivals to the Member State being reported.
Under current regulations Member States are allowed to let certain small businesses report simplified information, so long as the value of trade subject to simplified reporting does not exceed 6% of total trade.
Under the upcoming new regulation, Member States need only ensure that 95% of dispatches are reported and the exchange of data on intra-community arrivals between Member States is optional.
Keeping up to date with the latest rates, rules, and regulation of Insurance Premium Tax (IPT) is a challenge for insurers. Not to mention this is especially complex for insurers writing across multiple territories.
Written by Sovos’ team of regulatory specialists, IPT Compliance – A Guide for Insurers provides everything you need to know about the IPT regulatory landscape.
A mix of deep dive country-by-country information in addition to guidance on IPT and the digital tax landscape, this guide is for any insurer wanting to know more about IPT compliance.
Despite its focus on Europe, our guide also explores other jurisdictions in Asia, Australia, North and South America. This guide is your trusted source of information wherever in the world you write business.
Tax compliance intensifies – the cost of getting it wrong
Technology disconnect and why IPT needs prioritising
The changing landscape for European captives and the challenges ahead
Easing the stress of IPT filings
The complexities for insurers when writing insurance through third parties
Indirect tax rules for insurance across the world
European country deep dives
How Sovos can help
The digital future of IPT
The tax landscape is changing. Governments across the globe are looking to technology that helps to fill tax revenue gaps and also speed up tax collection. As a result, tax authorities are increasing their focus on the insurance industry. They are ensuring IPT and parafiscal taxes are collected correctly, accurately, and on time.
In light of the rise of digital tax regimes and granular reporting, IPT compliance should be a priority for insurers. Incorrect filing or reporting can lead to costly penalties and reputational damage otherwise.
Our IPT Compliance Guide for Insurers e-book provides guidance on the many elements of IPT compliance. This includes tax point, tax rates, currency, filing, submission and the importance of accurate data.
Owing to the recent changes in IPT across Europe, including Spain’s complex and detailed reporting requirements and Portugal’s Stamp Duty reporting, this guide will help you navigate the ever-changing IPT landscape.
The IPT Compliance Guide for Insurers takes an in-depth look into some of the more complex and unique IPT jurisdictions across Europe. This includes Italy, Slovakia, Portugal, France, Germany, Spain, Finland, Denmark, and the UK.
Europe is the third largest insurance captive domicile in the world. Around 15% of companies are established within the continent. This e-book also contains relevant IPT rules, applicable charges, and guidance for captives.
Progress has been made in the roll-out of the Polish CTC (continuous transaction control) system, Krajowy System of e-Faktur. Earlier this year, the Ministry of Finance published a draft act, which is still awaiting adoption by parliament to become law. Draft e-invoice specifications have been released and there has been a public consultation on the CTC system.
In June, the Ministry of Finance announced it had reviewed all comments submitted by the public and Polish ministers on the CTC system and decided to take the following actions:
Make the CTC system available for testing in October 2021 to prepare for the go-live date in 2022.The pilot will be available for all taxpayers.
Adopt and publish legislation in October 2021.
Make available two e-invoice schemas, one in Polish and one in English.
Roll-out the CTC system on a voluntary basis in January 2022, after 3 months of testing (October – December 2021).
Make the CTC system mandatory in 2023.
In the announcement, the Minister outlined the benefits of adopting the CTC system for taxpayers. These include: quicker VAT refunds; security of the stored invoice in the tax authority’s database until the end of the mandatory storage period; certainty about the invoice delivery to the recipient through the CTC platform and therefore quicker invoice payments; automation of the invoice processing and exchange due to the adoption of a standardized e-invoice format.
In addition, as a result of the new e-invoicing rules upcoming changes in the SLIM VAT 2 package will trigger further relief measures, e.g. around the handling of duplicates and corrective invoices.
The Polish authorities are making good progress in the implementation of the Krajowy System e-Faktur. It is positive to see that the public consultation has proven useful in defining next steps and the authorities’ intent for transparency and timely documentation will hopefully continue throughout the entire CTC roll-out.
Meet the Expert is our series of blogs where we share more about the team behind our innovative software and managed services.
As a global organisation with indirect tax experts across all regions, our dedicated team are often the first to know about new regulatory changes, ensuring you stay compliant.
We spoke to Wendy Gilby, technical product manager at Sovos, to find out more about her role developing Sovos’ Insurance Premium Tax (IPT) software to help customers meet the demands of a constantly changing regulatory environment.
How did you come to work at Sovos?
Prior to joining Sovos I worked at an investment bank in London, working my way up from trainee programmer to programmer, analyst, business analyst, systems analyst, project manager, global production support manager and eventually vice president.
Due to personal circumstances, I started working part time and was even briefly a rowing coach before heading back to university to complete a Computing and IT degree.
I was looking for another role in IT and originally worked for FiscalReps (now part of Sovos) on a short-term contract in 2016 or 2017. This is the product that we now know as Sovos IPT which needed testing to ensure it was fit for purpose.
After completing the project, I came back on a six month contract, which became a full-time permanent position and I’m still here today!
What is your role and what does it involve?
My role is to work out how to implement any modifications to the Sovos IPT system. We agree with the wider Sovos IPT team what new functionality or changes they want and work closely with the development team to convert the ideas into the solutions that our customers use.
I’ve recently been looking at the Sovos VAT solution to try and see the synergies between VAT and IPT in terms of user set up, user roles, uploading data, and initial validation on the files that we get from clients to improve the overall user experience for our IPT solutions.
What’s your team responsible for and how do they help customers?
We’re always trying to make the whole process of filing taxes more efficient, and a lot smoother for customers, whichever country they file their taxes in.
We’ve spent a lot of time refining the IPT Portal to make the process of filing and reporting IPT easier but also more compliant. We’re trying to eliminate as many of the manual steps involved in filing taxes as possible to reduce errors.
Sovos is a blend of technology and human expertise so we work closely with the compliance team who ensure reporting is accurate and compliant across all the tax authorities our customers file IPT in.
Our aim is to automate and integrate as much of the filing process as possible from data submission to receiving funds and submitting to the tax authorities to ensure we don’t miss any tax return dates and avoid late fees.
How are you using the latest technology to improve Sovos customers’ experience?
This probably ties into the work we’re doing on the IPT Portal. We’re trying to make everything more transparent so customers can see everything in one place including the status of their tax returns.
We’ve also introduced APIs as well, so customers can send us a file straight from their system, it’s a lot less hassle for them. We’re always focused on making it easier for customers to send us their data and providing as many options as possible to do this.
How have you seen the technology change since you joined Sovos? What has had the biggest impact?
I think the biggest impact has been the IPT Portal. When I started, much of the reporting processes were still paper based which meant a lot of sifting through paper tax return documents for the compliance team ahead of filing.
So having the IPT portal with all the documents that used to be printed out in one place, where clients can view everything online, has been the biggest change and one that our customers and our compliance team value, especially over the past year when companies have had to adapt to working remotely and not having as easy access to resources in the office.
What particularly excites you about future tax technology?
I think it’s the move towards a more connected reporting processes, joining all these disparate elements of tax returns to make the IPT reporting and filing process even easier and far less error-prone. As certain elements still require some manual input there’s still opportunities for mistakes so eliminating this concern altogether and making it a simple process from initial upload to submission to the tax authorities is really exciting.
Automated returns are becoming more prevalent and we’re in the process of working on these for Germany, France and Hungary so when I say future it’s actually already happening which is very exciting.
Moving goods from one place to another is a quintessential part of business. Manufacturers, wholesalers, transporters, retailers and consumers all need to carefully orchestrate the shipping and handling of raw materials, parts, equipment, finished goods and other products to keep business flowing. This supply chain harmony is what makes production and trade possible in society.
In Canada, the United States and most European countries, tax administrations don’t intervene much in these trade processes. Until recently, the same could be said about most countries of Latin America. But, with the rise and expansion of electronic invoicing mandates in the region, this is rapidly changing.
Most governments with mature e-invoicing mandates are now recognizing that these mechanisms and government platforms can be used as vehicles to understand where, what, how and when goods are being moved. The traditional electronic invoice, is no longer enough – and tax authorities are requiring businesses to report goods movements in real-time.
The implications are serious too. Goods moved on public roads without those documents are very likely to be seized by the authorities, and the owners and transporters will be subject to fines and other sanctions.
Brazil and Mexico lead the way
The country with the most sophisticated system in place is arguably Brazil. The MDF-e (or Manifesto Eletrônico de Documentos Fiscais) is a mandatory document required by the tax administration in order to audit the movement of goods in Brazil.
This purely digital document combines the information of an electronic invoice (NF-e) and the electronic documents that hauling companies issue to their clients (CT-e). This system became mandatory in 2014 and has since been expanded and modernized with a vast grid of electronic sensors and transponders placed in the public highways of Brazil, intended to ensure that every truck moving goods already has the corresponding MDF-e, NF-e and CT-e. In most cases, the authorities don’t need to stop the trucks to verify the existence of the document.
Mexico recently issued a new resolution requiring taxpayers delivering goods, or simply redistributing them, to have the corresponding authorization from the tax administration (SAT). Products delivered by road, rail, air or waterways need to have what is known as the CFDI with the Supplement of Carta Porte.
CFDI is the acronym for an electronic invoice in Mexico. That supplement of Carta Porte is a new attachment to the electronic invoice of transfer (Traslado) issued by the owners delivering products or to the CFDI of Income (Ingresos) issued by the hauling companies. Carta Porte will provide all the details about the goods being transported, the truck or other means being used, the time of delivery, route, destination, purchaser, transporter and other information. This new mandate will become effective on 30 September 2021. As is in Brazil, noncompliance with this mandate will result in hefty penalties.
E-transport elsewhere in LatAm
Chile also has a mandate requiring the delivery of goods to be pre-authorized by the tax administration. These tax authorized documents are locally known as Guias de Despacho (or dispatch guides) and since January 2020 they can only be issued in an electronic format.
There are some exceptions where the dispatch guide can be issued temporarily on a paper format by certain taxpayers. Also, in cases of contingency, taxpayers may be authorized to issue paper versions of the guide; however, that will not exempt the issuer of regularizing the process once the contingency is complete.
The content of the dispatch guide will vary depending on who issues it and the purpose of the delivery (sales, consignment, returns, exports, internal transfers etc.) but in general, delivery of goods in Chile without the authorized dispatch guide will be subject to penalties from the tax administration (SII).
Argentina has a federal level VAT and a provincial level gross revenue tax. To control tax evasion, both levels of governments exercise certain levels of control in the process of dispatching goods within their jurisdictions.
The tax authority’s system for controlling the flow of goods in public ways is not as encompassing as in Brazil, Chile and Mexico, but it is getting closer. Only the provinces of Buenos Aires, Santa Fe and Mendoza, plus the City of Buenos Aires, require authorization from the fiscal authority to move goods that originated in, or are destined to, their jurisdictions. For that, they require the COT (or Transport Operations Code) where all the data related to the products, means of transport and other information is included once the authorization is provided. The provinces of Salta, Rio Negro and Entre Rios are working on similar regulations.
At federal level, the AFIP (Federal tax administration) only requires pre-authorization for the delivery of certain products such as meat and cereals. But at this level too, the regulatory environment is changing.
The AFIP, along with the Ministry of Agriculture and the Ministry of Transportation have issued a joint resolution 5017/2021 that mandates the use of a digital bill of lading (Carta Porte Electronica) whenever there is a transfer of agricultural products on public roads in Argentina. This change will become effective on 1 November 2021. In 2022, this federal requirement may expand to other products.
LatAm sets the scene for electronic invoicing trends
The requirement of authorization for moving goods in LatAm is not limited to the largest economies of the region. Smaller countries with electronic invoicing systems have expanded, or are in the process of expanding their mandates to require taxpayers to inform the tax authority, before goods are moved as result of a sale or any other internal distribution.
For instance, Peru requires the Guias de Remision from taxpayers before they start the delivery of their products. This electronic document should be informed to and authorized by the tax administration (SUNAT) using the digital format established for that purpose and will include all the information about the product delivered, issuer, recipient, means of transport, dates and more.
Uruguay has the ‘e-Remitos’ which is an electronic document authorized by the tax administration (DGI). It is required for any physical movement of goods in Uruguay. As in other countries, this document will provide all the information about the goods being transported, the means used, the issuer, the recipient and additional data. It is electronically delivered and authorized by the tax administration using the XML schemas established for that purpose.
Lastly, in Ecuador the tax administration (SRI) requires the ‘Guias de Remision’ (Delivery Guide) for any goods to be transported legally inside the country. As the infrastructure to support the electronic invoice is not fully developed in Ecuador, in some cases the tax administration allows the taxpayer to comply with this part of the mandate by having the electronic invoice issued by the retailer delivering the goods to his clients. Even though Colombia and Costa Rica do not require a separate electronic document to authorize the transport of goods, it is expected that in the future, this requirement will come into effect, mirroring what has happened in many other countries of the region.
The common element of all these mandates in Latin America, is that all of them are closely knitted to the electronic invoicing system imposed in each country. They are basically seen as another module of the electronic invoice system where information regarding goods being transported by public roads, waterways, by rail or air should be submitted to the tax administration, via the XML schemas established for that purpose.
Tax administrations in the region are actively enhancing their systems to ensure that movements of goods are properly controlled in real time. In some cases, tax administrations have provided online solutions aimed at taxpayers with small numbers of deliveries. But for all other taxpayers, a self-deployed solution is required.
Enforcement of the mandate is made not only by the tax administration, but also by the police and the public roads authorities, both of which routinely seize goods for non- compliance. Since these mandates have proven to be successful to control tax avoidance and smuggling, it’s safe to say that the Remitos, Dispatch Guides, Carta Porte or COTs are here to stay for good and taxpayers doing business in Latin America have no option but to comply with this new regulatory requirement.
More than 170 countries throughout the world have implemented a VAT system, and some of the most recent adopters are the Gulf countries. In a bid to diversify economic resources, the Gulf countries have spent the past decade investigating other ways to finance its public services.
As a result, in 2016 the GCC (Gulf Cooperation Council), consisting of Saudi Arabia, UAE, Bahrain, Kuwait, Qatar and Oman, signed the Common VAT Agreement to introduce a VAT system at a rate of 5%.
The first step: VAT adoption across the GCC
Following the VAT agreement, Saudi Arabia and UAE implemented VAT in 2018. Bahrain followed with a VAT regime in 2019. Most recently Oman enforced a 5% VAT from April 2021, and looking ahead both Qatar and Kuwait are expected to enact VAT laws within the next year.
The second step: VAT digitization
After the implementation of VAT and the increase of VAT rate from 5% to 15%, Saudi Arabia has taken the next step to digitize the control mechanisms for VAT compliance.
The E-invoicing Regulation enacted in December 2020 sets out an obligation for all resident taxable persons to generate and store invoices electronically. This requirement will be enforced from 4 December 2021.
Saudi Arabia has made considerable progress since it first introduced VAT in 2018. The Saudi E-invoicing Regulation is expected to not only encourage digitization and automation for businesses, but also to achieve efficiency in VAT controls and better macro-economic data for its tax authority, a development which will likely be replicated by other GCC countries soon.
Considering the efforts involved in the digitization of government processes and the VAT implementation timeline, the next candidate for similar e-invoicing adoption would likely be the UAE. While there are currently no plans for a mandatory framework, the UAE has announced bold plans for general digitization. According to the UAE government website, “In 2021, Dubai Smart government will go completely paper-free, eliminating more than 1 billion pieces of paper used for government transactions every year, saving time, resources and the environment.”
The spread of VAT digitization is typically the second reform following VAT adoption. As Bahrain and Oman also have VAT systems in place, introduction of mandatory e-invoicing in the next a few years in these countries would not come as a surprise. The adoption of e-invoicing in Qatar and Kuwait would depend on the success of VAT implementation, therefore it is not easy to estimate when their VAT digitization journey will begin but there is no doubt that it will happen at some stage.
The next step for VAT adoption across the GCC
After the adoption of e-invoicing, the Gulf countries may continue to digitize other VAT processes, including VAT returns. Pre-population of VAT returns using the data collected through e-invoicing systems is another trend that the countries are moving towards.
Regardless of the shape and form of digitization, there will be many moving parts in terms of VAT and its execution. Businesses operating in the region should be prepared to invest in their VAT compliance processes to avoid unnecessary fines and reputational risk for non-compliance.
A current mega-trend in VAT is continuous transaction controls (CTCs), whereby tax administrations increasingly request business transaction data in real-time, often pre-authorising data before a business can progress to the next step in the sales or purchase workflow.
When a tax authority introduces CTCs, companies tend to view this as an additional set of requirements to be implemented inside ERP or transaction automation software by IT experts. This kneejerk reaction is understandable as implementation timelines tend to be short and potential sanctions for non-compliance significant.
But businesses would do better to approach these changes as part of an ongoing journey to avoid inefficiencies and other risks. From a tax authority perspective, CTCs are not a standalone exercise but part of a wider digital transformation strategy where all data that can be legally accessed for audit purposes is transmitted to them electronically.
It’s all about the data
In many tax authorities’ vision of digitization, each category of data is received at ‘organic’ intervals that follow the natural cadence of data processing by the businesses and data needs of governments.
Tax administrations use digitization to access data more conveniently, on a more granular level, and more frequently.
A business that doesn’t consider this continuum from the old world of reporting and audit to the new world of automated data exchange risks over-focusing on the ‘how’ – the orchestration of messages to and from a CTC platform – rather than keeping a close eye on the ‘why’ – transparency of business operations.
Data received quicker and in a structured, machine-exploitable format is infinitely more valuable for tax administrations as it gives them an opportunity to perform deeper analysis of both varying taxpayer and third-party sources of data.
If your business data is incomplete or faulty, you are likely exposing yourself to increased audits, as your bad data is under scrutiny and more transparent to the taxman.
Put differently, in a digitized world of tax, garbage-in will translate to garbage-out.
How to prepare for CTCS – automation is key
Many companies already have the magic formula to fix these data issues at their fingertips. Start by preparing for this wave of VAT digitization with a project to analyse internal data issues and work with upstream internal and external stakeholders – including suppliers – to fix them.
Tools designed to introduce automated controls for VAT filing processes can help achieve better insight into the upstream data issues that need ironing out. These same tools can also help you through the CTC journey by re-using data extraction and integration methods set up for VAT reporting for CTC transmission, thereby creating better data governance and keeping a connection between these two naturally linked processes.
A lot of bad data stems from residual paper-based processes such as paper or PDF supplier invoices or customer purchase orders. Taking measures now to switch to automated processes based on structured, fully machine-readable alternatives will make a big difference.
Improving invoice data is not the only challenge. With the inevitable broadening of document types to be submitted under CTC rules (from invoice to buy-side approval messages, to transport documents and payment status data) tax administrations will cross-check more and more of your data, as well as trading partners’ and third parties’ data — think financial institutions, customs, and other available data points.
Tax administrations are unlikely to stop their digitization efforts at indirect tax. Mandates to introduce The Standard Audit File for Tax (SAF-T ) and similar e-accounting requirements show how quickly countries are moving away from the old world of tax and onsite audits.
All this data, from multiple sources with strong authentication, will paint an increasingly detailed and undeniable picture of your business operations. It is just a matter of time before corporate income tax returns will be pre-filled by tax administrations who expect little to no legitimate changes from your side.
‘Substance over form’ is a popular aphorism in the world of tax. As more business applications and data streams become readily accessible by tax administrations, you need to start considering data quality and consistency as a first step towards thriving in the world of digitized tax enforcement.
Aim for more, not less, insight into your business than the taxman
In the end, tax administrations want to understand your business. They don’t just want data, they want meaningful information on what you do, why you do it, how you trade, with whom and when. This is also exactly what your owners and management want.
So the ultimate goals are the same between businesses and tax administrations – it’s just that businesses will often prioritise operational efficiency and financial objectives whereas tax administrations focus on getting the best, most objective information possible.
Tax administrations introducing CTCs as an objective may be a blessing in disguise, and there are benefits of introducing better analytics to your business to comply with tax administration requirements.
The real value lies in real-time insight into business operations and financial indicators such as cash management or supply chain weaknesses. This level of instant insight into your own business also enables you to always be one step ahead, leaving you in control of the picture your data is providing to governments.
CTCs are the natural next step on a journey to a brave new world of business transparency.
The introduction of the new Portuguese Stamp Duty system has arguably been one of the most extensive changes within IPT reporting in 2021 even though the latest reporting system wasn’t accompanied by any changes to the tax rate structure.
The new reporting requirements were initially scheduled to start with January 2020 returns. However this was postponed until April 2020 and once again until January 2021 due to the COVID-19 pandemic.
How does this affect reporting?
In addition to the information currently requested, mandatory information required for successful submission of the returns now includes:
Territoriality: The precise location the risk has been issued from (i.e., within or outside Portugal)</
Insured Name (Tax ID): The policyholder’s tax ID</
Insured Country Code: The policyholder’s country code to which the tax ID resides
Location of the risk insured in Portugal: The postcode to which the contract relates to, due to the requirement by the Portuguese authorities to file Stamp Duty on a provincial level, or at least whether the risk is located in Mainland Portugal, Azores, or Madeira.
Lessons learned and how Sovos helps you adapt
Our reporting systems have evolved to help customers meet these new requirements.
For example, our technical department have built a formula that confirms a valid ID to ease data validation and reporting. Consequently, a sense check was built within our systems to determine whether an ID is valid.
With the recent change in the treatment of negative Stamp Duty lines, we’ve also changed our calculations to account for two contrasting methods of treating negatives within our systems.
Previously, both the Portuguese Stamp Duty and parafiscal authorities held identical requirements for the submission of negative lines. However, the introduction of the more complex Stamp Duty reporting system called for amendments to the initial declaration of the policy.
Understandably, this new requirement is a more judicious approach towards tax reporting and will likely be introduced within more tax systems in the future.
Looking ahead
As with any new reporting system, changes within your monthly procedures are necessary. Our IPT compliance processes and software are updated as and when regulatory changes occur providing peace of mind for our customers.
And with each new reporting system, we learn more and more about how tax authorities around the world are trying to enter the digital age with more streamlined practices, knowledge and insight to increase efficiency and close the tax gap.
Take Action
Contact our experts for help with your Portugal Stamp Duty reporting requirements.
Update: 23 March 2023 by Dilara İnal
Japan’s Qualified Invoice System Roll-out Approaches
Japan is moving closer to the roll-out of its Qualified Invoice System (QIS), which will happen in October 2023.
Under QIS rules, taxpayers will only be eligible for input tax credit after being issued a qualified invoice. However, exceptions exist where taxpayers do not require a qualified invoice to take input credit.
The new system does not entail mandatory e-invoice issuance, though QIS introduces the following requirements for invoices:
The invoice must include the Qualified Invoice Issuer Number (QIIN) of the issuer
The invoice must include a breakdown of applicable tax rates for that given transaction, as well as the consumption tax amount
While only taxpayers can register and obtain a QIIN, a supplier exempt from Japanese Consumption Tax (JCT) can register under the QIS – provided that it voluntarily applied to become a taxpayer.
In line with the implementation of the new invoicing system, the Japanese government’s 2023 Tax Reform introduces new measures for the QIS transition. It is implementing efforts to reduce the tax liability amount for three years.
The measures will also lessen the administrative burden on businesses below a specific size for six years. The government will allow companies to take an input tax deduction for book purposes, but only for small-amount transactions.
Japan is in the middle of a multi-year process of updating its consumption tax system. This started with the introduction of its multiple tax rate system on 1 October 2019 and the next step is expected to be the implementation of the so-called Qualified Invoice System as a tax control measure on 1 October 2023.
Through this significant change, the Japanese government is attempting to solve a tax leakage problem that has existed for many years.
The cascade effect of multiple tax rates
The Japanese indirect tax is referred to as Japanese Consumption Tax (JCT) and is levied on the supply of goods and services in Japan. The consumption tax rate increased from 8% to 10% on 1 October 2019. At the same time, Japan introduced multiple rates, with a reduced tax rate of 8% applied to certain transactions.
Currently, Japan doesn’t follow the common practice of including the applicable tax rate in the invoice to calculate consumption tax. Instead, the current system (called the ledger system) is based on transaction evidence and the company’s accounting books. The government believes this system causes systemic problems related to tax leakage.
A new system – the Qualified Invoice System – will be introduced from 1 October 2023 to counter this. The key difference when compared to an invoice issued today is that a qualified invoice must include a breakdown of applicable tax rates for that given transaction.
Under the new system, only registered JCT payers can issue qualified tax invoices, and on the buyer side of the transaction, taxpayers will only be eligible for input tax credit where a qualified invoice has been issued. In other words, the Qualified Invoice System will require both parties to adapt their invoicing templates and processes to specify new information as well as the need to register with the relevant tax authorities.
Preparing for the Qualified Invoice System in Japan
A transitional period for the implementation of the new e-invoicing system applies from 1 October 1 2019 until 1 October 2023.
In order to issue qualified invoices, JCT taxpayers must register with Japan’s National Tax Agency (“NTA”). It will be possible to apply for registration from 1 October 1 2021 at the earliest, and this application must be filed no later than 31 March 2023, which is six months in advance of the implementation date of the e-invoicing system. Non-registered taxpayers will not be able to issue qualified invoices.
The registered JCT payers may issue electronic invoices instead of paper-based invoices provided that certain conditions are met.
What’s next?
The introduction of the Qualified Invoice System will affect both Japanese and foreign companies that engage in JCT taxable transactions in Japan. To ensure proper tax calculations and input tax credit, taxpayers must make sure they understand the requirements, and update or adjust their accounting and bookkeeping systems to comply with the new requirements in advance of the implementation of the Qualified Invoice System in 2023.
Take Action
Get in touch with our experts who can help you prepare for the Japanese Qualified Invoice System.
Turkey’s e-transformation journey, which started in 2010, became more systematic in 2012. This process first launched with the introduction of e-ledgers on 1 Jan 2012 and has since reached a much wider scope for e-documents.
The Turkish Revenue Administration (TRA), the leader of the e-transformation process, has played an important role in encouraging companies to embrace the digitalization of tax and created a successful model for following tax-related procedures.
The process was further accelerated with new requirements for e-documents.
Latest developments and expectations in Turkey’s e-transformation
The TRA continues to widen the scope of e-documents and the types of e-documents in use are:
Expense E-Note: This application helps you create electronic expense notes in accordance with TRA standards, retain electronic and hard copies of these notes, submit them to relevant parties and prepare reports.</
E-Bank Receipt: With this application, you can create electronic bank receipts in accordance with TRA standards, keep copies of receipts or submit these copies to relevant parties and prepare reports.
E-Foreign Exchange Receipt: This allows you to convert forex trading documents into electronic documents via relevant institutions and banks.</
E-Insurance Commission Expense Letter: This is an expense note which is created by insurance brokers in an electronic format according to the legislation.
E-Insurance Policy: This document is the electronic version of insurance policies issued by insurance, pension and reinsurance brokers.
E-Tab: This document shows the list of orders placed by customers in restaurants and cafés.
The digitization journey of e-documents
Many taxpayers have voluntarily adopted the new system since the TRA launched this whole process and TRA’s latest updates for e-documents are critically important to monitor for tax-related procedures.
As e-documents become more popular, any income loss arising from tax procedures will reduce. E-documents offer additional advantages for public institutions and private businesses, such as saving time, minimising costs and improving productivity. It’s certain that the scope of e-documents in Turkey will keep expanding in the future, which will affect taxpayers and tax procedures.
Take Action
Get in touch to find out how Sovos tax compliance software can help you meet your e-transformation and e-document requirements in Turkey.
In this blog, we provide an insight into continuous transaction controls (CTCs) and the terminology often associated with them.
With growing VAT gaps the world over, more tax authorities are introducing increasingly stringent controls. Their aim is to increase efficiency, prevent fraud and increase revenue.
One of the ways governments can gain greater insight into a company’s transactions is by introducing CTCs. These mandates require companies to send their invoice data to the tax authority in real-time or near-real-time. One popular CTC method requires an invoice to be cleared before it can be issued or paid. In this way, the tax authority has not only visibility but actually asserts a degree of operational control over business transactions.
What is VAT?
The basic principle of VAT (value-added tax) is that the government gets a percentage of the value added at each step of an economic chain. The chain ends with the consumption of the goods or services by an individual. VAT is paid by all parties in the chain including the end customer. However only businesses can deduct their input tax.
Many governments use invoices as primary evidence in determining “indirect” taxes owed to them by companies. VAT is by far the most significant indirect tax for nearly all the world’s trading nations. Many countries with VAT see the tax contribute more than 30% of all public revenue.
What is the VAT gap?
The VAT gap is the overall difference between expected VAT revenues and the amount actually collected.
In Europe, the VAT gap amounts to approximately €140 billion every year according to the latest report from the European Commission. This amount represents a loss of 11% of the expected VAT revenue in the block. Globally we estimate VAT due but not collected by governments because of errors and fraud could be as high as half a trillion EUR. This is similar to the GDP of countries like Norway, Austria or Nigeria. The VAT gap represents some 15-30% of VAT due worldwide.
What are Continuous Transaction Controls?
Continuous transaction controls is an approach to tax enforcement. It’s based on the electronic submission of transactional data from a taxpayer’s systems to a platform designated by the tax administration, that takes place just before/during or just after the actual exchange of such data between the parties to the underlying transaction.
A popular CTC is often referred to as the ‘clearance model’ because the invoice data is effectively cleared by the tax administration and in near or real-time. In addition, CTCs can be a strong tool for obtaining unprecedented amounts of economic data that can be used to inform fiscal and monetary policy.
Where did CTCs begin?
The first steps toward this radically different means of enforcement began in Latin American within years of the early 2000s. Other emerging economies such as Turkey followed suit a decade later. Many countries in LatAm now have stable CTC systems. These require a huge amount of data for VAT enforcement from invoices. Other key data – such as payment status or transport documents – may also be harvested and pre-approved directly at the time of the transaction.
What is e-invoicing
Electronic or e-invoicing is the sending, receipt and storage of invoices in electronic format without the use of paper invoices for tax compliance or evidence purposes. Scanning incoming invoices or exchanging e-invoice messages in parallel to paper-based invoices is not electronic invoicing from a legal perspective. E-invoicing is often required as part of a CTC mandate, but this doesn’t have to be the case; in India, for example, the invoice must be cleared by the tax administration, but it’s not mandatory to subsequently exchange the invoice in a digital format.
The objective of CTCs and e-invoicing mandates is often to use business data that is controlled at the source, during the actual transactions, to prefill or replace VAT returns. This means that businesses must maintain a holistic understanding of the evolution of CTCs and their use by tax administrations for their technology and organisational planning.
What’s on the horizon?
As more governments realise the revenue and economic statistics benefits that introducing these tighter controls bring, we’re seeing more mandates on the horizon. We expect the rise of indirect tax regimes based on CTCs to accelerate sharply in the coming five to 10 years. Our expectation is that most countries that currently have VAT, GST or similar indirect taxes will have adopted such controls fully, or partially, by 2030.
Looking ahead, as of today we know that in Europe within the next few years that France, Bulgaria and also Poland will all introduce CTCs. Saudi Arabia has also recently published rules for e-invoicing and many others will follow suit.
Upcoming mandates present an opportunity for a company’s digital transformation rather than a challenge. If viewed with the right mindset. But, as with all change, preparation is key. Global companies should allow enough time and resources to strategically plan for upcoming CTC and other VAT digitization requirements. A global VAT compliance solution will suit their needs both today and into the future as the wave of mandates gains momentum across the globe.
Since 1993, supplies performed between Italy and San Marino have been accompanied by a set of customs obligations. These include the submission of paperwork to both countries’ tax authorities.
Italy and the enclaved country of San Marino will abandon paper-based customs flows.
The Italian and Sammarinese tax authorities have decided to implement a “four-corner” model, whereby the Italian clearance platform SDI will become the access point for Italian taxpayers, while a newly created HUB-SM will be the SDI counterpart for Sammarinese taxpayers.
Cross-border e-invoices between the countries will be exchanged between SDI and HUB-SM. The international exchange system will be enforced on 1 July 2022, and a transition period will be in place between 1 October 2021 and 30 June 2022.
FatturaPA: The format of choice
HUB-SM’s technical specifications are now available for imports from Italy to San Marino, and exports from San Marino to Italy. The countries have also decided to choose FatturaPA as the e-invoice format, although content requirements for export invoices from San Marino will slightly differ from domestic Italian FatturaPA e-invoices.
The SDI and HUB-SM systems will process e-invoices to and from taxpayers connected to them, or under each country’s jurisdictions.
In other words, Italian taxpayers will send and receive cross-border invoices to or from San Marino via the SDI platform, while Sammarinese taxpayers will perform the same activities via HUB-SM.
Both platforms will deliver invoices to the corresponding taxpayers through the Destination Codes assigned by the respective tax authorities. This means HUB-SM will also assign Destination Codes for Sammarinese companies.
Integration documents for Sammarinese companies
Inspired by the Italian methodology for fiscal controls in cross-border transactions, San Marino will require Sammarinese buyers to fill out an additional integration document (similar to a “self-billing” invoice created for tax evidence reasons) upon receipt of the FatturaPA. This document will be filled out in a new XML-RSM format created by the enclave and sent to HUB-SM.
After the larger rollout of the SDI for B2B transactions in 2019, the platform has proven capable of adapting to new workflows and functionalities.
SDI has already debuted in the international arena through the acceptance of the e-invoices following the European Norm, which are mapped into a FatturaPA before being delivered to Italian buyers. This integration between SDI and HUB-SM might also reveal the early steps of interoperability between both tax authorities’ platforms for cross-border trade.
Take Action
Get in touch with our experts who can help you understand how SDI and HUB-SM will work together.
Starting in 2023, French VAT rules will require businesses to issue invoices electronically for domestic transactions with taxable persons and to obtain ‘clearance’ on most invoices before their issue. Other transactions, such as cross-border and B2C, will be reported to the tax authority in the “normal” way.
This will be a major undertaking for affected companies and although the changes are more than a year away, planning should start now. But what does planning mean in the context of a continuous transaction control (CTC) rollout? What have businesses on the cusp of such a transformation learnt when faced with the same challenge in countries such as Italy, India, Mexico and Spain? And how can businesses leverage those best practices for future CTC rollouts?
We share the points businesses should consider when planning for any CTC rollout, which can be used as a checklist for the France 2023 mandate to help you prepare.
Understand the new changes, and be aware of what’s ahead
Is your organisation aware of, and do the relevant functional teams understand, the material changes proposed by the government?
Do your teams understand what specifically is changing and do they have a reliable source of information to use as guidance?
In a situation as dynamic as a CTC rollout, do your teams have the means to monitor new developments and analyse future changes?
Is there a process in place in your organisation for implementing new changes once they’ve been introduced in law?
Understand how your business and operations are affected
Which of your business transactions are in scope? When do they need to be compliant?
How are your intercompany invoices processed today? It’s not uncommon for businesses to overlook compliance requirements for their intercompany invoice flows, but in a clearance system these invoices are almost always in scope.
How will invoices be sent to the French tax authority under the new system? Can you manage this internally or is a third party involved?
What information in addition to the invoice information must be sent?
Where an invoice is not required today e.g. B2C sales, what information must be sent?
How should these invoices be archived? Are there any specific legal or technical requirements for such storage?
Design or evaluate potential solutions
Is the CTC reform best solved through an internally developed solution?
If yes, talk to IT as soon as possible so they can start planning and allocate both the necessary time and budget for the project.
If no, who are the service providers that could help?
If external providers are used, how will the data go from your source systems to them and ultimately to the tax authority?
Which of your source systems contain the required data? Is it one or multiple?
Does the external provider have a ‘ready to go’ extractor for your ERP system/source system? Or, if your organisation relies on an API first strategy, which source systems will you use to send the data on to your provider or the tax authority?
Execute the solution
How much notice does your IT department need for such a project? Resources from IT will be required, regardless of whether it will be an external or internal project.
How much will development and implementation cost? Budget will need to be secured regardless of how you plan on implementing your solution of choice, internal or external.
When does the cost need to be submitted for budget approval?
When do you need to kick off the project? Once the planning is completed and the time required is known (including testing and training) you can work backwards to achieve a start date. This date should be confirmed with IT as soon as possible.
Once you’ve answered the questions above, you’ll be in a good position to both plan the roadmap to ensure compliant processes in time for the entry into force, as well as to estimate the cost and secure the needed funding for the project.
Treatment of fire charges is tricky in almost all jurisdictions. Fire coverage can vary from as high as 100% to 20%.
No-one would dispute that the most complex fire charge treatment is in Spain. In Portugal, whilst the rules are less complex, they have a unique reporting system for how the policies covering fire must be reported.
How Portuguese Fire Brigade Tax reporting is unique
The Portuguese Fire Brigade Tax (FBT), otherwise known as National Authority for Civil Protection Fire Brigade Charge or ANPC (Autoridade Nacional de Proteção Civil), is due on certain policies covering fire risks. Such policies can be mapped as Class 3-13.
The tax rate is 13%, but usually the fire coverage is set at 30%, so the applied rate is only 3.9%. As per market practice, if the fire proportion is not separately identified in the policy, then 30% fire proportion is assumed. ANPC is settled to the ASF (Autoridade de Supervisão de Seguros e Fundos de Pensões), the body that administrates parafiscal taxes in Portugal, on a monthly basis together with the other parafiscal taxes such as INEM (medical emergencies). There is currently no speciality in the regulation.
The unique feature of the Portuguese fire tax is the five yearly reporting requirement. This five yearly report was last due in 2016 and will be due again in 2021. The report requires insurers to prepare a summary which lists total ANPC or Fire taxes paid in respect of the year when it’s due. So although the report itself is due every five years, the reportable policies are limited only to the policies subject to ANPC in that reporting year.
Another unique feature of this reporting is that although all insurers are subject to settle ANPC liabilities monthly, not all insurers are necessarily obliged to submit this report. ASF informs the insurance companies who are required to submit this report.
How to report Portugal’s Fire Brigade Tax
Reporting is biannual. In 2016 the first semester data (01-01-2016 to 30-06-2016) was due to be reported by 31 August 2016 and the second semester data (01-07-2016 to 31-12-2016) was due by 28 February 2017.
In 2016, when this report was last due, ASF issued an official circular about the reporting requirements. A template has been published to provide help for insurance companies to fulfil their obligations.
In 2016 the report requested a total of the ANPC charges per county and per district. That included more than 300 districts. As yet, we’ve not seen a circular about the requirements for 2021, so we’re in contact with ASF to find out if the report is still due and if yes, the requirements and when the notifications will be sent to the insurance companies.
We hope the complexity of this reporting hasn’t been further increased by the ASF. This unique reporting is time consuming for insurance companies and looking at the global trends in reporting requirements we expect the FBT report will still be due this year.
