OECD BEPS and VAT
The Organisation for Economic Cooperation and Development (OECD) has recently issued its final recommendations for the reform of the global business tax regime. This project, known as Base Erosion Profit Shifting (BEPS), was launched two years ago by countries of the G20 to help harmonize the tax treatment of global trade and bring governmental tax policies and treaties into line with the realities of global trade.
Most of the 15 Actions Points contained within BEPS focused on the reform of corporate income tax. But a number will touch on VAT. Below is a summary of the key areas were the proposed BEPS project will crossover into VAT.
BEPS Action Point 1: Tax challenges in the digital economy
The explosive emergence of the digital economy has made it very easy for companies to sell digitally delivered goods and services in foreign countries where they have no presence. Foreign companies may therefore gain a commercial advantage over domestic companies if they are not charged VAT at the time of sale.
BEPS 1 therefore recommends that all consumption of such services is liable to VAT in the country of consumption – the destination principle. For the B2C supply of digital services (apps, software, games, vides, music, e-books etc.), the may require foreign companies to VAT register in the country of the consumer so that they can charge local VAT and remit it to the tax authorities. This is aligned to the EU VAT MOSS reforms this year, and other countries’ treatment, including South Africa, South Korea and Norway. Countries such as Japan, Australia and New Zealand have similar plans in the near future.
For B2B digital services, especially software, this would require the customer accounting for the VAT due under the reverse charge rules.
BEPS Action Point 7: Artificial avoidance of PE status
Many multinationals have been able to tax advantage of the current model tax convention which allows them to hold and sell stocks of their goods in a country without triggering a Permanent Establishment (PE) and therefore a liability to corporate income tax. Such mechanisms include the use of commissionaire and dependent agent structures and the use of rented warehousing.
BEPS 7 therefore recommends tougher rules on permanent establishment criteria, which will require more foreign companies to form local companies. This may create a clash with the VAT equivalent, the Fixed Establishment, and the obligation to VAT register. This will create accounting and tax challenges for companies selling across borders where there are differences – transactions may be subject to local income tax but outside the scope for VAT rules. This will be especially the case outside of the European Union where the differences between PE and FE are narrow.
BEPS Action Point 8: Transfer pricing and intangibles
A number of multinationals are seen to have taken advantage of the inter-group cross-border transactions of their own intellectual property, brand fees etc (intangibles) to artificially shift profits to low-tax jurisdictions.
The OECD is concerned with the definitions and valuations of such transactions. This will have an impact on the VAT transaction valuations too. In addition, and partially or fully exempt businesses will face issues around the deductibility and recovery of any input and output VAT, respectively.
BEPS Action Point 10: Country-by-country reporting
The members of the OECD believe that multinationals are able to present opaque tax reporting because there is a lack of disclosure of taxable profits declared in different countries where they are trading.
The OECD has recommended the implementation of country-by-country reporting by companies to the tax authorities – although this information will not be made public. Whilst this currently is focused on corporate income tax, it may be extended to VAT reporting. EU tax authorities in particular are action to more clearly understand foreign VAT activities and reporting in order to help eliminate VAT fraud.