VAT Fundamentals for U.S. Companies Buying or Selling in...

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VAT Fundamentals for U.S. Companies

Buying or Selling in the European Union

THURSDAY, JULY 6, 2017, 1:00-2:50 pm Eastern

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July 6, 2017

VAT Fundamentals

Britta Eriksson, President and CEO

Euro VAT Refund, Culver City, Calif.

[email protected]

Brian Groome, Senior Manager

KPMG, Chicago

[email protected]



Value Added Tax (VAT) Fundamentals for U.S. Companies Buying or Selling in the European Union Brian Groome, KPMG

Britta Eriksson, Euro VAT Refund, Inc.

July 6, 2017

5 © 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International

Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Notice The following information is not intended to be “written advice concerning one or

more Federal tax matters” subject to the requirements of section 10.37(a)(2) of

Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities

that are subject to change. Applicability of the information to specific situations

should be determined through consultation with your tax adviser.



Agenda

I. Basics of the European VAT tax base

II. VAT compliance issues and Reclaim of VAT for U.S. taxpayers

III. Latest regulatory and ratemaking developments with VAT

I. Basics of the European VAT Base

Brief introduction to VAT globally



VAT around the world – Timeline

Source: OECD,

Consumption Tax

Trends 2016;

WNT Research

9

Countries

19

Countries

24

Countries 32

Countries

44

Countries 89

Countries

119

Countries 137

Countries

153

Countries 164

Countries

166

Countries

1969 1974 1979 1984 1989 1994 1999 2004 2009

2014 2015+



The growing importance of VAT

Value-Added Tax (VAT) and Goods and Services Tax (GST) are

concerns for companies doing business internationally

— Currently, over 165 countries have a VAT regime

— The average VAT rate in the EU is 21.5 percent and averages 19

percent among OECD countries, with rates continuing on an upward

trend – U.S. is the only OECD country without VAT

― Many governments are shifting focus from taxing income to taxing

consumption

― Many governments use VAT as first tool in fiscal policy

— Reduce to stimulate consumption

— Increase to reduce deficits

— Given VAT is becoming a more significant source of revenue for

jurisdictions, there is a greater focus on enforcing compliance and

combating fraud

— Tax authorities are being more aggressive in how they treat VAT

errors/shortfalls – VAT should not be considered a “wash”

How VAT Works



What is VAT in a Nutshell?

The concept of VAT is similar in most countries – but the application of VAT can be very

different between countries

General Tax

VAT is aimed at taxing sales of goods, services, and intangible property

Consumption Tax

VAT is not a tax on profits

VAT is ultimately borne by the final consumer

Fractionally Collected

VAT is collected at each stage of the supply chain

Neutral for Businesses

VAT paid on purchases can be offset against VAT collected on sales

Relief for exports and certain domestic supplies



Basic Operation of a VAT

10.00 $10.00

20.00

(10.00) $10.00

30.00

(20.00) $10.00

Supplier (raw materials) $100 + $10

Factory [buys 100 + 10] $200 + $20

Wholesaler [buys 200 + 20] $300 + $30

Retailer [buys 300 + 30] $500 + $50 50.00

(30.00) $20.00

VAT rate = 10% Sells VAT return Govt. gets

$50

Total: $50.00



Retail Sales Tax Example

Supplier

Factory

Wholesaler

Retailer

Sale – material

$100

Sale – product

$200

Sale – product

$300

Government

Income $50

Individual Sale – product

$500 + $50 Tax

$50 remitted



VAT Example

Supplier

Factory

Wholesaler

Retailer

Sale – material

$100 + $10 VAT

Sale – product

$200 + $20 VAT

Sale – product

$300 + $30 VAT

Government

Income $50

$10 remitted

$10 remitted

($20 VAT – $10 credit)

$10 remitted


Individual Sale – product

$500 + $50 VAT

$20 remitted




VAT Terminology

Note the focus on movement on goods/services, rather than movement of money

• VAT charged by businesses on sales made to their customers

• “Output” meant to reflect outgoing sales Output Tax

• VAT spent by businesses on qualifying business expenditures

• “Input” meant to reflect incoming purchasing Input Tax

• VAT terminology for a “sale”

• Goods: tangibles; Services: intangibles Supply

• Payment received in return for the supply of goods or provision of services

• According to the EU, “everything received in return for the supply of goods and services, …”

Consideration

• Situation in which seller of services (usually foreign) is not liable for VAT, and instead buyer is required to account for VAT; commonly applied on intra-EU transactions

Reverse

Charge

Mechanism



Reverse Charge Mechanism – Example

UK Service Provider

DE Client

Sale - $100 + 0 VAT

VAT Return

VAT return $0 – VAT on sales $$ - due on purchases

$20 – VAT on sales $10 – VAT output R/C -$10 – VAT input R/C------------ $20 – payable to Govt

Consumer

Sale - $200 + $20 VAT

$20 – Sales Tax if applicable$10 – Use Tax self-accrual

-------$30 – payable to Gov’t

S/U tax comparison



VAT Rates

• EU VAT rates range from 17% to 27%. Average EU VAT rate is above 21.5%—somewhat less in ASPAC and LATAM

Standard

• Any rate lower than the standard rate

• E.g., basic food stuff, books—usually political decision Reduced

• No VAT is charged, but seller has a right to credit input tax

• E.g., exported goods and services

• Aka “Exempt with credit”

Zero-rated

• No VAT is charged, but the seller has NO right to credit input tax

• E.g., certain financial, medical and education services

• Aka “Exempt without credit”

Exempt

• Not within the scope of VAT in the jurisdiction concerned

• E.g., charities and non-business Outside Scope



Zero-Rated Transactions - Example

Wholesaler

Retailer

Consumer

Manufacturer

Sale - $200 + 20 VAT

Export Sale - $250 + 0 VAT

VAT Return

VAT return

$20 – VAT on sales- $10 – VAT on purchases------------ $10 – payable to Govt

$0 – VAT on sales- $20 – VAT on purchases------------ $20 – refund from Govt

Govt revenue

$10

$10

($20)----------------

$0

VAT return $10 – VAT on sales------------ $10 – payable to Govt

Sale - $100 + 10 VAT



Exempt Transactions - Example

Wholesaler/Importer

Retailer

Consumer

Manufacturer

Sale - $200 + 20 VAT

Exempt Sale - $250 + 0 VAT

No Return

VAT return

$20 – VAT on sales- $10 – Purchase VAT------------ $10 – payable to Govt

$0 – VAT on sales (exempt)- $0 – Purchase VAT (not recoverable)------------ $0 – payable to Govt

Govt revenue

$10

$10

$0----------------

$20

Sale - $100 + 10 VAT

Specific EU VAT rules



EU VAT law

Each EU Member State has its own VAT legislation, applied under local law by each tax authority /

judiciary

This in turn is governed by the Principal VAT Directive 2006/112/EC – all 28 Member States are

bound by this although they interpret the Directive’s provisions slightly differently.

“Shall” provisions

“May” provisions



Scope of EU VAT For a supply to be subject to EU VAT there must be:

A supply of goods or services

By a taxable person (i.e. a business required to be registered for VAT)

In the course or furtherance of business

Supplied in return for payment

Supplied in the EU Member State



Time of supply/Tax points – basic rules

GOODS

Basic tax point (“BTP”) When ownership of goods transfers

Payment before BTP Date of payment

Invoice within specified

deadline

Date of invoice

SERVICES

Basic tax point (“BTP”) When the service is performed

Payment before BTP Date of payment

Invoice within specified

deadline

Date of invoice



Place of supply - Goods

Basic Rule

If the goods do not move “cross-border”, the place of

supply is where the goods are physically located

when ownership transfers

Where the goods do move cross-border, the rules

become more complex

Where there are chain transactions (i.e., where

goods are sold through a chain of multiple parties

and move through numerous countries) the VAT

treatment can be very complex.



Intra-EU Dispatches and Acquisitions Sale of goods dispatched to other EU member states

(dispatches)

Sale should normally be zero-rated (0%) if dispatched to a

VAT registered business (B2B) in another EU member

state

More complex (“distance sales” thresholds etc.) for B2C

Documentation

Relevant contracts, invoices and transportation documents

should be retained to prove the goods have moved to

another EU member state

EU B2B customer VAT numbers should be checked using

the VIES system

EU B2B customer VAT numbers should also be included

on invoices



Import/Export

Sale of goods shipped outside the EU (exports)

Sale should normally be zero-rated

Important to consider Incoterms and contractual

terms to determine whether the shipping is

connected with the sale

Purchase of goods from a non-EU member state

The goods will be subject to import VAT when

brought into the EU

Documentation

Relevant contracts, invoices, transportation

documents and official customs declarations should

be retained to prove the goods have left the EU



Place of supply - Services Place of supply depends on whether supplies are to a business customer or a non-business customer

Business customer (B2B supply)

Place of supply is where the customer is located or established.

Often the business customer must self-account on the “reverse charge” basis

Non-business customer (B2C supply)

Place of supply is where the supplier is located or established – with some important exceptions

ABC Inc XYZ Ltd

XYZ Ltd Joe in Denmark



Place of supply - Services

Exceptions

There are additional rules that override the basic position. Some examples include:

Land related supplies

Place of supply is where the land is physically located

Examples include:

Architects

Construction services

Surveyor

Supply and Installation services

Place of supply is where the installation services are carried out

Electronically Supplied Services / Broadcasting /

Telecommunications

Place of supply is where the customer is located, even if B2C

Global VAT Risk Management



Requirement for Effective VAT Risk Management VAT is a transaction tax

— Must be considered for every purchase (input VAT) and every sale (output VAT), and

even some movements of own goods between some countries and states

— Total amount of output and input VAT managed by a company represents the “VAT

through-put”

Not simply an “in and out” tax

— Not all VAT may be recoverable



VAT throughput Doing business in a country with a VAT regime means dealing with

VAT on sales, services, purchases/costs

VAT net payable may not be substantial in itself, but the total amount

of VAT tied up in your company

(VAT “throughput”) can be a big “asset”

— The amount of VAT managed within a company is generally between 20

percent and 30 percent of non-U.S. revenue

VAT flowing through a supply chain often has hidden implications on

financial costs and the scale of penalties when reporting errors are

made

— Based on findings from Six Sigma, most processes run at an error rate

of between 0.6 percent and 6.7 percent



VAT Throughput

(*) Total VAT represents 34 percent of company gross sales (including price adjustments) or 340 percent of Net income and usually

one the company’s largest cash flows

Example (fully taxable business)

In millions, USD:

Sales $5,000

Purchases (3,000)

Salaries (1,000)

Transfer price adjustments (500)

Net Income 500

Income Tax (30 percent) 150

Total Output VAT (rate 20 percent) 1,000

Total Input VAT (rate 20 percent) 600

VAT on TP adjustment 100

Total VAT flow through the business 1,700(*)



What Happens if You Get it Wrong?

Incorrect VAT management may result in

— Underpaid VAT liability

— Overpaid VAT liabilities or under-recovered VAT on purchases

— Budget plans inadequate to cover unexpected VAT costs

— Financial losses

- VAT becomes a real cost if irrecoverable or never refunded by tax authorities

— Penalties and interests

- Up to 200% of tax due if not mitigated

— Closer scrutiny by tax authorities

— Commercial relationship with customers can be affected if incorrect VAT is collected

from customers

— Incorrect VAT documentation can disrupt import/export or movements of goods process

— Adverse publicity and public reputational damage

II. VAT Compliance Issues and Reclaiming VAT for the U.S. Taxpayers

VAT Reclaim for US companies

VAT incurred on business expenses can often be

reclaimed by the US company

Can be incurred on purchase of goods and some services such as travel,

conferences, tradeshows, services and sometimes goods.

Refundable from Western EU countries mostly

VAT registration may be required

37

How VAT works

Most companies:

1. Collect VAT on all sales

2. Pay VAT on all purchase invoices

3. Declare the difference to the VAT authorities

4. Pay VAT on the value that is added

VAT is accounted for on a Balance Account,

and is not a cost to the company usually.

VAT is a cost to the private end customer.

38

VAT registration may be required

1. US company has to act as the importer of goods

2. Drop-shipment of goods for sale

3. Drop-shipment of goods not for sale

4. Major installation or maintence projects

5. E-commerce: goods

6. Digital sales (online services) to private persons

7. Organizing of conferences and events

39

VAT registration without other liabilities

The EU countries allow non-EU companies to

register for VAT only with no establishment requirements.

Many restrictions apply:

• Local offices

• Hired personnel

• And more

40

1 & 2: Import and drop-shipments within

the EU

Sample: Import to the EU through the UK

Commercial value of shipment $10,000

Duty 3% 300 (pay to UK customs)

Value for import VAT* $10,300

20% UK import VAT** 2,060 (pay to UK customs)

*some additional charges, such as freight is also added in

**VAT is in most cases refundable to the business that is the “importer of record” and also owns the goods. Business must be registered for VAT.

41

VAT on purchases of goods from the EU

Goods and services purchased within the same EU country: VAT is

always charged

Goods and services purchased from one EU country to another:

• B2B: No VAT, but need back up, and needs to be reported

• B2C: VAT is charged

42

Sales within an EU country, and to

private persons in the EU

VAT is almost always charged for sales of goods and services within

a EU country, and on sales to private persons in any EU country

Sample UK:

Net price goods or service £1,000

20% UK VAT* 200

Total price £1,200

*VAT is refundable to most businesses. Ends up as cost to the private

person

43

Sales B2B to other EU country

Sample B2B from the UK to Germany:

Net price goods or service £1,000

0% UK VAT* 0

Total price £1,000

*Proof of delivery required. Transaction must be reported in the VAT

returns

44

Export to non-EU country

Sample export from the UK to the US:

Net price goods £1,000

0% UK VAT* 0

Total price £1,000

*Proof of delivery required. Transaction must be reported in the VAT

returns

45

VAT declaration to the local country

VAT invoiced to UK customers £5,000

VAT invoiced to B2B other EU countries 0

VAT invoiced to non-EU countries 0

Less VAT paid on imports -2,060

Less VAT paid to UK vendors -1,000

Less VAT paid to EU vendors 0

Total VAT due to the tax authorities £1,940

46

4. Drop-shipments of products not for sale

Sample: US medical device company ships around products in the

EU for clinical research.

US company must register for VAT in the countries they ship to

All transfer of own goods between the EU countries must be reported

on the local VAT returns

47

5. E-commerce: sales of goods

a) Goods sold online: shipped from US warehouse

b) Goods sold online: shipped from EU warehouse

48

5a. E-commerce: sales of goods from

US warehouse

Registration for VAT in the EU is usually not required

The customer is the “importer of record”

Private customer must understand that duty and VAT will be added to

price

Logistics has to be set up correctly:

• Some freight forwarders can clear customs and send bill for duty/VAT to US

company

• Postal offices usually cannot: the customer ends up with the charge

49

5b. E-commerce: sales of goods from EU

warehouse (sample sales on EU websites)

Registration for VAT in the EU country of the warehousing is required

Prices have to be stated incl. VAT on the EU website

“Importer of record” has to be the US business

All imports and sales have to be reported to the local VAT authorities

Try to avoid shipping from different countries, as VAT registration in each

country is required.

VAT registration for “distance sales” may be required

50

6. VAT on digital services

B2B: Business to business

Generally no VAT should be charged B2B (subject

to systems and documentary evidence such as VAT

Number).

B2C: Business to consumer

Generally VAT should be charged to the private customer.

The North American company that sells services online to private

individuals in the EU must register for VAT in one EU country, and

charge 17-27% VAT to the EU private customers.

Registration is usually not required if selling

digital services through platforms where the platform has responsibility.

51

Summary of rules under

MOSS - Definitions

Definitions under MOSS

Telecommunications services shall mean services relating to the transmission, emission or reception of signals, words, images and sounds or information of any nature by wire, radio, optical or other electromagnetic systems, including the related transfer or assignment of the right to use capacity for such transmission, emission or reception, with the inclusion of the provision of access to global information networks.

Broadcasting services shall include services consisting of audio and audio-visual content, such as radio or television programmes which are provided to the general public via communications networks by and under the editorial responsibility of a media service provider, for simultaneous listening or viewing, on the basis of a programme schedule.

Electronically supplied services as referred in Directive 2006/112/EC shall include services which are delivered over the Internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of information technology.

52

Summary of rules under MOSS - Place

of Supply (Sales) Determination

Place of Supply Determination:

Which services? Evidence presumption

Supplied at a location (e.g. Wi-Fi hot spot,

internet cafe etc.) where the physical

presence of the customer is required

Location of the service

Supplied through a fixed line Place of installation of the fixed line

Supplied through mobile networks Mobile country code of the SIM card used

Supplied through a decoder or similar, or

viewing card

Where the decoder or similar is located, or

where the viewing card is sent

All other circumstances 2 items of non-contradictory evidence

53

Routines to be in place

Track if the order is from business or private person

Register for VAT in one EU country i.e. Ireland

Charge local VAT to private persons i.e. 20% to UK,

25% to Sweden, 19% to Germany

Declare the VAT to the Irish tax authorities

54

7. Organizing of conferences or events

in the EU

US company/organization that arranges conference/event with

attendee fees charged: VAT registration usually required

Charge VAT to the attendees, and declare to the tax authorities

VAT incurred from vendors can be deducted

Registration usually not required if no fees to the attendees

55

VAT registration and compliance

Research if VAT is refundable, and if VAT registration is required

Research country by country: can differ within the EU

Confirm no other liability/PE issue

Register for VAT

Follow detailed instructions

File VAT returns and other reports until de-registration

56

VAT reclaim for non-registered companies

Determine if the EU country does refund VAT to US companies

(Western EU countries usually do)

Confirm that VAT registration is not required

File an application to the local tax authorities. Include the original

invoices.

57

III. Latest Regulatory and Ratemaking Developments with VAT

Changing Landscape of VAT Compliance, e-Commerce, etc.



Modernization of VAT compliance — Increased use of D&A by tax authorities to conduct audits

— Increased real-time reporting requirements (e.g., Brazil, Spain)

— With the increased use of electronic bookkeeping in enterprise resource planning

(ERP) systems, several countries, including in the EU, have started requiring taxpayers

to provide their financial data in a specific format, such as the standard audit file of tax

(“SAF-T”) format

- The SAF-T format is based on discussions at the OECD to facilitate tax audits

- In practice, the tax authorities request the files and use special audit data and

analytics software to detect errors in the VAT reporting

- To date, Portugal, Luxembourg, France, Austria, Poland, Lithuania and Norway

have implemented some form of SAF-T requirement

- Germany also has the Electronic Tax Balance Sheet (EBS) which is comparable to

SAF-T



Modernization of VAT compliance – Example: SII in Spain

SII introduced on July 1, 2017

Compulsory when submitting monthly VAT returns. VAT books to be kept in electronic format on the Tax Authority’s website.

Bigger data set required than for todays filings – in near real time. Supply of invoice data within 4 working days of the issuance or accounting date.



Countries’ VAT rules on digital services

EU: Proposal on Digital Single Market

Australia: Sourcing rules change for intangibles (Jul. 1, 2017) + taxation of low value imports (Jul. 1, 2018)

New Zealand: Sourcing rules change for all B2C services effective Oct. 1, 2016

Russia: Sourcing rules change for e-services effective Jan. 1, 2017

Rules enacted within last year

Reforms under consideration

Rules already in place

European Union

Belarus: Sourcing rules change for e-services effective Jan. 1, 2018

Thailand: Sourcing rules change for e-services under consideration

Taiwan: Sourcing rules change for e-services effective May 1, 2017

Malaysia: Sourcing rules change for e-services under consideration

India: service tax rule changes effective Dec. 1, 2016 and in GST effective Jul. 1, 2017

Colombia: VAT withholding effective Jul. 2018

Switzerland: Amendment to VAT registration threshold computation effective Jan. 1, 2018

Upcoming reforms

Turkey: Sourcing rules change for e-services under consideration

Serbia: Registration requirement for B2C e-services effective Jan. 1, 2017

GCC: Sourcing rules for e-services in VAT framework (2018)



Why should U.S. businesses care about addressing digital services? — Businesses that have not addressed this issue will:

- Face retrospective tax assessments and penalties/interest that can be 40

percent of revenue

- Be mispricing their sales and misstating their profits

— Any outstanding VAT liabilities would be expressed in foreign currencies, the

value of those liabilities will fluctuate with the currencies themselves – i.e., they

could increase in real terms simply due to foreign exchange shifts

— For businesses that are looking to launch an IPO or to be acquired, any

outstanding VAT, penalty, and interest liabilities found during due diligence can

interfere with those ambitions

— This issue is not going away – instead, more countries are changing their rules to

capture digital services provided by foreign companies (including U.S.

businesses) within their tax base

VAT reforms



Overview of major VAT reforms

China:

- VAT reform finalized in May

2016

India:

- GST reform effective Jul. 1,

2017

Egypt:

- 13% VAT introduced effective

Oct. 1, 2016

GCC:

- Plans to introduce VAT by 2018

Suriname:

- Plans to introduce VAT in 2018

Anguilla:

- Plans to introduce VAT in 2018

European Union:

- Proposal on Digital Single Market

(Dec. 1, 2016)

- Proposal on new intra-EU rules (2017)

United Kingdom:

- “Brexit” vote on Jun. 23, 2016



What is the Gulf Cooperation Council (GCC)? Regional political

organization consisting

of 6 countries in the

Persian Gulf

Bahrain, Kuwait, Oman,

Qatar, Saudi Arabia,

United Arab Emirates

(UAE)

Region has traditionally

not relied on tax revenue

Countries are looking to

introduce more reliable

and diverse sources of

revenue and reduce

dependence on oil and

hydrocarbons



GCC VAT framework All countries of the GCC have signed the GCC VAT Framework

Implementation expected in 2018 (e.g., UAE announced Jan. 1, 2018 date)

Harmonized VAT system throughout the GCC with local country-specific rules

— Harmonized rules include:

- Definition of taxable transaction

- Sourcing rules inspired by EU VAT

rules and OECD Guidelines

— Cross-border sales of goods:

taxable where goods arrive

— B2B sales of services: taxable

where recipient is located

— B2C sales of services: taxable

where vendor is located

— Exception: e.g., electronic supplied

services, real estate, restaurant

services,…

- Tax point rules

- Valuation rules

- Self-assessment under reverse charge

mechanism for cross-border

transactions

- Registration threshold: $100,000 for

residents; $0 for nonresidents

- Nonresident refunds

— Member states have to define:

- Conditions for VAT recovery

- Invoicing requirements

- VAT compliance (i.e., returns)

- Tax payments and refunds

- Transitional measures



GCC VAT framework (Cont’d)

Rates

— Standard VAT rate: 5%

— Requirement to zero-rate

— Exports of goods and services

— Medicines and medical equipment

— Cross-border transportation services

— Investment precious metal

— Requirement to exempt

— Financial services performed by licensed financial institutions

— Option to exempt or zero-rate

— Healthcare, education, real estate, local transport

— Option to zero-rate

— Oil sector depending on conditions set out by member state

— Basic food items as defined under unified list of commodities

— Vehicles used for commercial purposes and services related to them

— Option to exempt from VAT payment

— Public bodies and nonprofits as identified by member states, companies exempt under

agreements to host international events



GST Bills GST Rules

Central Goods and Services Tax Bill, 2017 • Valuation Rules and

• Input Tax Credit Rules

Goods and Services Tax (Compensation to States) Bill, 2017

• Transition Rules and

• Composition Rules Integrated Goods and Services Tax Bill, 2017

• Invoice Rules

• Payment Rules

• Refund Rules

Union Territory Goods and Services Tax Bill, 2017

• Registration Rules

• Return Rules

GST implemented from July 1, 2017

Rates and rules partially finalized in GST council meet on May 18-19. Balance approvals subsequent

Approved by Indian Parliament on April 6, 2017. Presidential approval

granted on April 12, 2017.

India - GST Status



India - GST compliance Registration

— General registration threshold of $30,000

— Not applicable to non-residents, persons making inter-state supplies, persons self-

assessing GST under “reverse charge mechanism,” e-commerce operators

Invoices

— Taxpayers must issue GST-compliant invoices

— Invoice to be issued in triplicate (for goods) or duplicate (for services)

— Special documents in certain situations: e.g., receipt voucher for advance payments or

invoice and payment voucher by customer self-assessing GST under reverse charge

mechanism

Returns

— Taxpayers must file multiple returns

- GSTR 1 for Outward Supplies (sales), GSTR 2 for Inward Supplies (purchases),

GSTR 3 Final Return, GSTR 9 Annual Return

- Other returns depending on taxpayer category or supplies

— Cross-check of information between returns



UK Brexit – Potential Tax consequences A two-year exit negotiation period has begun. The outcome of this negotiation will potentially have a significant impact on the UK tax system, as European law impacts UK tax law in two main ways. In a worse case scenario, the UK would cease to be a member of the EU, if no agreement is reached during the two-year period,

On June 23, 2016 the UK voted to leave the EU with an official notification dated March 29, 2017

―Means that UK domestic legislation cannot conflict with principles of EU law, particularly the “four fundamental freedoms”

―Direct taxes are said to be the competence of each EU member state

―However, UK domestic tax legislation must be in accordance with EU Treaty principles

―As such, UK direct taxation is subject to a number of EU directives, EU principles and the jurisdiction of the Court of Justice of the European Union (‘CJEU’)

1 Supremacy of EU law (direct taxation)

―EU legislation & CJEU determinations are the main sources of UK indirect tax legislation

―Customs & excise duties as well as VAT are governed directly by EU legislation

―Membership of the EU gives UK companies access to the internal market (made up of 28 member states) and to a wide network of preferential trade agreements with third countries

2 Indirect taxes

Four Fundamental freedoms: Free

Capital Services People

Goods



UK Brexit – Potential VAT consequences

Issue Explanation Implications Post-Brexit uncertainties

VAT is a tax

regulated by

consistent EU-

wide rules

― Intra-community

supplies of goods and

services will now be

treated as imports and

exports between UK

and EU

―UK rules and

interpretation may

diverge from EU over

time

―VAT leakage in certain supply

chains (import VAT v. intra-

Community acquisition)

―No EU reliefs available (e.g.,

triangulation relief)

― Invoicing and systems

requirements would change

―No more Intrastat and EC

Sales Lists

―No more data exchange via

VIES

―Unknown if UK will retain

VAT system in same form

and how it will interact with

EU counterparts

VAT is

governed by

EU legislation

and

interpretation

―UK no longer subject

to challenges by

European Commission

or to the jurisdiction of

the CJEU

―UK corporations no longer

afforded protection under EU

VAT principles or a right to

appeal to ECJ

―Cannot rely on ECJ and EU

jurisprudence for VAT matters

―UK courts decide interpretation

of VAT legislation

―Greater autonomy over VAT

rates and reliefs

―Possible that UK would

simply continue to mirror

EU interpretations and take

into account EU judgments

―Value of established ECJ

case law



UK Brexit – Potential VAT consequences (cont’d)

Issue Explanation Implications Post-Brexit uncertainties

Specific EU

VAT

simplification

measures no

longer apply

―Should no longer apply:

– MOSS for electronic,

telecommunication and

broadcasting services

– Simplified B2C distance

selling rules,

– Simplified cross-border

VAT refund procedures

– Simplified triangulation

rules

– TOMS

– Any future EU wide

simplifications under VAT

Action Plan

―UK MOSS registered

businesses would fall

under Non-Union Scheme

+ non-UK entities would

need to change

registration country

―Use of small value import

threshold simplification or

new system replacing it

―UK businesses will be

required to follow 13th

Directive refund

procedure

―UK intermediaries likely to

register in EU

―UK tour operators likely

be required to register in

EU

―Transition rules for MOSS

registered businesses

―Limitations to UK

businesses’ VAT refund

applications under 13th

Directive



UK Brexit - Potential exit scenarios The UK has two years to negotiate the nature of the exit….

― Participation in the

EU internal market

but no access to EU

FTAs

― Member of EFTA

― Free movement of

goods, services,

people & capital

― Not part of EU VAT

area

― Certain principles of

EU law apply (e.g.,

regulation and

employment)

― 9% reduction in UK

contribution to EU

budget

― No tariff barriers

with EU as UK

adopts EU product

market regulations

― UK required to

implement EU

external tariffs


area

― No contribution to

EU budget

― Participate in EFTA

free trade

agreements


area

― Negotiate a bilateral

trade agreement

with the EU

― 55% reduction in UK

contribution to EU

budget

― EU concerns about

cherry picking

Norway Model (EEA

Member)

Swiss Model (EFTA

Member)

Turkish Model (Customs

Union)

― Negotiate bilateral

trade agreements

with EU and other

major trading

partners

― Not part of any

customs free trade

area or trade

association


area

― UK to be excluded

from FTAs agreed

by the EU and the

EFTA


EU budget

― Not part of any

customs free trade

area or trade

association


area

― Negotiate bilateral

trade agreements

among trading

partners

― UK to be excluded

from all FTAs

agreed by the EU

and the EFTA


EU budget

Free Trade Agreements

Independent (WTO

Member)

Thank you



Contact Information

Brian Groome

Senior Manager, Chicago

KPMG International Indirect Tax

[email protected]

+1 312 665 1866 (office)

+1 312 560 0224 (cell)

www.kpmg.com

Contact information

Britta Eriksson, CEO

Euro VAT Refund, Inc.

[email protected]

Phone: +1 310-204-0832

www.eurovat.com

78


© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of

independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

All rights reserved.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular

individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such

information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on

such information without appropriate professional advice after a thorough examination of the particular situation.

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