Issue No. 8, 2014
VAT Newsletter
Introduction
Welcome to the eighth issue of Ernst & Young LLP’s
2014 VAT Newsletter for the US. These newsletters
cover a variety of topics, as VAT can impact
businesses in many ways. Approximately 150
countries now have a VAT, goods and services tax
(GST), consumption tax, service tax, or similar
VAT, and the laws and regulations are constantly
changing. We use this newsletter to inform you of
significant changes taking place.
At the end of this newsletter, you will find contact
details for the senior members of our team who
can help answer any questions you may have about
the articles in this newsletter or any other VAT
questions.
We are interested in your feedback on the items
covered and what topics you would like to see
covered in the future. Please provide any feedback
to Howard Lambert at [email protected].
If you would like to subscribe to EY’s other indirect
tax updates, please click here.
Summary
Global
EY’s 2014 Worldwide VAT, GST and Sales Tax Guide
EY’s Indirect Tax Briefing: a review of global indirect
tax developments and issues
Americas
Bahamas — General VAT and industry VAT guides
EU VAT Forum — VAT treatment of cross-border
transactions
EU Discount Vouchers European Court Case —
C-461/12 Granton Advertising BV
Hungary — Changes to invoicing rules
Ireland — Adjustment of input tax where
consideration remains unpaid after six months
Mexico — Tax authorities issue rules for electronically
filing accounting records
Russia — Transition to a new form of VAT return
Asia-Pacific
UK — Possible changes to “use and enjoyment”
VAT rules
Australia — ATO rules on tax treatment of bitcoin
Europe
EU — Skandia CJEU judgment: VAT due on
intragroup supplies
Russia — Plans to introduce sales tax legislation
Middle East, India and Africa
India — Introduction of a federal GST — latest news
Global
Americas
EY’s 2014 Worldwide VAT,
GST and Sales Tax Guide
Bahamas — General VAT &
Industry VAT Guides
You can access the latest guide here.
On 1 September 2014, the Government
of the Bahamas issued the following VAT
guides:
EY’s Indirect Tax Briefing: a
review of global indirect tax
developments and issues,
10th edition
You can access the latest briefing here.
• The Bahamas VAT Guide
• VAT Guidance on Transitional
Arrangements
• VAT Guidance for the Retail and
Wholesale Sectors
• VAT Guidance for the Transportation of
Passengers and Goods
• VAT Guidance for the Financial and
Insurance Services
• VAT Guidance for the Professional
Services Industry
• VAT and the Hawksbill Creek Agreement
• VAT Guidance for the Construction
Industry
• VAT Guidance for the Treatment of
Motor Vehicles
• VAT Guidance for Medical and
Healthcare Services
• VAT Guidance for Charities, Clubs and
Associations
• VAT Guidance for Education Services
• VAT Guidance for Land and Property
• VAT Guidance for Duty Free Shopping
• VAT Guidance for the Holiday
Accommodation Industry
• VAT Guidance on the Cash Accounting
and Flat Rate Schemes
Mexico — Tax authorities issue
rules for electronically filing
accounting records
On 4 July 2014, Mexican tax authorities
published in the Federal Official Gazette
the Second Amendment to the Temporary
Tax Regulations, which contains the tax
reporting requirements for accounting
information. Under these rules, the
requirement to file accounting information
monthly with tax authorities is effective
beginning July 2014.
Background
As part of the 2014 Mexican tax reform,
the Federal Tax Code (FTC) included a
requirement for taxpayers to file accounting
information with the tax authorities on
a monthly basis. Until now, however, the
extent of this filing requirement was not
known, as there was no description of what
needed to be filed.
Electronic accounting
requirements
Fraction III of Article 28 of the FTC requires
taxpayers to maintain electronic accounting
records, as applicable, in electronic devices
pursuant to the regulations issued by the
tax authorities. According to rule I.2.8.6.,
taxpayers must maintain accounting
The above guides can be found here.
October 2014 — Issue 8
VAT newsletter | 2
records through electronic systems that can create XML format
files, which include the following:
1. Chart of accounts used during the period. The chart of
accounts must include a field to include account groupings, as
defined by the tax authorities in Annex 24 of the Temporary
Regulations.
2. Trial balance, with initial balances, movement for the period
and final balances, for each of the accounts of the taxpayer,
including assets, liabilities, equity and results of operations
(revenue, costs and expenses). For final year-end balances,
information on recorded tax adjustments should be included.
The tax accounts should be identified along with, when
applicable, the different rates, quotas and activities for which
no tax is due, as well as transferred taxes and creditable taxes.
Guidance for these accounts is provided in Annex 24 of the
Temporary Regulations.
Taxpayers must submit the chart of accounts as described in
item 1 above with the first monthly filing each year (e.g., for 2015,
filed with the January 2015 submission in February 2015). Any
changes to the chart of accounts will also have to be filed.
Information related to the journal entries described above
(item 3 of rule I.2.8.6) would have to be provided to the Mexican
tax authorities upon request as part of an audit, review of the tax
returns, a review of a refund, or compensation of favorable tax
balances.
In addition, as part of a review, audit, tax refund or compensation
process, the tax authorities may also ask the taxpayer to provide
some additional items related to the journal entries referenced in
item 3, such as links to the electronic invoices.
3. Information related to journal entries in the accounting
records. This should include details for each transaction, such
as account, subaccount, sub-ledger and information related to
electronic invoices, and it should identify the different tax rates,
quotas and activities for which no tax is due.
In the event that the taxpayer’s electronic files contain information
errors, the tax authorities will notify the taxpayer by email.
The taxpayer will have three business days to refile the correct
information. If the taxpayer fails to correct the errors identified in
the notice within the three-day period, the tax authorities will treat
the information as not filed. Taxpayers that amend their previously
filed information should send the new files within three business
days of the modification.
How to file
Extended filing deadlines for 2014 reporting periods
To satisfy the filing requirement, taxpayers must submit their
files electronically by uploading their electronic files through their
electronic mailbox.
Reporting period
Due date
July
October 2014
August
November 2014
Filing requirements
September
December 2014
October
December 2014
November
January 2015
December
January 2015
This newly enacted amendment to the Temporary Regulations
establishes, among others, the type of electronic accounting
records that taxpayers must file with Mexican tax authorities.
Under rule I.2.8.7., taxpayers must electronically file, on a monthly
basis, the trial balance information referenced in item 2 above. For
companies, the filing deadline for each month is the 25th day of the
following month (e.g., 25 August 2015 for July 2015’s information,
25 September 2015 for August 2015’s information).
For individuals, the filing deadline for each month is the 27th day of
the following month.
The end of the tax year information, along with the corresponding
tax adjustments for each tax year, is due for companies by 20 April
of the following tax year (e.g., 20 April 2015 for the 2014 tax year,
20 April 2016 for the 2015 tax year). For individuals, the filing
deadline for each tax year is 22 May of the following tax year.
October 2014 — Issue 8
Similarly, taxpayers must upload the initial chart of accounts by
31 October 2014.
These extended due dates also apply to reviews by tax authorities
as part of a tax refund or compensation process. Notably, tax
authorities may only request a taxpayer’s detailed journal entries
for tax periods commencing in 2015.
Beginning January 2015, taxpayers must upload the electronic trial
balance through the tax mailbox in the month immediately following
the month for which the trial balance is prepared.
VAT newsletter | 3
Asia-Pacific
Australia — ATO rules on tax treatment
of bitcoin
The ATO recently delivered guidance on the taxation
treatment of bitcoin and other crypto-currencies in
time for people to complete their 2013–14 income tax
returns.
Under the guidance paper and rulings, bitcoin
transactions are treated like barter transactions with
similar taxation consequences.
Generally, there will be no income tax or GST
implications for individuals, if they are not in business,
or carrying on an enterprise and they pay for goods or
services in bitcoin.
Where an individual uses bitcoin to purchase goods
or services for personal use or consumption, any
capital gain or loss from disposal of the bitcoin will be
disregarded as a personal use asset, provided the cost
of the bitcoin is $10,000 or less.
Businesses will need to record the value of bitcoin
transactions as a part of their ordinary income. They
must also charge GST when they supply bitcoin and may
be subject to GST when receiving bitcoin in return for
goods and services.
Record-keeping requirements are similar to other
transactions. Where there may be a taxation
consequence, people should keep records of:
• The date of the transaction
• The amount in Australian dollars
• What the transaction was for; and
• Who the other party was (even if it is just the bitcoin
address)
There may be fringe benefits tax consequences for
businesses using bitcoin to pay employee salaries.
Individuals who use bitcoin as an investment may be
subject to capital gains tax rules when they dispose of
it, as they would for shares of similar assets.
October 2014 — Issue 8
VAT newsletter | 4
Europe
EU — Skandia CJEU judgment:
VAT due on intragroup supplies
In its judgment in the case of Skandia
America Corporation USA, Sweden branch
(C-7/13) released 17 September, the Court
of Justice of the European Union (CJEU)
found that a VAT group is a wholly ‘new’
and separate taxpayer from its constituent
members. Depending on how this decision
is implemented, it could result in significant
additional costs for businesses operating
VAT groups in EU countries that receive
intercompany services from operations in
other countries.
Going forward, such businesses may need
to account for VAT on all intercompany,
including branch-to-branch, services
provided into the EU country VAT group.
This could particularly affect banks and
insurance companies, which may be
required to charge VAT on branch-to-branch
services, which are currently disregarded.
The majority of EU member states disregard
supplies between branches of the same
legal entity, and as such, the Skandia
judgment is likely to result in a complete
change regarding how and where to
account for VAT.
Background
In the Skandia case, a US parent company
purchased services, which it supplied to its
Swedish branch, which was a member of a
local VAT group. In turn, the branch used
those services and supplied them onward to
a fellow group member.
The Swedish tax authorities separately
registered the US parent company’s head
office for VAT and assessed it for underdeclared VAT. This was on the basis that the
head office and its branch should be treated
as separate entities and that, through the
branch, the head office was also established
in Sweden.
The Swedish court referred questions to
the CJEU seeking clarification on whether
“supplies of externally purchased services
October 2014 — Issue 8
from a company’s main establishment in
a third country to its branch in a Member
State … constitute taxable transactions if
the branch belongs to a VAT group in the
Member State.”
Assuming the supply was subject to VAT,
a second question focused on who had the
obligation to account for any VAT due.
The issue
This case has been the subject of a great
deal of analysis and debate, especially
within the banking and insurance
community where the use of EU VAT
grouping is common. For example, under
current UK practice, services between
VAT group members are, subject to antiavoidance provisions, disregarded. This
treatment applies regardless of whether
or not the services are provided by a UK or
overseas establishment.
Moreover, Skandia also challenged the
treatment of branch-to-branch transactions
where one or both establishments are
members of a VAT group. An earlier case,
FCE, had previously confirmed that branchto-branch supplies should not be taxed, but
crucially, it did not consider this principle’s
interaction with VAT grouping provisions.
The judgment
The CJEU’s judgment has not followed the
AG’s Opinion and has instead found that
once a local branch joins a VAT group,
all supplies to it must be treated as being
supplied to the VAT group. As the VAT
group is a separate taxable person, those
services are subject to VAT. Paragraph 31 of
the judgment states that:
“In as much as the services provided
for consideration by a company such as
[Skandia] to its branch must be deemed,
solely from the point of view of VAT, to have
been provided to the VAT group, and as
that company and that branch cannot be
considered to be a single taxable person, it
must be concluded that the supply of such
services constitutes a taxable transaction.”
VAT newsletter | 5
The vast majority of EU member states disregard branch-to-branch
transactions even where the customer is a member of a VAT group.
Therefore, this judgment could produce a fundamental change in
the VAT treatment of all supplies within a corporate group.
The judgment also has wider implications in the UK. Given that the
UK takes the view that VAT grouping is ‘extra-territorial,’ supplies
from overseas branches of VAT group members to fellow group
members were also disregarded. The Skandia judgment strongly
indicates that such a treatment is no longer tenable.
On the second question, regarding which entity has the liability to
account for VAT, the CJEU confirmed that the local VAT group must
self-account for any VAT due.
What is the impact for businesses?
By holding that a VAT group is a ‘new’ person for VAT purposes,
all intercompany flows into an EU country VAT group should be
taxed, unless an alternative concession or exemption applies. This is
crucial for financial sector businesses, for which VAT is an abovethe-line cost.
EU VAT Forum — VAT treatment of cross-border
transactions
The European Commission has set up the EU VAT Forum, where
business and tax authorities strive to improve the way VAT works in
practice. One of the sub-groups within EU VAT Forum deals with the
project relating to cross-border rulings. At this stage, 15 member
states participate in this project.
The intention of the project is improving legal certainty for
companies in their cross-border VAT transactions where a certain
doubt about the VAT regime exists.
Among other conditions, cross-border rulings can be requested
by a business or a participating member state, if the transaction
is complex and has a cross-border aspect in two or more member
states.
More details relating to EU VAT Forum can be found here.
Businesses should consider what the financial impact of the
Skandia judgment may be. For example, large banks and insurance
companies will need to calculate VAT due on all flows, including
all head office-type charges. In many cases, this will require an
in-depth review of all intercompany services.
Given the value of intercompany and intracompany flows, financial
sector businesses will need to consider whether maintaining a VAT
group remains the most efficient way to structure their affairs.
Where the value of services from an overseas branch or head
office is large, removing that entity from the VAT group may be
preferable. As part of this exercise, businesses should also consider
whether any exemptions, including the exemption for cost sharing
groups, are of use.
All potentially affected businesses will eagerly await each EU
country tax authority’s response to the judgment. As noted above,
the impact of Skandia could result in significant irrecoverable VAT
all across the EU.
October 2014 — Issue 8
VAT newsletter | 6
EU Discount Vouchers European Court Case —
C-461/12 Granton Advertising BV
The CJEU has published its judgment in the case C-461/12 Granton
Advertising BV (Granton) that concerned the application of VAT on
discount cards.
Granton, a company incorporated under Dutch law, issued and sold
discount cards (Granton cards) that entitled their holders to acquire
goods or services from various suppliers (partner companies) on
preferential terms.
The partner companies accepted Granton cards to attract new
customers for their goods and services. Granton did not pay any
consideration to partner companies for the acceptance of the cards.
The Granton card had no face value and could not be exchanged for
money or goods. It only entitled its holders to a discount on orders
placed with partner companies.
Granton considered the sale of the cards to be VAT exempt on the
basis that the cards fell under the concept of “other securities” or
“other negotiable instruments” contained in Article 135 f) and d) of
the EU VAT Directive. The Dutch tax administrator disagreed with
this reasoning and assessed additional VAT to Granton. Granton
brought an appeal against this assessment, and the issue was
subsequently referred to the CJEU.
October 2014 — Issue 8
At first, the CJEU dealt with the question of whether the payment
received by Granton for the sale of cards could be deemed a thirdparty payment for the goods or services acquired by the customer
from the partner companies. The CJEU decided that the link
between the payment for the card and the provision of the goods or
services was not sufficiently direct and immediate for this payment
to be considered a part of the price of the supply.
The CJEU also examined the question of whether the card could be
considered as falling under “other securities” or “other negotiable
instruments” in the light of the EU VAT Directive. The CJEU
concluded that the card can’t be regarded as “other securities”
since it does not bear an ownership right (share to a company or to
a debt); it does not qualify as a financial transaction and there is no
difficulty in stipulating the tax base of the supply. The CJEU further
decided that the card can’t be considered as even falling under
“other securities negotiable instruments” since it does not have the
character of a payment system. The CJEU repeated that the terms
used in the EU VAT Directive on tax exemptions must be interpreted
narrowly and uniformly EU-wide.
According to the CJEU, the sale of discount cards entitling their
holders to receive discounts at partner companies where these
companies do not receive compensation for the discount is
therefore not exempt from VAT.
VAT newsletter | 7
Hungary — Changes to invoicing rules
The Hungarian Minister for National Economy has published a
new decree that changes the rules on the identification of invoices
and cash receipts for tax administration purposes and the rules
regarding tax authority audits of invoices stored in an electronic
format.
Although the new decree came into force on 1 July 2014, certain
provisions should only be applied as of 1 October 2014 or 1 July
2015.
Below we summarize the changes to the rules on the identification
of invoices and cash receipts. The most substantive change to
content is that enterprises have an obligation to inform the tax
authority of the software they apply for issuing invoices. As a new
element of the decree, this reporting obligation has been extended
to online invoicing systems as well, although with different content.
Three key changes concerning the invoicing program
1. Invoicing software can only be sold to registered taxpayers. The
supplier of the invoicing software must also include the tax number
of the customer (i.e., the entity using the invoicing software) on the
invoice.
requirements for invoicing software and online invoicing systems.
The reporting deadline is:
• 15 November 2014 for those who currently have or obtain
invoicing software before 15 October 2014
• Thirty days for those who purchase, or start using invoicing
software or online invoicing services after 15 October 2014
According to the information provided by the tax authority, the
form is currently in the planning phase, and it is expected to be
called SZAMLAZO. The tax authority intends to issue the form on
1 October 2014.
Provisions relating to computer generated cash
receipts
Based on the decree, the definition of computer-generated cash
receipts applies equally to those issued electronically or in paper
format. However, cash register-generated cash receipts refer to
those that have been issued either by traditional or online cash
registers (with or without electronic recording). Therefore, in
relation to the new legislation, it is important to highlight that
computer-generated cash receipts and those issued by cash
registers are not the same.
2. The user of the invoicing software should possess detailed
documentation of the software. The invoicing software should only
perform functions that are detailed in the user documentation.
From now on, developers are not obliged to provide a declaration
on the compliance of the software with the legislation, but they are
required to retain the complete documentation — electronically or
by other means — within the limitation period.
Based on the above, and pursuant to Annex 1 of Decree No.
48/2013 (XI.15.) of the Minister for National Economy, a taxpayer
who can only comply with invoicing obligations using a cash register
may not issue computer-generated cash receipts instead.
3. Users’ reporting obligations (coming into force on 1 October)
in relation to invoicing software and online invoicing systems are
also changing. The commencement and the end of usage (as
well as other data as set out in the decree) should be reported to
the tax authority. The decree prescribes different data content
If the parties intend to create and forward electronic invoices in the
EDI system as electronic data, they can also comply with their prior
written agreement obligation — set forth in the relevant provisions
of the act on VAT regarding the application and usage of EDI — by
concluding a contract prescribed in Annex 1 of the decree.
October 2014 — Issue 8
Changes relating to the electronic data interchange
system (EDI)
VAT newsletter | 8
Ireland — Adjustment of input tax where
consideration remains unpaid after six
months
The Revenue Commissioners have issued a number of
eBrief updates on a range of VAT issues, including:
October 2014 — Issue 8
adjustment, to the extent that the consideration
for a supply remains unpaid after six months. This
provision was introduced with effect from 1 January
2014 and the first adjustments should be made on
the VAT return for the July/August 2014 reporting
period (click here).
• 54-2014 outlines new legislative powers that
provide that the Revenue Commissioners may serve
notice on a business, requiring it to furnish specified
information in relation to its taxable supplies, where
failure to comply with the notice may result in a
penalty being imposed (click here).
• 57-2014 clarifies the VAT treatment applicable
to the commissioning by broadcasters of film and
TV program material, from producers operating
within the independent production sector, following
recent changes in the broadcasting sector in Ireland
(click here).
• 55-2014 outlines a new legislative provision (similar
to that in operation in the UK) that provides that a
business will lose its entitlement to credit for input
tax, and consequently must make an input tax
• 58-2014 draws attention to the issue of updated
guidance on the VAT relief for the transfer of
a business (or part thereof) as a going concern
(click here).
VAT newsletter | 9
Russia — Transition to a new form of VAT return
Russia — Plans to introduce sales tax legislation
The Russian tax authorities are developing a new form of VAT
return. It is highly likely that the new VAT return will be adopted and
effective starting from 1 January 2015. Currently, the draft of the
new VAT return is available. According to the draft VAT return we
have seen, the following will be part of the VAT return:
During the week of 4 August 2014, the Russian Ministry of Finance
prepared draft legislation intended to provide the legal framework
within which federal regions (of which there are 85) may implement
a sales tax, for discussion within these authorities.
• Data from the taxpayer’s purchase book and sales book
• Data from the log book of incoming and outgoing VAT invoices
where the taxpayer acts as an intermediary.
As a result, the VAT return reporting will be on a transaction-bytransaction basis, giving the Russian tax authorities the capability
to match information reflected in the seller’s VAT return with the
information in the buyer’s VAT return.
Difficulties arising during preparation of the VAT
return in the new form
We expect that businesses may face the following difficulties while
preparing the new VAT return:
• Huge amounts of information that need to be reflected in the
new VAT return will make manual processes of preparation
impossible.
This article summarizes the key facts concerning the said draft. It
is very likely that changes to this draft will be proposed during the
legislative process.
Draft proposals
• Implementation of the sales tax is to be allowed with effect from
1 January 2015.
• The sales tax should be introduced in a particular federal region
under a law enacted by the respective region.
• Taxpayers are organizations and individual entrepreneurs
carrying out activities in federal regions where a sales tax has
been introduced.
• The current draft provides for the implementation of a sales tax
at a maximum rate of 3% on goods, services and works supplied
to individuals.
• The federal regions are to determine:
• The necessity of using electronic format XML for tax returns will
require either modification of ERP-systems or implementation of
specialized software.
• The sales tax rate
• Introduction of new functions into existing ERP-systems will be a
complicated and time-consuming process, especially when using
highly customized versions of ERP.
• Compliance and reporting formalities
• The tax base is the price of the goods, services or work,
including VAT and excise duty.
• Significant efforts will be required to adopt ERP systems to the
new reporting, which could result in late submission and, as
such, potential noncompliance.
• The tax arises on the date of receipt of payment in the seller’s
bank account, or payment in cash, or the date of provision of the
goods, services or work.
If you have any questions regarding the new form, or need
assistance in transitioning to the new VAT return form please let
us know.
• Monthly returns are to be filed.
October 2014 — Issue 8
• Procedure and terms of payment
• The place of taxation (i.e., the federal region in which sales tax
should be reported and paid) is the place of state registration of
the organization or private entrepreneur or the place indicated
VAT newsletter | 10
in the charter documents (with respect to a separate
subdivision).
Important questions remain unanswered at this stage,
such as:
• Certain goods are to be exempt from sales tax.
Goods and services subject to a reduced VAT rate or
exemption from VAT will generally not be subject to
sales tax. This includes certain foodstuffs and dairy
products, pharmaceuticals, housing and utilities,
certain education services provided by nonprofit
organizations, textbooks, certain periodicals,
services provided by organizations working in
the field of culture and arts, health care, public
transport, financial services, and religious services.
• Should sales tax apply to free-of-charge supplies of
goods (services, works), including supplies in the
form of loyalty programs?
Implications
If a sales tax is implemented, companies operating in
Russia will have to:
• Analyze which products are subject to sales tax
(which will likely differ among federal regions)
• How will the authorities deal with a situation where
a company registered in a low or no sales tax federal
region is selling (e.g., via websites and mail order
catalogues) to individuals located in the federal
regions with higher sales tax rate?
• Will it be possible to credit sales tax in the case of
return of goods?
• How will a seller determine whether the individual is
buying goods for itself or for the company?
• To what extent can the existing VAT case law
be applied to resolve future disputes regarding
sales tax?
• Adjust their ERP/invoicing systems
• Implement compliance procedures (which will likely
differ among federal regions)
October 2014 — Issue 8
VAT newsletter | 11
UK — Possible changes to “use and
enjoyment” VAT rules
The use and enjoyment VAT rules affect any business
providing services across borders, where there is a need
to define where a supply is made and where it is actually
consumed. We understand that Her Majesty’s Revenue
and Customs (HMRC) is reviewing how UK businesses
apply the rules and that there may be changes to the
current rules.
The concept of use and enjoyment most commonly
arises in the telecommunications, electronically
supplied services and broadcasting industries. However,
it is also a factor across many service industries, such
as banking and insurance and some parts of the oil and
gas sector. Any change in the use and enjoyment rules
would have a significant impact, and service providers
(and recipients) will need to be up to speed with any
developments.
We have set out below the current position, the possible
changes in HMRC policy, the impact the changes would
have on businesses and the issues that businesses
might wish to consider now.
The current position
For business to consumer (B2C) supplies, the effect of
the use and enjoyment rules is that if the services are
consumed outside the EU, no UK VAT is due even if the
supplier is established within the UK. If the services
are consumed within the UK, UK VAT is due even if the
supplier is established outside the EU. For example, if a
October 2014 — Issue 8
UK individual uses a mobile phone while on holiday in
the US, the supply will not be subject to UK VAT as the
services are consumed outside the EU.
Use and enjoyment rules also apply when a UK business
supplies services on a business to business (B2B) basis.
Where these services are consumed outside of the EU,
no UK VAT applies regardless of where the customer
is located; where the services are supplied to a non-EU
customer but are consumed within the UK, UK VAT is
due.
The problem in applying the use and enjoyment VAT
rules for cross-border suppliers of services has typically
arisen in proving (and then agreeing a methodology
for apportioning) the extent to which supplies are
consumed outside the EU. For example, if software is
provided to a shipping company when the ship is docked
in the UK, but the software is for use in international
waters, what evidence is needed to prove that the
use and enjoyment of the software take place outside
the EU?
HMRC’s approach
HMRC has largely accepted the VAT treatment set out
above, to the extent it has become standard practice
in the UK. However, the VAT place of supply rules are
changing with effect from 1 January 2015 for suppliers
of B2C e-services, and this appears to have prompted
HMRC to rethink its policy on use and enjoyment
more widely.
VAT newsletter | 12
HMRC’s questions around use and
enjoyment appear to be particularly focused
on how businesses calculate the extent to
which their services are consumed outside
of the EU and, as a result, how much of the
supply can be treated as outside the scope
of UK VAT.
We are aware, for instance, that many
businesses with long-established (and
HMRC-approved) use and enjoyment
methodologies to calculate the VAT
due have been notified that these
methodologies are likely to be subject
to review.
HMRC has also approached some
businesses with a detailed questionnaire
about the types of services they supply, the
contractual arrangements in place and the
VAT place of supply rules that the business
has been applying.
We understand that HMRC is proposing to
issue further guidance (a business brief
or information sheet) in the fall of 2014
and that it expects all calculations to be
reviewed and agreed by 1 January 2015,
which coincides with the 2015 VAT changes
for B2C supplies. At the time of writing,
we are not aware of the exact scope of the
guidance, or what it will propose. However,
it seems reasonable to assume that HMRC
will be looking closely at use and enjoyment
methodologies applied by businesses
(especially B2C businesses), and there may
be a campaign to approach any UK business
that HMRC considers will be impacted.
Steps to take now
We are working with a number of businesses
to model the impact of a potential change
in the application of the use and enjoyment
rules for them. For many, a change in the
use and enjoyment methodology could have
a material financial impact, and businesses
need to be prepared should HMRC
successfully challenge current calculations.
Given the time frame (1 January 2015),
businesses should also be considering
alternative methodologies that demonstrate
an alternative “fair and reasonable” result
October 2014 — Issue 8
and that may be acceptable to HMRC based
upon any proposed change in approach.
Systems implications may also need to
be considered. Currently, data regarding
actual usage may, for some, be difficult to
obtain and to date has been unnecessary
as a result of an agreed methodology with
HMRC. Going forward, HMRC is likely to
insist upon a clear audit trail that can be
traced back to actual data. Businesses
should consider what their systems are
capable of tracking and how this can
be used to accurately calculate the VAT
treatment of supplies.
In the case of a mobile phone operator,
a key question will be how evidence is
to be gathered to show that the use and
enjoyment takes place outside the EU. In
many cases, this data is unlikely to be found
within tax reporting systems and will most
likely be held by operational business units,
or may even be held by third parties.
In the case of e-service providers, do
invoices show a billing and a “ship to”
address? If so, which address demonstrates
(and can be used to evidence) use and
enjoyment by a recipient outside the EU?
Our approach
We have been working with clients likely
to be affected by any changes for the last
six months. Working closely with our tax
policy team, we have been in discussions
with HMRC on some of the uncertainties
and issues and have regular dialogue with
all interested parties to share and discuss
developments.
We will continue this approach to ensure
that our clients remain up to date on any
changes (actual or proposed) and, where
possible, provide HMRC with insight into
the practical aspects and commercial
implications of operating a use and
enjoyment methodology. The intention is
that this dialogue will provide HMRC with
enough information to take an informed
and practical approach to any review of the
use and enjoyment rules and of existing
methodologies.
VAT newsletter | 13
Middle East, India and Africa
India — Introduction of a federal GST — latest news
The new central government, which came
into power six months ago, has made it
very clear that Central Sales Tax (CST) is a
top priority and is pushing very hard for its
introduction by ironing out the issues with
the state governments. In the budget for
2014–15, the Finance Minister has clearly
shown urgency for implementation of GST.
It may be noted that the long-pending
disputes regarding CST compensation, or
inclusion of products like petroleum and
alcohol, are still being debated between the
central and state governments.
October 2014 — Issue 8
Based on our discussions with the
authorities and news reports, we
understand that government is pushing
for a Constitutional Amendment Bill in the
winter session, i.e., in November 2014.
If that gets through, that would be a big
achievement. Any clarity with regard to
the road map of GST would only come
after that.
We also know that recently, Prime Minister
Modi sought progress on the Constitutional
Amendment Bill and GST from the Finance
Minister Jaitely. Therefore, GST is a top
priority for this government.
VAT newsletter | 14
EY newsletters and alerts
If you would like a copy of a green paper, newsletter or alerts
covering some of the topics mentioned below, please click on the
link or contact Howard Lambert at [email protected].
EY Indirect Tax August 2014
Croatia: EY Tax News: Ernst & Young Savjetovanje d.o.o.
(EY Croatia) has issued issue 04/2014 of its regular client
newsletter. From an indirect tax perspective, the following items
may be of interest:
• Positive changes in the Croatian tax system announced
• Official opinions of the Croatian Tax Authority
• EU VAT Forum — VAT treatment of cross-border transactions
Croatia: Tax Alert August 2014: EY Croatia has issued a
newsletter regarding VAT representation in Customs Procedure 42
(importation of goods intended for supply to another member state
or transfer of own goods to another member state for business
purposes) and in Customs Procedure 63 (re-importation of goods
intended for other member states).
Czech Republic: EY Tax News July 2014: Ernst & Young s.r.o. (EY
Czech Republic) has issued the July 2014 edition of the regular
client newsletter, EY Tax News. From an indirect tax perspective,
this edition includes the following items:
• VAT treatment of the transfer of developed and
undeveloped land
Hungary: EY Tax News 07/14: Ernst & Young Tanácsadó Korlátolt
Felelõssegû Táraság (EY Hungary) has recently issued its regular
client publication, EY Tax News. The following items may be of
interest from an indirect tax perspective:
• Advertising tax
• Transactions with periodic settlement
• Telecommunication services provided to non-taxable persons
• Reverse charge for steel products
Latvia: Tax Newsletter: VAT law changes re 2015:
SIA Ernst & Young Baltic (EY Latvia) has kindly shared the
July edition of its regular client newsletter. From an indirect
tax perspective this edition includes an item on the VAT law
amendments being introduced for the place of supply of services
changes that will come into effect on 1 January 2015.
Netherlands: Tax Update Weekly: Issue 29, 2014; Issue 30,
2014; Issue 31, 2014; Issue 31, 2014; and Issue 32, 2014: These
newsletters provide a roundup of VAT news from the Netherlands,
EU and other countries.
Slovakia: EY Tax news 6/2014: The 06/14 edition of
Ernst & Young k.s. (EY Slovakia) Tax News includes the following
items that may be of interest from an indirect tax perspective:
• Liability for VAT unpaid by supplier can be avoided — Guideline of
the Financial Directorate
• Summary of CJEU judgment in C-461/12 Granton Advertising
• Amendment to the VAT Act — approved by Parliament
Tax News August 2014: EY Czech Republic’s August edition of
its client newsletter contains the following items that may be of
interest from an indirect tax perspective:
• Commentary of CJEU judgment in C-461/12 Granton
Advertising BV — VAT on discount cards
• Problems regarding the modernization of VAT — article by
Jan Capek
• Importance of agreeing correct prices in contracts: in light of
recent Czech court cases.
• Commentary of the impact of the recent CJEU case in BCR
Leasing (C-483/13)
Germany: VAT Newsletter May/June/July 2014: The topics covered
by this newsletter include:
UK: VAT News: – weeks ending 21 July 2014, 28 July 2014, 4
August 2014, 11 August 2014, 18 August 2014 and 25 August
2014: These weekly client e-newsletters provide a roundup of VAT
news from UK, EU and other countries.
Ukraine: Ernst & Young LLC’s (EY Ukraine) newsletter includes
information related to the Pharmaceutical sector.
VAT Alert includes information on a new electronic system of VAT
administration and a change in the procedure and criteria for
claiming VAT refunds.
• VAT legislation changes
• Fiscal decrees on VAT
• VAT jurisdiction
October 2014 — Issue 8
VAT newsletter | 15
EY | Assurance | Tax | Transactions | Advisory
About EY
EY is a global leader in assurance, tax,
transaction and advisory services. The insights
and quality services we deliver help build
trust and confidence in the capital markets
and in economies the world over. We develop
outstanding leaders who team to deliver on our
promises to all of our stakeholders. In so doing,
we play a critical role in building a better working
world for our people, for our clients and for our
communities.
EY refers to the global organization, and may
refer to one or more, of the member firms of
Ernst & Young Global Limited, each of which is
a separate legal entity. Ernst & Young Global
Limited, a UK company limited by guarantee,
does not provide services to clients. For more
information about our organization, please
visit ey.com.
Ernst & Young LLP
US VAT practice leaders:
Regional resources:
Karen Christie
New York, NY
+1 212 773 5552
[email protected]
Alex Cotopoulis
New York, NY
+1 212 773 8216
[email protected]
Ernst & Young LLP is a client-serving member
firm of Ernst & Young Global Limited operating
in the US.
Ronnie Dassen
New York, NY
+1 212 773 6458
[email protected]
Maria Hevia Alvarez
New York, NY
+1 648 831 2187
[email protected]
© 2014 EYGM Limited.
All Rights Reserved.
Anne Freden
San Francisco, CA
+1 415 894 8732
[email protected]
Deirdre Hogan
San Francisco, CA
+1 415 894 4926
[email protected]
Ela Choina
Chicago, IL
+1 312 879 2935
[email protected]
Corin Hobbs
San Jose, CA
+1 408 947 6808
[email protected]
Gino Dossche
New York, NY
+1 212 773 6027
[email protected]
Howard Lambert
Irvine, CA
+1 949 437 0461
[email protected]
EYG no. YY3434
BSC no. 1410-1333778 W
ED 01.15
This material has been prepared for general informational
purposes only and is not intended to be relied upon as
accounting, tax, or other professional advice. Please refer to
your advisors for specific advice.
Steve Patton
New York, NY
+1 212 773 2827
[email protected]