Welcome to Inside Indirect Tax—a publication from KPMG’s U.S. Indirect Tax practice focusing on global indirect tax changes and trends from a U.S. perspective. Inside Indirect Tax is produced on a monthly basis as developments occur. We look forward to hearing your feedback to help us in providing you with the most relevant information to your business.

Announcement

KPMG China Publishes Guide on Managing Trading & Customs

The KPMG International member firm in China recently published a report on Managing Trade and Customs in China, which provides an insight into the regulatory environment, including the structure of related government authorities. The report describes, among other things, the structure of government agencies; types of duties and taxes; customs valuation; tariff classification; country of origin rules; customs environment for processing trade; import and export licensing; foreign exchange controls; export controls; enterprise internal controls; quality and quarantine controls; special customs supervision areas; unbundling; free trade agreements; tariff engineering; management of third-party service providers; and first sale for export. The purpose of the report is to aid companies to develop strategic planning options that can be applied when products are imported into China or are produced in China using imported components.

Global Rate Changes

The Americas

United States: Proposed Rule Would Adopt Economic Nexus Standard for Sales and Use Tax in Tennessee

Tennessee appears to be the next state seeking to jump-start litigation over the physical presence nexus standard articulated in the 1992 Quill case. Similar to a regulation adopted earlier this year in Alabama, the Tennessee Department of Revenue has proposed a rule adopting an economic nexus standard for sales and use tax purposes. If the rule becomes effective as proposed, out-of-state dealers that engage in the regular or systematic solicitation of consumers in Tennessee through any means and make sales exceeding $500,000 to Tennessee consumers during the calendar year would be considered to have substantial nexus with the state. These dealers would be required to register with the state by January 1, 2017 and would be required to collect and remit sales tax effective July 1, 2017. The rule is subject to legislative review before it becomes effective.

Brazil: Financial Transaction Tax on Foreign Exchange Transactions Amended

On May 2, 2016, Brazil’s federal government published Decree 8,731, which amends the application of the financial transaction tax (Imposto Sobre Operações Financeiras—IOF) to foreign exchange transactions. IOF is levied on credit, exchange, insurance and securities transactions executed through financial institutions. The tax also includes intercompany loans and gold transactions. The Decree increases the IOF rate on foreign transactions from 0.38 percent to 1.10 percent. In addition, foreign exchange transactions for the inflow of funds into Brazil implemented for the conversion of a foreign direct investment into investment in stocks/shares traded on the stock exchange are subject to IOF at rate of 0 percent. Finally, the Decree introduces changes that may affect the anticipated liquidation of foreign loans. Consequently, transactions involving the anticipated liquidation and/or capitalization of foreign loans may need to be analyzed on a case-by-case basis so that the potential IOF and foreign exchange impacts are properly assessed. To read a report prepared by the KPMG International member firm in Brazil, please click here.

Canada: Proposed Amendments to GST/HST Rules and Regulations

On July 22, 2016, Canada’s Department of Finance released draft legislative and regulatory proposals regarding the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) for public consultation. Some of the changes apply immediately. Other changes are proposed to take effect for a taxpayer’s next fiscal year, while some proposed changes will be effective once they are passed into law.

The proposals introduce rules that will essentially bring master trusts of pension entities within the application of the GST/HST pension plan rules. The current pension plan rules generally apply to participating employers and pension entities of their registered pension plans. The proposed changes will significantly affect many components of the GST/HST pension plan rules where there is a master trust in the structure, including the deemed sales made by the employers, the tax adjustment notes, the election related to the actual sales, the pension entity rebates and the special attribution method (SAM) formula and its calculations. The proposals also include a few technical changes to the current GST/HST pension plan rules that may affect the GST/HST obligations and calculations of employers and pension entities.

The Department of Finance further announced several technical amendments to the GST/HST drop-shipment rules. Businesses that have transactions subject to the drop-shipment rules with nonresidents or that issue or accept drop-shipment certificates should ensure they review all the changes and determine whether any of the proposed changes affect their tax obligations. The draft legislation includes numerous amendments to clarify and modernize the drop-shipment rules. As a result of these technical changes, some Canadian vendors may be required to collect GST/HST from their nonresident clients. The proposals include various amendments to the related exceptions that could potentially affect the scope of the GST/HST relief. Also, the wording in the drop-shipment certificates has changed. Consignees that have issued certificates and consignors that have received the certificates should review the circumstances covered by the certificates and whether they may be affected by the proposed changes. In general, the proposed changes in the draft legislation apply to sales made after July 22, 2016. However, some changes will apply only after they are enacted.

Moreover, the draft legislation amends other GST/HST rules such as: (1) include credit unions under the selected listed financial institutions (SLFI) rules for banks; (2) extend the SLFI rules to group trusts for registered education saving plans; (3) amend some provisions related to qualifying small investment plans in light of the changes related to master trusts; (4) clarify the amounts to be included in the SAM formula related to the section 150 closely related group election; (5) simplify the SAM formula to reflect the fact that it was common for SLFIs to make a certain election under the SAM formula; (6) amend various rules for imported sales into Canada and for sales brought into or used in HST-participating provinces; and (7) clarify and amend certain provisions related to municipal transit services.

Finally, the Department of Finance released a 16-page consultation paper related to the GST/HST rules for certain limited partnerships and investment plans, which includes the following proposals: (1) expand SLFI rules to include investment limited partnerships; (2) change the definition of investment plan; (3) amend the permanent establishment test; (4) modify the provincial attribution percentages; (5) expand the self-assessment rules; and (6) introduce new GST rebate. The Department of Finance will accept comment on these points until November 30, 2016. To read a report prepared by the KPMG International member firm in Canada, please click here.

Puerto Rico: Sales Tax Guidance Published

On June 30, 2016, the Puerto Rico Treasury Department (PRTD) issued Circular Letter 16-08-RI clarifying that all merchants holding an expired Manufacturing Plant Exemption Certificate or certificate expiring on or before August 31, 2016 will have until August 31, 2016 to renew the certificate using current procedures. However, the merchant must ensure that it maintains the corresponding bond with the Treasury Department. Any new merchant and all merchants holding a certificate expiring after August 31, 2016, must request or renew the certificate, as applicable, according to the current procedures. The Manufacturing Plant Exemption Certificate allows manufacturing plants to acquire raw materials, machinery and equipment to be used in the manufacturing process exempt of sales and use tax (SUT) payment. Circular Letter 16-08 RI further provides that all Certificates of Waiver from Collection of the SUT on Manufacturing Service Contracts (Waiver Certificates) will remain in force and will be effective for the duration of the corresponding Manufacturing Services Agreement. Any new merchant that qualifies for this certificate must request it according to the established procedures. The Waiver Certificate allows a merchant to claim a SUT exemption for manufacturing services, known as “toll manufacturing” or “contract manufacturing.”

On June 30, 2016, the PRTD issued Circular Letter CC 16-09-RI clarifying that Reseller and Eligible Reseller Certificates will continue to be in effect regardless of the expiration date contained on the certificate (provided the expiration date is after December 31, 2015) until the PRTD issues a publication establishing the new renewal process for these certificates. Any new merchant reseller and all merchants whose Reseller Certificate had expired as of December 31, 2015 must request or renew it, as applicable, through the currently established procedure. Said certificate will be effective for one year from its date of issuance or renewal.

Source: CCH, Puerto Rico Tax Reports, 632.

Europe, Middle East, Africa (EMA)

Belgium: Destination Document Valid as Alternative Proof of Shipment

On July 1, 2016, the Belgian value added tax (VAT) authority issued Decision ET 129.460 in which it stated that it would accept a so-called “destination document” (bestemmings document/document de destination) as alternative proof of an intra-European Union (EU) shipment. To invoke the zero-rating on intra-EU sales of goods, the vendor must be able to prove the shipment of these goods from Belgium to another EU Member State. In practice, however, it is often difficult for the vendor to obtain the shipment document (e.g., CMR) which is properly completed and signed by all parties involved, especially if the shipment of the goods is organized by the buyer.

According to the Decision, if no shipment document is available, the VAT authority will now accept a “destination document” in combination with the sales invoice, proof of payment, and the shipment invoice (if shipment is organized by the vendor) as valid proof of the intra-EU shipment. The destination document, which must be signed by the buyer, confirms that the goods are in the possession of the buyer in another EU Member State.

The VAT authority allows that the vendor can determine whether to use such a destination document on a sale-by-sales basis. Further, one destination document may include all sales made to a customer during a period of maximum three consecutive calendar months. Finally, the Belgian VAT authority preserves the right to demand documents other than shipment documents to verify the validity of the transactions and the statements mentioned on the destination document. To read a report prepared by the KPMG International member firm in Belgium, please click here.

European Union: Directive on VAT Treatment of Vouchers Adopted

On June 27, 2016, the Council of the European Union adopted a Directive to harmonize the VAT treatment of vouchers across the EU. Directive 2016/1065, OJ L 177, p. 9 (July 1, 2016). According to the Directive, a voucher means an instrument where there is an obligation to accept it as consideration or partial consideration for a sale of goods or services and on which either the goods or services to be sold or the identities of their potential vendors are indicated. Vouchers may be in physical or electronic form. However, vouchers do not include payment instruments, such as instruments entitling the holder to a discount on purchase of goods or services, but carrying no right to receive such goods or services (e.g., cash back or similar arrangement). The new voucher provisions further do not apply to shipping tickets, admission tickets, postage stamps, or similar transactions.

The Directive distinguishes the VAT treatment applicable to single-purpose vouchers and multi-purpose vouchers. A single-purpose voucher means a voucher where the sourcing of the goods or services to which the voucher relates, and the VAT due on those goods or services, are known at the time of issue of the voucher. A multi-purpose voucher is any other type of voucher.

According to the Directive, each transfer of a single-purpose voucher made by a vendor acting in his own name is considered as a sale of the goods or services to which the voucher relates. The vendor must thus account for VAT on the consideration received for the voucher. Provided the voucher issuer and the vendor of the underlying goods and services are the same, the act of providing the underlying goods or services is not deemed to be a separate transaction for VAT purposes. Where the performing vendor and the voucher issuer are not the same, the performing vendor will be treated as if it had sold the goods or services to the issuer. VAT should thus be accounted for on the consideration the retailer actually selling the goods or services receives from the voucher and, if applicable, the additional consideration received from the consumer redeeming the voucher. Moreover, if the voucher is issued or distributed by a vendor acting on behalf of another, the issue of the voucher will be attributed to that other party.

For multi-purpose vouchers, neither the issue nor the transfer is subject to VAT. The taxable transaction consists only of the sale of the underlying goods or services. The taxable amount will be determined on the basis of general principles. Therefore, in the absence of any information regarding consideration, the monetary value indicated on the multi-purpose voucher or in related documentation should be used.

The Directive applies to vouchers issued effective January 1, 2019, meaning EU Member States have until December 31, 2018, to implement the rules in their domestic VAT laws. To read a report prepared by the KPMG International member firm in Germany, please click here.

European Union: VAT Committee Working Papers Published

The European Commission recently published working papers of the VAT Committee, which was set up to promote the uniform application of the provisions of the EU VAT Directive and is responsible for publishing the nonbinding VAT guidelines. Working paper 906 discusses the interaction between electronically supplied services (ESS) and intermediation services. The issue concerns the situation in which a vendor, acting in the name and on behalf of another party, arranges services that are booked online, but are not themselves electronically supplied (e.g., accommodation and event tickets). The question is whether such services are electronically supplied services and thus taxed where the customer belongs or business-to-consumer (B2C) intermediation services and thus taxed where the underlying service is taxed. According to the Commission, intermediation services should always be taxed where the underlying sale is taxed as the link is very close. Therefore, if the underlying sale is not an ESS, the intermediation service is not an ESS. The reverse is also true. If the underlying sale is ESS, the intermediation service is treated as ESS. It is then necessary to define what an intermediation service is and what is advertising. To act as an intermediary, the Commission considers that the vendor of the intermediation service should play a deliberate role between service provider and customer, by assessing customer needs, vendor suitability, influencing pricing or the selection of who makes the underlying sale. In terms of specific services, the Commission was of the view that an automated bidding process is an electronically supplied service.

Working Paper 907 discusses the issues arising from the Court of Justice of the European (ECJ) decision in the Fast Bunkering (FBK) case. Case C-526/13 (September 3, 2015). Recall, in this case the ECJ held that an intermediary could not sell fuel to ship owners as someone else had done that already. They never saw the fuel, which went straight from owner to the ships’ tanks. So they could only provide services. The fact this might affect their business by requiring them to disclose margins had no impact on the VAT analysis. However, in a situation where fuel was sold to the intermediaries and subsequently sold by them to the ship owners, based on the analysis of what constitutes a sale of goods, then only the second sale of the fuel would be VAT free. The paper examines several different scenarios involving supply chains and goods, especially focusing on scenarios in which the goods are delivered to someone other than the person to whom the goods are legally sold, but that transfer empowers the other person to dispose of the goods, and in which the goods are sold under contracts where commission is payable on either the purchase or the sale.

Other published working papers include Working Paper 892 on the VAT treatment of Bitcoin following the ECJ decision in Hedquist, Case C-264/14 (October 22, 2015), Working Paper 901 on the VAT treatment of greenhouse gas emission allowances, and Working Paper 903 on sales of works of art.

European Union: Failure to Comply With Formal Obligations May Result in Denial of VAT Deduction

On July 28, 2016, the ECJ published its judgment in the Astone case, Case C-332/15, regarding whether the right to deduct VAT may be subject to formal requirements imposed by national legislation. In the case at hand, the taxpayer did not keep accounts, but had issued invoices and failed to submit VAT returns. The taxpayer was charged in criminal proceedings during which he produced invoices by third party undertakings, invoices which were paid, inclusive of VAT, but were not entered into that company’s accounts. The Italian tax authority denied the credit of VAT relating to these invoices because the Italian legislation makes the right to deduct VAT contingent on compliance with formal obligations such as the submission of the relevant returns and recording the invoices concerned in the respective register within a two-year limitation period.

In line with established case law, the ECJ held that the possibility of exercising the right to deduct without any temporal limit would be contrary to the principle of legal certainty, which requires the tax position of the taxpayer, having regard to his rights and obligations vis-à-vis the tax authority, not be open to challenge indefinitely. The national court will have to decide whether the two-year limitation is in line with EU legislation. The ECJ further concluded that according to settled case-law, the fundamental principle of VAT neutrality requires deduction of input tax to be allowed if the substantive requirements are satisfied, even if the taxable person has failed to comply with some of the formal requirements. The case may be different if non-compliance with such formal requirements effectively prevents the production of conclusive evidence that the substantive requirements have been satisfied. The substantive requirements for the right to deduct are those which govern the actual substance and scope of that right whereas the formal requirements regulate the rules governing exercise of the right and monitoring thereof and the smooth functioning of the VAT system. The latter include the obligations relating to accounts, invoicing and filing returns. In addition, Member States may impose other obligations which they deem necessary for the correct collection of the tax and for the prevention of evasion. The ECJ has repeatedly held that EU law cannot be relied on for abusive or fraudulent ends, and national authorities should refuse the right of deduction, if it is shown, in light of objective factors, that that right is being relied on for fraudulent or abusive ends. In the case at hand, even if the infringements of the formal obligations do not prevent the production of conclusive evidence that the substantive requirements giving rise to the right to deduct input VAT are satisfied, the ECJ found that such circumstances may establish the simplest case of tax evasion, in which the taxpayer deliberately fails to fulfil the formal obligations incumbent on him with the aim of evading payment of the tax. In particular, the failure to file a VAT return, like the failure to keep accounting records, which would allow VAT to be applied and monitored by the tax authorities, and the failure to record the invoices issued and paid are liable to prevent the correct collection of the tax and, therefore, to compromise the proper functioning of the common system of VAT. Therefore, EU law does not prevent Member States from treating such infringements as amounting to tax evasion and from refusing to grant the right to deduct in such cases.

Source: IBFD, EVD News: Terra/Kajus (August 1, 2016).

Ireland: Updated Guidance on Management of Special Investment Funds Published

On July 5, 2016, the Irish Revenue Commissioners issued Revenue eBrief No. 63/16, which sets out its position on the management of special investment funds following the ECJ decision in GfBK, Case C-275/11 (March 7, 2013) and on the VAT treatment of management services provided in relation to Self-Directed Life Assurance Bonds and equivalent products.

Recall, in GfBK, the ECJ held that advisory services concerning investment in transferable securities, provided by a third party to a fund manager which managed a special investment fund fall within the concept of “management of special investment funds” for the purposes of the VAT exemption if the activity is “intrinsically connected” to the fund manager’s activity so that it has the effect of performing the specific and essential functions of management of a special investment fund. According to the eBrief, the Irish Revenue Commissioners will consider services outsourced to a third party to constitute the activities of “management” of a specified fund for the purposes of the VAT exemption if (1) the services, viewed broadly, form a distinct whole, and are specific to, and essential for the management of special investment funds and (2) the services are intrinsically connected to the activity characteristic of a fund manager. It is not essential that the outsourced services lead to a change in the legal or financial situation; rather, the services should constitute “an outsourcing, in substantive terms, of the activity of management.” However, mere support or technical activities, such as making IT systems available, providing software, general legal, and accountancy services are not covered by the scope of the exemption.

The Irish Revenue Commissioners further clarified that management services provided to a Self-Directed Life Assurance Bond (SDB) or an equivalent product may qualify as VAT exempt management services of a special investment fund if the following conditions are met: (1) the product must not be treated as a Personal Portfolio Policy in Ireland under Section 730BA of the TCA 1997 when sold to Irish resident investors or if the product is sold to overseas investors, it must not be regarded as equivalent to a Personal Portfolio Policy under corresponding legislation covering personalized portfolio bonds or similar life products in the jurisdiction into which the policies are sold; (2) the assets included in the product must be equally available to all investors within an investor class (i.e., not personalized); and (3) the service provided must constitute “management” of the SDB or an equivalent product in accordance with paragraph 6(4) of Schedule 1 to the VAT Consolidation Act 2010, as amended.

Ireland: Guidance on How to Avoid Being Involved in VAT Fraud Published

On June 30, 2016, the Irish Revenue Commissioners issued eBrief No. 61/16 on how to protect a business from becoming involved in VAT fraud. According to ECJ case law, a taxpayer who knew or ought to have known that, by his purchase of goods, he was party to a fraudulent transaction can have his right to deduct related VAT credits refused. Moreover, a taxpayer who knew or ought to have known that the transaction carried out was part of a tax fraud committed by the purchaser may be denied the right to zero-rate the intra-EU sale to that purchaser. The Irish Revenue Commissioners clarified that it will follow these principles and will apply additional penalties where appropriate. The guidance further proposes due diligence practices and discusses steps to take to establish the integrity of customers, vendors, and sales. It clarifies additional ways to minimize risk of VAT fraud, and reiterates that the Irish Revenue Commissioners has powers to cancel VAT registration numbers and may, in some cases, notify vendors and/or publish those cancellation details. Finally, the guidance asserts that it is up to taxpayers to be diligent in the conduct of their business and to ensure that appropriate checks are undertaken and recorded. If a commercial proposition looks too good to be true, it probably is, and taxpayers need to undertake whatever enquiries are necessary to establish the bona fides of the transaction or transactions concerned and the trading partners involved.

Netherlands: Pension Funds May Not Automatically be Entitled to Deduct VAT on Costs Recharged

On June 17, 2016, the Advocate General of the supreme court of the Netherlands issued his Opinion in Case no. 15/04099 on the deduction of VAT charged on the costs that a company pension fund recharged to the group entities for which it operates the pension. In the case at hand, the taxpayer is a company pension fund that administers the pension plans of various companies (which provide taxable services) of the same group (the “employer”). It was decided to dissolve the company pension fund and transfer the pension entitlements to an industry-wide pension fund. Included in the written agreement was the rule that the employer would contribute to the transition costs incurred by the pension fund. In accordance with this agreement, the pension fund issued an invoice (including VAT) to the employer for the purposes of recharging the majority of the costs incurred, and the VAT was deducted on the incoming costs. The Supreme Court was asked to rule on whether the company pension fund was correct in deducting the input VAT charged on the incurred costs with regard to the transition. The Court of Appeals had previously confirmed that the recharging of costs must be regarded as a payment for a taxable service which a company pension fund provides to the employer. (For KPMG’s previous discussion on the Court of Appeals decision, please click here.) However, the Advocate General disagreed with the ruling of the Court of Appeals, and stated that the tax inspector was not given sufficient opportunity to refute the presumption that the payment to the company pension fund is reciprocated by identifiable service. According to the Advocate General, the Court of Appeals should have identified the taxable service it refers to that was directly related to the recharged costs. The Advocate General has advised the Supreme Court to refer the case for an examination of facts. In practice, the possibility of pension funds being able to deduct the VAT on incoming costs by way of recharging costs to the employer is an issue that often comes up for discussion. The judgment rendered by the Court of Appeals confirmed that a VAT-taxable service can be the underlying factor in the recharging of costs to the employer and offers an additional argument to substantiate the deduction of VAT on incoming costs. However, if the Supreme Court follows the Opinion of the Advocate General, the case will be referred to a Court of Appeals for a further examination of the facts. To read a report prepared by the KPMG International member firm in the Netherlands, please click here.

Netherlands: Proposal to Simplify VAT Refunds in Case of Bad Debts

The Dutch government recently introduced a bill that, if adopted, would simplify rules for the refund of VAT in the case of bad debts effective January 1, 2017. Under current legislation, VAT can only be reclaimed if the receivable, in full or in part, is irrecoverable; the moment of which is often difficult to determine and subject to differences on review. The new bill includes an evidentiary presumption, whereby a receivable is in any case deemed to be irrecoverable no later than one year after the date on which the payment became fully due and payable. Furthermore, under the proposed legislation, the amount of the VAT refund is deducted in the VAT return for the period in which the entitlement to the refund arose, eliminating the requirement for a separate refund request to be filed. If a VAT refund has been made, and full or partial payment is received at a later date, the refunded VAT must be repaid under proposed changes. If accounts receivable are transferred, the proposed legislation provides the buyer replaces the transferring vendor, indicating that the entitlement to the refund of VAT is transferred to the business that acquires the receivables. If VAT has been deducted by a purchaser, the VAT deduction should be corrected once it is obvious that the receivable, in full or in part, will no longer be paid. At present, this adjustment must be made no later than two years after the receivable became fully due and payable. The new bill reduces this period to one year, so that it is the same as for the refund. Finally, the new bill reduces the VAT deduction adjustment period from two years to one year. These proposed changes would also apply to the refund of VAT in the case of partial bad debts. In such a case, the Explanatory Notes to the proposed changes explicitly state the amount of VAT to be refunded will be calculated in proportion to the portion of the previously invoiced payment that was not received. To read a report prepared by the KPMG International member firm in the Netherlands, please click here.

Romania: Amendments to VAT Reporting Requirements

On July 15, 2016, the tax authority of Romania published in the official gazette Order no. 2048 (the Order), which amends VAT reporting requirements effective July 30, 2016. According to the Order, the following sections of Form 088 have been removed: (1) details of headquarters/secondary offices; (2) the section regarding details of any administrators of the company, who were also administrators of other Romanian companies in past five years and had debts to the State Budget; (3) details of minor offences recorded in the fiscal criminal records of administrators/shareholders; (4) the section requesting details of contacts in Romania who could give information about administrators/shareholders, and main financial indicators obtained by shareholders; (5) the section in which shareholders and administrators had to declare the companies where they hold or have held status of administrator/shareholder in past five years; and (6) the section in which the taxpayers had to state the number of 088 forms filed. In addition, the following documents are no longer required to be submitted with Form 088: (1) employment contracts recorded in REVISAL for individuals holding relevant positions in the company; (2) documents giving details of the education levels of administrators; and (3) documents giving details of the nature and amount of gross income obtained during the last 12 months by administrators of the company. However, the following information must now be provided: (1) a description of the activity carried out by the company, mentioning the main clients/vendors; (2) details of addresses where an investment will be made, the length of time that the investment will be carried out, its estimated value, and the number/date of building permit; (3) assets and their net value held by the company which it uses to carry out its main economic activity; and (4) information on the type of intra-Community transactions carried out in/outside the EU, the nature and value of the goods/services, and country of origin and country of destination. Finally, the Order clarifies that Form 088 must be submitted by taxpayers when requesting VAT registration, or if they have been selected by the tax authority as representing a high degree of fiscal risk. To read a report prepared by the KPMG International member firm in Romania, please click here.

Russia: Nonresident E-Services Providers Required to Register for VAT Effective January 1, 2017

On June 15, 2016, the Russian Parliament passed a new law that imposes new VAT obligations on foreign vendors of e-services to Russian customers, effective January 1, 2017. (For KPMG’s previous discussion on the earlier proposals, please click here.) According to the law, e-services include services relating to remote access to software and updates thereto; internet advertising; internet-platforms; cloud storage; hosting; provision of domain names; data storage and processing; remote system administration; sales of digital books, images, music, movies, etc. However, the following are not classified as electronic services: the sale of goods where goods ordered via the internet are provided without the internet; the sale of computer programs on physical storage media; the provision of consulting services by electronic mail; and the provision of Internet access services.

E-services will be sourced based on the location of the customer. Foreign e-service vendors (and intermediaries) providing services directly to Russian individual customers will be required to register for VAT purposes in Russia. The tax base will be determined as the cost of electronic services inclusive of VAT. A tax-inclusive rate of 15.25 percent is to be applied to the tax base in calculating tax, and must be paid by foreign companies no later than the 25th of the month following a quarter which has ended. Furthermore, if a foreign or Russian legal entity is an intermediary in a complex e-service supply chain, it may be difficult to identify which party should act as the VAT agent for a foreign e-service vendor, which is why intermediary legal entities should structure their transactions carefully with counterparties and pay close attention to the wording of the related channels. Moreover, the law retains the VAT exemption applicable to the sale of software and/or databases on the basis of a license agreement.

Finally, if a foreign company registers for VAT under the new law, but submits inaccurate information upon registration, fails to pay VAT, any fine or penalty; fails to provide the tax authority with the requested documents; or fails to file tax returns with the tax authority, the non-compliant foreign company will be de-registered and no re-registration will be possible until any VAT, penalty and late payment interest have been paid. If a nonresident company sells e-services to Russian consumers without a VAT registration and the VAT liability exceeds RUB 1.5 million ($22,600), the company’s officials will face criminal charges for illegal business activities. To read a report prepared by the KPMG International member firm in Russia, please click here.

Source: CCH, Global Tax Weekly – A Closer Look, Bill on Taxation of Electronic Services Adopted in Third Reading (July 21, 2016).

Russia: VAT Guidance Letters Issued

Russia’s Ministry of Finance (MOF) and Federal Tax Service (FTS) issued two guidance letters clarifying the VAT implications of specific transactions. Guidance Letter 03-07-11/40960 dated July 13, 2016 clarifies that a resident legal entity’s transactions involving the granting of an option to conclude a contract with that entity or the assignment of rights under that option are subject to VAT in accordance with the general established procedure.

Guidance Letter SD-4-3/11936 dated July 4, 2016 clarifies the VAT treatment of cross-border freight forwarding services provided to a Russian legal entity by several foreign carriers using seagoing vessels and motor vehicles. According to the Letter, international shipping means the shipment of goods by seagoing vessels, river-going vessels, and mixed (sea-river) vessels, as well as shipment by aircraft, railway, and motor vehicles if the points of departure or destination are located outside Russia. Therefore, freight forwarding services involving the sea and road shipment of goods should be considered provided in Russia only if the point of departure or destination are in Russia. The freight forwarding services should be zero-rated even if the services are provided by several entities.

Source: Tax Analysts, Russia Issues VAT Guidance Letters (July 27, 2016).

Asia Pacific (ASPAC)

China: VAT Exemptions Expanded for Financial Services Industry

On June 30, 2016, the Ministry of Finance (MOF) and State Administration of Taxation (SAT) jointly issued Circular Caishui [2016] 70 (Circular 70) which expands the VAT exemption affecting the financial services sector. Recall, effective May 1, 2016, China transitioned all remaining business sectors, including the financial services sector, from the business tax to VAT. The model chosen by the government was one of having VAT apply to most financial services, including not only fee based services as in many other VAT jurisdictions), but also taxing many margin-based services. Only limited exemptions were provided.

Circular 70 clarifies or expands the scope of the financial services exemption included in Caishui [2016] No. 36 (Circular 36). The financial services exemptions now apply to lending activities between a bank and the People’s Bank of China (PBOC), interbank placements, interbank deposits, interbank short term lending, interbank domestic lending, interbank cross-border lending, interbank payments by direction, discounted bills of exchange, holding of bonds issued by financial institutions including the Import – Export Bank of China or the China Development Bank, pledged-type reverse Repo, and outright-type reverse Repo.

Circular 36 further provided that gains from trading in financial products are generally subject to VAT. However, Circular 70 clarifies that the VAT exemption applicable to Qualified Foreign Institutional Investors also applies to RMB Qualified Foreign Institutional Investors. Moreover, pursuant to Circular 70 an investment in the interbank money market by an offshore entity approved by the PBOC is also VAT exempt. Finally, Circular 70 clarifies that deposits between financial institutions are VAT exempt.

With the expansion of the VAT exemption, it is likely that the non-recoverable amount of VAT incurred on expenditures will increase, and financial institutions will be required to perform an apportionment of their VAT recoverability. To read a report prepared by the KPMG International member firm in China, please click here.

India: Constitution Amendment Bill Allowing to Impose GST Passed by Upper House

On August 3, 2016, India’s Rajya Sabha (upper house of parliament) approved the Constitution Amendment Bill (Bill 192 of 2014) allowing for the implementation of a national GST regime that will replace several indirect taxes levied at the federal (Central) and State levels. Recall, under the proposed indirect tax reform, India would implement a Central GST (CGST) at the federal level, a state GST (SGST) at the state level, and inter-state GST (IGST) on inter-state transactions. The proposed GST would replace most of the existing federal and state indirect taxes, including central excise duty, service tax, VAT, and central sales tax. The approval completes the main legislative process for the Bill, but it must still be ratified by at least 50 percent of the states and receive presidential assent before entering into force. Although additional steps are needed, it is not expected that the entry into force will be delayed.

According to an overview of next steps published by India’s Ministry of Finance, once the Constitution Amendment Bill is implemented, the Indian federal cabinet will have to form a GST Council which will recommend the Model GST Laws. The federal legislature will then have to approve the CGST and IGST laws, whereas all state legislatures will have to approve the state specific SGST laws. It is expected that the various GST laws will be approved in the last quarter of 2016.Moreover, the final rules and the necessary IT infrastructure will be completed by the end of 2016, with the roll out of the GST regime expected to take place on April 1, 2017.

Trade & Customs (T&C)

European Union: Expanded Customs Security and Clearance Program with China

On July 18, 2016, the European Commission announced that the EU and China have agreed to expand the “smart and secure trade lanes” (SSTL) pilot project that allows testing end-to-end supply chain security instruments and mechanisms in line with the World Customs Organization (WCO) SAFE framework of standards governing security measures applied to containers, facilitating Customs-to-Customs data exchange, risk management cooperation, mutual recognition of customs controls and trade partnership programs. Signed into effect July 15, 2016, Phase 3 of the SSTL pilot project means that the General Administration of China Customs and Hong Kong Customs join the customs authorities of eight EU Member States (Belgium, France, Germany, Italy, Netherlands, Poland, Spain, and the United Kingdom) and the Directorate-General for Taxation and Customs Union of the European Commission. Furthermore, seven additional EU Member States (Czech Republic, Greece, Hungary, Lithuania, Portugal, Romania, and Slovakia) as well as the WCO are to take part as observers. Phase 3 is intended to result in an increase in the share of goods traded between participants covered by SSTL, and is thus expected to have a substantial impact on overall supply chain security and trade facilitation between the EU and China. This involves notably expanding the scope of the pilot, both geographically as well as to air and rail shipment, in addition to maritime shipment; increasing the volume of consignments covered; and incorporating advanced risk management techniques and developing common risk rules. A data exchange mechanism is being developed to support the above objectives and actions. To read a report prepared by the KPMG International Member firm in the European Union, please click here.

Indonesia: Voluntary Declaration of Customs Value for the Calculation of Customs Entries

The Ministry of Finance of Indonesia recently issued Regulation No. 67/PMK.04/2016 on Voluntary Declaration of Customs Value for the Calculation of Customs Entries, which introduces the process of “voluntary declaration,” effective May 27, 2016. This procedure allows importers to use an estimated transaction value as the basis of their import payable calculation. The Regulation further governs the obligation of importers in the voluntary declaration of customs value and the requirements to determine future price, royalty and proceeds, which constitute transaction value for custom purpose. Importers are required to undertake “voluntary payments” to cover any difference if, at a later date, the estimated transaction value is found to be lower than the actual transaction value. Importers are also required to settle any underpaid import duty and/or import tax to the customs office. To read a report prepared by the KPMG International member firm in Indonesia, please click here.

In Brief

About Inside Indirect Tax

Inside Indirect Tax is a monthly publication from KPMG’s U.S. Indirect Tax practice. Geared toward tax professionals at U.S. companies with global locations, each issue will contain updates on indirect tax changes and trends that are relevant to your business.