VAT Tax

According to the media an administrative court in Spain has nullified 5.1 billion EUR worth of VAT tax assessments sent out to taxpaying businesses from 2006 through 2008.

The 5.1 billion, EUR includes assessments and related penalties.  Apparently, the agency based assessment on calendar years, when the law requires that it be done on a monthly or quarterly basis.
 
The 5.1 billion EUR will have to be returned to over 480,000 entities who were charged the tax. But the Treasury hopes to reassess using the required monthly and quarterly periods.

According to the media the Estonian government has approved the following draft amendments to the country’s VAT Act:

• VAT payers whose turnover does not exceed €200,000 would be entitled to use cash-basis VAT accounting; The amendment is based on EC Council decision 2009/1022 of December 15, 2009, which authorizes Estonia to apply a measure derogating from
article 167 of EU VAT Directive (2006/112/EC).

• For anti-evasion purposes, taxation by reverse charge would be extended to the
supply of waste metal and real estate.

• The special tax regime applicable to cross-border supplies of natural gas and
electricity via network would also be extended to heating and cooling energy. Under
the special tax regime, the place of supply of heating and cooling energy would be the
place where the customer is established. This amendment would implement changes
introduced to the EU VAT Directive by Council Directive 2009/162/EC.

If adopted, the amendments will enter into force on January 1, 2011.

It has been reported that  Britain's tax authority will introduce reverse value-added tax (VAT) charges relating to carbon emissions trading from November 1, 2010, replacing a zero tax rate implemented last year to prevent fraud.

The zero VAT rate was put in place in July 2009 as an interim measure to halt rapidly escalating carousel fraud in spot trading of European Union carbon permits, called EUAs, HMRC said.

The new reverse charge will also apply to sales of two types of Kyoto Protocol carbon offsets called Certified Emissions Reductions (CERs) and Emissions Reduction Units (ERUs).

HMRC had been awaiting an EU-wide directive to provide a reverse charge option, which was finally adopted by member states in March.

You can access the HMRC announcement at: http://www.hmrc.gov.uk/briefs/vat/brief3510.htm

The rules are as follows according to Canada Post:

• Most Canada Post goods and services are subject to the Federal Goods and Services Tax (GST), and to the Provincial Sales Tax (PST or QST) or to the Harmonized Sales Tax (HST), where applicable.
• Effective July 1st, 2010, Canada Post goods and services will be subject to Ontario and British Columbia HST at the rate of 13% and 12%, respectively.
• There are certain items sold by Canada Post that are not taxable such as postal Money Orders, the fee on a Money Order and the exchange on a Money Order.
• Certain Provincial governments and their entities and certain Indian Bands and Natives are exempt from paying sales taxes.
   

In the UK, government ministers have advised professional representatives that they will make online filing of VAT returns compulsory for all businesses from 1 April 2012.

According to the reporting media, people who have a conscientious objection to using a computer will be able to continue filing paper returns and the CIOT has argued that some people with disabilities that prevent them using computers should also be exempted from the rule. 

Obviously, there are a few issues to be finalized yet and I will keep you informed as the information becomes available.

Since 1980 when the VAT Law was implemented the Mexican Government has been facing a tax dilemma related to the scope of VAT. The main point of discussion has been to expand the scope of the Value Added Tax to include food and medicines.

With just a month far away from the 2011 Budget presentation, Mexico’s two biggest parties have expressed their agreement on taxing current exempt goods such as food and medicines.

In an interview with Bloomberg legislator David Penchyna from the Institutional Revolutionary Party (PRI) spoke in favor of taxing some food items by applying a low rate but keeping a basket of basic foods exempt to reduce costs for the poor.

President Felipe Calderon has September 8^th as his deadline to submit the 2011 Budget Proposal.

On 30 June 2010 when updating the information on the Romanian VAT rate in my blog I made the following statement: “I trust that other EU Member States may follow in the near future.  I have my eye on the Czech Republic.”

I admit that at the time I did not have Poland in mind.   However, I got this partially right in suggesting that other EU Member States may increase the VAT rate.    Poland's prime minister is on record as saying that his government plans to raise the value-added tax by one percentage point to 23 percent as part of efforts to tackle the country's budget deficit.   Therefore, it is highly likely that Poland will be the next EU Member State to use a hike in the indirect tax rates to battle its country’s deficit.

The ECOFIN Council which met on 13th of July has adopted a directive aimed at simplifying VAT invoicing requirements, in particular as regards electronic invoicing. The new directive sets out to ensure the acceptance by tax authorities of e-invoices under the same conditions as for paper invoices, and to remove legal obstacles to the transmission and storage of e-invoices.  It also comprises measures to help tax authorities ensure that tax is paid so as to better tackle VAT fraud. These include establishing deadlines for the issuance of invoices, thus enabling speedier exchange of information on intra-EU supplies of goods and services.

Also, the Council has decided to allow Estonia to adopt the euro as its currency with effect from 1 January 2011.

While the political debate over the pros and cons of the HST is being waged in British Columbia,  it is becoming apparent that the HST will have an effect on Washington State’s revenue. An announcement from the Washington Department of Revenue on June 8, 2010 states that British Columbia residents will soon be entitled to an exemption from state and local sales taxes on merchandise.  British Columbia residents will be able to get the exemption by showing their driver’s licenses.  The new exemption for British Columbia residents is the result of two factors:

·         the 1965 law meant to benefit Clark County merchants; and

·         a change in the tax system in British Columbia.

The 1965 law says that people whose home states or provinces have a sales tax of 3 percent or less are entitled to a sales tax exemption when they shop in Washington.  British Columbia's provincial sales tax is now 7 percent, and as of July 1, 2010 will become a component of the 12% HST rate.  At least in this case, a value added tax is not viewed as a sales tax to the “benefit” of British Columbia residents.  This will result in legal and interpretive arguments on what constitutes a sales tax.  In my view what should be debated is tax fairness and the question of double taxation resulting from cross border commerce.  The US and Canada have integrated their economies but have missed on opportunities to integrate indirect tax laws to the level of personal income tax to avoid double taxation specifically for consumers.  Presently, where a resident of British Columbia buys taxable goods from a merchant in Washington State he/she also pays the sales tax and the GST and PST on return to British Columbia.  Whatever the arguments in Washington State, effort should be made to avoid the double taxation of consumers.  In addition, where a US resident shops in Canada there are mechanisms to recover the GST/HST on exit from Canada which is neither fair nor equitable as it lacks reciprocity. 

The Council of the Economic and Finance Ministers (the “Council) of the 27 EU Member States has met in Luxembourg on Monday, June 6, 2010 and has agreed to establish Eurofisc - a “common operational structure” which would allow member states to coordinate “rapid action in the fight against cross border value added tax (VAT) fraud. On Wednesday, June 8, 2010 the Council made the following press release:

“The Council today reached political agreement on a draft regulation aimed at enabling the member states to step up their efforts in combating fraud with regard to value-added taxation (VAT).

The main innovation involves the creation of Eurofisc, a network of national officials to detect and combat new cases of cross-border VAT fraud.  Combating VAT fraud represents a major challenge for the EU, as every year it costs member states billions of Euros in lost revenues. VAT fraud is often organized on a cross border basis, in particular so-called carrousel schemes where goods are traded amongst several operators in different member states without paying VAT to the tax authorities.

The Council has highlighted the need for a common approach, so as to make cooperation between tax administrations more effective and to give member states the means to combat

VAT fraud more effectively.  The draft regulation, which recasts regulation 1798/2003, specifies the cases in which member states must exchange information spontaneously, the procedures for providing feedback on such information and situations in which member states must conduct multilateral controls.

 The Eurofisc network, in which all member states will participate, will enable targeted and swift action to be taken in order to combat new and specific types of fraud. It will involve a multilateral early warning mechanism, and the coordination of both data exchange and the work of liaison officials in acting upon warnings received.

The regulation will be adopted without discussion at a forthcoming Council meeting, once the text has been finalized.”

From the beginning of 2010 the total indirect tax rate changes in our international practice (outside the US) were approximately 40, which is consistent when compared with the changes made in the same time period last year.  Predominantly, the trend has been for governments to increase the rates of indirect taxes as a source of reliable revenue.  For example nine Indian States have increased the VAT rates since the beginning of 2010. Indonesia has increased the maximum rate of the luxury tax to 200% and Canada’s province of Nova Scotia will increase its provincial component of the HST to 10% on July 1. 2010.  Many more are planning increases including Panama, Belize, New Zealand, and Quebec, Canada.   

 While there is a general trend to increase the VAT worldwide, there seems to be disunity in Europe. Some European states are relying on higher VAT rates to shore up its budget deficits.  The most notable increase in the VAT rate has been in Greece where the rate has jumped from 19% to 21% and on July 1, 2010 it will rise again to 23%.   Iceland presently has the highest VAT rate at 25.5% of all existing and aspiring EU Member States after its economy wielded to the global financial crisis. Other European states that saw increases in the VAT rates in the first half of 2010 were Belarus and Moldova. In July of 2010 Finland will increase its VAT rates with a single percentage.  There are calls for VAT rate increases in Spain, Portugal, Latvia, and Switzerland.  It is likely that by the end of this year or early 2011other European countries will increase their VAT rates. 

At the same time some European countries are bucking the global trend, choosing to not increase the VAT or even lower some VAT rates as a fiscal stimulus to their economies. In the first half of 2010 Germany, Ireland, Belgium, Hungary, and Slovenia saw targeted decreases of VAT specific to certain product taxability.    

Other European countries have gone back and forth on their VAT rate several times.  Bulgaria’s government for example has committed to lowering the VAT rate in principal, however due to immediate budgetary constraints may temporarily be forced to increase it, instead. Latvia and Romania seem to be caught in the same dilemma between budgetary deficit constraints and economies that need stimulating.
 

VAT in the US?

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