Issue No. 2, 2014

VAT newsletter

Welcome to the second 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 around the world 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 as a way of informing 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 howard.lambert@ey.com.

GlobalEY’s Indirect Tax Briefing: ninth edition

EY’s Cloud Computing Tax Guide now available on the EY Global Tax Guides app

AmericasMexico — Companies in Mexico may apply for VAT and

excise tax certification

Asia-PacificJapan — Levying of consumption tax on electronic

services purchased from abroad

EuropeEuropean Commission — VAT rates applied in the EU

Member States as of 13 January 2014

European Commission — Expert Group on Taxation of the Digital Economy: VAT issues

European Commission — VAT place of supply changes from 2015: guide to the mini one-stop shop

European Commission — Extension of trial of VAT ruling requests for complex cross-border transactions

European Commission — Fighting tax evasion and avoidance: progress against the Action Plan

European Commission — Updated details of VAT Committee guidelines as of 20 November 2013

European Commission — Regulation: notification form for Quick Reaction Mechanism

Czech Republic — General Financial Directorate’s opinion on the application of VAT on real estate

Germany — European Court of Justice rules on the Ibero Tours GmbH VAT case

Italy — Increase of threshold for VAT credits and fast-track” VAT refund claims

Italy — New “Google tax” law: VAT implications for the provision of online advertising services

Poland — Proposed Council decision: deduction on motor vehicle costs

Romania — European Court of Justice rules on Fatorie VAT case

Spain — Changes to the Spanish VAT return

Middle East, India and AfricaBotswana — Budget 2014–15

Egypt — Expected introduction of VAT

Kenya — VAT Act 2013

Introduction

Summary

EY’s Indirect Tax Briefing: ninth editionThe ninth edition of EY’s Indirect Tax Briefing is now available. In addition to our regular “snapshot” overview of recent and upcoming indirect tax changes around the globe, the trends and themes section of this issue contains an interview exploring the work of the EU VAT Expert Group, the indirect tax results of the recent EY Worldwide computing guide and a review of the business and tax considerations of carbon regimes around the world. Our network of VAT and Global Trade professionals also provide information and insights on indirect tax developments and hot topics in a number of countries. You can access the latest Indirect Tax Briefing here.

EY’s Cloud Computing Tax Guide now available on the EY Global Tax Guides appThe Cloud Computing Tax Guide is now available externally in app form. It is catalogued as one of the worldwide tax guides available in the iTunes Store under the EY Global Tax Guides app. This app can be downloaded via the app store or at ey.com/TaxGuidesApp.

2 VAT Newsletter2

Mexico — Companies in Mexico may apply for VAT and excise tax certificationMexico’s Tax Administration Service (SAT) issued the sixth Amendment to Mexico’s General Rules on Foreign Trade for 2013 on 1 January 2014. The amendment includes the specific requirements, benefits and obligations for companies that apply to obtain a VAT and excise tax certification.

BackgroundAs a result of the 2014 Mexican tax reform, beginning 1 January 2015, temporary imports under the maquiladora program in Mexico (IMMEX) and imports under certain types of qualified customs programs will be taxed at the 16% general VAT rate and at the applicable rate under Excise Tax Law provisions. These new regulations are especially relevant for companies with export manufacturing operations in Mexico.

Under the VAT Law and Excise Tax Law provisions, however, companies that obtain a VAT/Excise Tax Certification may get a credit equivalent to 100% of the applicable VAT or excise tax to offset the tax payable upon the importation of goods under any type of qualified customs program, provided that such certification is obtained before 1 January 2015.

There are three categories of certification that the authorities may grant: A, AA and AAA, each with progressive benefits, requirements and obligations.

BenefitsThe following chart summarizes the difference in benefits for each certification level:

AmericasGlobal

3March 2014 — Issue 2 3

Benefits A AA AAAVAT and excise tax credit on temporary imports under a qualified program

Yes Yes Yes

Expedited VAT refund terms 20 days 15 days 10 days

Validity of certification 1 year 2 years 3 years

Grace period for self-correction due to irregularities identified by the taxpayer

N/A 30 days 60 days

Issuance of an invitation letter to correct any presumptive omission of customs taxes rather than a formal requirement by tax authorities

No Yes Yes

If the tax authorities identify any cause for suspension of the importer’s and specific exporter’s registry of the company, requirement for the tax authority to follow the suspension process regardless of the cause for suspension (i.e., to notify the taxpayer, grant a period to detract the arguments and provide documentation to correct the suspension)

No Yes Yes

Option to file monthly consolidated import documents (pedimentos) No No Yes

Provided the taxpayer transmits certain data of the inventory control system under the terms set forth by SAT, taxpayer deemed to have complied with the obligations set for importers under Article 59 of Customs Law and Annex 24

No No Yes

Possibility for customs clearance without declaring or transmitting the serial numbers in the pedimento, or applicable document, under certain conditions

No No Yes

Option for taxpayers to conduct customs clearance for export at their domicile, provided they meet the guidelines published here

No No Yes

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RequirementsFor type A certification, taxpayers should meet the general requirements and the specific requirements by type of customs program. To achieve a type AA or type AAA certification, taxpayers have to meet additional requirements, which are summarized below.

General requirementsUnder the general requirements, a taxpayer must:

• File an application for the certification through the single-window system (VUCEM)

• Keep an inventory control system that meets SAT requirements, which currently means taxpayers must maintain an inventory control system for customs purposes though this may change

• Have a positive opinion of the company’s compliance with tax obligations issued by SAT 30 days before filing the application

• Not be on SAT’s list of non-compliant taxpayers at the time of filing the application

• Have valid certificates of digital seals for electronic invoices that were not deemed invalid by SAT during the 12 months preceding the application’s filing

• Provide records of the total number of personnel enrolled at the Mexican Social Security Institute (IMSS) and provide supporting documentation of the payment of IMSS contributions for at least 10 employees (for subcontracted labor, additional information will be required)

• Provide documentation that evidences the investment in Mexico

• Include in the application the name and address of foreign customers and suppliers with which foreign trade activities were carried out during the previous year

• Allow access to the Customs Audit Administration personnel when required to verify compliance with customs parameters

Specific requirements by type of customs programIn addition to the general requirements, depending on the type of customs program under which the taxpayer operates, specific requirements should be met. These are outlined in the following table.

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Specific requirement IMMEX

IMMEX sensitive products

Bonded warehouse

(automotive)

Strategic and non-strategic

fiscal areaHave valid authorization (IMMEX, bonded warehouse, strategic and non-strategic fiscal area)

Yes Yes Yes Yes

Comply with the requirements related to obtaining an authorization for a bonded warehouse (Rule 4.5.30)

N/A N/A Yes N/A

Comply with the guidelines of the customs authorities for control, monitoring and security of the facility and the merchandise

N/A N/A N/A Yes

Be registered with SAT and have all tax addresses or establishments related to the IMMEX program

Yes Yes N/A N/A

Have the necessary infrastructure to perform an IMMEX program operation (industrial or services)

Yes Yes N/A N/A

Have evidence that the value of the transformed and exported goods in the last 12 months represents at least a certain percentage of the value of temporary importations

60% 80% N/A N/A

Have proof of the legal use or enjoyment of the property where the activities are being engaged for at least a year from the filing date of the application

Yes Yes N/A N/A

Describe the activities of manufacturing or services processes according to the instructions for certification (to be published)

Yes Yes N/A N/A

Have a maquila agreement, purchase or services order, buy-sell agreement, to prove the continuance of an export project

Yes Yes N/A N/A

Maintain ongoing operations under an IMMEX program for at least 12 months before submitting the application

N/A Yes N/A N/A

Provide certifications and other requirements of all the employees registered with the IMSS for at least 20 additional employees

N/A Yes N/A N/A

Have evidence of taxable income in tax returns filed from the last two years submitted for the shareholders, legal representative or directors

N/A Yes N/A N/A

List freight companies, and if applicable, the fiscal areas with which customs operations have taken place

N/A Yes N/A N/A

Meet the threshold for equity or machinery and equipment value: MXN4 million (US$305,000)

N/A Yes N/A N/A

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Additional requirements to achieve AA or AAA certificationTo achieve either a type AA or type AAA certification, taxpayers under any type of customs program must additionally meet the requirements listed below. Although not many, these additional requirements significantly increase the level of compliance and due diligence to obtain and/or maintain the certification levels.

Additional requirements AA AAAPercentage of the value of the core operations conducted in Mexico during the previous year that took place with suppliers that have a positive opinion of their compliance with tax obligations

40% 70%

Either of:• Minimum number of years of operations under the

regime for which the certification is requested5 years 7 Years

• Minimum average number of employees, registered before IMSS during the previous year

1,000 2,500

• Minimum value of equity or machinery and equipment MXP50 million

(US$3.8 million)

MXP100 million

(US$7.6 million)

Number of months without tax assessment issued by SAT before the filing of the application

12 months 24 months

Not applicable if the applicant requests the authorization from SAT to pay the tax assessment in installments within 12 months following the request

Yes Yes

Number of months without negative resolutions issued by SAT for VAT refunds requested before filing the application

12 months 12 months

In addition, the amendment contemplates a list of obligations that the certified companies are required to permanently observe and the causes for cancellation in case of non-compliance with those obligations.

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Under the amendment, the tax authorities are required to issue a resolution within 40 days of receiving the electronic application. If the tax authorities deem that additional information is necessary to issue the certification, the taxpayer will be granted a one-time, 15-day period to provide the information; otherwise, the application will be dismissed. The 40-day period will be computed when all requirements related to the filing have been met. If, after the 40-day period, the authority has not issued a resolution, the request will be deemed to be denied.

For renewals, taxpayers with a certification may apply 30 days before the date of expiration through the VUCEM. If, after 20 days, the tax authorities provide no response, the resolution is deemed to be favorable. Level AA and AAA companies are eligible for an automatic renewal.

The following calendar and the company’s tax address have to be observed when applying for the certification.

Customs Regional Administration PeriodCertified companies under the terms set forth by Rule 3.8.1, Chapter L of the General Free Trade Rules and companies operating under a bonded warehouse for assembly or manufacture of vehicles

1–30 April

North Pacific 15 April–15 May

Northeast 3 June–3 July

Center North 7 July–7 August

Center 7 August–8 September

West and South 22 September–22 October

Asia-Pacific Europe

Japan — Levying of consumption tax on electronic services purchased from abroad Japan is currently contemplating imposing consumption tax on electronic services that are purchased by Japanese consumers from abroad by requiring foreign service providers to register with the Japanese tax authorities.

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European Commission — VAT rates applied in the EU Member States as of 13 January 2014The European Commission has issued an updated document reflecting the VAT rates applied in the European Union (EU) Member States as of 13 January 2014.

The updated document can be accessed by clicking here.

European Commission — Expert Group on Taxation of the Digital Economy: VAT issuesThe European Commission’s high-level Expert Group on Taxation of the Digital Economy is examining the best ways of taxing the digital economy in the EU, weighing both the benefits and risks of various approaches. Its focus is on identifying the key problems with digital taxation from an EU perspective and presenting a range of possible solutions. The Commission will then develop any necessary EU initiatives to improve the tax framework for the digital sector in Europe.

The second meeting of the Expert Group was held on 14–15 January 2014. One of the topics discussed at the meeting was the digital economy and VAT. Specifically, on the basis of a Working Paper on VAT issues prepared by the Commission in advance of the meeting, the group discussed the new rules concerning telecoms, broadcasting and electronic services supplied to EU resident individuals that will enter into force on 1 January 2015 and the existing rules concerning the supply of goods ordered online (both within the EU and from a third country), as well as the main emerging issues.

The summary record of the meeting and the working paper can be accessed by clicking here and here respectively.

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European Commission — VAT place of supply changes from 2015: guide to the mini one-stop shopThe European Commission has drawn attention to the fact that a shorter (31 pages) version of its Guide to the VAT mini One Stop Shop is now available. This practical guide has been prepared in order to provide a better understanding of the EU legislation relating to the mini one-stop shop. To recap, on 1 January 2015, changes will be made to the EU VAT place of supply rules for telecoms, broadcasting and electronic services supplied to EU resident individuals. From this date, instead of VAT being payable in the Member State where the supplier is established, it will become due where the customer is located. This means that affected businesses will have VAT reporting obligations for every Member State in which they have non-business customers, although the mini one-stop shop will enable such businesses to comply with all of their VAT obligations in all Member States from their country of registration.

The guide and more general information on the 2015 changes can be accessed by clicking here and here respectively.

European Commission — Extension of trial of VAT ruling requests for complex cross-border transactionsIn May 2013, the European Commission announced that a group of 13 EU Member States (Belgium, Estonia, Spain, France, Cyprus, Latvia, Lithuania, Malta, Hungary, the Netherlands, Portugal, Slovenia and the UK) had agreed to participate in a pilot system of EU VAT rulings involving complex cross-border transactions.

The trial envisages that taxable persons planning complex cross-border transactions involving two or more of the participating Member States may request a cross-border ruling on the VAT treatment of the proposed transactions. The request should be made via the tax authorities in the participating Member State where the taxable person is registered for VAT purposes, in line with the conditions governing national VAT rulings in that Member State.

On the basis of such a request, the tax authorities of the Member States concerned will consult each other with a view to reaching a common view on the VAT treatment of the proposed transactions, though there is no guarantee that a consensus will be reached in all cases. In November 2013, HMRC acknowledged its participation in this trial and confirmed that it will accept such VAT ruling requests provided the person making the request is registered for VAT in the UK; the request complies with the conditions for non-statutory clearance; and it relates to a complex, cross-border transaction involving two or more of the aforementioned Member States.

On 22 January 2014, the Commission announced that this trial, which had been scheduled to run between 1 June 2013 and 31 December 2013, has now been extended to 31 December 2014. The trial has also been opened to all Member States. Finland has already decided to join the 13 original participants. Names of other Member States will be announced as soon as they confirm their participation. A midterm review of the trial will be conducted in June 2014.

The Commission’s announcement and more detailed information on the trial can be accessed by clicking here and here respectively.

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European Commission — Fighting tax evasion and avoidance: progress against the Action PlanOn 5 December 2013, the European Commission published a memo and accompanying presentation that provide an update of progress made by EU institutions against the Commission’s Action Plan for tackling tax evasion and avoidance over the past 12 months. From a VAT perspective, reference is made to:

• The adoption in July 2013 of two directives, establishing the Quick Reaction Mechanism and the Reverse Charge Mechanism. They will enable Member States to better combat VAT fraud from 2014.

• The Commission’s proposal in October 2013 for the introduction of a simplified, standard VAT return for use by businesses throughout the EU. The introduction is expected to improve tax compliance.

• The Commission’s publication in September 2013 of a new report that sets out detailed data on the VAT gap in the EU for the period 2000 to 2011. This study helps to better understand the recent trends in the EU and better shape and target policy measures to improve VAT compliance.

The memo and accompanying presentation can be accessed by clicking here and here respectively.

European Commission — Updated details of VAT Committee guidelines as of 20 November 2013The Commission has published updated details of all guidelines agreed on by the VAT Committee on 20 November 2013. These guidelines have been prepared in response to specific questions raised by the Commission and Member States concerning the application of EU VAT provisions. Note that guidelines issued by the VAT Committee are merely views of an advisory committee. They do not constitute an official interpretation of EU law and do not necessarily have the agreement of the Commission. They do not bind the Commission or the Member States, who do not have to follow them.

By way of illustration, two of the more recent guidelines relate to:

• The scope of the exemption with credit (i.e., zero-rating) laid down in Article 148(e) and (f) of the VAT Directive for the supply of aircraft used by airlines operating for reward chiefly on international routes, and related supplies, in the light of the Court of Justice of the European Union’s (CJEU) judgment in the case of A Oy (C-33/11)

• The VAT treatment of the purchase of airplane tickets, including cancellation charges

Further information regarding the VAT Committee and the updated list of guidelines can be accessed by clicking here and here respectively.

European Commission — Regulation: notification form for Quick Reaction MechanismThe Official Journal of the European Union L 8 of 11 January 2014 includes the text of a Commission Implementing Regulation ((EU) No. 17/2014) of 10 January 2014, which gives the standardized form for the notification of a special measure under the Quick Reaction Mechanism against VAT fraud. The Quick Reaction Mechanism involves an accelerated procedure for allowing Member States to apply a reverse charge to specific supplies of goods and services for a short period of time in cases of sudden and massive VAT fraud, subject to any objection by the Commission. In order to facilitate the process for notifying the Commission, this regulation provides for the adoption of a standardized form of notification that sets out the information that a notifying Member State is required to provide. The standardized form is available in the Annex to the Regulation.

The Commission Implementing Regulation can be accessed by clicking here.

11March 2014 — Issue 2

Czech Republic — General Financial Directorate’s opinion on the application of VAT on real estateThe new VAT Act effective as of 1 January 2014 makes many fundamental changes to the way that transfers and the leasing of real estate is taxed.

The changes considerably expand the instances in which a supply of land is subject to VAT and introduce a new approach to units (apartments and commercial premises). Nevertheless, in many respects the new arrangements were not sufficiently aligned with other changes that will take place as a consequence of the new system of private law taking effect, and they have introduced a large number of questions and ambiguities.

A contribution to the coordination committee on which we actively participated examined these problems, and the General Financial Directorate (GFD) reacted by publishing an information memorandum.

Of the GFD’s published opinions, the following are noteworthy:

• Advance payments accepted in 2013 for the sale of land that would have been exempt in 2013 but will be taxed in 2014 will not enter the tax base in 2014 (i.e., will not be taxed ex post).

• The lower rate will also apply to detached houses that will form part of land (if they are construction for social housing).

• The three-year time test remains for real estate acquired before the end of 2012.

• The tax regime of developed land is derived from the regime of the relevant building, even when the owners are different. A utility network (e.g., sewage system or main distribution system) is also deemed a building.

• If there is to be more than one building on the land, the three- or five-year deadline for exemption is derived from the oldest building.

• The term “land” in the VAT Act should be interpreted as a “plot” or “parcel.”

• A “utilized” and “non-utilized” right to build must be distinguished.

• The term “building permit” cannot be confused with other concepts (e.g., zoning decision or building location decision).

• Exempt rent from real estate does not enter turnover.

• The terms used in the VAT Act must be interpreted in accordance with EU law. Their content cannot be automatically taken over from Czech private law.

While at first sight most of the conclusions enumerated above provide a useful guide to how things will operate in practice, they do not cover all situations and the ambiguities that can be encountered in the sphere of real estate. In addition, several of the GFD’s interpretations attempt to overcome the imperfections of legislation at the cost of not being completely in accordance with it and in certain cases even negating it.

We would therefore recommend weighing up the application of these conclusions in practice, bearing in mind the specific circumstances of a particular case.

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Germany — European Court of Justice rules on the Ibero Tours GmbH VAT caseThe CJEU released its judgment on 16 January 2014 in this German referral. The judgment was on whether the CJEU judgment in the case of Elida Gibbs (C-317/94) means that a travel agent can treat a discount as a reduction in taxable turnover in circumstances where a travel agent (Ibero Tours) offers customers (travelers) a share in its taxable commission paid by tour operators as a discount off the end price payable by the customer to the tour operator. For completeness, the CJEU delivered the opinion of Advocate General Wathelet on 18 July 2013.

The CJEU disagreed with the Advocate General (i.e., the travel agent cannot reduce its taxable turnover). The CJEU observed that, whereas Elida Gibbs involved a chain of the same or similar transactions ending with the final consumer, in the present case the tour operator provided its services directly to the final consumer (the traveler), with Ibero Tours acting as an intermediary in that single transaction only. Ibero Tours’ intermediary service was totally separate from that provided by the tour operator. In the present case, Ibero Tours gave no discount for its intermediary services provided to the tour operator, for which the agreed commission was payable. Further, the tour operator gave no discount for its travel services provided to travelers since Ibero Tours was, in any event, bound to pay the tour operator the agreed price for the travel services, regardless of any discount that Ibero Tours gave to the traveler. On this basis, the fact that Ibero Tours financed that discount from a part of its commission or from other funds had no impact on the consideration received by the tour operator for the sale of the travel services or on the consideration received by Ibero Tours for its intermediary services.

Accordingly, the CJEU held that the discount in question did not lead to a reduction of the taxable amount for either supply.

The Court summary judgment reads:

“The provisions of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, must be interpreted as meaning that the principles established by the Court of Justice of the European Union in Case C-317/94 Elida Gibbs [1996] ECR I-5339 concerning the determination of the taxable amount for VAT purposes do not apply when a travel agent, acting as an intermediary, grants to the final consumer, on the travel agent’s own initiative and at his own expense, a price reduction on the principal service provided by the tour operator.”

The full judgment can be accessed by clicking here.

Italy — Increase of threshold for VAT credits and fast-track VAT refund claimsEffective 1 January 2014, the annual amount of VAT credit that could be used for netting off other tax liabilities is increased to €700,000 (approximately US$962,000) (as per Law Decree No. 35 of 8 April 2013, converted into Law No. 64 of 6 June 2013).

The same increase to €700,000 also applies to the threshold for fast-track VAT refunds. Up to this amount, the refund is reimbursed directly by the Italian tax collector (i.e., Equitalia S.p.A.) while the refunds of annual VAT credits exceeding the threshold follow the standard procedure managed by the local competent tax office (i.e., Agenzia delle Entrate).

The new threshold is applicable to yearly VAT refund claims that will be filed with the Annual VAT return for Financial Year 2013 starting from 1 February 2014.

13March 2014 — Issue 2

Italy — New ”Google tax” law: VAT implications for the provision of online advertising services The Italian Government has passed a law (dubbed Italy’s new “Google tax” law) that may have important VAT implications for businesses operating in the digital economy. EY’s Global Tax alert provides further details. The impact of the new law, which has still not been completely clarified, is on companies who purchase online advertising spaces and sponsored links on search engine pages to be viewed by customers in Italy. Such services must be purchased from an Italian VAT-registered entity with effect from 1 July 2014. The draft legislation specifically says that the services must be purchased “through” an Italian VAT-registered entity. However, we understand that this means “through” in the sense of “from” (i.e., it is the service provider that needs to be registered for VAT in Italy and not the purchaser).

The Italian law, as drafted, does not refer to an Italian VAT-registered supplier with an establishment in Italy; it only makes reference to supplies by an Italian VAT-registered person. This may have implications for entities with centralized arrangements for the supply and/or purchase of advertising services where the contractual supplier does not hold an Italian VAT registration.

The new legislation also stipulates that for the purchase of online advertising and related ancillary services, it will be mandatory to use bank or postal accounts or any other means of payment allowing full traceability of transactions, including the VAT identification of the supplier.

We expect a lot of debate and comment in relation to the practical application of this new law in the coming months. Where uncertainty regarding the application of the new rules exists, we recommend undertaking a review of your current position and potentially obtaining a ruling from the Italian tax authorities in advance of 1 July 2014. Please contact your EY indirect tax contact for further information.

Poland — Proposed Council decision: deduction on motor vehicle costsThe European Commission has published a Proposal for a Council Implementing Decision (COM(2013) 831) authorizing Poland to restrict to 50% the right of a taxable person to deduct VAT on the purchase, hire, rent or lease of certain types of motor vehicles and expenditure related to (including fuel) where the vehicle is not used exclusively for business purposes. Consequently this relieves taxable persons from the obligation to account for VAT on the private use of such vehicles, as a special measure derogating from Articles 26(1)(a) and 168 of the VAT Directive. The measure is restricted to vehicles under a certain seating capacity and under a certain total weight, such that it will mainly apply to passenger cars, vans, pick-ups and motorbikes. The Commission proposes that this should apply from 1 January 2014 until the date of entry into force of EU rules governing restrictions on the right to deduct in this area, or until 31 December 2016, whichever is the earlier. Poland is currently authorized to restrict to 60% the right to deduct VAT on the purchase, hire or lease of certain motor vehicles other than passenger cars, up to a maximum of PLN6,000. That expires on 31 December 2013.

The proposal can be accessed by clicking here.

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Romania — European Court of Justice rules on Fatorie VAT caseThe European Court released its judgment on 6 February 2014 in this Romanian referral concerning the refusal of the right to deduct VAT charged and paid on the basis of an incorrectly drawn up invoice where the supply in question was properly subject to a domestic reverse charge. This case proceeded to judgment without a written Advocate General’s opinion.

SC Fatorie SRL (Fatorie) received building services from a local supplier. The supplier issued a normal VAT invoice for these works. Fatorie paid the invoice and obtained repayment of VAT from the tax authorities. However, the tax authorities subsequently sought to recover the VAT (plus interest) from Fatorie on the basis that a domestic reverse charge applied to the services in question (i.e., the invoice was incorrectly drawn up by the supplier). In the intervening period, the supplier went insolvent, thus ruling out the possibility of the invoicing error being corrected, and failed to pay the VAT on the invoice to the tax authorities. In these circumstances, the referring court asked whether EU law precluded Fatorie from being deprived of the right to deduct the VAT.

The CJEU observed that Fatorie incorrectly paid the VAT that was wrongly identified on the invoice. Under the reverse-charge regime, it should, as the recipient of the services, have paid the VAT to the tax authorities. The right to deduct could be exercised only in respect of VAT actually due. Thus, because the VAT paid by Fatorie to the supplier was not due and that payment was made in breach of the reverse-charge regime, Fatorie could not claim the right to deduct that VAT. The fact that the supplier was insolvent was irrelevant in this regard. The CJEU indicated that Fatorie’s only recourse, having paid VAT that was not due, was to seek repayment of the VAT from the supplier in accordance with national law.

The summary judgment reads:

I. In a transaction subject to the reverse charge regime, in circumstances such as those in the main proceedings, Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax and the principle of fiscal neutrality do not preclude the recipient of the services from being deprived of the right to deduct the value added tax which he paid when that tax was not due to the service supplier on the basis of an incorrectly drawn up invoice, even where the correction of that error is impossible because that supplier is insolvent.

II. The principle of legal certainty does not preclude an administrative practice of the national tax authorities whereby, within a limitation period, they revoke a decision by which they granted the taxable person the right to deduct value added tax and then, following a fresh investigation, order him to pay that tax together with default interest.

The full judgment can be accessed by clicking here.

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Spain — Changes to the Spanish VAT returnIn December 2013, the Spanish tax authorities approved the following changes to the VAT return form:

• The new model 303 will now be used to declare special VAT regimes, which previously had their own VAT return.

• Intra-EU acquisitions and services will now be declared in the same box.

• A special box has been created for declaring transactions subject to reverse charge mechanism other than EU ones.

• When a modification is made in the taxable base, for example for recovery of bad debts, it is necessary to fill in special boxes.

Also, there are new VAT rules relating to the entrepreneurs, mainly:

• The entrepreneur has to indicate if it is applies the special cash accounting regime or if it is the client of these kinds of invoices. In addition, additional informative boxes have to be filled in related to the cash accounting regime.

• Entrepreneurs in bankruptcy have to declare if the return is prior or post this situation.

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Botswana — Budget 2014–15The Minister of Finance and Development Planning for Botswana, the Honorable O.K. Matambo, presented his budget speech on 3 February 2014. He announced the following VAT amendments to be introduced in the 2014–15 financial year.

Exemptions from VATThe VAT Act will be amended to exempt all farming equipment and all basic food stuffs that are currently zero-rated. Basic foodstuffs include, among other things, vegetables, rice and milk.

VAT registration thresholdThe VAT registration threshold will be increased from BWP500,000 to BWP1 million (approximately US$56,100 to US$112,200).

Egypt — Expected introduction of VATEgypt is expected to announce the introduction of VAT to replace its existing general sales tax (GST) regime. GST is levied on locally manufactured goods and imported goods and on 17 types of services. It is expected that Egypt will opt for a single rate of VAT between 10% and 12%, which will be imposed on all goods and services, with a few limited exceptions.

Kenya — VAT Act 2013

PreambleThe VAT Act 2013 came into effect 2 September 2013. The Government and the business community faced numerous challenges in implementing the VAT Act. We have analyzed the VAT Act 2013, which has drastically changed the content of the repealed VAT legislation by removing some provisions and introducing several new ones. Notable changes include removal of VAT remission, removal of a reduced VAT rate of 12%, incorporation of the previous subsidiary legislation into the principal legislation, reduction of schedules from eight to two schedules and introduction of tax charges on previously zero-rated and exempt supplies.

To assist in the appreciation of VAT Act 2013 and its impact and to improve compliance, we have summarized the key changes designed to mitigate the non-compliance risk associated with the overhaul of the VAT legislation. However, we expect various clarifications to the provision of the overhauled VAT Act, some of which have been communicated while others are expected. A summary of key issues on the VAT Act 2013 as compared with the previous VAT Act are as follows:

New provisions in the VAT Act 2013

Deduction of input taxPreviously, deduction of input tax on items such as furniture, household electrical appliances and staff housing was restricted. Currently, deduction of input tax on these items is allowed. Input tax on passenger vehicles is restricted unless acquired for the exclusive purpose of making a taxable supply of the automobile in the ordinary course of continuous and regular business. In addition, input tax on accommodation, restaurant and entertainment services is

Middle East, India and Africa

17March 2014 — Issue 2

deductible as far as it is incurred while the recipient is away from home for purpose of business.

The period of claiming input tax was reduced from 12 to 6 months of raising the respective invoice. This calls for speedy processing of invoices to avoid some of the input tax being time barred.

Advance rulingThe VAT Act 2013 provides for public and private rulings. Public rulings re the Commissioner’s interpretation on the application of the act, and they are binding on the Commissioner. On the other hand, the Commissioner can, on application by a taxpayer, issue a private ruling setting the Commissioner’s interpretation on application of the act in relation to a proposed transaction. While the ruling is binding on the Commissioner, it is not binding for the taxpayer. These provisions are likely to play a key role in streamlining the ambiguities in the VAT Act.

Objection against VAT assessmentWhen taxpayers receive an additional VAT assessment that they do not agree with, they are entitled to raise an objection to the Commissioner within a period of 30 days from the date of the additional assessment. Upon receipt of the objection, the Commissioner is required to respond to the objection within 60 days. Otherwise, the objection will be deemed to have been accepted. This is a positive step for taxpayers as the Commissioner has to fast-track objections.

Zero-rated and exempt suppliesMost of the goods that were previously zero-rated have become taxable at a standard rate with a few becoming exempt. Various goods and services that were formerly exempt have also become taxable. This brings these supplies under the VAT net, thus reducing the number of companies claiming VAT refunds as a result of making zero-rated supplies.

There is, however, the challenge of ambiguity as to whether some supplies are covered under the list of exempt or zero-rated supplies. In this regard, some clarifications have been given through a public ruling, and we expect more rulings, both public and private, aimed at streamlining the ambiguities.

Information technologyThe VAT Act 2013 provides for use of information technology for most tax formalities and procedures. This includes registration, electronic returns, tax payments, and notices and guidelines on the use of tax computerized system. The introduction of the provisions gives a legal backing to the online tax management system (iTax), which is already operational, and paves way for new services via information technology.

Returns and recordsThe VAT Act clarifies the procedures for amending VAT self-assessment returns, further giving the Commissioner discretion to accept or deny their subsequent amendment. In addition, it provides for extension of time for submission of a return. An application is to be made in writing before the due date for submission. However, a mere application does not exclude the applicant from penalties applicable, if any.

The VAT Act 2013 recognizes the use of a certified copy of a tax invoice. This was previously not acceptable.

VAT Newsletter18

The transfer of a business as a going concern The transfer of a business as a going concern by a registered person to another registered person, which previously required approval for exemption under the repealed VAT Act, is now explicitly zero-rated. This is a positive move because no approval will be required, improving the speed at which such transactions are concluded.

Tax representativesA person required to apply for VAT registration and does not have a fixed place of business in Kenya is required to appoint a tax representative. The registration should be in the name of the non- resident person.

Provisions dropped in the VAT Act 2013

Withholding VAT systemEffective 1 July 2011, withholding VAT agents were de-registered. However, the provisions on withholding VAT remained in the VAT Act. The VAT Act 2013 scrapped the withholding VAT system.

VAT rates The repealed VAT Act provided for a reduced VAT rate of 12% on electrical energy and heavy industrial oils. The reduced VAT rate of 12% was eliminated, implying that the supplies became subject to 16% VAT. In addition, the Cabinet Secretary can vary the standard rate by a maximum of 25% of the current rate, which would translate to a 4% increase or decrease.

Remission of VATProvisions for VAT remission have been dropped. VAT remission approved before the enactment of VAT Act 2013 will, however, be valid for the next five years. Businesses planning to undertake huge capital outlay projects will be affected negatively. Supplies to mining, oil and gas, and geothermal exploration companies will qualify for exemption instead. This reduces administrative bottlenecks in the processing of remissions.

Subsidiary legislation (VAT regulations)The VAT Act 2013 provides that subsidiary legislation under the repealed act will remain in force as long as it is consistent with the VAT Act 2013 and until new subsidiary legislation is enacted. It is, however, notable that some subsidiary legislation was incorporated into the main VAT Act.

Reverse-charge VAT relating to taxable suppliesRegistered persons will only be required to account for reverse-charge VAT to the extent it relates to exempt supplies. This is a positive move because it will lessen the burden of compliance and save on business cash flow. There is, however, a contradiction under the VAT Act as to whether businesses that are not registered for VAT should account for reverse-charge VAT because the VAT Act doesn’t mention accounting for VAT for businesses not registered for VAT. We are seeking clarity on the issue with the Kenya Revenue Authority.

The VAT tribunalAlthough the repealed VAT Act provided for the lodging of VAT appeals within 30 days on receipt of a non-agreed amended assessment or confirmation notice, the VAT Act 2013 does not have provisions for lodging an appeal. This is an oversight, and we have raised the issue with the Kenya Revenue Authority. It’s also noted that Tax Appeals Tribunal was established to deal with all tax appeals.

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Steve Patton New York, NY +1 212 773 2827 steve.patton1@ey.com

Ernst & Young LLP

Financial Services Overview, January 2014

Bulgaria: VAT turbulence around finance leases

Colombia: VAT Alert

Croatia: EY Tax News, August 2013

Czech Republic: EY Tax News, January 2014

Estonia: President rejects amendments to VAT Law in 2014

France: Taxation of digital services

Hungary: EY Tax News, December 2013 and January 2014

Italy: New rules on digital economy

Luxembourg: VAT rate increases

Mexico: Presidential Decree for Maquiladoras

Mexico: Companies may apply for VAT and Excise Tax Certification

Netherlands: Tax Update Weekly, issues 49, 50 and 51 for 2013 and issues 1, 2, 3, 4, 5 and 6 for 2014

Poland: Alert on ECJ referral (VAT): European Commission v. Poland (Case C-639/13): reduced rate of VAT

Slovakia: EY Tax News, November 2013 and January 2014

Spain: New VAT Cash Accounting Scheme

South Africa: eServices: mandatory VAT registration even for B2B supplies

UK: VAT News, weeks ending 16 and 23 December 2013; 13, 20 and 27 January 2014; and 3 February 2014

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