South Africa – VAT Alert – Budget speech – Proposed amendment to include software supplies to the Electronic Services Regulation

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Following the recent National Budget speech in South Africa, various proposals were tabled for consideration including a proposed amendment to the Electronic Services Regulation No. 37489, dated 28 March 2014.

As previously reported here the National Treasury published regulations on 28 March 2014, prescribing what constituted “electronic services” for South African Value Added Tax purposes.

The definition of “electronic services” covers the following broad categories:

  • educational services;
  • games and games of chance;
  • internet based auction service;
  • miscellaneous services; and
  • subscription services.

It is now proposed that the supply of software be included as an electronic service. The proposal seeks to update the Regulations to specifically include software.

The proposed tax amendment in the budget speech reads as follows:

“The regulations prescribing electronic services will be updated to include software and other electronic services and to remove some uncertainties.”

You recall that software which was defined to mean application software, systems software, plugins or any updates to software was initially included in the draft Regulation issued in January 2014 and subsequently excluded in the final Regulation. As a result, foreign suppliers of software (which did not fall in any of the other categories) were not required to register for VAT in South Africa.

We understand that the proposal is meant to further address the issues on Base Erosion and Profit Shifting (BEPS). However, it is uncertain when the proposed amendment will come into effect.

We will follow the developments closely and keep you posted.

If you have any questions please contact Gerard Soverall or Louis Carney from PwC South Africa.

 

Albania – VAT registration obligation for non-established B2C e-service providers

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Albania joined the group of countries which require non-established e-service providers to register for VAT for supplies made to private individuals.

Effective from 1 January 2015 the Albanian VAT legislation deems the place of supply of “telecommunication, transmission and electronic services” to non-taxable persons to be where the non-taxable person receiving the service is “placed, has a permanent address or resides usually”, regardless of the place where the supplier is established.

The services in scope include the supply of

  • telecommunication services;
  • transmission services for radio and television;
  • websites, web-hosting, maintenance of software and hardware;
  • software and their update;
  • images, texts, information and evaluation of databases;
  • music, movies and games, including games of chance and betting games, transmission of political, cultural, artistic, sportive, scientific and entertainment programs;
  • e-learning;

What does it mean for you?

You need to monitor whether you make any such supplies to Albanian private customers / non-taxable persons. If so, you would be liable to VAT register from the first “lek”, as there is no registration threshold. As a non-established service provider you would also need to appoint a fiscal representative to account for VAT and to meet your VAT compliance filing obligations. The currently applicable VAT rate in Albania is 20%, so you may also want to check if your pricing is right.

For further information please contact Loreta Peci, Country Director Albania & Kosovo, at loreta.peci@al.pwc.com.

Luxemburg – e-books are subject to the standard VAT rate as of 1 May 2015

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The Luxemburg tax authorities were rather quick to the react on the ECJ’s recent decision on the VAT treatment of e-books. As reported in our previous post, in the infringement procedure against Luxemburg and France the court held that these countries incorrectly applied reduced VAT rate to the sale of e-books.

It is confirmed in a “Circular” published by the tax authorities on 16 March that Circular 756 is revoked with effect from 1 May 2015, and as of that date the standard VAT rate of 17% should be applied to the sale of e-books. (Please refer to the news update on PwC’s GlobalVATOnline.)

What does it mean for you?

Companies involved in the sale of e-books in Luxemburg have slightly more than a month to re-consider their pricing of e-books, i.e. a price increase or margin reduction taking into account the 14% change in the applicable VAT rate (form 3% to 17%).

Changes in the ERP systems must also be made to ensure that VAT is accounted for the correct rate.

It will be interesting to see whether France, which was also involved in the infringement procedure for similar reasons, will change it its rules with the same speed … (and we should keep an eye on Italy, too)

Argentina – Turnover tax regime for digital supplies suspended by the Tax Authority of Buenos Aires for an indefinite period

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The Tax Authority of Buenos Aires (AGIP) has established a new turnover-based (i.e., provincial sales tax) withholding tax system for foreign suppliers of e-services to Argentinian private consumers located in Buenos Aires (B2C supplies).
According to initial provisions of the new regime, effective February 1, 2015, withholding agents (Argentine credit card companies) that collect payments for such services should withhold 3% turnover tax from the payments made by final consumers to the non-resident service providers. Credit card companies have, however, formally asked the AGIP for additional time to make the necessary amendments to their systems, enabling them to identify whether the payments relate to taxable services to be used in Buenos Aires. As a result, the AGIP has postponed the enactment of the new regime until withholding agents can adequately modify their systems to be able to collect the tax.

What does it mean for you?

The resolution does not provide an exact date of enforcement of the new regime. Non-establsihed businesses that supply e-services to private consumers located in Buenos Aires should monitor these changes closely and consider the impact on profit margins.

It is interesting to note, that in this case we have a provincial sales tax at hand (not even a consumption tax on national level), which clearly demonstrates the complexity non-resident B2C e-service providers face and must consider to set their prices right.

Further information is available from Ricardo Tavieres or Fernando Lopez Menendez of PwC Argentina, and we will keep you posted of the developments on the blog.

 

Japan – Update on proposed legislation for Japanese consumption tax (JCT) on cross-border services

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As previously reported, the Japanese government plans to tax the supply of electronic services by non-established service providers, as of 1 October 2015. The proposal is expected to pass through the legislation this spring.

 
According to the draft legislation the place of supply of electronic services will change from the origin principle (i.e. where the supplier is established) to the destination principle (i.e. to the place where the recipient is located).

 
The proposed services in scope are defined as “telecommunication online services”, which include the provision of digital online services performed via telecommunications and in particular: the distribution of e-books, music or advertisements. However the interpretation of the exact scope of services which will be subject to JCT is yet to be further defined in the implementing regulation and guidelines of the Japanese tax authorities. The draft of these documents are being prepared, but have not yet been published.

 

The B2B supplies of these services by a non-established service provider are proposed to be subject to JCT under the reverse charge mechanism by the recipient of the services. However, if the services are provided B2C, non-established service providers will become liable to register and account for JCT on their supplies, according to the proposal.

 

If the legislation is accepted the JCT registration will be open as of 1 July 2015 for non-established B2C e-services providers.

 

What does it mean for you?

Japan will likely become yet another country where non-established B2C e-services providers must take care of indirect taxes. It is therefore recommended to keep an eye out for the developments in this regard.

E-books – ECJ rules reduced VAT rate is not applicable

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The ECJ today delivered its long awaited judgments on the infringements procedures against France and Luxemburg on the application of the reduced VAT rates to e-books.

The court held that, in line with the VAT Directive and Implementing Regulation, e-books qualify as electronically supplied services, and as such reduced VAT rates cannot be applied. Therefore, the VAT treatment of printed books (or more precisely, “books on of all physical means”, according to the VAT Directive), which are taxable at the reduced VAT rate in most EU countries, cannot be extended to e-books. In this respect, the ECJ also quoted its previous decision in the Finnish K Oy case, in which the court decided that the reduced VAT rate may be used for the sale of books on CDs or USB siticks, as these are “physical means”.

Accepting the ECJ’s argumentation and strict interpretation of the relevant legislation, the only option to use the reduced VAT rate for e-books as well, is to change the legislation. This is likely to be done as part of an overall review of the VAT system, which will be a longer process.

What does it mean for you?

This is clearly bad news for e-book publishers in France and Luxemburg. The two countries are required to change their national legislations and apply the standard VAT rate to the sale of e-books. When these rules will become effective e-book sellers will need to review the pricing of their e-books or absorb the additional cost which is caused by the application of the standard VAT rate.

On a separate note, it is yet to be seen whether Italy, where the reduced VAT rate on e-books is only effective as of January 2015, will take any action in light of this judgment.

India – Invite to the webcast on the Indian Union Budget 2015 – 4 March 2014

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The government in India announced its Budget (including tax and policy proposals) on February 28, 2015. As this is stated to be the first serious Budget for the new government after being elected 8 months ago, the government likely will push through significant policy measures to revive economic growth and boost foreign investment. There is also high expectation from foreign investors and multinational companies for the government to address several long standing and pressing tax issues.

Speakers

  • Ketan Dalal, Senior Tax Partner & Member India Leadership Team, PwC India
  • Nitin Karve, Partner, International Tax Services, PwC India
  • Puneet Arora, Partner, Financial Services, PwC LLP
  • Lindsey J Bristow, Partner, International Tax Services, PwC LLP

Date & Time:

Wednesday, 4 March 2015 at 5.00 pm CET / 11.00 am EDT (Duration: 60 minutes (including Q&A)

For further information and registration please follow the attached links:

Union Budget 2015

Registration

Partial revision of the VAT Law in Switzerland – Lower VAT registration threshold for e-service providers is proposed

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The Swiss Federal Council has published its commentary to the partial revision of the VAT Law. If the draft legislation is approved by the Swiss parliament, the changes will come into effect on 1.1.2016. Among other changes we set out below those which are most relevant for ebiz & e-commerce.

Change of VAT registration threshold for e-service providers

According to the proposal businesses, which provide electronic services to private individuals (B2C) in Switzerland, are to be liable for tax in Switzerland, if their worldwide (i.e. Swiss and non-Swiss) turnover exceeds the threshold of CHF 100,000. By way of example, if you sell e-services to US customers in excess of CHF 100,000 and you have only one Swiss private customer who pays CHF 100 for your services, you will be required to register Swiss VAT.

This is a significant change, as currently the VAT registration threshold of CHF 100,000 is calculated for Swiss turnover only.

Changes for e-commerce

In on-line trading, up to now small deliveries with a tax amount of less than CHF 5 (e.g. books up to CHF 200) have been exempt from import VAT. In future these sales are to be taxable in Switzerland, if the non-established supplier with such deliveries generates turnover of more than CHF 100,000.

Change for electronic newspapers

The draft legislation also proposes to extend the application of the reduced VAT rate of 2.5% to electronic newspapers and magazines (without advertising character). It should be noted that e-books would continue to be taxed at the standard rate of 8%.

What does it mean for you?

You should keep monitoring the legislative changes, so that you are able to act on time to address all matters which the above changes may trigger for you (i.e. VAT registration application, pricing review, system changes etc.).

USA – Texas comptroller finds software licensed to Texas customers created nexus for sales and use tax purposes

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The Texas Comptroller of Public Accounts has recently determined that electronically downloaded software licensed by a Utah corporation to Texas customers constituted physical presence in Texas sufficient to establish sales and use tax nexus. According to the decision, nexus was established because the software was characterized as tangible personal property and the Utah corporation retained all property rights in the software, which was physically present and generating revenue in Texas. The Comptroller upheld an Administrative Law Judge (ALJ) determination that the corporation had an obligation to charge and collect use tax from customers, and denied refund claims of sales tax paid and an interest waiver. [201409970H; SOAH Docket No. 304-13-5657.26; CPA Hearing No. 106,632, Texas Comptroller of Public Accounts (9/19/2014)]​

In detail

A Utah corporation (Petitioner) licensed computer programs and digital content that was downloaded through the internet to Texas customers. The license agreements provided that the licensed products were property of and proprietary to Petitioner. Petitioner otherwise had no significant contacts with Texas. The Business Activity Research Team (BART), part of the Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller), conducted an examination of Petitioner’s activities to determine whether it had nexus with Texas and should have collected and reported sales and use tax on its sales to Texas customers. BART concluded the licensing of software downloaded over the internet to Texas customers established substantial nexus for sales and use tax purposes because the software was tangible personal property and Petitioner retained title to the software, which was physically present and generating revenue in Texas.

Electronically delivered software is characterized as tangible personal property in Texas

The ALJ analyzed whether the licensed software and digital images constituted tangible personal property for sales and use tax purposes. In Texas, electronically downloaded software is statutorily categorized as tangible personal property. The ALJ noted that while this characterization is not in and of itself determinative that there is the requisite physical presence in Texas, what was ultimately determinative was that Petitioner did not challenge this characterization. Consequently, Petitioner’s software was treated as tangible personal property for the purposes of applying the Supreme Court’s bright-line test requiring substantial physical presence.

Petitioner retained property rights in the licensed software constituting substantial physical presence

The ALJ noted that “nexus is not automatically conferred by the statutory characterization of a computer program as taxable tangible personal property. The substantial physical presence requirement is determined by the character of the rights and interest Petitioner retained in the software and digital images downloaded by users located in Texas.” The ALJ concluded that the record established Petitioner had retained all property rights in tangible personal property, and as a result, the software established substantial physical presence in Texas.

The takeaway

In recent years, Texas has adopted increasingly assertive positions on software and computer servers for sales and use tax nexus purposes. Under Texas law, a retailer that owns or uses tangible personal property located in the state, including a computer server or software, is considered engaged in business within Texas and hence may be responsible for collecting and remitting Texas sales and use taxes. The Comptroller’s decision expands the scope of Texas sales and use tax nexus to specifically include taxpayers retaining property rights over software electronically delivered to Texas customers. The ALJ assumes that electronic software statutorily defined as tangible personal property for sales tax purposes also necessarily constitutes a ‘physical presence’ for constitutional nexus purposes. Further, the ALJ concluded Petitioner’s physical presence was substantial based on the (undisclosed) amount of revenue generated from the licensing agreements. Although this is an administrative level decision and likely subject to further proceedings, Texas may consider companies licensing software in any form to Texas customers to have established Texas sales and use tax nexus.

For more information on this topic, please contact Jennifer Jensen, Director of PwC US (email: jennifer.jensen@us.pwc.com, tel: +1 202 414 1741).

Online shopping – PwC’s Total Retail Survey 2015

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Fifteen years ago, in the heyday of the e-business boom, Internet promised to change industries and business models very quickly, first of all in the retail sector. When these promised changes did not realise that quick, it resulted in the burst of the dot-com bubble.

However, even if change took longer than expected, now it is already part of our lives and not only in the developed countries, but all around the world. New online business models have a disruptive effect on long established businesses, as the fate of firms, such as Blockbuster, Borders and quite recently, RadioShack shows.

PwC prepared a Global Survey of online shopping behaviour, analysing the disruptive effects of mobile and online shopping on traditional retail shopping. 15,000 customers around the globe were asked of their opinion about online buying behaviours, effects of social media on purchases, use of mobile payment and virtual currencies.

If you are interested, the report can be accessed here, where you can also find further information related to the survey.

There is also an interactive map with country results and a few interviews with retail executives around the globe. You may want to look around and watch some of the videos.