VAT Planning for Year-end and Beyond for U.S. Multinationals
VAT Planning for Year-end and Beyond for U.S. Multinationals
VAT regimes worldwide have been the target of many changes during 2020. Governments have introduced a myriad of relief measures to address the devastating economic consequences of the coronavirus pandemic. At the same time, they have been exploring ways to secure tax revenue and ensure that online supplies of goods and services do not escape VAT (or goods and services tax (GST), where applicable), particularly in the context of the digital economy. These efforts have resulted in the extension of VAT/GST to the supply of digital services by foreign online providers, intermediaries and platforms, triggering VAT registration and collection obligations.
U.S. businesses operating in countries that have a VAT regime should examine how any of these changes to VAT rules affect their situation. They will also need to identify whether rules that become effective in 2021 will give rise to opportunities or create additional VAT registration and reporting obligations.
This article highlights specific areas that are likely to be important for many businesses to consider when planning for VAT in 2021.
The U.K.’s transition period for its full exit from the EU ends on December 31, 2020, (during the transition period, the UK remains in the EU customs union and single market so EU rules continue to apply) after which VAT arrangements between the UK and EU will change extensively. As of January 1, 2021, the UK will be treated as a “third country” for EU VAT purposes, with the result that goods transferred between the EU and the UK will be considered supplies between the EU and the UK that will not benefit from the EU intra-community supply rules; customs controls will be reinstated, and selling goods into the EU may give rise to VAT registration requirements where none existed prior to Brexit. Businesses engaging in VATable activities in the UK also will no longer be able to benefit from various VAT compliance simplifications.
According to a recent report published by the U.K.’s National Audit Office, as many as 40%-70% of shipments between the EU and the UK could experience significant disruption at the border as many businesses will not be ready for new EU controls.
U.S. businesses engaging in intra-EU trade involving vendors/customers in the UK should take immediate steps to ascertain how Brexit will impact their activities (including their supply chains) and implement plans to help ensure minimal disruption to their businesses.
BDO has developed an action plan to help businesses understand and prepare for the impact of Brexit.
The coronavirus pandemic has disrupted how people work and conduct business across the globe, and businesses have had to adapt quickly to transitioning to a remote workforce. Many companies have implemented permanent remote working rules, including allowing employees to live and work in jurisdictions other than that in which the employer is physically located.
Any business that allows its employees to live and work in another jurisdiction should consider the potential VAT implications. The presence of employees permanently (or even semi-permanently) in other countries could create a fixed/permanent establishment for VAT purposes, which would give rise to compliance obligations (e.g., registration, collection of VAT, etc.) in those countries.
In addition, the VAT implications of “use and enjoyment” rules should be taken into account. These rules ensure that certain services are subject to VAT in the place where the services are used and enjoyed and aim to prevent double taxation, non-taxation or the distortion of competition. Businesses may need to register and account for VAT in countries where use and enjoyment rules apply.
EU VAT Rules
The EU VAT package, which will introduce significant changes to the rules for e-commerce transactions, particularly online sales of goods, becomes effective on July 1, 2021. (The VAT package originally was to apply as from January 1, 2021, but the effective date was postponed as a result of the coronavirus pandemic.) The package includes measures to modernize the VAT system, prevent VAT fraud by ensuring that online sales of goods to EU consumers do not escape EU VAT, and also makes changes to registration, reporting and compliance obligations, the latter of which is likely to require modification of businesses’ internal systems and reconfiguration of ERP systems and procedures. There also may be commercial (e.g., pricing) and legal implications that will have to be considered.
The EU VAT rules are becoming increasingly complex. U.S. companies that have VATable transactions in the EU should begin to analyze the impact of the new EU VAT rules on their business models, the implications of new registration requirements (or changes to existing registration), and whether changes to internal systems need to be made to ensure compliance.
Digital Services and Intercompany Recharges
2020 saw many countries worldwide expand their VAT/GST systems to include the supply of electronic/digital services, a trend that is expected to continue through 2021. These new rules can result in VAT/GST registration and collection obligations for foreign and local suppliers, intermediaries or e-commerce platforms.
A growing number of these VAT regimes capture both business-to-business (B2B) and business-to-consumer (B2C) transactions. With electronic/digital services being broadly defined to include software, web hosting and cloud services, intercompany technology recharges by U.S.-headquartered businesses to foreign subsidiaries could give rise to an obligation for the US headquarters to register, charge, collect and remit VAT in foreign jurisdictions.
U.S. multinationals that recharge technology-related costs to foreign entities should review the VAT rules in the countries in which the foreign entities are located to determine if the technology recharge gives rise to a VAT registration and reporting obligation.
VAT in Oman
A new VAT law will become effective in Oman on April 1, 2021. A standard VAT rate of 5% will apply to the supply of goods and services, subject to the zero-rating or exemption of specified supplies.
Registration for VAT purposes will be mandatory for businesses located in Oman with annual revenue exceeding OMR 35,000 (approximately USD 90,000); voluntary registration will be possible for businesses with revenue exceeding OMR 19,250 (approximately USD 50,000). Non-resident businesses making VATable supplies in Oman will be required to register, irrespective of the registration threshold.
Some areas that affected businesses may wish to review to ensure VAT readiness include:
- VAT treatment of sales and purchases
- Contracts and pricing
- Accounting systems
- VAT return preparation
Given the short timeline, businesses should begin planning for the implementation of VAT in Oman as soon as possible.
VAT compliance requirements are complex and can ultimately impact cash flow. U.S. multinationals with a presence in a jurisdiction that has a VAT regime should be aware of the potential VAT registration and compliance obligations that could arise from making supplies of goods and/or services into such a jurisdiction, as well as the impact of noncompliance. These U.S. companies also should begin to prepare for the new rules that will apply in 2021.