OECD’s VAT and GST guidelines move forwardOctober 23, 2013
Launch of the consolidated version of the VAT and GST Guidelines
For a number of years, the Organisation for Economic Co-operation and Development (OECD) has been working on guidelines on applying value-added taxes in an international context. In this article, we discuss the OECD’s recent consultation process and the likely further development of value-added tax (VAT) and goods and services tax (GST) guidelines.
During the OECD’s first Global Forum on VAT, held on 7 and 8 November 2012 in Paris, businesses, academics and national representatives came to the unanimous conclusion that there is a strong need for internationally agreed principles on VAT.
The OECD’s work in this area reached a first milestone in February 2013, with the publication of the consolidated version of the OECD International VAT/GST Guidelines (the Guidelines) on the place of taxation for cross-border supplies of services and intangibles in a business-to-business (B2B) context.
The Guidelines are intended to consist of a set of framework principles that countries can implement in their national legislation. The key objective of the process is to build the largest possible worldwide consensus on using the Guidelines as the future international standard for applying VAT to cross-border trade, with a view to minimizing risks of double taxation and unintended non-taxation.
As part of the process, the OECD invited interested stakeholders to provide comments on the draft consolidated VAT Guidelines before 4 May 2013. The text of the draft consolidated VAT Guidelines, as well as the comments that the OECD received from a number of businesses, interested parties and professional organizations, including EY, have now been published, and they may be found in full on the OECD website.
Commentators broadly agree with the approach and orientation of the Guidelines. Notwithstanding this general agreement, there are three main areas where changes or additional guidance are still needed:
- Definition of “establishment”
Chapter 3 of the draft consolidated VAT Guidelines addresses the place of taxation for cross-border supplies of services and intangibles supplied to businesses that have establishments in more than one jurisdiction. Together with other commentators, we reminded the OECD that unless the Guidelines have a clear definition of the meaning of “an establishment” for VAT purposes, double or non-taxation could result if two jurisdictions involved in a supply apply different definitions of “establishment”. The result could be either that both jurisdictions seek to attract the place of supply or that neither country provides a place for taxation, because the existence of an establishment is denied.As a possible solution, we recommended that the OECD should examine, in more detail, to what extent the broadly accepted and well-known definition of “permanent establishment” used in the OECD Model Tax Convention could also serve as a definition for indirect taxes. In our view, using this definition would allow a better alignment between direct and indirect taxes, as it would remove the current mismatch between the different definitions, which can result, for example, in a company having an establishment for VAT purposes in a country even if it does not have a permanent establishment for income tax purposes. As such, aligning the definitions could significantly simplify the situation for businesses and tax administrations alike.
- Recharge allocation arrangements
The draft Guidelines address the case where a customer acquires services for use by other establishments, requiring the customer to recharge the other establishment(s) for using the services or intangibles. This internal recharge is treated as consideration for a supply within the scope of VAT. In general, the commentators supported this approach. However, a number of concerns were raised with respect to the scope of this method and aspects of its implementation. In particular, we expressed the concern that applying the recharge method to determine the right to tax may trigger other, unwanted consequences that have nothing to do with the place of taxation. In addition, we and other commentators requested that the OECD provide further guidance on the valuation on any internal charge, because adopting this approach is likely to raise valuation issues and possible transfer pricing implications.
- Guidelines on types of services to which a specific rule for place of supply could apply
Deciding where a supply of services should be taxed is a difficult issue. Ideally, taxation occurs at the place of consumption, but where is a service “consumed”? Generally, VAT legislation adopts a series of proxy tests that seek to ensure that VAT applies in the most appropriate place.It is common understanding that the proposed main rule for determining the place of taxation for services under the Guidelines is the place where the customer is located, and that this rule should be applied as broadly as possible. But the Guidelines recognize that there are specific services that may require alternative rules. The Guidelines suggest a two-step approach to determine which jurisdiction has the taxing rights over a supply of a service:
- The first step is to test whether the main rule leads to an appropriate result under the criteria of the Guidelines.
- The second step applies if the main rule does not lead to an appropriate result. In that case, the use of a specific place-of-supply rule for that service might be justified. In this context, the Guidelines mention services related to immovable property as an example of a likely exception. They indicate that these supplies should be taxed at the place where the property is located.
We and other commentators agree with this approach, but we would welcome more guidance in this area. After all, double taxation (or non-taxation) currently arises precisely because two jurisdictions apply different proxies to determine the place of supply.
We therefore suggested in our comments that the OECD should provide an exhaustive list of all types of services that would not fall under the main rule in order to provide the highest level of clarity and certainty for business.
The full version of this article was published in EY´s Indirect Tax Briefing, issue 8 (pdf, 3.28 MB).
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