Dear FS professional,
This is the final newsletter for 2014. As mentioned in the October FS Tax Newsletter the Skandia judgment may have a significant impact on financial service providers. Therefore, in this issue we will give you an update on recent developments regarding the Skandia case and what action could be taken by your business. Furthermore, we would like to inform you about the VAT changes on E-commerce services, which may have an impact on the digital Financial Services business a well.
We will also provide you with our experiences of the increasing interest from the Dutch Tax Authorities in the tax returns and payments of insurance premium tax from insurers and insurance intermediaries. Furthermore we will discuss the actions that should be taken with respect to Country-by-Country reporting. Last but not least, we would like to remind you that the deadline to register Financial Institutions under the FATCA legislation is approaching fast, 31 December 2014.
We wish you a happy, healthy, and successful 2015!
Partner, Financial Services Tax Group
Table of Contents
- 1. Update on the Skandia case
- 2. E-commerce services from January 1, 2015
- 3. Country-by-Country Reporting: Time to Act
- 4. Insurance premium tax
- 5. CRS
- 6. FATCA
1. Update on the Skandia case
Recent developments following the CJEU judgment in Skandia America Corporation
In the October 2014 FS Tax Newsletter we informed you that the Court of Justice of the European Union (“CJEU”) has rendered its judgment in the Skandia America Corporation case. The CJEU ruled in this court case that services provided by a head office to a fixed establishment that is part of a VAT group are subject to VAT. Please find our Skandia-alert here. This judgment may have a significant impact on financial service providers. We would therefore like to update you on recent developments regarding the Skandia case and inform you what action could be taken by your business.
Initial response Dutch tax authorities
After the publication of the Skandia ruling, the Dutch tax authorities (“DTA”) defined an internal policy for applying Skandia in the Netherlands, to be adopted effective of the date of the judgment (September 17, 2014). The essence of this internal policy was that the Skandia case will be applied (i.e. VAT is potentially due) in the following situations:
- a) A ‘Skandia situation’ (thus foreign head office, Dutch fixed establishment in a Dutch VAT group).
- b) A ‘reverse’ Skandia situation (thus foreign fixed establishment, Dutch head office in a Dutch VAT group).
Response of taxpayers to position Dutch tax authorities
The Dutch Banking Association (Nederlandse Vereniging voor Banken, “NVB”) and the Dutch Association of Tax Advisors (Nederlandse Orde van belastingadviseurs, “NOB”), with the collaboration of parties such as Meijburg & Co, and the Confederation of Dutch Industry and Employers (“VNO-NCW”), spent the recent period actively protesting against the abovementioned policy of the Dutch tax authorities. The objective was to convince the Dutch Ministry of Finance (“MoF”) and DTCA to take more time to carefully consider the course to be taken.
Result: DTA’s internal policy on hold as of October 28, 2014
On October 28, 2014 it was announced that the MoF and DTA had put the internal policy on hold for the time being. The MoF and DTA will use the coming period to first map out the various interests at play (i.e. the tax-specific cases and the related financial interests). The NVB, NOB and VNO-NCW have provided their input, with the collaboration of Meijburg & Co. The input concerns the following perspectives: domicile perspective, technical tax perspective, administrative perspective and policy perspective. For the financial services industry, the additional VAT cost is a crucial factor.
The MoF will define a draft policy that will be presented to the usual forums (NVB, VNO-NCW and presumably also the NOB. This draft policy is expected before the end of this year. If the Skandia case will have to be applied in the Netherlands, it is expected that it will not apply from September 17, 2014, but with effect from a later date.
Developments in other EU Member States
Tax authorities in EU Member States are currently considering the implications of the Skandia judgment in their jurisdiction. At this stage, the UK and Ireland have indicated that businesses should continue to follow existing practice. These countries have not ruled out a more restrictive (balanced) reading of Skandia. Finland has indicated that it expects to publish guidance at the beginning of 2015.
Developments at European Commission level
The European Commission (“EC”) is currently considering a statement explaining how Skandia should be interpreted according to the EC. For now it appears that the EC desires a wide application of Skandia. As such, the EC would ignore the wishes of Member States such as the UK and Ireland. The expectation is that at the beginning of 2015 the EC will already seek the VAT Committee’s input on the course that – in the view of the EC – should be adopted.
What to do?
In the future, reversed Dutch VAT may be payable on services provided between a foreign head office and a Dutch fixed establishment / head office that is part of a VAT group in the Netherlands. It is therefore advisable to assess the potential implication of this judgment on your business in the Netherlands, but also abroad. At the same time, we recommend assessing from a technical tax perspective to what extent the Skandia case differs from your case.
We would be pleased to assist you in assessing the implication of this judgment on your business. If you would like to discuss the judgment and the implications it may have on your business, please contact Gert-Jan van Norden or Irene Reiniers.
2. E-commerce services from January 1, 2015
On January 1, 2015, EU VAT changes to the place of supply of telecommunications, broadcasting and electronic services will enter into force. These changes may have an impact on the digital Financial Services business as well.
With effect of January 1, 2015, electronic services to private individuals (B2C supplies) will be deemed to take place in the country where the private individual is residing. Until that date, electronic services rendered by EU service supplier to private individuals have been falling within the scope of VAT in the country where the supplier is established.
In the FS industry, the vast majority of electronic services (e.g. digital financial products) to private individuals will be eligible for a VAT exemption. However, attention should be paid to the VAT treatment of cross-border services to the extent VAT exemptions do not apply. For instance, the online streaming of real time stock market data (automatically generated by software) appears to be regarded as an electronic service. Foreign VAT will become payable should the service not fall within the scope of a VAT exemption in the customer’s country.
Generally, Financial Institutions providing digital financial products, as well as Intermediaries, should review their position when they render their services to private individuals in EU countries abroad. If the new rules apply to a taxpayer’s retail or intermediary business, the taxpayer is able to use a so-called Mini One Stop Shop (“MOSS”) scheme for a centralized declaration of VAT across the EU. Please contact Gert-Jan van Norden or Irene Reiniers for more information.
3. Country-by-Country Reporting: Time to Act
On September 18, 2014, the Organisation for Economic Co-operation and Development (“OECD”) released recommendations for guidance on transfer pricing documentation and country-by-country reporting as one of the initial seven deliverables prepared under the base erosion and profit shifting (“BEPS”) action plan—as BEPS Action 13.
Action 13 of the BEPS action plan calls for a review of the existing transfer pricing documentation rules and the development of a template for country-by-country reporting of income, taxes, and economic activity for tax administrations.
The view appears to be that, armed with a full and clear picture of where companies’ profits are generated, how this aligns to where their activity takes place and where they pay taxes, national governments will be better able to bring pressure to bear on perceived aggressive tax avoidance or non-compliance with the rules.
The resulting Country-by-Country (CBC) Reporting requirements are likely to pose a compliance burden for multinational companies, as gathering and reporting the data in the required format will require a new compliance process, potentially requiring new technologies or system changes, but certainly involving commitment from resources across the organization.
Financial services companies are likely to face particular challenges as they will have to address these CBC requirements as well as those imposed under the EU Capital Requirements Directive IV (CRD IV), which requires public reporting of revenues, profits, taxes, employee numbers and public subsidies for regulated entities within the EU.
Many financial services groups should by now have made their first public disclosure under the CRD IV rules. Unfortunately that does not mean the work is done; the OECD requirements are more extensive as they require more data points, but also cover every entity in the group rather than just certain regulated entities.
Significant uncertainties remain over the implementation process and timing. The OECD recognizes that if the standardization of transfer pricing documentation is to succeed, it needs to try and deliver a coordinated implementation process with countries introducing the same template at the same time.
The OECD recognizes these challenges and is going to do further work in the coming months to develop the implementation plan and sharing mechanism, with a view to making recommendations in January 2015.
Compliance and beyond
Regardless of the precise implementation timetable, it seems inevitable that this will be implemented and multinationals should be considering how they will comply and how this process can be developed to become a ‘business as usual’ compliance process alongside others.
However, the strategic view on this is also vital – what is the company’s strategy concerning disclosure and transparency? Is there an opportunity to use some of this data to publicly articulate the company’s position on tax? Is there a need or a desire to provide more narrative to the tax authorities to supplement the data and aid understanding? Would further narrative help to address some of the potential queries in advance, thereby reducing the compliance burden down the line? Is the CBC template information what tax authorities are looking for and how does this fit with the information in the Master File?
Bringing all of this together goes beyond strict reporting compliance and involves many more functions than the tax department. This will require a consistent, coordinated response strategy, reflecting all key interests in the company and will need to be driven from a senior level. This is not simply a question of how to comply most efficiently and cost-effectively with specific obligations. Leading banks – like major multinationals in other sectors – are realizing that an explicit strategic framework is necessary to guide the voluntary release and dissemination of financial, operating and tax information. This is increasingly an issue of corporate reputation management, requiring the development of a consistent communication strategy and a coherent narrative of corporate policy. Consistency of disclosure will also be critical to maintaining a sound public position, since data revealed to one agency may well be communicated to others; and any information shared with tax authorities could ultimately end up in the public domain. A compelling narrative should also act as a strong defense against information being misinterpreted.
The environment of global policy making, public expectation and information disclosure is changing rapidly. Tax strategies which may be legal are increasingly regarded as unacceptable; transfer pricing is perceived by some as a mechanism used by multinationals to artificially shift earnings to low tax jurisdictions, and supporting and defending business models will be tougher but ever more important in the future; the requirements around reporting and transparency will continue to increase.
The new requirements for disclosure, and for effective explanation, will bring significant operational challenges. But the strategic challenge is wider and more fundamental - can groups use disclosure as a way to restore public trust in corporations? How much should groups voluntarily disclose to stay ahead of the public debate? To meet this challenge, multinational financial services companies will need to develop a clear philosophy and vision, integrated with other expressions of corporate values, and ensure that all relevant functions, in all relevant jurisdictions, endorse it. The necessary thinking should be starting now.
The advisors of the Transfer Pricing Team of Meijburg & Co would be pleased to help you as they have extensive experience in these matters. Feel free to contact Jaap Reyneveld or Mark Bonekamp for more information.
4. Insurance premium tax
The Dutch tax authorities are showing increasing interest in the actions of insurers and insurance intermediaries with respect to their tax returns and payment of insurance premium tax.
This interest stems from the pretext for the tax return and payment of insurance premium tax formalized in the tax legislation (i.e. ‘the time at which the premium expires), and the recent legally implemented rate increases (the rate was increased to 9.7% (was 7.5%) on March 1, 2011 and a further increase of the rate to 21% followed on January 1, 2013).
The aforementioned ‘time at which the premium expires’ – i.e. the time when, according to all interested parties, insurance premium tax is payable – is not defined in the tax legislation and in the parliamentary commentary on this legislation is not unequivocally explained.
The Dutch tax authorities have recently formally adopted the position that the time at which the premium expires is the due date for the payment of the premium by the client (of the insurer or insurance intermediary) and this means that the date on which the premium is due and payable and can be collected by the insurer or insurance intermediary of the policyholder is therefore decisive for the liability to pay insurance premium tax. Clearly, this discussion is important for the Dutch tax authorities because insofar as it can be argued that this liability to pay premiums arises after the rate increases referred to, then more insurance premium tax will have to be declared and paid.
In practice, it appears that market players in the insurance sector employ different approaches with regard to the specific wording of insurance policies concerning the time at which the premium expires. As a result, the Dutch tax authorities have in various cases identified premiums reported by parties within the insurance sector which it believes should have been paid after the rate increase and therefore that the rate reported in the tax returns of the relevant parties was too low and too little insurance premium tax was paid. The Dutch tax authorities are currently trying to substantiate and provide insight into its position in this respect by means of both regular and EDP audits and have in specific cases brandished high additional assessments.
Our experience shows that the arguments and position taken by the Dutch tax authorities can and should be qualified in a number of cases. This may give rise to the reduction of these additional assessments, but this will have to be evaluated on a case-by-case basis.
If you have any further queries, please contact Otto van Gent.
On July 21, 2014 the OECD (Organisation of Economic Cooperation and Development) published the Standard for Automatic Exchange of Financial Account Information in Tax Matters, including the Commentary on the Common Reporting Standard (CRS). CRS is a big step towards a globally coordinated approach to disclosure of income earned by individuals and organizations. As a measure to counter tax evasion, it builds upon other information sharing legislation, such as the Foreign Account Tax Compliance Act (FATCA, see next topic) and the European Union (EU) Savings Directive.
CRS involves governments obtaining information from their financial institutions and exchanging data automatically with other nations. Financial institutions (FIs) will face a major increase in reporting requirements, with potential penalties for those unable or unwilling to comply fully. The information to be collected is complex and varied, and the OECD Standard for the automatic exchange of information is much wider in scope than FATCA.
It is expected that CRS will go live in adopting countries in 2016. FIs must then meet the due diligence obligations. Reporting will presumably start in 2017. An early adopter group of over 40 jurisdictions (including the Netherlands) agreed on the implementation of CRS with an effective date of January 1, 2016.
More information on CRS can be found here.
The deadline to register FIs under the FATCA legislation – December 31, 2014 – is approaching fast and the market is therefore responding. On July 1, 2014 the Dutch Ministry of Finance published a draft Decree to implement FATCA in Dutch law. Relevant parties were asked to provide comments on the draft Decree before August 19, 2014. It is expected that the final Dutch FATCA regulations will come into force before year-end 2014. Furthermore, it is expected that the Dutch Ministry of Finance will publish the Dutch FATCA Guidance in January 2015. Whereas the Dutch FATCA regulations are merely the implementation of the signed IGA in Dutch law, it is expected that the Dutch FATCA Guidance will contain in-depth explanatory notes to the FATCA definitions together with required processes such as the classification of an entity as a financial institution.