Eight steps to take now to ensure VAT package compliance - Ernst & Young - Global

Eight steps to take now to ensure VAT package compliance

Businesses that supply and/or purchase services across the European Union (EU) will be affected by the “VAT package” – a series of rules by the European Council which became effective 1 January 2010. The rules relate to the value added tax (VAT), which is an indirect tax on the domestic consumption of goods and services, except those that are “zero-rated” (such as food and essential drugs) or are otherwise exempt. Developed in response to the growing internationalization of business, the new measures are meant to provide a simpler approach and to thwart VAT arbitrage opportunities previously available to taxpayers.

The new rules shift the determination of VAT taxation for business-to-business transactions from the place of supply of services to the place of consumption or receipt of services. (See Figure 1.)

Impact on transfer pricing
The new VAT rules on services have several transfer pricing implications, including:

1. Recipients of various services will now be obliged to conduct a thorough review of all incoming service transactions (provided by a related or third party) to determine whether they fall under the purview of the new rules. Before 1 January 2010, services provided from outside the EU may have been outside the scope of VAT; as of 1 January 2010, these same services will be subject to a reverse charge of self-assessment by the EU service recipient.
2. Businesses must ensure the necessary changes to internal tracking and accounting systems are implemented to account for VAT correctly under the new rules.
3. Additional reporting and compliance measures are now required of EU-based affected entities.
4. Non-EU-based multinational corporations that have a European presence may face significantly more tax exposure and uncertainty. Many services that once qualified for VAT-free treatment will be liable for the tax. Since financial services companies are unable to recover significant portions of VAT, the increased VAT reverse charges expected under the change will represent an additional taxation burden for financial services companies.

Steps to take now to ensure compliance
To comply with the new VAT package measures, affected companies should:

1. Conduct an economic impact assessment.
2. Consider options to mitigate any negative financial impact.
3. Review existing global contracts at group level.
4. Review existing two-country contracts and consider specifically which new VAT risks (if any) arise and who bears those risks.
5. Review intercompany agreements, charges and invoices.
6. Decide how to deal with additional compliance obligations.
7. Ensure necessary systems and process changes are promptly implemented.
8. Monitor closely all new regulations, policy developments and guidance.

For additional news about the transfer pricing, download our March FSTP Worldwide newsletter.