VAT Snapshot Q4 2023

The Q4 2023 VAT Snapshot includes a summary of the Revenue Commissioners public consultation on modernising Ireland’s administration of VAT which provides an opportunity for businesses to express their views on the future of Ireland’s VAT system.

We address the recent Court of Justice of the European Union (CJEU) judgment in the Deco Proteste case. This case concerns whether a gift provided with a magazine subscription is a free of charge supply or ancillary to the supply of the magazine.

The Snapshot also includes a summary of the key updates from the recent meeting of the VAT Expert Group (VEG) from October 2023. This includes the special scheme for small enterprises, further insights on the special schemes for e-commerce and the customs reform package.

Finally, we share with you an updated Digital Services Tax (DST) tracker which includes 23 jurisdictions and may be of interest to those businesses impacted by DST.

Please do reach out to any of the contacts referenced or your usual EY contacts to discuss any of these items in more detail.

1. Modernising Ireland’s administration of Value-Added Tax

Issue

The Irish Revenue Commissioners have launched a public consultation, following the announcement by the Minister for Finance in Budget 2024, on how Ireland can use digital advances to modernise Ireland’s VAT invoicing and reporting system.

Relevance

The launch of the public consultation by the Revenue Commissioners is Ireland’s first step towards complying with the European Commission’s VAT in the Digital Age (ViDA) proposal which was announced during 2022. The ViDA proposals, which were to be effective from 1 January 2028 but are likely to be delayed, includes the introduction of mandatory e-invoicing and digital reporting requirements for all intra-Community B2B supplies with details of such transactions to be shared with tax authorities within days. Several other EU Member States have already introduced or plan to introduce real-time reporting and e-invoicing systems. However, the ViDA proposals seek to establish a common approach across the Member States. As such, it will be important for Ireland to ensure that any changes to the VAT system are in line with the ViDA proposals.

The public consultation, which will run from 13 October 2023 to 12 January 2024, seeks input from a wide range of stakeholders and allows stakeholders to share their views on the future of the VAT system, the approach to be adopted and any concerns. As noted in the consultation paper, the aim of modernising Ireland’s VAT system, in addition to aligning with the proposed changes at EU level, is to align compliance obligations more closely with normal business processes in order to reduce compliance costs and to ultimately yield additional efficiencies for tax compliant businesses. In doing so, this should enable Revenue to focus its efforts efficiently and effectively on combatting fraud.

Any changes to Ireland’s VAT system will have a significant impact on various areas of businesses such as tax, IT systems, finance, etc. and it will take time and investment to ensure businesses are prepared, requiring cross-departmental collaboration. As such, it is important for companies to engage with the wider sections of their businesses to understand the potential impact and we would encourage businesses to engage in the consultation process and submit a response to ensure their views are considered.

How EY can help

EY are collating responses to the public consultation and would like to encourage businesses to share their views with us in advance of the deadline to ensure their views are taken into consideration. Our online survey can be accessed here.

2. A gift provided with a magazine subscription is not a ‘free transfer of goods’ and is ‘incidental’ to the main supply

Issue

Deco Proteste – Editores (DPE) is a Portuguese established company that is engaged in the publishing of magazines. DPE runs promotional campaigns aimed at attracting new customers whereby new subscribers who sign up for a magazine subscription receive a tablet or smartphone (with a value of less than €50) as an introductory gift. The publisher sends the introductory gift to the new subscribers after the first monthly subscription payment and does not charge the subscribers anything extra for the gift. There is no minimum period of subscription required and even if the subscriber cancels the subscription after the first payment, they can still keep the tablet or smartphone.

DPE had only paid VAT at the reduced rate (6%) on the supply of the subscription and had not paid VAT at the standard rate (23%) on the supply of the introductory gift. The Portuguese tax authorities disagreed and argued that the devices were gifts constituting a separate deemed supply which should have been subject to VAT and assessed VAT on DPE.

The CJEU held that there was no deemed “free” supply for VAT purposes but rather that the supply of the introductory gift was ancillary to the supply of the magazine, with the result that VAT only had to be accounted for on the subscription fee (being the principal element of the supply). The Court held that as DPE takes account of the fact that some subscribers will cancel their subscriptions after the first payment, and how the renewal of a subscription does not give rise to the entitlement to a new gift, the gift did not have an independent purpose and there was a clear link between the delivery of the gift and the subscription. As the gift was held to be ancillary to the magazine subscription, the reduced rate of VAT applied to the entire supply.

Relevance

This case is important for any businesses supplying “gifts” in similar circumstances such as incentives to increase customers or subscribers and should provide an opportunity to review and consider the current VAT treatment being applied. It may be possible to treat “business gifts” which have been treated as deemed supplies as ancillary supplies where there is a predominant principal element. The judgment of the court placed reliance on the customers perspective, and this may create broader opportunities for businesses engaged in similar supplies.

How EY can help

We can support businesses in reviewing their supply chains to determine whether any items may come within the scope of the ancillary supply analysis as outlined in this CJEU judgment and the opportunity to avail of a reduced rate in certain circumstances. We can support businesses with making submissions to relevant tax authorities where overpayments of VAT have been identified.

3. VAT Expert Group (VEG) Updates

Issue

The VAT Expert Group recently published minutes of their 34th meeting which was held on 26 October 2023. The purpose of this group is to “advise the Commission on the preparation of legislative acts and other policy initiatives”. The minutes can provide a useful insight into EU VAT proposals and also the practical impact of existing legislation.

Relevance

One of the topics discussed was the special scheme for small enterprises (the SME scheme) and the draft Explanatory Notes which have been produced by the Commission. The SME scheme will apply from 1 January 2025 and aims to simplify VAT compliance for small businesses who are engaged in cross border trade within the EU. Currently, SMEs can have VAT registration and compliance obligations in each Member State where they make taxable supplies. They may be able to benefit from VAT registration thresholds in the Member State where they are established but cannot benefit from these thresholds in other Member States. Under the SME scheme, the local Member State VAT registration thresholds will also apply to SMEs established in other EU Member States provided the local registration threshold cannot exceed EUR85,000 and the total annual turnover of the SME for the whole of the EU does not exceed EUR100,000. Once implemented, the measures are expected to reduce the VAT compliance costs incurred by SMEs by up to 18% per year.

Continuing with the theme of simplifying VAT compliance for traders, the minutes contain some interesting data on the operation of the three special schemes for e-commerce: the EU, non-EU and Import One Stop Shop Schemes and are a testament to the success of those schemes. In 2022, a total of EUR20 billion was declared via the three schemes which represents a 25% increase on the extrapolated revenue for the previous year when the schemes were introduced. By the end of 2022 there were 113,800 traders registered for the EU Scheme, 10,200 registered for the Import scheme and 4,300 registered for the non-EU scheme.

The work to further simply compliance for e-commerce continues with the Customs Reform Package. The customs proposals which were adopted on 17 May 2023 make online platforms the key actors in ensuring that goods imported and sold into the EU are compliant with customs rules. In particular, the proposals include the following:

• The concept of deemed importer so that when the online platform is the deemed supplier, they can use IOSS
  
  
• The removal of the EUR150 customs de minimis threshold for IOSS
  
  
• The requirement that the online platform must ensure that the customs duties and VAT are paid at purchase by the customer

The negotiations regarding these proposals and the VAT in the Digital Age (ViDA) are continuing. We understand that the introduction of the ViDA proposals are likely to be delayed with the EU Parliament’s Committee on Economic and Monetary Affairs having voted for a one-year delay to all three ViDA proposals on 23rd October, although this is not yet binding.

Finally, under the AOB part of the meeting, the VAT treatment of donated and recycled goods was discussed. Concern was raised over the perceived incentive for businesses to destroy rather than donate unsold goods due to the operation of VAT recovery rules. Suggestions were made to allow a right of deduction in relation to donated goods and also to apply a reduced rate of VAT to recycled goods. The Commission confirmed that there is no intention to change the current rules due to concerns around fraud and creating a distortion of competition for charities.

How EY can help

EY can support businesses with understanding the impact of any of these areas on their operations and assessing current operations in light of proposed changes. We are available to support in determining whether the proposals could benefit businesses and discuss in further detail as required.

4. Digital Services Tax (DST) summary

Issue

EY has recently issued a summary of Digital Services Taxes and other taxes on the digital economy on 17 November 2023.

Relevance

The drive to tackle the challenges of tax base erosion and profit shifting by multinationals has been spearheaded by the Organisation for Economic Co-operation and Development (OECD) which has been working with its members to obtain international consensus. In July 2021, a statement was issued by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (the Inclusive Framework) which outlined a two-pillar approach. Pillar One would allocate a portion of profits to the jurisdiction from which revenues were earned, and Pillar Two would introduce an agreed global minimum effective tax rate. One of the conditions of the implementation of Pillar One, would be the removal by members of any unilateral DST or similar measure.  

Some countries such as the UK, France and Spain had already introduced DST in advance of the OECD proposals and in recent times more countries such as Canada and New Zealand have announced their intention to introduce domestic DST due to the slow pace of progress on agreement and implementation of the OECD framework.

The EY summary contains details of the DST rules in 23 countries. Please reach out to your usual contact or the contacts listed below if you would like to receive a copy of the DST summary.

How EY can help

EY can assist businesses in understanding their DST obligations and support with registrations and compliance obligations as required. Leveraging our connected global network of experts, we can assist businesses in evaluating and minimising their risks in the area of DST.