2016 VAT/GST fixed establishment survey
In 2016, we surveyed EY Indirect Tax professionals in 67 countries and asked them how the term “fixed establishment” for VAT/GST is defined in their local tax legislation, whether the concept of FE for VAT/GST is aligned with the concept of permanent establishment for direct taxes in their countries and whether the current definition of FE is under review as a result of projects such as the Base Erosion and Profit Shifting (BEPS) Actions or Court of Justice of the European Union (CJEU) case law.
Survey findings: Q&A
- Is the term fixed or permanent establishment for VAT/GST purposes defined your country’s domestic VAT/GST law?
The term “FE” for VAT/GST purposes is specifically defined in the primary legislation of only 13 of 67 countries surveyed; however, 35 of these countries rely on another source to define the term (e.g., EU legislation, case law and regulations). Therefore, in total, the term “FE” for VAT/GST is defined in legislation in 48 countries.
- Is this definition under current review or likely to change (e.g., as a result of BEPS or CJEU case law, changes in the digital economy, etc.)?
Forty of 67 countries responded that the definition is not currently under review. However, this is not the whole story. In 5 countries (Belgium, Brazil, Israel, Lithuania and South Korea) respondents said that the definition is under review and another 11 countries indicated that the definition could well come under scrutiny (Armenia, Australia, Austria, Canada, Egypt, Jamaica, Malta, the Philippines, Turkey, the UK and Uruguay).
Significantly, these countries include EU Member States and countries that are actively reviewing the impact of the digital economy on the local VAT/GST system.
- Is the definition used for fixed or permanent establishment for VAT/GST purposes the same as that used for direct taxation in your country under domestic tax law and double tax treaties?
In 36 countries surveyed, the definition of FE used for VAT/GST purposes is not the same as that used for PE for direct tax purposes. These differences can confuse nonresidents who may be caught by one establishment rule but not by another.
Countries surveyed that do use the same definition for PE and FE are: Algeria, Argentina, Chile, Czech Republic, Estonia, Indonesia, Jamaica, Kenya, Mauritius, Slovak Republic, South Korea, Switzerland, Uruguay and Vietnam.
In the remaining jurisdictions, companies that operate from multiple locations must consider how their activities are covered by the separate FE and PE definitions to determine their obligations under each set of criteria.
- If a foreign company has a fixed or permanent establishment for VAT/GST purposes in your country, is it effectively treated as a domestic VAT/GST payer (e.g., with regard to VAT/GST registration, VAT/GST compliance, VAT/GST refunds)?
In 46 countries surveyed, if a foreign company has an FE for VAT/GST, it is effectively treated as a resident VAT/GST payer.
Generally, if a foreign business is found to have an FE in a country, it is responsible for registering for VAT/GST and accounting for the tax in the country where it is established (effectively, as a resident business). Where an FE exists, the supplier’s customers are not generally obliged (or permitted) to self-assess for VAT/GST. Failure to register for VAT/GST may result in severe financial penalties, even when there has been no effective tax loss because the customer has accounted for tax under a “reverse charge” (self-assessment) mechanism.
A foreign business with an FE must meet all related VAT/GST compliance obligations, such as invoicing, keeping appropriate books and records, submitting VAT/GST returns, making VAT/GST payments, and submitting any supplementary information that the tax administration may require. On the other hand, once a foreign business has an FE, it is generally permitted to recover VAT/GST on costs and overhead in the same way as all other resident businesses. In countries that do not refund VAT/GST paid by nonresidents, VAT/GST recovery can be an important benefit of achieving FE status.
- Can a foreign company be required to register for VAT/GST in your country if it does not have a fixed or permanent establishment for VAT/GST purposes?
The FE concept is not as decisive for determining tax chargeability for indirect taxes as the concept of PE is for direct taxes. In many cases, the charge to VAT/GST depends on criteria other than whether the supplier has an establishment (such as the location of goods when they were sold). In some cases, if VAT/GST applies, the nonresident’s tax obligation may be fulfilled through obligations on the resident customer.
Increasingly, a nonresident supplier may be liable to register for VAT/GST in a country where it has no FE, generally for supplies of goods and services to private consumers who are not taxable persons for VAT/GST purposes.
In 46 countries surveyed, a nonresident may be required to register for VAT/GST purposes even if it has no FE.
This aspect of the VAT/GST system represents a significant difference from how most other taxes operate in a cross-border context. In particular, it has far-reaching implications for remote sellers of goods and services, many of whom may be unaware of their obligations in countries where they have no physical presence.
Further, the activities that create an obligation for a nonresident to register for VAT/GST differ among countries with no formal harmonization outside of the EU itself. Common activities that create an obligation to register for VAT/GST without an FE include:
- Sales of goods (e.g., sales made by a group procurement company to a local distributor)
- E-commerce sales of goods to EU consumers
- Services related to immovable goods (e.g., repairs)
- Supplies of digital services to end consumers (e.g., downloaded games, e-books and music)
Increasingly, the costs of complying with VAT/GST obligations in a foreign jurisdiction are likely to be a factor in evaluating business opportunities for nonresidents in the digital economy. Businesses that do not comply with their obligations risk incurring severe financial penalties, disrupting their business and damaging their reputation.
However, many nonresident companies struggle to meet these obligations, and for some, doing so may present a significant barrier to doing business. Generally, if an overseas business is obliged to register for VAT/GST, it must account for the tax in the country and it must generally meet all the VAT/GST compliance obligations in that country (e.g., invoicing, keeping appropriate books and records, submitting VAT/GST returns, making VAT/GST payments and submitting supplementary information).
Nonresidents may face additional requirements that differ from those imposed on residents. These obligations are generally not harmonized and may vary by country. For example, in many countries, a nonresident must appoint a resident fiscal representative to act on its behalf, or it may be required to set up a local bank account or bank guarantee.
In some jurisdictions, such as the EU and South Korea, simplified VAT/GST returns may be available for nonresidents (e.g., the EU Mini One Stop Shop for remote sellers), but other restrictions may apply to businesses that use the simplified scheme (such as restrictions on VAT recovery).
- If a foreign company has a fixed or permanent establishment for VAT/GST purposes in your country, does it automatically have a permanent establishment for direct tax purposes?
In defining an FE for VAT/GST purposes, most countries apply different criteria from those used to define a PE for direct tax purposes (see Question 3). In 41 countries surveyed, the existence of an FE for VAT/GST does not mean that a foreign business automatically has a PE for direct tax purposes. However, in 17 countries surveyed, the tax administration does automatically link FE and PE (Algeria, Argentina, Egypt, Estonia, Greece, Indonesia, Jamaica, Kenya, Malawi, Mauritius, Peru, Slovak Republic, South Korea, Switzerland, Turkey, Uruguay and Zambia).
In an additional 15 countries, the existence of an FE for VAT/GST is influential in determining PE status (Bulgaria, Congo, Croatia, Cyprus, Czech Republic, Hungary, India, Luxembourg, Malta, Portugal, Romania, Singapore, Spain, Sweden and the United Kingdom). The link between FE and PE is particularly strong in the EU.
- If a foreign company is registered for VAT/GST in your country, does it automatically have a permanent establishment for direct tax purposes?
Most countries do not automatically connect VAT/GST registration and PE status. However, such a link is automatic in 14 countries (Armenia, Brazil, Dominican Republic, Egypt, Jamaica, Kenya, Malawi, Mauritius, Peru, the Philippines, South Korea, Thailand, Turkey and Vietnam). And the existence of VAT/GST registration would be influential in deciding PE status in 10 others (Congo, Croatia, India, Jordan, Malta, New Zealand, Portugal, Russia, Singapore and Zambia).
- If a foreign company has a permanent establishment for direct tax purposes in your country, does it automatically have a fixed establishment for VAT purposes?
In most countries surveyed, the existence of a PE for direct tax purposes does not automatically confer FE status, although this link is automatic in 20 countries (Algeria, Angola, Argentina, Australia, Chile, Croatia, Curacao, Egypt, India, Indonesia, Jamaica, Kenya, Malawi, Mauritius, Peru, Portugal, South Korea, Switzerland, Turkey and Uruguay).
And the existence of a PE is considered influential in deciding FE status in 23 other countries (Armenia, Austria, Brazil, Bulgaria, Congo, Cyprus, Czech Republic, Dominican Republic, France, Hungary, Kazakhstan, Latvia, Malta, New Zealand, Poland, Romania, Russia, Singapore, Slovenia, South Africa, Spain, Sweden and Zambia). These responses indicate that the presumption of FE status is stronger if a taxpayer already has a PE.
- Can a foreign company have a fixed or permanent establishment for VAT purposes in your country for receiving supplies of goods or services?
In recent years, the concept of an FE to receive supplies for VAT/GST purposes has been developing within international VAT/GST legislation and CJEU case law. It is directly linked to the increase in cross-border intra-company activity and to the spread of e-services — where the concept is being used, in particular, to distinguish the liability to tax and place of supply for cross-border services supplied B2C and B2B. This is sometimes called a “passive” FE.
Thirty-one of 67 countries responded that a business may have a VAT/GST FE for receiving supplies (Austria, Belgium, Brazil, Canada, Chile, Croatia, Cyprus, Czech Republic, Finland, France, Greece, Hungary, Indonesia, Ireland, Italy, Jamaica, Kenya, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Singapore, Slovak Republic, Slovenia, Spain, Sweden and the UK).
One country (Australia) indicated that this status may be possible. Because this is still a developing concept, the practical consequences and potential risks of having a passive FE are not clearly defined in many countries. The general assumption is that the “passive” FE is likely to trigger the same rights and obligations as an “active” FE — to register for VAT/GST, to account for VAT/GST (e.g., on reverse-charge services), to submit all VAT/GST declarations and reports, and to recover input tax.
1 Article 11, EU Regulation 282/2011.