International Tax Monthly – May Issue

                OECD Issues International VAT/GST Guidelines

The Organizsation for Economic Co-operation and Development (OECD) released guidelines on applying Value Added Tax (VAT) and Goods and Services Tax (GST) to international trade transactions.

Officially called the Recommendation of the Council on the Application of Value Added Tax/Goods and Services Tax to the International Trade in Services and Intangibles, the guidelines are aimed at addressing issues that arise from the uncoordinated application of national VAT systems in international trade. Specifically, the guidelines include recommended approaches for collecting VAT on cross-border sales of digital products.

Destination Principle

The guidelines highlight that VAT is designed to tax final consumption in the jurisdiction where it occurs — that is, according to the destination principle. The guidelines note that implementing that principle for trade in services and intangibles is more difficult than for trade in goods. For services and intangibles, VAT systems must have mechanisms to identify the jurisdiction of consumption. These systems are necessary for business-to-consumer (B2C) and business-to-business (B2B) supplies, which are often different from each other.

For B2B supplies, the place of taxation rules should focus on two factors:

1. Where the business customer will use its purchases to create the goods, services or intangibles that final consumers will acquire, and

2. Facilitating the flow-through of the tax burden to the final consumer.

For B2C supplies, the rules are used to predict the place where the final consumer is likely to consume the services or intangibles.

VAT imposes compliance costs and burdens on businesses and administrative costs and burdens on tax authorities. Examples of costs associated with VAT compliance include the following:

  • Administration (costs related to employees, collection, and recovery,
  • Infrastructure (costs associated with establishing systems and processes, including making software changes), and
  • Finance (cash-flow costs and bank guarantees).

According to the guidelines, foreign businesses shouldn’t be disadvantaged or advantaged compared to domestic businesses. Foreign businesses shouldn’t incur irrecoverable VAT if this is considered “unjustified discrimination” compared to domestic businesses.

Several Approaches

A number of approaches can be used in this situation, such as direct refunds to foreign businesses, refunds through a domestic registration procedure, or making supplies VAT-free. Consult with your tax professional, who can help you decide how to proceed.

            IRS Adds FAQs on FATCA Beneficial Owner Requirements

The IRS recently added three frequently asked questions to its Foreign Account Tax Compliance Act (FATCA) compliance page elaborating on identification requirements for a beneficial owner withholding certificate.

Question: Under what circumstances is a withholding agent required to collect a foreign taxpayer identification number (TIN) or date of birth on a beneficial owner withholding certificate?

A. A withholding agent must obtain a foreign TIN on a beneficial owner withholding certificate in the following circumstances:

1. For a foreign person claiming a reduced rate of withholding under an income tax treaty, if the foreign person does not provide a U.S. TIN and the income is a type to which the TIN requirement apples, and

2. Except as otherwise provided for a foreign person that is an account holder of a financial account maintained at a U.S. branch or office of the withholding agent, but only if the withholding agent is a financial institution.

Question: Is a beneficial owner withholding certificate invalid during calendar year 2017 if it doesn’t include a foreign TIN or date of birth for the beneficial owner identified on the certificate?

A. For calendar year 2017, a withholding agent isn’t required to treat an otherwise valid beneficial owner withholding certificate as invalid when it does not include a foreign TIN because, in the absence of actual knowledge otherwise, the withholding agent may assume that the foreign person does not have a foreign TIN.

For beneficial owner withholding certificates obtained by a withholding agent on or after January 1, 2017, the withholding agent must collect a date of birth on a beneficial owner withholding certificate for an individual beneficial owner. However, if the withholding agent has the beneficial owner’s date of birth in its files, it may use that information for reporting purposes and will not be required to treat a Form W-8BEN as invalid because it didn’t include a date of birth.

Question: How is a withholding agent permitted to obtain a foreign beneficial owner’s foreign TIN that isn’t included on an otherwise valid beneficial owner withholding certificate for purposes of satisfying the requirements?

A. Where a foreign beneficial owner’s foreign TIN isn’t included on an otherwise valid beneficial owner withholding certificate, in order to satisfy the requirements, a withholding agent is allowed to obtain the foreign beneficial owner’s foreign TIN on a written statement provided by the beneficial owner (including a written statement transmitted by email). The statement must indicate that the foreign TIN is to be associated with the beneficial owner withholding certificate. A withholding agent is similarly permitted to obtain the reasonable explanation for the absence of a foreign TIN.

Background on Withholding

In general, nonresident aliens and foreign corporations are subject to a U.S. withholding tax on certain income from U.S. sources that aren’t effectively connected with a U.S. trade or business. Such “fixed, determinable, annual, and periodic income” includes interest, dividends, royalties, compensation, and certain gains. The withholding tax is generally collected at the source by a withholding agent, who is generally the last person in the U.S. who handles the item before it is remitted to the foreign taxpayer or the taxpayer’s foreign agent.

The Internal Revenue Code requires withholding agents to withhold 30% of certain payments to a foreign financial institution (FFI) unless that enterprise has an agreement with the IRS to report certain information with respect to U.S. accounts, among other things. The code also imposes withholding, documentation, and reporting requirements on withholding agents related to some payments made to certain non-financial foreign entities (NFFEs). In cases where foreign law would prevent an FFI from complying with its agreement with the IRS, two alternative intergovernmental agreement models help facilitate application of FATCA.

A beneficial owner withholding certificate is a statement by which the beneficial owner of a payment states it is a foreign person and, if applicable, claims a reduced withholding rate. A separate certificate must be submitted to each withholding agent. A beneficial owner receiving more than one type of payment from a single agent may have to submit more than one withholding certificate to the agent for the different types of payments.

Certificate Validity

A withholding certificate is valid for purposes of a payment of an amount subject to withholding only if it is provided on:

  • Form W-8 (Certificate of Foreign Status,
  • Form 8233 (Exemption from Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual), in the case of personal services income or certain scholarship or grant amounts,
  • A withholding agent’s substitute form, or
  • Any other form that the IRS prescribes.

Note: A substitute form is acceptable if its provisions and signature-under-penalties-of-perjury statement are identical to those on the official form and its certifications are similar. A substitute form is acceptable even if it doesn’t contain all of the provisions contained on the official form, so long as it contains those provisions that are relevant to the transaction for which it is furnished.

FATCA: What’s Required?

The Foreign Account Tax Compliance Act (FATCA) was passed as part of a 2010 law. It generally requires that foreign financial institutions and certain other non-financial foreign entities report on the foreign assets held by their U.S. account holders or be subject to withholding on withholdable payments.

The 2010 law (the Hiring Incentives to Restore Employment Act) also contains requirements for U.S. persons to report, depending on the value, their foreign financial accounts and foreign assets.

                China Revises Transfer Pricing Rules

In a long-awaited announcement, China updated its special tax adjustment measures.

The Special Tax Investigations, Adjustments and Mutual Agreement Procedures (Announcement 6) integrates elements of the Base Erosion and Profit Shifting (BEPS) transfer pricing work of the Organisation for Economic Co-operation and Development.

Clarifying positions

It should help taxpayers better understand the focus areas and rationale of Chinese tax authorities when undertaking transfer pricing investigations because it clarifies the country’s position on:

  • The arm’s length principle,
  • Intangible property transactions,
  • Intercompany services transactions,
  • Location specific advantages,
  • Transfer pricing methods, and
  • Various procedural matters, such as mutual agreement procedures (MAPs) under China’s tax treaties.

Moreover, given that Announcement 6 regulates both outbound payments and inbound receipts of royalty and service fees, it appears that the first steps are being taken to administer transfer pricing rules in relation to outbound-investing Chinese multinational enterprises (MNEs), alongside the traditional focus on foreign multinationals.

Major Questions Linger

Ultimately, key questions remain on how well the Chinese implementation of the BEPS intangibles profit allocation rules reconciles to the approaches taken in other major countries to resolve disputes. MNEs will need to closely monitor these developments and make adjustments to documentation and tax structures and strategies accordingly. Consult with your tax advisor about how to proceed in your situation.