Espen Qvist and Trond Ingebrigtsen of PwC Norway provide an overview of issues being tackled as part of the OECD’s base erosion and profit shifting (BEPS) project which are having an impact on Norwegian indirect tax policy.
In July 2013, the OECD introduced a plan, supported by the G20 countries, which focused on counteracting base erosion and profit shifting (BEPS).
The main areas of focus are:
- Countering base erosion and arbitrage between territories;
- Establishing the jurisdictional right-to-tax in light of the digital economy; and
- Dealing with transfer pricing issues.
From an indirect tax perspective, the focus has been on identifying the main difficulties that the digital economy poses for the application of existing international tax rules and on preparing options to address these difficulties (BEPS Action 1). Existing tax legislation is not designed for the modern communication technology with an increased geographical spread of customers due to increased cross-border supplies and a more dynamic and efficient trade environment. The fast growth of the digital economy has opened the door for new digital products, and new ways to shop. The following issues have been at the centre of the OECD’s attention in the BEPS digital economy paper:
- Collection of VAT in the digital economy;
- Growth in e-commerce and online purchases of goods;
- Remote digital supplies to consumers;
- Remote digital supplies to exempt businesses; and
- Remote digital supplies to multi-location enterprises.
A key conclusion in the paper is that the collection of VAT in business-to-consumer (B2C) transactions must be addressed urgently. The paper also concludes that the criteria for creating a permanent establishment (PE) should be further reviewed. Indirect tax changes should be further considered to support digital growth.
The OECD has released discussion drafts of two new elements in the international VAT/GST Guidelines supporting these key conclusions in the paper:
1. Place of supply for B2C supplies of services and intangibles.
Proposing the destination principle - customer's usual residence - as the best way to identify the place of consumption;
Exceptions proposed for services physically performed at identifiable locations, immovable/movable property and for specific services like passenger transport; and
Guidelines proposed for when the need for specific rules should be assessed by governments.
2. A simplified registration and compliance regime for non-resident suppliers
Similar to the EU mini one-stop shop (MOSS)
A new strategy was announced by the EU in May this year taking the above into account. The following mechanisms in the VAT legislation were proposed:
Extending the single electronic registration and payment mechanism to intra-EU and third country online sales of goods to private consumers;
Introducing a common VAT threshold to help small start-up e-commerce businesses;
Allowing for home country controls including a single audit of cross-border businesses for VAT purposes; and
Removing the VAT exemption for the importation of small consignments from suppliers in third countries.
To summarise, a list of changes in the area of indirect tax can be expected, including:
Additional reporting obligations imposed by tax authorities (as a result of moving to a destination principle and shifting the place of taxation to where the customer is located) to ensure that tax is actually calculated on each single transaction in the supply chain;
Intensified attention from tax authorities on intra-group transactions from a transfer pricing perspective to give the tax authorities better access to valuable information about the VAT compliance status of businesses. It is expected that this will also intensify the number of indirect tax inspections by the tax authorities;
The implementation of a standard mechanism of collecting VAT on all B2C transactions in customer location;
An increase in the number of VAT registrations;
An increase in the amount of VAT reporting obligations;
A reduction of the threshold for when a PE is created, which will have significant impact on the VAT reporting obligations, including:
an increase of potential fixed establishments; and
vital changes to the current mechanism for allocation of VAT on the acquisition and supply of services (and goods).
The principle of country-by-country reporting (CbCR) will also most likely lead to additional VAT reporting and administrative burden.
In Norway, we have not seen any direct action taken by the Norwegian tax authorities due to the BEPS announcements from the OECD.
The use of the destination principle in Norway by shifting the place of taxation to where the customer is located is mainly limited to the supply of certain qualifying services for B2B transactions and B2C e-services. To be aligned with the scope of the destination principle in neighbouring countries we should expect that the Norwegian tax authorities will consider expanding the application of the reverse charge mechanism on B2B transactions in the future. Implementation of a general reverse charge principle for B2B cross-border service supplies and for domestic supplies of goods by non-established entities should be expected.
The current simplified VAT registration scheme for supply of electronic services B2C in Norway (VAT on electronic services, VOES) is based on the same principles as for the MOSS scheme in the EU. A strengthened cooperation between the tax authorities in the different countries is expected due to the CbCR principle. This would increase the focus on Norwegian VAT compliance for non-established entities supplying goods and services to Norway.
Even though there are no signals from the Norwegian tax authorities that they intend to expand the scope of Norwegian VAT on supplies of goods and services to consumers in Norway, there might be changes due to the signals and themes contained in the BEPS papers. Taking into consideration that the simplified VAT registration scheme for non-established entities supplying electronic services has been a success in Norway, an expansion of the scope for this simplified scheme including all types of B2C transactions would not be surprising at all.
A reduction of the threshold for creating a PE will most likely have a significant impact on when a fixed establishment for VAT purposes is created in Norway. This will subsequently have an impact on the Norwegian principles for allocation of VAT on the acquisition and supply of services. Today, these principles are based merely on where the contracting parties are established. By considering foreign entities as having a fixed establishment in Norway, foreign entities will most likely be considered as domestic entities in a Norwegian VAT context in the future. New criteria for when a branch should be considered as taking part/intervening in the supply and receiving supplies will have to be defined and should be in line with neighbouring countries.
Norwegian businesses should also expect to have more attention on compliance with foreign indirect tax reporting obligations in the future. An increase of the indirect tax competence of Norwegian multinationals would be required to comply with a rather more complex foreign indirect tax landscape due to the implementation of BEPS indirect tax measures. This is also likely to be a competitive disadvantage if not taken care of by Norwegian businesses in the future.
These legislative changes will also require systems changes to be implemented to comply with the new VAT reporting obligations. Systems changes will often be complex and both time-consuming and expensive to implement for the businesses. Further, businesses do not always know who their customers are or have little information about them. By changing from being a domestic business operator and turning to a global business operator in the future, Norwegian businesses should expect to have systems that are capable of collecting much more information about transaction flows and customers in order to comply with the future reporting obligations set out by the tax authorities.
The OECD will announce new recommendations and reports in light of the BEPS project both in October and December this year. In October, recommendations regarding PE and transfer pricing will be released. In December, a supplementary report, reflecting the outcomes of the BEPS work on digital economy issues, will be published. These recommendations are also likely to have an impact on the indirect tax landscape in the future.
BEPS concerns and anti-BEPS actions have also heightened expectations around the Norwegian fiscal Budget for 2016, which will be published on October 7 this year; expectations abound that it could see the first indirect tax propositions from the Norwegian Government building on the principles by the OECD in the BEPS project.
