Implementing the ‘destination principle’ to intra-EU B2B supplies of goods

Feasibility and economic evaluation study Final Report - 30 June 2015

The European Commission published a study prepared by EY that is titled “Implementing the destination principle to intra-EU B2B supplies of goods”.

The feasibility study examines issues of the current VAT model in force and the level of EU VAT fraud. It as well takes into consideration the compliance costs by taxable persons, especially those who conduct cross-border transactions versus domestic.

In this report, administrative costs for a Member State Tax Authority will include costs relating to the following activities: processing VAT registrations, undertaking VAT audits, reviewing VAT returns, reviewing EC Sales Lists (recapitulative statements), helpline and written query handling, and the implementation of new legislation.

The European Commission has identified two fundamental issues with the current model of taxation: namely the additional compliance costs borne by businesses that conduct cross-border trade when compared to those businesses that only trade domestically and the occurrence of VAT fraud.

The European Commission has commissioned EY to conduct a study of five policy options designed to enable the implementation of a destination based VAT system across the EU that to some extent addresses these issues.

As part of the study, EY has gathered information from businesses, tax experts, Member States’ Tax Authorities and additional sources in order to make a comparison against the current “As Is” taxation model and also determine the impact of the implementation of each of the five proposed policy options.

This information aims to assess the impact of the five policy options from both a qualitative and quantitative perspective.

To this end, information has been obtained on business compliance costs, tax administration costs, cash flow costs, VAT fraud implications, legislative implications and aspects of practical implementation for each of the five proposed policies.

In addition to the collection and analysis of this information, EY has provided a conclusion as to whether the policy options have a potential to address the two fundamental issues and what (if any) impact there will be on the European economy as a whole.

Improving Large Business Compliance

On 22 July 2015 the Revenue & Customs in the UK have published two linked consultation documents that relate to compliance and anti-avoidance. Both are directed at behaviours and behavioural change for large corporates in particular.

The document entitled Improving Large Business Compliance contains 3 main proposals:

• A legislative requirement for large businesses to publish their tax strategy
• A voluntary ‘Code of Practice on Taxation for Large Business’
• A ‘Special Measures’ regime to apply to businesses continually undertaking aggressive tax planning or persistently refusing to engage with HMRC in an open and collaborative manner.

In relation to tax strategy, the document sets out the areas that should be covered by a tax strategy and also proposes that businesses could publish information to demonstrate how the tax strategy is being applied in practice.

Importantly it also envisages that there should be a named individual at Executive Board level who is responsible for owning and signing off the tax strategy.

As these elements apply to indirect taxes, we believe that this is an important development in approaching the work that we have been discussing and the level of focus that this will receive internally.

Although the potential application is just to the UK, you will clearly want to consider being consistent across jurisdictions. Perhaps most importantly this type of thinking within Revenue authorities is or will become commonplace and is important to be thinking a few years ahead to the challenges you will be facing from a compliance perspective.

The consultation papers give a clear indication of the thinking in this regard of one of the world’s leading tax authorities.
We think there are a number of things to do:

• Take some time to think about a sensible response to the consultation by the deadline of October 14
• From a direct tax and indirect tax perspective begin to think further about how this aspect of tax strategy will be articulated on both a UK and international basis
• If the UK document is going to be published, as planned in the consultation, it will be accessible to other tax authorities of course and they will need to be considered when drafting even a purely UK strategy document
• Make all the improvements possible in the time before such legislation comes into force so that the starting position is as strong as possible
• For companies that do significant acquisitions we would also expect there to be some comment of substance in a tax strategy document as to how such businesses are brought within a high quality control environment for direct tax and indirect tax and within what timeframe

Read more about setting up an Indirect Tax Strategic Plan

Richard Baxter
Richard Cornelisse

Tax Compliance Consultation - UK

The Government’s goal is to make the UK the best place in the world to locate a business. We have one of the most open economies globally, a highly skilled workforce, access to capital markets, and first-class infrastructure.

We also have a highly competitive tax system. We remain committed to creating the most competitive corporate tax regime in the G20, having lowered the corporation tax rate to 20 per cent in 2015, the lowest in the G7, and the joint lowest in the G20, and announced that it will be lowered again to 19 per cent in 2017 and 18 per cent in 2020.

While we want a tax system that is competitive for businesses, we also want a tax system where businesses pay their taxes. It is clear that attitudes to aggressive tax planning are changing – and that the public, investors and stakeholders now expect higher standards of tax compliance and more transparency from large businesses about the way they approach taxation.

The UK has played a leading role in the transformation of international tax transparency, working through the OECD to establish a common standard for the automatic exchange of information on financial accounts with more than 90 countries. But there is still more to do.

While increasing numbers of UK businesses are already being transparent about their approach to taxation, a number are still failing to do so. In addition, there are still a small number of businesses which simply do not play by the rules – persistently engaging in tax avoidance or highly aggressive tax planning, or refusing to engage with HMRC in a full, open and proper way.

It would be unfair to the vast majority of businesses not to do more to tackle this problem, and to level the playing field for all.

We also recognise that any relationship must be built on clear and fair guiding principles, and that the relationship between HMRC and our large businesses should be no different. For these reasons we are proposing to introduce:

• A legislative requirement for all large businesses to publish their tax strategy, enabling public scrutiny of their approach towards tax planning and tax compliance;
• A voluntary ‘Code of Practice on Taxation for Large Business’, which sets out the behaviours which HMRC expects from its large business customers; and
• A narrowly targeted ‘Special Measures’ regime to tackle the small number of large businesses that persistently undertake aggressive tax planning, or refuse to engage with HMRC in an open and collaborative manner.

These new proposals will continue to cement best practice amongst large businesses operating in the UK, contributing to the achievement of our ambition to make the UK the best place in the world to do business.

Improving Large Business Tax Compliance Consultation document Publication date: 22 July 2015