Whilst current European Union (EU) law would prevent the doubling up mentioned above, the same cannot be said in other jurisdictions – the solution to date has always been to register in the offshore jurisdiction and reclaim the tax – you just have to live with the admin burden. However we are now seeing a number of jurisdictions (including Australia) making it increasingly difficult for non residents to get registered and in some instances the introduction of special rules which can lead to potential double indirect taxation.
I recently advised a client who has outsourced its IT support function to a third party. Because of proposed new VAT legislation for ecommerce supplies in South Africa, the supplier may be required to charge VAT at 14 percent on the services to the South African subsidiary. However the cost is billed to the Australian head office, which recovers it with a range of other costs by way of a management fee. Head Office is not currently registered for VAT in South Africa, and under the equivalent of the Australian legislative “connected with” provisions would not be entitled to register. If the legislation is enacted the VAT cost on the business process outsourcing (BPO) provider fee will not be recoverable.
So whilst you consider your position under the BEPS debate from a corporate income tax position, don’t neglect the many potential indirect tax impacts.