The infamous 'Double Irish Dutch Sandwich', which seems to be at the centre of many global tax structures, is perceived to be ‘the root of all evil’ in the international tax world. Whilst those structures comply fully with the national laws of Ireland and the Netherlands, they do rely on the features of the bi-lateral double tax treaty between the two countries, and hence the drive from the OECD and National Governments to change the Double Tax Treaty network.
So let's move the base erosion and profit shifting (BEPS) debate to the goods and services tax (GST) / value added tax (VAT) world. Remember there are no double tax agreements for indirect taxes, so our 'sandwich' could produce an indirect tax rate of 63 percent. Current European Union law prevents the doubling up mentioned above, however, the same cannot be said for other jurisdictions.
"Trading internationally can give rise to many potential indirect tax impacts. Getting it right, however, can lead to substantial savings."
Head of Indirect Tax
The solution to date has always been to register in the offshore jurisdiction and reclaim the tax and consequently live with the administrative burden.
Unsurprisingly, things cannot be that simple. We are now seeing a number of jurisdictions (including Australia) making it increasingly difficult for non residents to get registered, and, in some instances, introducing special rules that can lead to potential double indirect taxation.
We recently advised a client who had outsourced their IT support function to a third party, under a single global contract.
As a result of proposed new VAT legislation for e-commerce transactions in South Africa, the third party supplier may be required to charge South African VAT at 14 percent on the services to the South African subsidiary. The legislation is being introduced to combat what the South African Government sees as tax lost on supplies consumed in country, which they cannot effectively tax any other way.
However, as 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. Head Office would not itself be providing digital services so the new legislation would not apply to it. If the legislation is enacted as drafted, the VAT cost on the business process outsourcing (BPO) provider fee will not be recoverable.
While we delivered a great result for them it did open up our eyes to what many other organisations are facing.
So while you consider your position under the BEPS debate from a corporate income tax position, it is becoming increasingly evident you should not neglect the many potential indirect tax impacts.