Opportunities and challenges in the area of European taxation

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Opportunities and challenges in the area of
European taxation
Tom Verbrugge Griet Hautekeete

• Taipei
• May 22, 2006

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Overview
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1. What is Europe Europe vs. European Union?
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Europe
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Europe - Countries
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European countries

• United Kingdom
• Romania
• Belarus
• Greece
• Bulgaria
• Iceland
• Serbia Montenegro
• Hungary
• Portugal
• Austria
• Czech Republic
• Ireland

• Lithuania
• Latvia
• Croatia
• Bosnia Herzegovina
• Slovakia
• Estonia
• Denmark
• Netherlands
• Switzerland
• Moldova
• Belgium
• Albania

• Russia
• Greenland
• Turkey
• Ukraine
• France
• Spain
• Sweden
• Germany
• Finland
• Norway
• Poland
• Italy

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European countries

• Macedonia
• Slovenia
• Cyprus
• Luxembourg
• Faroe Islands
• Andorra
• Malta
• Liechtenstein
• San Marino
• Monaco
• Vatican City

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European Union
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Countries being part of the European Union
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Countries being part of the European Union

• Austria
• Belgium
• Czech Republic
• Cyprus
• Denmark
• Estonia
• Finland
• France
• Germany
• Greece
• Hungaria
• Ireland
• Italy

• Latvia
• Lituania
• Luxembourg
• Malta
• Poland
• Portugal
• Slovakia
• Slovenia
• Spain
• Sweden
• The Netherlands
• United Kingdom

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Single Internal Market

• At the core of todays European Union
• Hundreds of directives adopted to sweep away the
  technical, regulatory, legal, bureaucratic, and
  cultural barriers that stifled free trade and
  free movement within the European Union
• Four freedoms of movement (enshrined in the
  Treaties) for goods, services, people and
  capital

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Customs Union

• Free movement of goods within the European Union,
  meaning no customs duties and controls on
  movements of goods cleared into the European
  Union
• One common foreign trade policy towards non
  European Union countries
• Customs union vs. free trade zone (e.g. NAFTA)

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2. European taxes
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Overview of main European taxes
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Direct taxes vs. indirect taxes

• Direct taxes
• Country specific regulated
• No general European basis
• Tendency towards EU harmonisation
• Indirect taxes
• European framework general denominator
• Some topics can be regulated on a national level
  (can lead to country differences)

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FORT EUROPE Harmonization Indirect Taxes

• Indirect taxation refers to taxes on production
  and consumption
• i.e. VAT, customs and excise duties, transfer
  duties, inheritance tax, environmental taxes,
  etc.
• Indirect taxation calls for a high degree of
  harmonization as it affects the free movement of
  goods and services.
• Mainly regulated by means of EU
  Directives/Regulations

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FORT EUROPE Alignment Direct Taxes

• All taxes on the income of individuals and
  company profits
• income tax and corporation tax.
• EU Member States are free to set rate of direct
  taxes and taxes on savings and capital gains.
• As the EC Treaty does not specifically call for
  direct taxes to be aligned, tax coordination
  remains a delicate exercise.

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FORT EUROPE Alignment Direct Taxes

• Corporate tax measures towards alignment
• Parent/Subsidiary Directive
• The Mergers Directive
• The Arbitration Convention
• The Interest/Royalties Directive

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European Union Intercountry level

• European countries avoid international double
  taxation by means of bilateral tax treaties based
  on the OECD Model Tax Convention.
• Country specific
• Countries which concluded a double tax treaty
  with Taiwan
• Belgium
• Netherlands
• UK
• Sweden
• Denmark

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Overseas VAT Refund Claims

• Non-established, non VAT-registered businesses
  may be able to submit claims to recover VAT
  incurred in a foreign jurisdiction.
• Recoverable VAT may be included in costs managed
  through the AP system (eg associated with
  contract manufacturing operations, imported
  products, trade shows, exhibitions, training
  events etc)
• Recoverable VAT may be included in costs managed
  through payroll as part of the employee expenses
  reimbursement process (eg hotel, subsistence,
  entertainment, car hire etc)

3. Opportunities
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Value Added Tax

• Upon entry of goods into the European Union
• Bonded warehouse warehouse under special regime
  allowing that import VAT on goods stored in the
  warehouse is paid at the moment that the goods
  leave the warehouse to their final destination in
  stead of at the moment of entrance into the EU
• OPTIMISATION deferment of the moment of payment
  of import VAT or avoidance of payment cash flow
  advantage
• In some countries there are specific licenses
  allowing to shift the payment of import VAT to
  the VAT return or a later moment instead of the
  moment of import.
• OPTIMISATION deferment of payment to a later
  moment or elimination of payment cash flow
  advantage

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Value Added Tax

• Trade of goods within the European Union
• Reverse charge mechanisms are widely implemented.
  This system involves a reporting obligation of
  the VAT but no payment of VAT.
• OPTIMISATION avoidance of pre-financing of VAT
  resulting in a cash flow and commercial advantage
• In general monthly VAT recovery possible
• OPTIMISATION Cash flow advantage

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Customs Excises

• Bonded warehouse warehouse under special regime
  allowing that import duties on goods stored in
  the warehouse are paid at the moment that the
  goods leave the warehouse to their final
  destination in stead of at the moment of entrance
  into the EU
• OPTIMISATION deferment of the moment of payment
  of import duties or avoidance of payment cash
  flow advantage and/or cost saving
• Transit mechanisms transport on the EU territory
  of goods which have not (yet) been customs
  cleared into the European Union
• OPTIMISATION deferment of the moment of payment
  of import duties or avoidance of payment cash
  flow advantage and/or cost saving

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Customs Excises

• Valuation the basis for computation of import
  duties is the customs value. The latest
  transaction value available upon import must be
  used but EU legislation allows to use an earlier
  sale (FSFE first sale for export)
• OPTIMISATION First sales invoice computation
  of import duties based upon a value which was
  charged in a previous sales transaction resulting
  in a lower taxable base
• Classification of the goods very important to
  correctly classify the goods and accordingly
  apply correct import duty rate (high penalties in
  case of incompliance incorrect application can
  lead to overcharges of import duties)
• OPTIMISATION payment of correct amount of
  duties, avoiding risk and overpayments

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Customs Excises

• Origin of the goods origin of goods can result
  in preferential (lower) import duties upon import
  into the EU
• OPTIMISATION sourcing of raw materials can
  influence the determination of the origin of the
  goods

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Individual income taxes social security duties

• Some countries have special regimes for
  expatriate employees. Expat regime allowing an
  advantageous tax treatment of income earned in
  foreign countries (e.g. non taxable allowances,
  specific rulings, etc.).
• OPTIMISATION structuring of income
• Multiple employment contracts break the
  progression of tax rates (split taxation over
  different countries)
• OPTIMISATION conclude cross border employment
  agreement
• Bilateral agreements with countries outside
  Europe on e.g. social security duties levied on
  individual income

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Corporate income taxes

• Some countries have tax incentives to attract
  investments, e.g. Belgium and its NID (notional
  interest deduction)
• OPTIMISATION invest or have European HQ in such
  a country resulting in minimal taxable base
• Ruling practices allowing to diminish the taxable
  income base
• OPTIMISATION lower corporate income taxes
• Legal certainty in tax matters possibility to
  obtain rulings on all kind of issues, e.g.
  transfer pricing, MA, etc.
• OPTIMISATION legal certainty

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Output Tax Decelerator
Overseas VAT Refund Claims
4. Challenges

• Example
• A UK VAT-registered business raises invoices on
  its accounting system near the end of a quarterly
  VAT accounting period (e.g. between November 20
  and 30 for a November 30 period end) but
  physically issues the invoices at the beginning
  of the next period
• Normally, the business would account for output
  VAT based on when the invoice was raised on the
  accounting system (payment due by December 31)
• However, if the business can account for output
  VAT based on the date when the invoice is issued
  (VAT period ending February 28), a cashflow
  benefit is received since the payment will not be
  due until March 31 usually long after the
  payment is received from the customer

• Non-established, non VAT-registered businesses
  may be able to submit claims to recover VAT
  incurred in a foreign jurisdiction.
• Recoverable VAT may be included in costs managed
  through the AP system (eg associated with
  contract manufacturing operations, imported
  products, trade shows, exhibitions, training
  events etc)
• Recoverable VAT may be included in costs managed
  through payroll as part of the employee expenses
  reimbursement process (eg hotel, subsistence,
  entertainment, car hire etc)

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Challenges Value Added Tax

• Challenge for Value Added Tax
• Although regulated on a European level, country
  differences persist and different compliance
  processes are applicable
• Opportunity offered
• Deloitte offers a unique concept the European
  Indirect Tax Compliance Centre
• A one stop shop handling VAT compliance (and
  consulting) all over Europe

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Challenges Customs Excise

• Challenge for Customs excise
• Customs compliance has to be taken care of
• Opportunity offered
• Can be taken care of by third party
• Electronic compliance processes paperless
  customs is a project of the European Commission
  for which a.o. Deloitte offers solution to the
  business

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Challenges Customs Excise

• Challenge for Customs excise
• Trade policies with non EU countries
• Opportunity
• To be assessed before entering into business

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Challenges Corporate Income Tax

• Challenge for Corporate income tax
• Transfer pricing price setting is extremely
  important, especially between related parties
• Opportunity
• Transfer pricing strategy is a must
• Certainty can be obtained by means of a ruling
  issued by the tax authorities

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Challenges Corporate Income Tax

• Challenge for Corporate income tax
• Permanent establishment in Europe
• Stock
• Liaison office
• Representation office
• Opportunity
• Facts should be reviewed in depth
• Depending on the competencies attributed, a PE
  can be avoided for income tax purposes

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Challenges Personal Income Tax

• Challenge for Personal income tax
• A variety of different taxation regimes in Europe
• Opportunity
• Can lead to a double exemption of certain income
  categories
• Split taxation of income when working in
  different countries

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Efficient Importing
Output Tax Decelerator
Overseas VAT Refund Claims
5. Belgium as your gateway to Europe

• Example
• A UK VAT-registered business raises invoices on
  its accounting system near the end of a quarterly
  VAT accounting period (e.g. between November 20
  and 30 for a November 30 period end) but
  physically issues the invoices at the beginning
  of the next period
• Normally, the business would account for output
  VAT based on when the invoice was raised on the
  accounting system (payment due by December 31)
• However, if the business can account for output
  VAT based on the date when the invoice is issued
  (VAT period ending February 28), a cashflow
  benefit is received since the payment will not be
  due until March 31 usually long after the
  payment is received from the customer

• There are numerous ways to make importing more
  cash-efficient from a VAT perspective
• Warehousing (1) delay the time at which goods
  are imported for VAT purposes by placing them in
  a bonded warehouse (useful for storage of spare
  parts)
• Warehousing (2) undertake certain transactions
  in a VAT or Customs warehouse without indirect
  tax implications
• Deferment accounts use of VAT and duty
  deferment accounts can reduce the cashflow impact
  at importation by postponing payment date for
  days or weeks

• Non-established, non VAT-registered businesses
  may be able to submit claims to recover VAT
  incurred in a foreign jurisdiction.
• Recoverable VAT may be included in costs managed
  through the AP system (eg associated with
  contract manufacturing operations, imported
  products, trade shows, exhibitions, training
  events etc)
• Recoverable VAT may be included in costs managed
  through payroll as part of the employee expenses
  reimbursement process (eg hotel, subsistence,
  entertainment, car hire etc)

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Top 10 considerations for Belgium

• Gateway to Europe centrally located in Europe
  (elected as the number 1 logistics location in
  Europe in European Distribution Report 2006 by
  Cushman Wakefield)
• Excellent infrastructure (road, rail, etc.)
  close to important ports when trading in Europe
  (Antwerp, Zeebrugge)
• Brussels is the capital of Europe, especially
  with the presence of the EU Commission, NATO and
  other big international institutions and the
  presence of a lot of HQ of multinational
  companies
• Highly skilled people, especially with respect to
  language (3 languages is more or less a standard)
• High quality of life in Belgium
• Politically neutral Extensive network of
  commercial treaties with other countries
• Close to a wide range of test markets
• Effective Corporate tax rate minimal via NID,
  ruling on taxable basis and distribution centers
• Expat tax status is unique
• Brussels EU compliance center runs your
  accounts, VAT and income tax formalities for the
  whole of Europe from 1 single point

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Contact us
Belgian Practice established in Brussels

• Customs excise
• Tom Verbrugge 32 2 600 66 20
• tverbrugge_at_deloitte.com
• Indirect taxes
• Griet Hautekeete 32 2 600 66 47
• ghautekeete_at_deloitte.com

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