AURIFER
U.S. EU Switzerland Challenge Gulf Tax on Soft Drinks at WTO

U.S. EU Switzerland Challenge Gulf Tax on Soft Drinks at WTO

20180730 by Matthew Kalman
The U.S., the European Union, and Switzerland are challenging the legality of excise taxes on carbonated and energy drinks by Bahrain, Saudi Arabia, and theUnited Arab Emirates.

U.S. EU Switzerland Challenge Gulf Tax on Soft Drinks at WTO

U.S. EU Switzerland Challenge Gulf Tax on Soft Drinks at WTO
20180730 by Matthew Kalman
The U.S., the European Union, and Switzerland are challenging the legality of excise taxes on carbonated and energy drinks by Bahrain, Saudi Arabia, and the United Arab Emirates.

The three Gulf countries began applying a 50 percent 
excise tax to carbonated drinks except water and a 100 percent tax to energy drinks and tobacco products in 2017. The Kuwaiti government said in May that it would accelerate plans to impose similar measures. The measure is supposed to reflect the impact on health but is actually ‘‘discriminatory,’’ with shoppers opting for similar local products that are now cheaper, said Taina Sateri, a trade counselor at the EU delegation to the UAE in Abu Dhabi. ‘‘Consumers have not necessarily reduced consuming these products but have changed their consumption habits to similar types of products which have escaped the tax,’’ Sateri said in a July 19 email.

Fruitless Talks 

The EU has been raising the issue with its Gulf Cooperation Council partners since the GCC framework agreement came to light in 2016, according to Lucie Berger, head of trade and economic affairs in the GCC at the EU delegation in Riyadh. 
After months of fruitless bilateral negotiations, the U.S., EU and Switzerland turned to the World Trade Or- ganization, most recently at the Council for Trade in Goods on July 3. ‘‘Since the introduction of the selective tax, the industry has noted considerable decline in sales of their products,’’ Berger said in a July 20 email. The tax had a ‘‘severe impact’’ on the sales of energy drinks in Saudi Arabia and slowed sales growth in soft drinks, Euromonitor confirmed in February. Consumers are ‘‘shifting to cheaper products that contain often higher level of sugar and other ingredients such as caffeine,’’ Berger said, adding that the 50 percent and 100 percent tax rates are ‘‘unprecedented’’ and far exceed the 20 percent recommended by the World Health Organization. ‘‘Without scientific evidence, it is difficult to understand why some products have been included—such as sugar free products, or flavored carbonated water— while other products are not subjected to the tax, such as juices or caffeinated drinks,’’ she said.

‘‘The EU understands the need to promote a healthy diet through a variety of tools, taxes included. Taxes should ideally be designed in a way to help consumers make healthier choices, while this particular tax might potentially be discriminatory, pushing consumers towards cheaper—and not healthier—alternatives,’’ she added.

Protecting Health? 

While the Gulf states argue that the excise taxes are designed to protect health and the environment, not to shield local industries, they don’t fulfill that aim, Sateri said.
‘‘The tax is based on carbonization, whereas there are many non-carbonated drinks with high sugar content not taxed,’’ said Sateri. However, flavored carbonated drinks continue to be taxed despite having almost no sugar content. ‘‘If health is used as a reason then the range of products would need to be modified. Similarly the energy drinks are taxed at 100 percent but there are many caffeinated drinks on the market with higher caffeinated levels which do not fall under the tax,’’ Sateri said.

Sluggish Resolution 

The dispute could take some time to resolve, leaving other Gulf states unable to advance their own tax plans, said Thomas Vanhee, founding partner at Aurifer Tax Advisers in Dubai. 
‘‘The claims could pose a serious challenge to the GCC Excise Tax and may prevent the other GCC states from implementing it in its current form,’’ Vanhee said in a July 19 email. He noted that under the WTO dispute settlement system, the issue is currently in the consultation phase. If no mutually agreed solution in line with the WTO agreement is found, the case will be referred in a first stage to a WTO panel. ‘‘A potential ruling is binding on the WTO members. The majority of WTO disputes get resolved in the consultation phase,’’ Vanhee said. Coca-Cola Co. declined to comment. Austrian-based energy drink manufacturer Red Bull didn’t respond to a request for comment.

Reproduced with permission. Published July 20, 2018. Copyright 2018 by The Bureau of National Affairs, Inc. (800-372-1033) <http://www.bna.com>
UAE VAT and entertainment - entertaining distinctions leading to less festivities

UAE VAT and entertainment - entertaining distinctions leading to less festivities

20180726 by Aurifer
Practitioners asked for it and here it came, another clarification. The UAE's FTA published its fifth public clarification, this time on entertainment expenses. Article 53 of the UAE's Executive Regulations prevents the recovery of input VAT on entertainment expenses. The FTA distinguishes entertainment expenses for employees and non-employees.

UAE VAT and entertainment - entertaining distinctions leading to less festivities

UAE VAT and entertainment - entertaining distinctions leading to less festivities
20180726 by Aurifer
Practitioners asked for it and here it came, another clarification. The UAE's FTA published its fifth public clarification, this time on entertainment expenses.

Article 53 of the UAE's Executive Regulations prevents the recovery of input VAT on entertainment expenses. The FTA distinguishes entertainment expenses for employees and non-employees.

VAT on entertainment expenses provided to non-employees, such as accommodation, food and drinks not provided during a meeting and access to shows or events, or trips provided for the purpose of pleasure or entertainment, is not recoverable. 

This very strict and conservative position disallows pharmaceutical companies inviting their buyers to a conference in a hotel to deduct input VAT. A dealer holding a launch party for a new car model will also be prevented from recovering the input VAT on the food, drinks, band, etc. although it is clearly done with the objective of increasing sales. It is however allowed to provide potential customers with gifts (although these could constitute deemed supplies for which VAT is due).

For employees, VAT on employee expenses is recoverable if there is a legal obligation, a contractual obligation or documented policy (and a proven business practice) or a deemed supply which is accounted for. 

The hotel stay paid to a new joiner before this joiner finds his own home is a recoverable expense. However, the lunch or dinner for employees (e.g. Iftar) is not.

Simple hospitality does not block you from recovering input VAT. Expenses qualify as simple hospitality:
- when the hospitality is provided at the same venue as the meeting
- if the meeting is interrupted only be a short break
- if the cost does not exceed internal policies
- there is no additional entertainment accompanying the food and beverages

A gala dinner where food and refreshments are considered to be so substantial that they constitute an end in themselves, will be considered as an entertainment expense.

Importantly, for conferences and business events, if a fee is charged for attendance input VAT is deductible, if not the catering services will not be deductible.

There are some interesting distinctions as well for sundry and pantry expenses. Tea and coffee is generally deductible, as well as flowers, chocolates and dates.

For staff parties no VAT is recoverable, neither for service awards, retirement gifts, Eid gifts, etc.

The clarification was much needed, as audits in the past few months have shown diverging interpretations of the term entertainment expenses. 

Although seemingly anecdotal in nature, the business versus entertainment nature of expenses has proven controversial in all VAT jurisdictions around the world. It has lead to (Administrative) Supreme Court decisions in various countries.

It can be expected in the UAE that it will also be subject to controversy. Businesses will have to review their expense policies again as a result of the publication of this clarification. Especially documenting certain employee expenses will allow them to still recover the input VAT.
UAE Clarifies VAT on Laborers’ Accommodation Provided by Employers

UAE Clarifies VAT on Laborers’ Accommodation Provided by Employers

20180714 by Matthew Kalman
The United Arab Emirates has clarified the application of value-added tax to accommodation provided by employers. VAT Public Clarification VATP003, published by the Federal Tax Authority, distinguishes between residential accommodation, which is zero-rated on first supply and afterward exempt, and standard-rated service accommodation. “The clarification is important for the numerous companies in the UAE which have an extensive labor force and provide housing to their employees. This is customary for laborers in the construction sector,” said Thomas Vanhee, founding partner at Aurifer Tax Advisers in Dubai.

UAE Clarifies VAT on Laborers’ Accommodation Provided by Employers

UAE Clarifies VAT on Laborers’ Accommodation Provided by Employers
20180714 by Matthew Kalman
The United Arab Emirates has clarified the application of value-added tax to accommodation provided by employers. VAT Public Clarification VATP003, published by the Federal Tax Authority, distinguishes between residential accommodation, which is zero-rated on first supply and afterward exempt, and standard-rated service accommodation. “The clarification is important for the numerous companies in the UAE which have an extensive labor force and provide housing to their employees. This is customary for laborers in the construction sector,” said Thomas Vanhee, founding partner at Aurifer Tax Advisers in Dubai.

Where employers supply “incidental” services such as cleaning communal areas, garbage collection, access to a pool or gym within the building, and basic building maintenance, the accommodation will be zero rated. The supply of additional services including telephone or internet, laundry, catering, pest control, room cleaning and fresh bed linen will be considered “serviced accommodation” and subject to value-added tax. There will be implications for recovering tax on expenses, Vanhee said by email July 5. “No input VAT is deductible with respect to the business offering exempt residential rent, contrary to a business offering taxed serviced property,” he said. 

The clarification also addresses whether the accommodation is “a single composite supply” of either type, or “a mixed supply with separate component parts.” “Where a single composite supply is made, the entire consideration for the supply shall be subject to the VAT treatment of the principal component,” the circular says. “Where a mixed supply is made, each component part must be valued and the correct VAT treatment applied to each component part.” “This is an area that often causes problems for business as, in the case of a single composite supply, the entire consideration is subject to the VAT treatment of the principal component, whereas in a mixed supply, each component must be valued and a VAT treatment applied to it,” A big 4 said in a circular emailed to clients July 3. “One criteria that the FTA will consider to be crucial is that a single composite supply must have all components supplied by a single supplier. If the components come from multiple suppliers, it will not be treated as a single composite supply, and the tax treatment of each component must be individually evaluated.” 

‘Scores of Clarifications’

The treatment of mixed supplies “has been an area of some complexity in the U.K., and it deserves a Public Clarification of its own,” said a tax and public policy partner at a law firm in London, by email July 5. He expects “scores of Public Clarifications to emerge” as the UAE fine-tunes its VAT regulations, he said. More details may be required on this subject, Vanhee said. “The clarification does not discuss any cases in which the building is located in a Designated Zone,” which is not subject to VAT, he said. Suppliers could face “considerable fines” if they don't treat the accommodation supplies correctly, said a partner at a law firm in Dubai. “Each provider will still need to make an individual assessment of the correct approach to take, but they will now be better informed as to the way in which the FTA will review the treatment that has been selected,” he said by email July 5. However, what isn't clear is the impact the new clarification will have on providers that have previously taken an alternative interpretation to that provided by the FTA with this new clarification. “The providers will need to assess whether or not this will mean that any previously filed VAT returns will need to be re-submitted and VAT claimed from customers where it was not previously the case,” he said.

Reproduced with permission. Published July 6, 2018.  Copyright 2018 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com.
BEPS MLI enters into force today

BEPS MLI enters into force today

20180701 by Thomas Vanhee & Laurent Bertin
Tax avoidance and profit shifting have resulted in an estimated annual loss of USD 100 to 240 billion of tax revenue worldwide, effectively 4-10% of global corporate tax revenue. The Base Erosion and Profit Shifting initiative was endorsed by the OECD and the G20 and aims to address and tackle the shortcomings of the international tax system.

BEPS MLI enters into force today

BEPS inclusive framework’s Multilateral Instrument finally reaches the required ratifications

BEPS MLI enters into force today
20180701 by Thomas Vanhee & Laurent Bertin
Tax avoidance and profit shifting have resulted in an estimated annual loss of USD 100 to 240 billion of tax revenue worldwide, effectively 4-10% of global corporate tax revenue. 

The Base Erosion and Profit Shifting initiative was endorsed by the OECD and the G20 and aims to address and tackle the shortcomings of the international tax system.

In order to achieve more quickly the objectives of the BEPS project, in November 2016 the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (also known as "MLI") was adopted by over 100 jurisdictions.

The MLI is aimed at bridging the gap between international tax rules and the anti-BEPS measures. It simplifies the previously cumbersome process of renegotiation and amending tax treaties by allowing the MLI to supersede any existing treaties.
 
Once a bilateral tax treaty has been listed under the MLI, it does not need to be renegotiated for the MLI to have effect, thus avoiding any need for bilateral negotiations. The MLI notably contains a general anti-avoidance principle and specific provisions tackling the circumvention of treaty limitations or treaty shopping.  

The MLI will have a worldwide tax impact as its signatories include jurisdictions from all continents. On 29 June 2018 82 jurisdictions had signed the MLI, with a further 6 expressing their intent to sign. The current signatories have listed over 2,500 treaties, already leading up to over 1,200 matched treaties.

The MLI has now achieved the minimum number of ratifications to enter into force. As of today 1 July 2018, the MLI has entered into force in the ratifying countries. As from today, any jurisdiction ratifying the MLI will see it applying as from the date chosen for its entry into force. This will notably be the case on 1 October 2018 in the United Kingdom which ratified the MLI on 29 June 2018.

Direct impact on the GCC

The BEPS Inclusive Framework (“IF") obliges committed countries to ratify the MLI or to meet its objectives. Being a member of the IF, the UAE, KSA and Bahrain have been working on modifying their tax policies. No GCC State however has ratified the MLI but they are expected to do so in the short run.

With the date of ratification yet undetermined, the consequences for GCC companies might seem far from their concern. However, examining each tax treaty with ratifying and non-ratifying countries and planning for necessary changes to be made is necessary to avoid its adverse effects. 

Leading up to the ratification of the MLI, businesses need to estimate costs of compliance, consider possible restructuring in order to continue benefiting from the double tax treaties and assess impacts on future cash flow. 

Indirect impact on the GCC

The jurisdictions ratifying the MLI are more likely to scrutinize the treaties and their benefits to ensure there is no abuse, even if the treaty is not covered by the MLI. Therefore, even in absence of ratification of the MLI by any GCC state, the application of its tax treaties might be altered by countries with whom treaties are signed and have ratified the MLI. 

Companies within the GCC with subsidiaries or parents in jurisdictions ratifying the MLI should assess all transactions to and from these countries in the light of the tax treaties impacted by the MLI.