Posts Tagged ‘international’

Today’s post comes from Guest Blogger, Daniel Clark.

ANY business that requires their consumers to have internet access to enjoy their services will be affected by the new EU VAT digital services reform.

The new rules have been created with the intention of creating a “level playing field” for all businesses in the digital economy. These are the word of the EU’s Taxation Commissioner Algirdas Semeta who has also stated that the aim of the new EU VAT on digital services is to ensure that the digital economy “plays fair and pays fair.”

In a sense, the powers that be in Brussels, have become increasingly agitated over the influence and power of Silicon Valley multinationals within the EU.

The new rules will close the oft-used loophole of non-EU businesses setting up their European HQ in Luxembourg.  The Grand Duchy has become extremely popular due to its low-tax environment.  For some businesses – such as Amazon – the VAT rate drops as low as 3% for eBooks.  This is referred to as a ‘super-reduced’ rate.

The Silicon Valley giants have been able to do this without breaking any laws.  These new VAT rules are the European Commission’s first steps towards changing the tax culture in the EU.

So, why change VAT first?

VAT has not been as effective as the European Commission would have hoped.  It has been too easy to avoid or not comply with VAT regulations.  The main reason for this is that VAT – which was always intended to be a tax on consumption – was turned on its head and businesses took advantage.  The giants setting up in Luxembourg were doing so to take advantage of the low-tax environment because the rules allowed them to do so.  They charge the low VAT rate based on where they are located.  The key change in the new rules returns VAT to a tax on consumption and from January 2015 onwards VAT on digital services will be charged based on where the consumer is located.

This instantly eliminates any commercial advantage to setting up in a low-tax environment.

This will hurt Luxembourg

Luxembourg has already changed their VAT rates – probably because of the introduction of these new rules.  The finance ministry in Luxembourg has estimated a loss of between €600 million and €1 billion from the EU VAT on digital services reform.  That is 70% of its VAT revenue.

However, there isn’t a lot of sympathy for the Grand Duchy with many arguing that they have for too long taken advantage of the VAT system at the expense of other EU member states.

Meanwhile, EU member states with a large digital service consumer base such as the UK and Germany will benefit from the new rules.  Remember, VAT will now have to be charged based on the location of the consumer.  The rule change only affects B2C sales of digital services.  The UK, for example, has already estimated that it will benefit to the tune of €1.2 billion over four years between 2015 and 2018.

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With the battle surrounding the Bush tax cuts between President Obama and Mitt Romney taking center stage as the election nears, an area of the tax law where the two candidates may have even more disparate views has slipped into the background.

In the international tax arena, Mitt Romney has thrown his support behind a move to a pure “territorial” tax system. In such a system, U.S. tax would never be imposed on income earned from non-U.S. sources by a foreign subsidiary of a U.S. corporation. The foreign subsidiary would also be permitted to repatriate the earnings with tax-free dividends to its U.S. parent, which — the theory goes — would eliminate the current penalty for bringing foreign earnings back to the U.S., and thus encourage domestic investment and growth.

Detractors of the territorial system — with President Obama foremost among them — argue that this system encourages U.S. corporations to shift operations to jurisdictions with lower tax rates, taking jobs and revenue along with them and eroding the U.S. tax base. As a result, the President has strongly encouraged legislation that would penalize U.S. corporations that move business overseas, while providing incentive in the form of tax breaks for those U.S. companies that currently have operations abroad to bring business back home.

It appears Senate Democrats are ready to push forward with the President’s mandate, as they announced today that the plan to vote next month on a proposal that would accomplish both goals.

The proposed legislation, titled the “Bring Jobs Home Act,” would grant companies a  20% tax credit for the expenses incurred in bringing jobs and investment to the U.S., while also denying companies a deduction for the expense of moving investment out of the U.S.

With regards to the credit, the bill provides that if pursuant to an insourcing plan, a company incurs expenses (aside from normal operating expense and severance expenses) to eliminate a business unit located outside the U.S. and establish a new business unit in the U.S., then upon completion of the relocation the taxpayer is entitled to a credit equal to 20% of the qualified expenses. The bill also provides that the taxpayer may alternatively elect to take the credit in the year after it would typically be allowed.

On the disallowance of the deduction for outsourcing U.S. activities, proposed I.R.C. § 280I would deny any expenses incurred by the taxpayer to relocate the operations outside the U.S. For these purposes, the definition of “expenses” is the same as that used in defining the expenses eligible for the credit.

Voting should take place by July 4th.

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In a case decided earlier today, the Supreme Court held that a husband and wife who were Japanese citizens but lawful residents of the U.S. could be deported after pleading guilty to filing a false tax return.

Mr. and Mrs. Kawashima, seeking refuge from the repeated Godzilla attacks that plague their homeland, fled Japan and became legal permanent residents of the U.S. in 1984. Ten years later, Mr. Kawashima completed the process of assimilating into our society and becoming a “true” American by egregiously cheating on his taxes. He pled guilty to filing a false return under I.R.C. § 7206(1), while his wife pled guilty to aiding and assisting in the filing of a false return under I.R.C. § 7206(2).

I.R.C. §§ 7206  provides that willfully filing a false tax return is a felony. The issue at hand for the Supreme Court, however, was whether a conviction under these sections constituted an “aggravated felony” under the immigration laws, punishable by deportation.

An aggravated felony is one that either:

Clause #1: Involves fraud or deceit in which the loss to the victim or victims exceeds $10,000; or

Clause #2:  Is described in I.R.C. § 7201 (relating to tax evasion) in which the revenue loss to the government exceeds $10,000.

The Kawashimas argued that their conviction for filing a false return failed to meet the standard of an aggravated felony for three reasons:

1. Clause #1 did not apply to their crime, as I.R.C. § 7206 does not contain the words “fraud” or “deceit,”

2. Clause #1 was not intended to cover tax crimes, as that was solely the responsibility of Clause #2, and

3. Since Clause #2 was specific to tax evasion under I.R.C. § 7201, it did not cover their conviction under I.R.C. § 7206.

In its 6-3 decision, the Supreme Court shot down all three arguments, holding that the Kawashimas’ previous conviction qualified as an aggravated felony under Clause #1, as it involved fraud — even if fraud was not an express requirement of the statute — and the loss to the government exceeded $10,000. So sadly, it’s back to Japan for the Kawashimas.

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