Financial Services Tax & Legal Update - April 2021

KSA: VAT e-invoicing

In brief

Resident businesses that are registered for KSA VAT must comply with recently published legislation relating to Electronic Invoicing (“E-Invoicing”). The key deadlines can be summarised as:

1.By 4 December 2021: E-Invoices and Electronic Notes (e-notes) must be generated. This includes compliance with the legal provisions relating to the processing of documents and record keeping.

2.By 1 June 2022: The transmission of E-Invoices and E-Notes and sharing them with GAZT will be implemented through phases starting from 1 June 2022.

As detailed below, GAZT also recently started a public consultation period on E-Invoicing. This period will end on 17 April 2021. Impacted parties are encouraged to contribute their feedback within this time.

In detail

As summarised in guidance issued by the KSA General Authority of Zakat and Tax (“GAZT”), E-Invoicing can be described as

“.... a procedure that aims to convert the issuing of paper invoices and notes (e.g.handwritten or scanned invoices and notes) into an electronic process that allows the exchange and processing of invoices, credit notes and debit notes in a structured electronic format between buyer and seller through an integrated electronic solution”.

GAZT published the E-Invoicing Regulation on 4 December 2020 (with the first key implementation date falling a year from this publication). The Regulation was accompanied by a supporting guide and a list of frequently asked questions to help taxpayers comply with the new requirements.

More recently, on 18 March 2021, GAZT published a draft resolution - for public consultation - on the requirements, technical specifications and procedural rules for implementing the provisions of the E-Invoicing Regulation. As noted above, the deadline for responses to the public consultation is 17 March 2021. 

The GAZT website which in turn directs users to a number of the related documents can be accessed here.

The E-Invoicing Regulation and supporting documents, including the draft resolution, include a significant amount of detail on the technical, procedural and systemic requirements that impacted businesses will be required to fulfil. As examples of key points arising:

• Standard rated and zero-rated supplies made by an impacted taxpayer will be subject to the E-Invoicing regulation..
• Exempt supplies made, imports of goods made and “reverse charge” supplies received by a taxpayer are not subject to the E-Invoicing regulation.
• GAZT has published detailed specifications and requirements for the E-Invoice Generation Solution to be used by a taxpayer to generate E-Invoices and E-Notes (E-Notes will relate to scenarios such as the cancellation of supplies made).
• GAZT has also provided details on the requirement for taxpayers subject to the E-Invoicing Regulation to integrate systems with GAZT’s systems using an Application Programming Interface (“API”) with effect from 1 June 2022 and in accordance with any additional timelines and other specifications to be stated by GAZT.

Compliance with the E-Invoicing requirements will be important to businesses for a number of reasons. As key examples:

• Penalties may apply in the event of non-compliance.
• Non-compliance may create VAT costs within supply chains (e.g. due to the potential inability to recover VAT incurred on non-compliant invoices).

In light of this, we consider it is GAZT’s expectation that at this time businesses are already preparing to generate and transmit E-Invoices in compliance with the Regulation.

Key takeaway

As a suggested way forward, it is our experience that financial services institutions are starting to work towards E-Invoicing compliance through a phased approach with key milestones including:

• Completing an E-Invoicing “gap analysis” - i.e. based on current status, what actions will be needed to reach compliance from both the “VAT technical” and practical perspectives?
• Identifying and designing the solution to be used by the business.
• Testing and implementing the solution, in advance of the initial 4 December 2021 “go live” date.

PwC has developed an integrated approach in supporting our clients from their current positions through to ongoing compliance with the E-Invoicing requirements, combining input from both our VAT technical and Digital specialists. Please contact us if an initial related discussion would be of value.

HMRC announces EU’s Mandatory Disclosure Regime (“DAC6”) ceases to apply in its entirety in the UK

In brief

The Council Directive (EU) 2018/822 amending Directive 2011/16/EU, commonly known as DAC 6, imposes mandatory reporting of potentially aggressive tax planning arrangements which meet one or more specified characteristics (hallmarks) by EU based intermediaries or taxpayers to the tax authorities and requires the automatic exchange of this information among the EU Member States.

In detail

Following the end of the Brexit transition period (i.e. 11 pm GMT on 31 December 2020), DAC 6 has ceased to apply to the UK and as such the UK is no longer obliged to implement DAC 6. In line with the UK’s obligations under the FTA agreed between the UK and the EU on 24 December, 2020, reporting under DAC 6 will still be required for a limited time, but only for arrangements which meet hallmarks under category D.

Under the FTA, the UK is required to ensure the legislation it implements as at the end of the transition period relating to the exchange of information concerning potential cross-border tax planning arrangements offers the level of protection afforded by the Organisation for Economic Co-operation and Development (OECD) MDR.

While the UK has not implemented MDR in its domestic legislation as at the end of the transition period, the rules in the Statutory Instrument “SI 2020/25” provide a ‘level of protection’ which in certain respects is equivalent to that in the OECD’s MDR, and in other respects goes beyond the MDR. Consequently, the UK government (“The Government”) has decided to legislate for changes to SI 2020/25, to restrict reporting only to those arrangements that are reportable (i.e. arrangements which meet hallmarks under Category D).

In the coming year, the UK will consult on and implement the OECD’s MDR as soon as practicable, in order to transition to international, rather than EU standards on tax transparency.

The Government has also amended the regulations to ensure the rules work correctly as at the end of the transition period, including ensuring that references to EU Member States refer to the UK or an EU member State after the end of the transition period. The changes have come into effect as of 31 December 2020. The following is a link to the updated Regulations:

https://www.legislation.gov.uk/uksi/2020/1649/contents/made.

Additionally, HMRC will be updating the reporting guidance at IEIM600000 to reflect the changes to the legislation and is expected to soon provide an update on the required reporting platform.

Key takeaway

Whilst the amendments to the Regulations significantly reduces the number of disclosures to HMRC under DAC 6, cross-border transactions that would otherwise have been reportable to HMRC may need to be reported to EU tax authorities.

There may therefore be a number of arrangements that taxpayers or intermediaries were expecting to report to HMRC but where there is now no obligation to disclose to HMRC. However, it is possible in this case that the reporting obligations will shift from UK entities to other group entities which are based in an EU member state and are involved in the transaction.

OECD releases Blueprints on Pillar One and Pillar Two, Updated Economic Analysis

In brief

On 12 October 2020, the Organisation for Economic Co-operation and Development (OECD) released a series of documents regarding the ongoing work of the OECD/G20 Inclusive Framework (IF).

In detail

The OECD/G20 IF has been working to address tax issues arising from the challenges of the digitalising economy since the initial recommendations of the OECD’s Base Erosion and Profit Shifting (BEPS) work. In 2019, the OECD Secretariat suggested a two-pillar approach that the IF has adopted as the basis for a work program.

A stated goal of the Pillar One proposal is to allocate a greater share of (residual) profits to market/user jurisdictions by moving away from the traditional arm’s length principle (ALP) approach in certain respects and creating a standalone nexus rule without reference to physical presence. The current scope is intended to cover both highly digitalized businesses as well as consumer-facing companies with cross-border activity. The Pillar Two goal is expressed as addressing remaining BEPS challenges by ensuring large companies pay a minimum level of tax on income regardless of where it arises.

The documents released by the IF on 12 October include the following elements:

IF Cover Statement

The IF has published Blueprints for Pillar One and Pillar Two. Pillar One would “adhere to the concept of net taxation of income, avoid double taxation and be as simple and administrable as possible.”

On Pillar Two, the framework would allow for a “right to ‘tax back’ where other jurisdictions have not exercised their primary taxing rights, or the payment is otherwise subject to low levels of effective taxation.”

Pillar One Blueprint

The Pillar One Blueprint recognises three core components, each with subsidiary building blocks:

• Amount A: a new taxing right for market jurisdictions with a share of a multinational entity’s (MNE’s) residual profit being reallocated;
• Amount B: a fixed return for certain baseline marketing and distribution activities taking place physically in a market jurisdiction (with the outcomes consistent with the arm’s length principle);
• Processes to improve tax certainty through effective dispute prevention and resolution mechanisms.

Under Amount A, there are several key design features of the new taxing right including a revenue threshold, scoping rules, new nexus rule, a loss carryforward regime, potential safe harbors, elimination of double taxation and proposed implementation of a simplified administrative process for necessary filing burdens.

For Amount B, the Blueprint suggests a standard remuneration for activities involving distributors that buy from related parties and sell to unrelated parties and have a routine distributor functionality profile; the determined amounts are intended to approximate results reached in accordance with the ALP.

Pillar Two Blueprint

The Pillar Two Blueprint discusses several mechanisms envisioned to establish a global framework of minimum taxation.

• The income inclusion rule (IIR) operates as a top-up tax when income of controlled foreign entities are taxed below an effective minimum tax rate.
• The switch-over rule (SoR) complements the IIR by removing treaty obstacles in situations where a jurisdiction uses an exemption method that could frustrate the application of a top-up tax to branch structures.
• The undertaxed payments rule (UTPR) serves as a backstop to the IIR through application to certain constituent entities; the top-up tax computation is the same as under the IIR.
• The subject-to-tax rule (STTR) would help source countries protect their tax base by denying treaty benefits for deductible intra-group payments made to jurisdictions with low or no taxation.

The IIR and UTPR (collectively, ‘GloBE’), would apply to companies with more than €750 million in annual gross revenues. The financial accounts of the parent entity are used to calculate the tax base and an effective tax rate (ETR) after taking into account covered taxes (broadly of an income nature; a digital services tax (DST) is not a covered tax).

The GloBE provisions contemplate allowing recognized losses when computing the tax rate and providing for a formulaic substance carve-out to exclude certain fixed returns. In a next step the ETR per jurisdiction is determined. In recognition of administrative considerations and need for simplicity, the Blueprint raises a number of potential design choices, such as reliance on Country by Country Reporting (CbCR) thresholds and definitions, rule ordering, etc.

Analysis of economic impacts and investment effects

The OECD released a new report addressing the anticipated effects that the Pillar One and Pillar Two proposals might have on countries’ tax revenues and economic investment. The report relies on a combination of firm-level and aggregate data sources, including CbCR data, and predicates that Pillar One modeling is using a 20% residual profit allocation key while using a 12.5% minimum tax rate for Pillar Two.

Pillar One might result in approximately USD 100 billion per year of profit reallocated to market jurisdictions. Taking into account the combined effect of the Pillar One/Two proposals (USD 47-81 billion) and the US Global Intangible Low-Taxed Income (GILTI) regime (USD 9-21 billion), the total effect could represent USD 56-102 billion per year of new revenues (or up to around 4% of global Corporate Income Tax (CIT) revenues). The exact revenue gains, of course, would depend on the final design and parameters of the pillars, the method of implementation, and the behavioral response by MNEs and governments. Under Pillar One, it is expected that low, middle and high-income economies would all benefit from revenue gains, while ‘investment hubs’ would tend to lose tax revenues. Pillar Two is anticipated to result in a significant increase in corporate income tax revenues across low, middle and high-income economies.

The report argues that pillars could lead to a relatively small increase in the average post-tax investment costs of MNEs. 

Key takeaway

The IF has agreed to continue discussions on the Pillar One and Pillar Two frameworks with a view to reaching political agreement by mid-2021.

• The Blueprints show that technical progress has been made on agreeing to the intermediate architecture of the plans.
• Significant elements of both Pillar frameworks remain to be resolved, such as the scope of Amount A and reallocation rate under Pillar One, and the minimum tax rate and ‘whitelisting’ of deemed compliant regimes under Pillar Two.
• The updated economic impact analysis states that reallocated profits to market jurisdictions could reach up to USD 100 billion each year under Pillar One, and new revenues raised under Pillar Two (combined with the effects of global intangible low-taxed income (GILTI) and Pillar One) could be in the range of USD 60-100 billion annually.
• The US position in the negotiations has changed under the new Biden Administration and the likelihood of agreement has in our view increased.