Financial Services VAT Briefing Tuesday, 12 June 2012

Transcription

1 Financial Services VAT Briefing Tuesday, 12

2 Welcome and introduction John Fay Tax Partner, Slide 2

3 Agenda Welcome & introduction Overview of technology developments in financial services VAT considerations of technology developments for financial services EU review and other developments Doctrine of Fiscal Neutrality Closing comments Slide 3

4 Technology developments- what this means for financial services Bartley O Connor Advisory Services Senior Manager, Slide 4

5 Digital transformation in a converging world Technology Infocomms Financial Services Entertainment Media Slide 5

6 Growth in smart devices driving digital revenues Source : Entertainment and Media Outlook Slide 6

7 Entire value chains are changing as a result of digital transformation $20tr Estimated value of the global digital economy by 2013 equivalent to almost 1/3 of global GDP The challenge for organisations is how to identify and capture value in the digital world Slide 7

8 The growing role of data analytics The industry challenge is to engage with customers at an individual, personalised level but many companies are only just starting to learn how to generate real value from data Slide 8

9 Changing customer behaviour driven by digital media Slide 9

10 Millennials : powered by technology 41%... would rather communicate electronically than face-to-face or over the phone 78%... say that access to preferred technology at work makes them more efficient 59%... say their employer's provision of state-of the-art technology is important when considering a job 40%... feel that their use of technology isn't always understood 50%... routinely use their own technology at work And some feel held back by outdated and rigid work styles Generation Y and Millennials naturally expect a rich digital experience that is both mobile and social in all their interactions... including financial services Slide 10

11 What the future for digital channels may look like in financial services Needing to open a new account\policy, Claire consults friends online and, based upon their recommendations, decides that ABC Financial is the service provider for her. Claire responds to the prompt on ABC s online application to sign on with her Facebook ID, and the application pre-fills many of the fields for her. She has to pause her application, but notes that she can continue from where she left off on her mobile. Later on, she finishes the application on her mobile, and clicks to make an appointment at the branch nearest to her current location to finalise the process Claire pops into the ABC branch, where she is met by Tim, her new account manager. Tim is expecting her and has her application completed. He hands Claire her new debit card and has her set the PIN on his tablet. He also scans her phone, activates its built-in contactless payment capability, and uploads Claire s 50 of mobile top-up. Tim draws Claire s attention to the online money review, a free service on her current account that will allow Claire to see her transactions and expenditure in the form of a customisable analysis tool. Sometime later, Claire books another appointment with Tim. Tim noticed she s got disposable income at the end of each month, and Claire wants advice on where best to invest it. She has already got some ideas from her online research and recommendations from friends. Slide 11

12 mcommerce finally becoming a reality? While mobile operators, financial services firms, and retailers have been evaluating the feasibility of mobile payments since early 2000, recent developments on both the supply and demand side are prompting the key players in the value chain to get serious about its potential. Sitting on the sidelines is no longer an option. Slide 12

13 Changes to the payments ecosystem are likely to radically transform the financial services industry Slide 13

14 Several players are deploying mobile wallet solutions Slide 14

15 6 steps to creating a digital strategy 1. Envision success 2. Understand your customers 3. Visualise customer value propositions 4. Assess the impact 5. Develop the business case 6. Build the roadmap Slide 15

16 Thought leadership Slide 16

17 Technology developments VAT considerations for financial services John Fay Tax Partner, Slide 17

18 Emerging banking ecosystem and some of the VAT challenges Primacy of customer relationship - Key to increased revenue and market share - My Customer approach Enhanced and new service offerings - More persons entering into the FS arena (in a VAT sense) e.g technology providers, payment processors etc Impact on VAT profile of services - Single or multiple supplies? - Taxable or exempt? Mix of both? Preserving exemption and reducing the irrecoverable VAT Similar VAT themes arise across the entire FS sector Slide 18

19 Emerging banking ecosystem Exempt Traditional Banking Loans Credit Cards Deposit Taking Account Operation New Entrants Relationship Owners Telco Social Media Providers Technology Providers Payment Processors Card Networks Digital Offering E-Wallets Apps Smart Cards Contactless Debit Cards Smart Phones E-Vouchers E-Cash M-Payments Exempt Taxable? Exempt Slide 19

20 The key VAT considerations Establishing the nature of the supply Understanding the supply flows who is supplying services to whom and for what consideration? Determining the applicable VAT treatment i.e. taxable or exempt Place of supply if there is a cross border dimension Review of VAT Compliance including systems, processes & controls Two Big Challenges! - Does the profile of the service to the customer change? - In a more fragmented value chain do any of the individual elements become taxable? Slide 20

21 Application of VAT exemption EU VAT Directive (2006) but only a Recast of 1977 Directive Article 135 provides that the following services shall be exempt: - the granting and the negotiation of credit and the management of credit by the person granting it - transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments (but excluding debt collection) Other exemptions. Slide 21

22 VAT exemption strict interpretation VAT exemptions are an exception to the basic principle that services provided for consideration should be subject to VAT VAT exemptions should be applied strictly A strict interpretation must not deprive the exemption in question of its intended effect, as detailed in AXA UK PLC vs Revenue & Customs Commissioners Slide 22

23 Nature of the supply What service is provided? E.g. banking, insurance, telecom, payment processing etc It is necessary to determine the true nature of a supply and the applicable VAT treatment Reed Employment the court based its decision on: - the economic reality of the supplies made - the regulatory framework and contracts under which those supplies are made may not be determinative Many of the digital developments relate to..payments, transfers. (contactless payments, e-wallets, m-commerce etc) Slide 23

24 Nature of the supply SDC transactions concerning transfers In Sparekassernes Datacenter vs Skatteministeriet ( SDC ) the court held that exemption applied to services which, when viewed broadly, - form a distinct whole, fulfilling the specific, essential functions of a service described in that provision - must have the effect of transferring funds and - lead to a change in the financial and legal relationships of the parties Court found that it was the nature of the services and not the identity of the supplier or recipient which determined whether or not the exemption applied Slide 24

25 Nature of the supply FDR Limited - transactions concerning transfers The SDC judgment was tested in the UK Court of Appeal case of FDR Limited The Court of Appeal found that: - the term transfer of money, meant no more nor less than the entry of a credit in the payee s account and the entry of a corresponding debit in the payer s account, and that the credit and debit entries constituted the transfer - For a transfer to take place there did not have to be anything over and above a change in the relevant parties legal relationship constituted by corresponding credit and debit entries in their respective bank accounts Slide 25

26 Nature of the supply Axa UK plc The Court found that: - Applying an economic purposive test the supply made by AXA was a single supply of a debt collection service and - therefore specifically excluded from exemption in Article 135(1)(d) Court decided that debts include both current and future debts Does this decision endanger other services relating to payment processing linked to the settlement/collection of debt? Slide 26

27 Single v Composite Supply - CPP The key principles from the seminal case of Card Protection Plan vs Customs & Excise Commissioners ( CPP ) are: - Every supply of services must normally be regarded as distinct and independent, - Multiple supplies and individual supplies - Composite supplies/principal supplies and ancillary supplies - A supply which comprises a single service from an economic point of view should not be artificially split - A single charge can be indicative of a composite supply but is neither a decisive nor a necessary condition. Slide 27

28 So what do these cases mean? Contractual arrangements economic reality of supplies True Nature of the Supply - exempt financial services v taxable debt collection services v taxable telecom/technology services etc Does the customer receive one service or a number of services? Retailer Bank/Card Issuer Online Enabler e.g Telecom, Social Network Mobile Wallet Stored Value Card Loyalty Ticketing End-user Slide 28

29 VAT liability and recovery What is the optimum VAT position? What are the VAT consequences for each parties having taxable or exempt supplies? Consider single v multiple supplies The VAT interests of the parties may differ The provider may seek to apply VAT on supplies of services to financial service providers It is likely that any VAT charged by the provider to the financial services provider will be irrecoverable for the financial services provider and result in the cost of the supply for the financial services provider increasing Where a supply is treated as exempt by the telecom provider this will result in a VAT restriction for the telecom provider and additional VAT compliance obligations No one size fits all so it is important to plan! Slide 29

30 What does it all mean for financial service providers? What about partnerships or collaboration arrangements with others e.g tech company? Traditional VAT analysis will have to change VAT legislation does not currently reflect technological advancements will the Proposed EU FS Directive make the necessary amendments? Trade off likely between recovery of VAT on costs against the impact on revenues Key Actions: - Detailed understanding of who is supplying what to whom - Classification of supplies - Identifying potential VAT difficulties - Consideration of optimum VAT position Threats & opportunities Slide 30

31 EU review and other developments Colm Blaney Tax Director, Slide 31

32 Draft FS directive update Progress has stalled no work being done right now Is it dead in the water? What does this mean for the issues highlighted? Continue to operate with outdated legislation Pressure to implement certain ECJ decisions Implications for other FS sectors Slide 32

33 SWIFT services Nordea Pankki Suomi ( Nordea ) SWIFT Services = international financial messaging services used in the course of 'settlement' transactions between banks Dispute concerned whether SWIFT services come within the scope of the VAT exemption Court concluded that the messaging services do not qualify for VAT exemption as these services are: - technical in nature and - do not perform the functions required to be exempt A service may be essential for the processing of exempt transactions but of itself that does not make the service exempt Slide 33

34 Turnover method BLC Baumarkt Case The AG opined that derogation from the turnover method should not be of a general nature and should be restricted to particular situations The AG was content that a Member State was not precluded from prescribing a different recovery formula (i.e. not the turnover based method) for a mixed use supply Where a different formula is used it must guarantee a more accurate result than the general turnover based method Slide 34

35 Branch turnover for partial exemption purposes Credit Lyonnais Case Referral by the French Court concerning whether the turnover of foreign branches of a French bank can be taken into account when calculating input VAT apportionment pro rata of the bank s French head office Article 174 of the Principle EU VAT Directive The question is, essentially, if a taxpayer has several branches in other EU and/or non EU states, what turnover is to be included in the calculation: - Only the head office s turnover or - The turnover of the head office plus the turnover of it s branches Slide 35

36 EU VAT Council implementing regulation Regulation ensures uniform application of specific aspects of Directive 2006/112/EC across Member States. In particular, the regulation deals with: - Determining the location of the Customer Determining the place where supplies are taxable where the customer is established in more than one country Intervention in other words the level of intervention required by a branch for force of attraction rules to apply Slide 36

37 Intervention provision This article is applicable to suppliers who have a fixed establishment in the place (jurisdiction) where the tax is due Background Article 192(a) deems a supplier with an establishment in a Member State not to be established for VAT purposes where the supplier makes a supply within that Member State and the fixed establishment in that Member State does not intervene in that supply A fixed establishment of a supplier in a Member State shall not be deemed to intervene in a supply unless the technical and human resources of that fixed establishment are used by the supplier to fulfil the supply Where the resources of the fixed establishment are used only for administrative support tasks such as accounting, invoicing and collection of debt claims, they shall not be regarded as intervening Slide 37

38 Article 192 (a) of VAT Directive - intervention Foreign Supplier Irish Customer Irish Branch Slide 38

39 Article 192 (a) of VAT Directive - intervention Foreign Supplier Irish Customer Irish Branch Slide 39

40 Doctrine of Fiscal Neutrality Emma O Dea Tax Manager, Slide 40

41 Doctrine of Fiscal Neutrality what does it mean for VAT purposes? A breach of the doctrine of Fiscal Neutrality must be interpreted as meaning:.a difference in treatment for the purposes of VAT of two supplies of services which are identical or similar from the point of view of the consumer and meet the same needs of the consumer is sufficient to establish an infringement of that principle. Doctrine of Fiscal Neutrality pushing the boundaries of the application of VAT exemptions e.g investment management & funds Is the discretion of Member States to apply VAT exemptions under threat? Developed by caselaw to ensure equal treatment Slide 41

42 Doctrine of Fiscal Neutrality what does it mean for VAT purposes? Need to consider the following ECJ judgements & opinions to understand the true meaning: - JP Morgan Fleming Claverhouse Investment Trust plc - Leo Libera - The Rank Group plc - Deutsche Bank Slide 42

43 Fiscal Neutrality evolution of caselaw - special investment funds JP Morgan Fleming Claverhouse Investment Trust plc The key points in this judgment are: Member States have a discretion to define special investment funds for the VAT exemption but, in doing so, must pay due regard to: - the objective of the exemption - the principle of fiscal neutrality There must be equality of VAT treatment for funds which are similar to, and in competition with, funds falling within the scope of the exemption e.g. UCITS VAT treatment should not be determined based on the supplier Slide 43

44 Fiscal Neutrality evolution of caselaw Leo Libera GmbH - The court acknowledged a certain level of discretion for Member States to exempt from tax only certain forms of gambling but not others - Court implicitly opted for strict interpretation - The principle of fiscal neutrality does not preclude legislation similar to that at issue - Court dismissed doctrine of fiscal neutrality Slide 44

45 Fiscal Neutrality evolution of caselaw The Rank Group plc Where 2 services are : - comparable from the point of view of the average customer and - meet the same needs of the customer the same treatment should apply for VAT purposes The existence of competition between the services in question or a distortion of competition due to differing treatment is not relevant in determining a breach of fiscal neutrality The existence of different licensing regimes was deemed irrelevant Slide 45

46 Fiscal Neutrality evolution of caselaw The Rank Group plc Court considered that: the principle of fiscal neutrality was intended to reflect, in matters relating to VAT, the general principle of equal treatment Rank decision has far reaching implications for the application of VAT exemptions to the principle of fiscal neutrality in general Decision represents a further move by the Court from the principle of strict interpretation of exemptions in defence of fiscal neutrality Slide 46

47 Fiscal Neutrality key considerations Key considerations in determining a breach of the doctrine of fiscal neutrality: - Are services similar or identical from the point of view of the consumer? - Do the services meet the same needs of the consumer? Two supplies are similar where: - there is similar characteristics - they meet the same needs from the point for view of the consumer; - the differences between the supplies do not have a significant influence on the decision of a consumer to use one service over another Slide 47

48 Fiscal Neutrality evolution of caselaw - investment portfolio management services Deutsche Bank AG opined that: - individual portfolio management services are financial transactions for the purposes of the place of supply provisions but - Fall outside of the exemption for transaction in securities and management of special investment funds AG provided that the interpretation of the VAT exemptions must be:..consistent with the objectives pursued and must comply with the requirements of the principle of fiscal neutrality Slide 48

49 Fiscal Neutrality evolution of caselaw - investment portfolio management services Deutsche Bank AG understood the logic of the taxpayer but based its opinion on the following: - Characterisation of the service - Intention of the exemption - Principle of fiscal neutrality cannot be extended to include a service which is not provided for by the exemption AG accepted that individual portfolio management services are in competition with direct investment or investment in special investment funds Slide 49

50 Fiscal Neutrality evolution of caselaw - investment portfolio management services Deutsche Bank Implications AG opinion consistent with current Irish VAT treatment Open door to application of exemption where transaction in securities is most important activity Application of competition principle is questionable Is opinion consistent with Commission stance? Ultimate outcome difficult to predict Slide 50

51 What do these cases mean for financial services? VAT rules applying to investment management & funds are changing Pension Funds (potential refund of VAT, protective claims) Wheels case referred to ECJ What other services can be reviewed? e.g Consumer Finance (HP v Leasing) Increased litigation relating to the interpretation of VAT exemptions Impact on input tax recovery from increased exemption Slide 51

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