VAT and financial servies comparative law and economics perspectives

Robert F van Brederode Richard Krever Editors VAT and Financial Services Comparative Law and Economic Perspectives VAT and Financial Services Robert F van Brederode Richard Krever Editors VAT and Financial Services Comparative Law and Economic Perspectives 123 Editors Robert F van Brederode Crowe Horwath LLP Atlanta, GA USA ISBN 978-981-10-3463-3 DOI 10.1007/978-981-10-3465-7 Richard Krever Monash Business School Monash University Melbourne, VIC Australia ISBN 978-981-10-3465-7 (eBook) Library of Congress Control Number: 2016963325 © Springer Nature Singapore Pte Ltd 2017 This work is subject to copyright All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed The use of general descriptive names, registered names, trademarks, service marks, etc in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations Printed on acid-free paper This Springer imprint is published by Springer Nature The registered company is Springer Nature Singapore Pte Ltd The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore Preface For over half a century, countries have struggled to reconcile the principles and design of a VAT or GST system and the unique features of financial supplies A VAT taxes the value of transactions, which is relatively straightforward where explicit fees are charged, but intriguingly difficult where implicit fees are charged as is the case with some types of financial services At the same time, the VAT has mechanisms to remove tax from business-to-business transactions involving no final consumption but these, too, are difficult to apply to some types of financial services The fundamental design features of the tax also appear problematic in terms of the goal of removing tax from pure savings in the form of financial instruments Relieving financial services from the tax altogether runs counter to the character of the VAT as a broad-based tax levied on all final consumption Equally at odds with the design principle of the VAT is imposing a limited tax on business-to-business transactions along the supply chain or imposing a limited tax on pure savings No VAT or GST systems have yet achieved these objectives consistently Financial services constitute an important and large economic sector and the application of VAT to financial services is particularly complex and has given rise to a multitude of problems and selective solutions At the same time, financial services are becoming increasingly globalized The growth of cross-border trade and investment has led to financial service providers providing global services to entire company groups Consumers, too, have access to cross-border services from internet gambling to investment and personal banking facilities With the increasing number of free trade agreements, there is pressure on governments to simplify oversight regulation to allow foreign financial service providers such as banks and insurance companies access to their markets This will exacerbate difficulties arising from inconsistent treatment of financial services across different VAT regimes The difficulties of taxing financial services are well known among specialist academics and policy-makers; absent is an overview of the problems and possible solutions in a single, comparative study Missing, too, is a study combining theory and practice that financial institutions and their advisors can use to plan global operations and develop advocacy positions for reform in their home and operational v vi Preface jurisdictions This volume seeks to fill these gaps, acting as a helpful reference for policy-makers tasked with (re)designing VAT rules for financial services, and for academics and practitioners when providing insight and counsel on how VAT is applied to different types of financial services The volume provides an overview of the VAT treatment of financial supplies in the European Union, covering 27 jurisdictions that apply variations of the traditional VAT under a common EU-mandated umbrella, as well as a selection of countries applying modern VATs with remarkably divergent approaches to the treatment of financial supplies This volume is divided into four parts Part I provides the general introduction to this study It first lays out the scope of and defines the purpose of the collaborative research It then demonstrates the consequences of, and problems associated with, partial taxation of financial services, as is the practice in most jurisdictions Since VAT is aimed at taxing personal consumption, it is essential to determine the nature of consumption and define this concept, and the second chapter offers two theoretical approaches, which yield different tax bases Parts II–IV deal with the application of VAT to different types of financial services Part II focuses on loan intermediary services, starting with a theoretical chapter, followed by treatises on how VAT is applied to such services in nine jurisdictions: Argentina, Australia, Brazil, Canada, China, the European Union, Israel, New Zealand, and South Africa Part III deals with financial investments, again starting with a theoretical chapter, followed by two jurisdictional chapters, covering the European Union, and South Africa In addition, there are chapters explaining the intricacies of VAT as it relates to cost-sharing arrangements and crowdfunding Part IV focuses on financial pooling services: one chapter is dedicated to gambling and three jurisdictional chapters cover the VAT treatment of insurance services in Australia, the European Union and Singapore To facilitate comparisons between the approaches of the selected jurisdictions, all authors followed guidelines as to the topics to be covered in each chapter The chapters not mirror one another in terms of structure, however, which reflects the very different taxation approaches used in different jurisdictions The bibliography is organized separately for each chapter and found directly following each individual chapter A register of case law is also organized by chapter and found in consolidated form after Part IV This volume is current with literature and case law through September 2016 The editors are grateful to Peter Mellor for his invaluable assistance with the preparation of this manuscript for the publisher We would also like to extend our gratitude to Crowe Horwath LLP for sponsoring the conference which gave rise to this volume, held at the Monash University Centre in Prato, Italy, allowing the authors to present and discuss the first versions of their respective contributions Atlanta, GA, USA Melbourne, VIC, Australia Robert F van Brederode Richard Krever Contents Part I Theories of Consumption and the Consequences of Partial Taxation of Financial Services Robert F van Brederode and Richard Krever 1.1 The Concept of Consumption 1.2 The Consequences of Partial Taxation of Financial Services 1.2.1 Mixed and Composite Supplies 1.2.2 Change of Use 1.2.3 Sale of Used Business Assets 1.2.4 Input Tax Allocation 1.3 The Challenge References Part II Establishing the VAT and Financial Supplies Benchmarks 9 10 11 11 Loans and Intermediary Services Taxing Loan Intermediary Services: Theory and Design Considerations Robert F van Brederode and Richard Krever 2.1 Introduction 2.2 Characterizing Loan Principal, Interest and Loan Intermediary Services for VAT Purposes 2.2.1 Loan Principal 2.2.2 Interest 2.2.3 Loan Intermediary Services 2.3 Alternative Methods of Taxing Financial Services 2.3.1 Treating Financial Services as Exempt Supplies 2.3.2 Recharacterizing Loans as Ordinary Business Supplies 2.3.3 Limited Input Tax Credits for Financial Loan Service Suppliers 15 15 16 16 16 18 20 20 22 23 vii viii Contents 2.3.4 Zero-Rating 2.3.5 Addition Method 2.3.6 Subtraction Method 2.3.7 Cash Flow Method 2.3.8 Modified Reverse Charge 2.4 Summary, Conclusions, and Policy Objectives References 24 25 26 26 29 31 32 Loan Intermediary Services: Argentina Guillermo Teijeiro 3.1 General Description 3.1.1 Legal Framework 3.1.2 VAT Scope: Financial Supplies—Loan Intermediary Services 3.1.3 Tax Point 3.1.4 Place of Supply or Equivalent 3.1.5 Chargeable Amount: Valuation 3.1.6 Tax Rate 3.1.7 Exempt Supplies or Equivalent 3.1.8 Deduction and Recovery of Input Tax 3.1.9 State, Provincial or Local Indirect Taxes 3.2 Account Fees 3.3 ATM Fees 3.4 Credit Card Purchase Surcharges 3.5 Facilitators of Loans 3.6 Finance Leases 3.6.1 Tax Point 3.6.2 Special Exemption 3.6.3 Leasing of Motor Vehicles 3.6.4 VAT Financing 3.6.5 Optional Regime to Offset Output VAT in Advance 3.6.6 Leasing Contracts on Real Estate 3.6.7 Leaseback Transactions 3.7 Non-financial Services that Might Be Deemed to be Financial 3.7.1 Safe Deposit Boxes 3.7.2 Implicit and Explicit Loans in the Course of Business 3.8 Gross Income Tax References 35 36 36 36 37 37 38 39 39 40 41 42 42 42 43 43 44 44 44 45 45 46 47 48 48 48 49 49 Contents ix 51 51 53 53 56 57 57 57 58 60 61 63 63 64 64 67 68 72 72 73 75 78 78 78 81 86 87 Loan Intermediary Services: Australia Richard Krever and Jonathan Teoh 4.1 Introduction 4.2 What Are Financial Supplies? 4.2.1 The Definition of Financial Supplies 4.2.2 Credit Card Surcharges 4.3 Recovery of Input Tax by Financial Suppliers 4.3.1 The General Apportionment Rule 4.3.2 The de Minimis Exception to Apportionment 4.3.3 The ‘Acquisition Supply’ 4.3.4 Borrowing-Related Costs 4.4 Reduced Input Tax Credits 4.5 Imported Services Provided to Enterprises Making Financial Supplies 4.6 Exported Financial Supplies 4.7 Reform Recommendations References Loan Intermediary Services: Brazil Flavio Rubinstein 5.1 Introduction 5.2 Federal VAT Taxation of Financial Services 5.2.1 Federal Taxation of Gross Revenues: PIS and COFINS 5.2.2 PIS and COFINS Levies on Financial Institutions 5.2.3 PIS and COFINS Levies for Non-financial Institutions 5.2.4 Inbound and Outbound Financial Services 5.3 Sub-national VAT Taxation of Financial Services 5.3.1 National Framework 5.3.2 National Rules for the Taxation of Financial Services References Loan Intermediary Services: Canada Simon Thang 6.1 Overview 6.2 Lending in General 6.2.1 Introduction 6.2.2 Exclusions from ‘Financial Service’ 6.2.3 ‘Arranging For’ Financial Services 6.2.4 Credit Card Surcharges 6.2.5 Loans in the Course of Business 6.2.6 De Minimis Financial Institutions 87 88 88 92 95 98 99 101 x Contents 6.2.7 Input Tax Credits 6.3 Self-assessment Requirements 6.4 Special Attribution Method for Provincial Tax Reference 103 105 107 108 Loan Intermediary Services: China Na Li and Richard Krever 7.1 Introduction 7.2 Scope of Loan Intermediary Services in China 7.3 The Former Business Tax Regime 7.4 The Current VAT Regime 7.4.1 Explicit Loans 7.4.2 Implicit Loans 7.4.3 Timing Issues 7.4.4 A Lost Opportunity 7.5 Exported Loan Intermediary Services 7.6 Tax Administration 7.7 Summary References 109 109 111 112 114 115 116 118 119 119 120 121 121 123 123 125 125 127 130 131 132 134 135 135 137 137 139 139 141 143 143 143 Loan Intermediary Services: European Union Joachim Englisch 8.1 Legal Framework 8.2 Treatment of Financial Sector Loan Intermediary Services 8.2.1 General Approach: Exemption Without Credit 8.2.2 Scope of the Exemption in the Case of Core Lending Activities 8.2.3 Exemption of Ancillary Activities 8.2.4 Services Related to Credit Cards 8.2.5 Exemption of Outsourced Activities 8.2.6 Apportionment Formula for Input Tax Credits 8.3 Direct Loans in the Course of Business 8.3.1 Treatment as a Separate or Merely Ancillary Supply 8.3.2 Apportionment Formula for Input Tax Credits References Loan Intermediary Services: Israel David Goldman 9.1 Introduction 9.2 The Case for Imposing Wage and Profit Tax on Financial Institutions 9.3 The Financial Institution Classification 9.3.1 The Legal Definition 9.3.2 Commercial Banks .. .VAT and Financial Services Robert F van Brederode Richard Krever Editors VAT and Financial Services Comparative Law and Economic Perspectives 123 Editors Robert... include European Union law, European and international tax law and comparative tax law Currently her research is focused on European VAT In 2016 she defended her doctoral thesis, a comparative study... co-editor of the publication VAT in Europe with client research and publications of articles and white papers Marie Pallot is a lawyer and policy manager with the New Zealand Inland Revenue Department