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VAT News Alcoholic beverages On the importation of certain alcoholic beverages, in particular wine, brandy, fermented drinks and vermouth, VAT and excise duties will be imposed on the “transactional value” of the imported goods. Canada Direct selling industry On 27 January 2009, the Finance Minister tabled the federal Budget. Most of the attention on the Budget has gone to the extensive spending proposals (both direct spending and tax credits) designed to kick-start the economy. The Liberals have announced that they will support the Conservative Budget, and thus the Budget proposals will definitely be enacted. The Budget included one detailed GST proposal, introducing a new Sec. 178 to deal with network sellers. The Supplementary Information in the Budget provides this explanation: Simplification of the GST/HST for the direct selling industry The direct selling industry distributes goods to final consumers through a large number of contractors and sales representatives rather than through retail establishments. The direct selling industry generally employs two business models: – the buy-and-resell model, where contractors purchase goods from a direct seller and resell the goods to consumers with a markup; and – the commission-based model, where a network of sales representatives of a direct selling organization (a “network seller”) is established for arranging for the sales of the network seller’s goods to consumers, for which the representatives receive a commission. To simplify the operation of the goods and services tax/harmonized sales tax (GST/HST) for direct sellers and their contractors, the Excise Tax Act currently offers an alternative collection method (ACM) for direct sellers employing the buy-and-resell model [Secs. 178.1-178. ed.]. The method is not available to those in the direct selling industry employing the commission-based model. Where a direct seller elects to use the ACM, the contractor pays, to the direct seller, an amount equal to the GST/HST on the suggested retail price of the direct seller’s goods, and the direct seller is required to remit the equivalent tax to the government. The contractor is not obliged to remit GST/HST on the contractor’s sales of the direct seller’s goods to consumers, since the amount of tax has already been remitted by the direct seller. In addition, under the ACM, sales of direct-seller goods by a contractor are ignored in determining whether the contractor qualifies as a small supplier for GST/HST purposes. Also, supplies by a direct seller of sales aids to a contractor, as well as supplies of host gifts made directly or indirectly through a contractor, are not subject to GST/HST. The Budget 2009 proposes to allow network sellers who meet the conditions listed below to use a special GST/HST accounting method to simplify GST/HST compliance. With the approval of the Minister of National Revenue, where those conditions are met and a network seller jointly elects with all of the network seller’s sales representatives to use the proposed method: – the commissions and bonuses received by these sales representatives from the network seller for arranging the sale of the network seller’s goods would not be subject to GST/HST; – the commissions and bonuses received by sales representatives from the network seller for arranging the sale of the network seller’s goods would be – ignored for determining whether sales representatives qualify as small suppliers who are not required to register for GST/HST purposes; certain supplies by network sellers of sales aids to these sales representatives, and supplies of host gifts to the sales representatives and hosts, would not be subject to GST/HST; and – the sale of the goods by the network seller to the final consumer would continue to be subject to the GST/HST under the normal rules. A GST/HST-registered network seller will generally be eligible to elect to use this special method for a fiscal year if the following conditions are met: – all or substantially all of the sales of the network seller in the fiscal year are expected to be made through sales representatives or, if the network seller employs both business models referred to above, through a combination of sales representatives and buy-and-resell contractors; – all or substantially all of the sales of the network seller in the fiscal year arranged by sales representatives are expected to be made to final consumers; – all or substantially all of the sales representatives of the network seller are expected to receive commissions and bonuses from the network seller of no more than CAD 0,000 in the fiscal year; and – joint elections are made with each new sales representative to continue to qualify for the election. Where a network seller has elected to use the special GST/HST accounting method, and it is subsequently determined that one or more of the conditions of the election were not met in a fiscal year, the network seller will be required to make an adjustment to the network seller’s GST/HST net tax. An adjustment to the GST/HST net tax of a network seller will also apply where the network seller fails to notify its sales representatives that the election has ceased to have effect. The Budget 2009 has also proposed that this special GST/HST accounting method will be available in respect of fiscal years of a network seller that begin after 2009. From our correspondent David M. Sherman Toronto, Ontario 1 INTERNATIONAL VAT MONITOR MARCH/APRIL 2009 © IBFD
Central African Republic Petroleum products Law No. 08-024 of 7 December 2008 enacted the Finance Law for 2009. Under Law No. 08-024, retail sales of petroleum products were added to the list of taxable transactions with effect from 1 January 2009. VAT on petroleum products is not deductible, unless the products are: – purchased by importers or wholesalers for resale, or used for the purposes of generating electricity for resale; or – used by manufacturers in industrial enterprises as fuel for fixed machinery. Rates Law No. 08-024 of 7 December 2008 provides that, from 1 January 2009, the VAT rates are as follows: – the standard rate is 19%; – the reduced rate of % (previously 10%) applies to wheat, milk, frozen fish, and refined oil; and – the zero rate applies to exports and related international transport services, on the condition that the exports have been declared to, and verified by, the customs authorities. China (People’s Rep.) The amendments to the VAT system that entered into effect on 1 January 2009 did not address certain issues and, consequently, it was not clear whether the special reduced VAT rates and the simplified VAT collection system continued to apply from that date. Under the simplified VAT collection system, small businesses are subject to a reduced rate of VAT and, at the same time, not entitled to deduct input tax. On 19 January 2009, the Ministry of Finance and the State Administration of Taxation (SAT) jointly clarified the situation by means of a notice, Cai Shui [2009] No. 9, which applies with retrospective effect from 1 January 2009. The notice contains the following information. Reduced rates The following goods continue to be taxed at the reduced rate of 1 %: – agriculture products, including all primary products of vegetable or animal nature produced on farms, by cultivation or in the forestry industry and animal husbandry; – audio and visual products, including recorded audio and video tapes, records, CDs, laser discs, etc.; – electronic information carriers, such as CD-ROMs, rewritable CD-ROMs, floppy and hard disks, integrated circuit cards, various memory chips, etc.; and – dimethyl ether. Ordinary taxpayers may opt for application of the rate of % in respect of the supply of the following self-produced goods: © IBFD INTERNATIONAL VAT MONITOR MARCH/APRIL 2009 VAT News – electricity produced by small hydropower stations (having a capacity of not more than 0,000 kilowatts) operating at, at least, county level; – sand, earth and stone materials used for construction or for production of construction materials; – bricks, tiles and lime from sand, earth and stone materials or other mineral goods excavated by the taxpayer; – biological products made from microbe, microbe metabolite, animal toxin, and human and animal blood or tissue; – running water; and – commercial concrete made of cement. Ordinary taxpayers are subject to VAT at the rate of 4% in respect of: – sales of goods that the retailer has on consignment; – sales by pawnshops of uncollected goods; and – sales of goods in duty-free shops approved by the State Council or another authorized government department. Disposal of self-used fixed assets by ordinary taxpayers must be taxed in accordance with Art. 4 of notice Cai Shui [2008] No. 170, which states that self-produced or purchased fixed assets are generally taxed at the rate of 2%, if the assets were purchased prior to 1 December 2008. The sale of self-used goods other than fixed assets is subject to VAT at the normally applicable rate. It should be noted that, where an ordinary taxpayer has opted for taxation as a small business, i.e. under the simplified collection system, the option is irrevocable for a period of three years. Simplified collection system Under the condition that they have not deducted input tax, small businesses continue to be subject to the following concessions under the simplified VAT collection system: – disposals of self-used fixed assets referred to in Art. 10 of the VAT Implementing Rules are taxed at the rate of 2% (i.e. half of 4%) and disposal of other selfused goods is subject to the rate of %. – sales of second-hand goods are subject to VAT at the rate of 2% (i.e. half of 4%). “Second-hand goods” are used goods that still represent some value, such as second-hand cars, motorcycles and yachts, not selfused personal goods. Export of textiles and garments On February 2009, the Ministry of Finance and the SAT issued a notice, Cai Shui [2009] No. 14, which provides that, with retrospective effect from 1 February 2009, the VAT refund rate for exported textile and garments is increased from 14% to 1 %. A detailed list of eligible textiles and garments is attached to the notice. 1 7
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