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Managing indirect taxes in the digital age
G-20/OECD BEPS recommendations – the impact on customs duty
How EY can helpOur global indirect tax network can help companies of all sizes operating in the digital economy. We can carry out a risk review to help analyze the appropriate duty valuation for related-party transactions and the impact of payments for intangibles on the valuation of tangible goods, as well as review the impact of any changes in legislation or business model.
Reducing the taxable base for duties and VAT for online transactions directly increases the gross margin. We can assist clients in all sectors to identify and achieve VAT and duty savings for online sales in connection with:
• Currency issues, transport costs, customs duty, royalties other surcharges
• Discounts, returned goods, collection costs and bad debts• Product valuation• Valuation planning
Although the OECD BEPS project has garnered the most attention for its impact on direct taxation and transfer pricing, a number of the Actions appear to have customs implications, falling into three broad categories:
• Pricing of tangible goods• Additions to the customs value• Supporting documentation
In particular, transfer pricing methodologies used by companies will have a significant impact on how customs values will be supported. Country-by-country documentation requirements will increase the amount of data and transparency of related-party transactions for customs authorities. And the limitation on base erosion for financial payments can impact customs related-party valuation analysis and results.
From a customs authority perspective, addressing base erosion generally means looking to add off-invoice payments to expand the base for customs duty purposes, and therefore increasing the dutiable value. This trend is seen in the changes at the EU and at the World Customs Organization level with the increased scrutiny on royalty payments.
With increased transparency, customs authorities will have full details of related-party flows at their fingertips, not just details about transfers of tangible good sales. Importers will need a supportable position if they seek to exclude certain payments from dutiable value.
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We interviewed the Senior Global Trade Director of a Fortune 500 company about how technology is changing the management of the company’s trade function.
Centers of excellence for global trade managementCompanies are beginning to realize the tremendous opportunities that exist with the new technologies available today, particularly cloud technologies that enable the cost-effective storage and management of massive amounts of data. Those who embrace these technologies early will gain competitive advantages.
Trade teams specifically also have a responsibility to articulate and to “sell” a new vision. Many times there is a gap in internal processes due to the trade team’s inability to articulate the company’s needs from a perspective that articulates the business impact, or due to where the function is positioned within the company.
As a result, a lot of companies are not getting a full picture of the impact effective trade management can have on a company’s bottom line (both in terms of mitigating compliance risk or enriching business opportunity) nor are they fully realizing the value propositions available with these opportunities.
How digital will affect trade management in the near futureIn my view, heads of in-house trade functions who take the time to analyze the use of technology very carefully will determine that if they take the slow-progression route, they will fall behind and could end up spending much more money than is necessary. Those that embrace the available “disruptive technologies” sooner will have the advantage — both in the short term and in the long term.
You don’t have to wait five years or more; cloud computing and the Internet of Things are realities today. By leveraging the best of these technologies now, companies can get a better handle on their compliance management programs, and be in a position to adopt evolving technologies effectively, because they will have the right baseline to build from. The benefits can include realized savings across the entire value chain of trade functions, in addition to the management of indirect taxes.
Managing the global trade functionWe have a more robust stack of technology that we use today compared with when I took over this function, and the program is much deeper and integrated with our critical business priorities. I’d say the biggest change in recent years is this integration to the business. Rather than thinking about Trade functionality as an afterthought or as an add-on, we now realize we need to embed it into the whole process, from start to finish.
I’d say my own priorities are to make sure we don’t get pulled into thinking of any part of the process or a needed change piecemeal; that is, not be reactive to one special project or specific need, but always think about the entire process and how to evolve and enhance it in a way that is business-ready, while still maintaining our fiduciary obligations for trade compliance when we need it.
Managing trade processes in the digital age
Managing trade processes in the digital ageDigitization is changing all aspects of global enterprise: opening new markets, reshaping supply chains, creating direct connections between sellers and buyers, and shifting the emphasis of many companies from goods to services. Technology is also changing customs processes and declarations. We talked with the Senior Global Trade Director of a Fortune 500 company about how technology is changing the management of the company’s trade function.
Data integrity depends on processTechnology has come a long way, and it now allows us to easily collect and store master data and drill down to the specific transactional data that the user needs. From cloud data centers to business innovation tools, technology exists to enable small and medium-sized companies to take advantage of these opportunities — as readily as large multinationals and governments can.
In this environment, what companies need to think about is process, partnerships, and controls and compliance. The technology exists and can be leveraged, but without process, partnerships and controls, you really can’t get to reliable master or transactional data.
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Interview
How customs administrations are using technologyCustoms administrations around the world are making huge investments in automating their processes. Unfortunately, in many cases they are automating old processes and legacy practices. Some gains are being made, but not as much as could be realized through the adoption of “best in class” processes and technologies as part of the overall initiative.
Administrations also tend to develop their systems apart from one another in many jurisdictions. Very few are building on the Single Window platform and maximizing the opportunities that could arise from leveraging existing platforms or best practices. Gathering of aggregate data, and real-time analysis, still remains less than optimal in many cases.
Internally, we are able to leverage our technologies to conduct real-time analysis and determine trends, which enables us to make any adjustments needed to ensure compliance and effective duty and tax management.
The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.
Three priorities for managing the global trade function1 Have a plan: it is important for tax and trade professionals to clearly articulate
the needs, the value add and the plan. Without this, efforts can be piecemeal and not resonate with the key stakeholders in management who are in the position to support and fund best-in-class initiatives.
2 Process matters: without clean and clear processes, it is difficult to get the full benefits of using any technology; in fact, the function’s efforts could become expensive and inefficient, and lose support.
3 Partner and build trust: this means establish relationships of trust with business partners, regulators and business leaders who are in the position to articulate and champion what is needed in terms of output to prove the business value: communications and partnership matter.
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Interview
Developed by the Korea Customs Service (KCS) more than 20 years ago, UNI-PASS is recognized as one of the most digitally advanced import/export clearance systems for customs procedures in the world. As a fully automated electronic system, it aims to facilitate trade, provide uninterrupted services and enforce transparency and control of the customs administration by using a stable IT system.
The following activities and services can be performed with UNI-PASS:
• Clearance management• Duty collection• Drawback• Cargo management• Transit management• Surveillance• Investigation• Audit• Legal process management• Advanced Passenger Information
System (APIS)• Harmonized System (HS) management• Integrated Risk Management (IRM)• Customs Data Warehouse (CDW)• Knowledge Management System (KMS)• Performance Management System• Law compliance• Early Warning and Control System
(EWACS)• Single window
Benefits for traders and companies• The web-based UNI-PASS portal
is operational all day, every day.• It allows individual importers or
companies to carry out customs-related procedures (including paying duties and applying for duty drawback) without having to physically visit each customs authority.
• Traders can apply online for regulatory permits and licenses, declare goods for importation, locate cargo, and review the progress of import and export clearances in real time.
• Individual importers and companies can pay duties and other fees for regulatory permits and licenses in a secure manner and online at any time.
• The portal and single window allow information to be shared between regulatory agencies, the customs authority and other stakeholders. The information can be used for the granting of regulatory permits, and for statistics and data analysis.
• Companies and goods are evaluated and divided into two categories: safe track (low-risk) or non-safe track (high-risk). The safe track allows for faster clearance (automatic clearance) with little control while the non-safe track subjects goods to stricter controls and inspections. This mechanism encourages low-compliance companies to improve their performance so they can be transferred to the safe track.
Benefits for the customs authority• UNI-PASS helps the customs authority
achieve greater transparency and control in customs administration procedures and greater efficiency by allowing traders to perform customs procedures themselves at any time using the fully automated system.
• Customs officers can use UNI-PASS to check cargo status and location in real time throughout the process. In effect, the customs authority can control and track bonded goods by checking whether they have been delivered to their destination within the statutory time frame.
• The integrated portal enables information sharing between regulatory agencies, the customs authority and other stakeholders. Customs officers can cross-check certain information on the portal, and they can use the comprehensive information for statistics and analysis purposes. The information in the portal is also used for post-importation customs audits or investigations.
• UNI-PASS allows the customs authority to perform effective integrated risk management. Companies are sorted into low-risk and high-risk categories based on their compliance records, including correct duty payments and clearance practices. The low-risk category enables a faster clearance together with various other incentives such as exemption from inspection. In the meantime, the customs authority can enforce greater control and carry out more inspections on high-risk companies.
UNI-PASS: South Korea’s customs e-clearance system
Contact
Seung Yeop Woo+82 2 3787 6508 [email protected]
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Insight
Excerpts from the 2016 EY Global Trade Symposium report
Data in a digital world Companies are leveraging data to enter new markets, transform existing products, and introduce new business and delivery models. But, with reports showing businesses using only a fraction of the data currently available, what are the challenges for Trade professionals?
ey.com/tradedata
Digital future and distribution channels Digital transformation is changing business models. A recent Economist Intelligence Unit survey reports that almost 80% of companies are seeing changes in how their customers access goods and services, and the majority of these companies are changing their pricing and delivery models. Read how participants in our Global Trade Symposium are experiencing these changes and the complexity the are causing.
ey.com/digitaldistribution
6 Managing indirect taxes in the digital age
Insight
New technologies reshape the way people do business, and an ever-increasing portion of the world’s economy is now the digital economy. Wireless technologies have made it possible to perform transactions at virtually any place and at any time.
E-commerce has caused geographical barriers to evaporate. In theory at least, any consumer anywhere in the world could be a potential customer.
Advances in technology (such as e-commerce, 3D printing and data mining) drive the digital economy and force companies to continuously adapt to constantly changing realities. Such continuous adaptation also affects manufacturing strategies and international supply chains.
Because legislation often struggles to keep pace with technology, the digital economy frequently results in challenges for companies, consumers and governmental authorities. As physical borders disappear, the digital economy raises many new questions in the area of customs duties. In the European Union, the guiding legal principles for addressing these questions can be found in the EU’s Union Customs Code (UCC).
The impact of 3D printing on customs duties illustrates the challenges raised by the digital economy for customs legislation.
Customs and the digital economy
What is 3D printing?3D printing (also known as “additive manufacturing”) is a generic term for a range of technologies that allow a computer-controlled device to create (“print”) a three-dimensional object by adding successive layers of its constituent material, one on top of the other, until the object is complete.
Currently, the printable substances (“elemental inks”) are primarily thermoplastics, metals and metal alloys. In the future, other materials will also be used, such as rubbers, clays, medicines, edible substances and textiles, greatly expanding the range and type of goods produced using this process.
The object is designed electronically through computer-aided design (CAD) or a 3D scan, meaning that the design can be transmitted over the internet. Unlike traditional manufacturing processes, 3D printing does not require production aids (such as tooling and dies) to be sent to the manufacturing location. Only the printing equipment must be available.
As a process, 3D printing is still maturing, and specialized companies and research institutes are looking to increase the print speed and accuracy, the size of printable objects, the combined printing of objects consisting of more than one substance, and the variety of printable substances.
We have not reached the end of the technological evolution — not by far. 3D printing is expected to become more commonplace, both for private individuals and for companies, with seemingly endless possibilities:
• A private individual may download an object design from the internet and print the object at home or at a specialized 3D “print shop.”
• A company can offer customizable products to its customers (e.g., by means of easy-to-use web-based CAD software). As part of this customization, 3D printing will replace certain steps in the traditional manufacturing process. For example, plastic parts that were previously injection-molded may now be printed.
3D printing undermines the ideas of standardized and globalized manufacturing processes, and counteracts the economies of scale that formerly applied: once the object design is made, and provided that the 3D printing infrastructure is available, the cost of producing one object or 1,000 objects is virtually the same, with only the elemental ink as an incremental cost. With 3D printing, production planning is driven by actual demand, not by forecasts, allowing just-in-time deliveries at the customer’s premises without transport or logistical delays.
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Impact of 3D printing on EU customs duties3D printing will affect EU customs duties, especially if it causes the actual production place to shift from one country to another: the consumer downloads the object design from a foreign server (he “imports” the intangible element) and locally conducts the manufacturing process, which would otherwise have taken place abroad. There is no longer an import of a finished product. Only the elemental ink may be imported into the EU (and even this may not always be the case).
Potential customs duty savingsHow should such localized private production be taxed from a customs perspective? Arguably:
• The intangible element (the object design) would not be subject to any customs duty because it may not in itself be related to any tangible imported good.
• The tangible element (the elemental ink), whenever it is imported into the EU, should be considered as such, namely, as a relatively low-value substance subject to relatively low import duty rates.
If this argument can be upheld before the customs authorities, the model of localized private manufacturing may indeed entail an important customs duty savings for the company.
Other scenarios shifting the manufacturing locationCountless variations in the 3D supply chain can be imagined in our globalized economy. For instance, an EU consumer could purchase (download) an object design from a Japanese product developer, customize the object design to its own taste, and send the revised design to a US-based company that would “print” the object and send it to the EU.
Various legal challenges could arise from this type of arrangement. The questions could include:
• Would the Japanese object design qualify as a taxable element in import duties when the final object is imported into the EU?
• Would it make any difference if the consumer bought the object design from an EU developer?
• What would be the impact of this private customization of the object design?
• What would be the impact if the 3D printing took place in the EU? How should the customs value of the object be assessed?
Legal challengesWhenever a company decides to venture into 3D printing, the impact on customs duties must be examined for every individual manufacturing scenario. However, the current customs legislation has been designed for traditional manufacturing processes. Therefore, companies must be prepared to enter new — and uncharted — territory when implementing technological innovations such as 3D printing in their production chain.
Future changes to tax legislation?If 3D printing becomes widespread, national and supranational legislators will likely start thinking of alternative ways to tax this business model. The possibilities include:
• Increasing import duty rates on elemental ink (and addressing whether separate tariff headings are required)
• Designing new customs valuation rules for importing intangibles (which would mean deciding how to appraise electronic data for customs purposes)
• Raising other taxes, e.g., increasing rates of value-added tax (VAT) or introducing new taxes on services
Export controlsWhen object designs are transmitted electronically abroad, export control requirements or restrictions may also apply.
Contact
Bernard Coopmans+32 2 774 9488 [email protected]
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IntangiblesIntangibles that have no relationship to imported tangible goods are not subject to customs duties. Examples could include tax advice emailed by a foreign advisor, or information downloaded from a server in a foreign country. In these cases, the intangible is considered a service, not a good, and is not subject to customs duties, although it may be subject to value-added tax (VAT), goods and services tax (GST) or other indirect taxes.
However, intangibles that relate to imported tangible goods can be dutiable for customs purposes.
The UCC valuation rules require that intangibles related to tangible goods are (wholly or partially) subject to customs duties.
The UCC includes a strict “catchall” provision for the taxation of royalties, license fees and trademarks related to imported goods, making these items commonly subject to customs duties. The new code also abolishes the relaxation for trademark royalties. This important change could have a significant impact on any company currently importing goods into the EU for which trademark royalties are paid.
The intangible elements related to engineering, development, artwork, design work, plans and sketches are subject to customs duties, insofar as:
• These elements are necessary for he production and sale of the imported goods.
• The activities are undertaken outside the EU.
• They are supplied directly or indirectly by the buyer free of charge or at areduced cost.
• These elements are not already included in the sales price of the goods.
Other intangible elements (such as brand value) may be included in the exporter’s sales price. As a result, these elements would also normally be subject to customs duties.
On 1 May 2016, the EU’s Union Customs Code (UCC) will enter into force, providing a new, streamlined and codified framework of customs legislation, replacing the current Community Customs Code (CCC). Specifically in the context of the digital economy, the following provisions can be cited:
Customs dutiesCustoms duties are levied only on tangible goods when they are imported into the EU. They are assessed on a transaction-by-transaction basis (not on an aggregate level) and they are generally calculated on the value of the imported goods (mostly, the sales price). For intercompany transactions, the sales price must be based on an open market value.
The Union Customs Code and the digital economy
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Use of ICT in customs-related activitiesThe UCC relies heavily on information and communications technology (ICT) to facilitate legitimate trade and aid the effectiveness of controls by the customs authorities. In the near future, various ICT applications will be developed so that all customs-related activities can function in a paperless environment. These developments will concern not only the customs clearance process but also the application for various procedures and decisions, as well as communication between customs authorities and with the EU Commission. Common data requirements will be applied throughout.
Online retailOne particular innovation is that the UCC permits customs warehouses to be used for online retail purposes. This is a breakthrough for online retailers operating EU-based distribution centers that serve surrounding countries and territories (e.g., Switzerland, Russia, North Africa and the Middle East). This change will help many online retailers to reduce customs duty costs and to maintain a flexible supply chain.
Impact on international parcel trafficThe rise of the digital economy has led to an increase in international parcel traffic. Although debated politically, the customs legislation upholds an exemption from customs duties for consignments with an intrinsic value below EUR150. Most EU countries provide VAT relief for imports of a negligible value up to EUR22, but, in some cases, it is not applicable to mail-order deliveries. Given its potential for market distortions, this VAT relief seems likely to be abolished in the future.
Based on the risk analysis conducted by customs authorities, the carrier is obliged to lodge an Entry Summary Declaration (ENS), regardless of the consignment’s value. This latter requirement is a new provision in the UCC, and it is giving rise to practical concerns in the shipping and courier industry. However, a waiver to lodge an ENS will subsist until the end of 2020 on postal consignments that don’t weigh more than 250 grams. Contact
Bernard Coopmans+32 2 774 9488 [email protected]
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Contacts
Excerpt from Managing indirect taxes in the digital age. Read the full report and access interactive content at ey.com/indirectdigital .
Global Director of Indirect Tax
Gijsbert Bulk+31 88 40 71175 [email protected]
Americas
Jeffrey N. SavianoNew York +1 212 773 0780 Boston +1 617 375 3702 [email protected]
Robert S. Smith+1 949 437 0533 [email protected]
Asia Pacific
Adrian Ball+65 6309 8787 [email protected]
Europe, Middle East, India and Africa (EMEIA)
Kevin MacAuley+44 20 7951 5728 [email protected]
Global Trade
William M. Methenitis+1 214 969 8585 [email protected]
Neil Byrne+353 1 221 2370 [email protected]
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About EY’s Indirect Tax servicesIndirect taxes, ranging from value-added tax (VAT) and customs duties to environmental levies, affect the supply chain and the financial system. They pose unique challenges to multinational tax functions since they must be managed accurately and in real time. These often invisible taxes can have significant impacts — on cash flow, absolute costs and risk exposures.
Thanks to our network of dedicated Indirect Tax professionals, who share knowledge and ideas, we can provide seamless, consistent service throughout the world and help you deal effectively with cross-border issues. These include advising on the VAT treatment of new and complex transactions and supplies, and helping resolve classification or other disputes and issues with the authorities.
We provide assistance in identifying risk areas and sustainable planning opportunities for indirect taxes throughout the tax life cycle. We can provide you with effective processes to help improve your day-to-day reporting for indirect tax, reducing attribution errors and costs, and making certain indirect taxes are handled correctly.
We can support full or partial VAT compliance outsourcing, help identify the right partial exemption method and review accounting systems. Our customs and international trade teams can help you manage customs declarations, audit and review product classifications, and evaluate import and export documentation. Our globally integrated teams can give you the perspective and support you need to manage indirect taxes effectively.
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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.
The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.
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