BEPS: Beware of all taxes, not just income tax

Learning CentreBEPS: Beware of all taxes, not just income tax

BEPS: Beware of all taxes, not just income tax

The BEPS recommendations mainly focus on the erosion of the income tax base. However, tax authorities may also choose to introduce indirect tax measures such as withholding taxes or levies to access to a greater portion of the transacted funds via other means such, as trade tariffs or permits. there seems to be an increased focus on the possible use of import duties as well as taxes on scarce natural resources to combat perceived tax leakage from commodity source jurisdictions.

Many jurisdictions apply VAT to the transaction value of the commodity versus an income tax, which applies to the net profit of the commodity supply chain. It is also essential to keep in mind that, unlike income tax, many countries do not address cross-border indirect tax issues, and typically require that VAT is paid in the jurisdiction where the commodity is consumed. Despite this, some traders may view that the issue can be managed by passing the cost on. However, the example below should hopefully illustrate that it can be quite complex to work out the additional markup and that this can usually make or break the economic viability of a particular trade.

Generally, most VAT systems operate such that goods that are purchased for export are typically not subject to VAT (i.e. treated as zero-rated supplies), if they are exported within a specified time frame after being acquired from the domestic vendor.  Similarly, any services which are acquired in the source jurisdiction, to move the export commodity from the farm/mine gate to the export point, may be afforded the same treatment or alternatively, be subject to VAT (sometimes at a reduced rate), after which the exporter is entitled to claim a credit. 

This leaves the exporter with only a timing delay (which varies between jurisdictions) if the credit is refundable.  However, if the credits are not refundable, the input VAT becomes an outright cost, as exporters are typically not required to charge output VAT on export sales.  This amount can add up, especially if input VAT applies to the underlying commodity, e.g. in a situation where there is a shipping delay or a change in market conditions forces accumulation and storage in the source jurisdiction for an extended period.

Furthermore, that can happen sometimes that tax authorities have expanded the scope of VAT in the delivery jurisdiction by introducing measures where the local buyer is required to withhold and remit a portion of the sales proceeds owed to the foreign vendor, and in many cases, these are not final withholding taxes, hence the process of getting these funds back can become complex and will most likely require the filing of returns. If the tax withheld is not refundable, it becomes an on-budget cost for the foreign vendor.