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VAT alert: branch <-> head office

VAT cost if VAT grouped

Court of Justice of the European Union Judgment in Skandia America Corp (USA)

The Revenue has released an eBrief following the ruling handed down by the Court of Justice of the European Union (CJEU) in the case of Skandia America Corporation (USA) which held that that supplies of services from an overseas head office to a branch in a VAT group in a Member State should be subject to VAT and accounted for under the reverse charge mechanism by the VAT group.

In this eBrief Revenue has confirmed it is looking at the implications of the decision for Irish law.  Consultation with industry, tax advisors and other interested parties will be undertaken as part of this.  Until this process has been completed and new specific guidance has been issued, taxpayers may continue to treat those services on the basis of the existing practice.

HMRC in the UK issued similar guidance, advising they are considering any impact the case may have and whether changes are required to UK legislation.  Businesses operating in the UK have been advised to continue following the existing guidance.

Further details on Skandia and its impact in Ireland can be found below.

September 2014 saw the CJEU hand down a decision in the case of Skandia America Corp (USA) which could result in Irish VAT being imposed on services and cost allocations provided on a cross-border basis where either the “supplier” or the “recipient” is a member of an Irish VAT group.

In response, Revenue have embarked on a consultation process with industry, tax practitioners and other interested parties to understand the implications for Irish VAT law and practice arising from the Skandia decision but Revenue have assured Irish businesses that, for the time being, they can continue to operate the current practice (Revenue eBrief No. 95/14 of 30th October 2014).

Background
Skandia is part of the Old Mutual insurance group. A Skandia US entity acted as the global purchasing company for IT services for the Skandia group. That Skandia US entity also carried on activities in Sweden through a Swedish branch, where that Swedish branch was included with other Skandia entities within a Swedish VAT group.  Skandia US provided externally-purchased IT services to both its Swedish branch and to the other members of the Swedish VAT group.

The Swedish fiscal authority took the view that the IT supplied from Skandia US to the Swedish VAT branch constituted a supply of services falling within the charge to VAT and so sought to levy VAT by way of a reverse charge liability on the Swedish branch.

Decision
The CJEU agreed with the Swedish fiscal authority, holding that a service supplied from a head office in one country to its branch established in another country could constitute a VATable transaction where either the head office or the recipient branch is a member of a VAT group.  In that scenario, the recipient of that service could become liable for VAT under the reverse charge mechanism.

Implications for Irish businesses
The decision of the CJEU may have significant consequences for all arrangements that involve services being provided by an overseas head office or branch to an Irish branch or head office where either the supplier or recipient is a member of an Irish VAT group.  

This will be of particular importance in the funds, banking and insurance sectors where commercial arrangements regularly see the Irish branch of a non-Ireland entity take membership of an Irish VAT group, but where a low VAT recovery rate could see this potentially new charge to VAT creating a significant cost for VAT groups operating here.

To date, Ireland, as well as many other EU Member States, has interpreted the VAT grouping rules to mean that inclusion within a VAT group is on an all-or-nothing basis for a legal entity and so once a branch is included within an Irish VAT group registration the entire legal entity is included.  Accordingly, where the head office is located in another country Ireland would regard a head office to Irish branch transaction as being a transaction within the same legal entity and so not giving rise to any VAT considerations, whether or not either establishment is a member of a VAT group.

Until such time as the consultation period has been completed and new guidance issued or legislation amended, the advice from the Irish Revenue is that businesses should continue to follow the existing practice and that any changes to the current Irish position should be on a prospective basis.

Where any such changes are implemented leading to additional charges to VAT, Irish businesses would need to consider how any such VAT costs can be mitigated.  Cross-border services and cost allocations will need to be scrutinised to identify and tax only those VATable elements. Consideration would also need to be given to ensuring that services or cost allocations in respect of a current period are not delayed beyond the introduction of any new rules.  Finally, corporate groups may need to determine whether altering underlying contracts or delivery arrangements could result in any VAT savings.

Responses across the EU
Fiscal authorities across the EU have been cautious in their response to Skandia.  Similar to the Revenue’s response, the fiscal authorities in the UK and Netherlands are also considering the impact of the judgment on their domestic rules and practices, and even those Member States that do not have VAT grouping, such as France and Portugal, are considering how Skandia might apply locally.

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