E-commerce in the European Union and its VAT changes in 2021
The European Union will implement new Value Added Tax (VAT) regulations on cross-border e-commerce businesses on 1 July 2021. Due to the increase in globalization, international trade and the need for worldwide tax controls, the new regulation aims to simplify and modernize the procedures.
How will this affect exporters from China? How can you regulate your sales in EU?
In response to the increase in globalization, international trade, and the need for worldwide tax controls, on 1 July 2021, the European Union will enact the new regulatory package of Value Added Tax (VAT) on e-commerce.
The package introduces the ‘Import One-Stop Shop’ electronic portal, which regulates the payments of e-commerce VAT in each member state. This change concerns the growth of e-commerce and digitalization, which have boosted international trade; Companies based in the European Union selling online can also export to mainland China and Hong Kong, and vice versa.
KEY CHANGES IN VAT REGULATIONS
- Changes in VAT declaration
The regulation includes an important change of the VAT collection method on e-commerce. Previously, VAT was paid in each European Union member state, depending on the seller’s location. To illustrate, if a seller in Germany sells products online to a Spanish client, VAT would be declared and taxed in origin, Germany.
As of 1 July, 2021, tax will be declared in the state where the buyer is located and the purchase is made. Hence, in the previous example, the VAT declaration would be made in Spain. This regulation also affects sellers outside the European Union.
- Exemptions of the VAT
The current system permits VAT exemptions on products imported to EU which are less than €22, while those products exporting from EU are still subject to VAT. This exemption makes imported products more competitive in terms of price compared to those of European origin.
The regulations as of 1 July will eliminate the e-commerce VAT exemption for products with a value of less than €22, which implies that all imports to EU, even those of little value, will be charged VAT at the destination. This is one of the most supported initiatives since it can balance the playing field between imported products and local products.
Meanwhile, imports of products with a value of less than €150 are still not subject to customs duties and do not require a full customs declaration.
IMPLICATIONS FOR ONLINE SELLERS FROM MAINLAND CHINA OR HONG KONG
The different online platforms and marketplaces are contemplated in this regulation as these platforms are, by far, the most used vehicles for the sale of online products from overseas, including China and other parts of Asia. On behalf of users and buyers, the platforms will act as guardians of compliance with the e-commerce VAT, which especially includes those outside the European Union member states and that import from non-member countries.
Although the general concern for exporters whose sales cover the entire EU territory is how to make the declaration in multiple states, the ‘Import One Stop Shop’ records, and files all declarations across the EU. On the contrary, if the seller does not want to use the ‘Import One Stop Shop’, the alternative is to allow the final consumer to pay VAT when the product is delivered, and all responsibilities and declarations rest on the consumers.
The foreign trade community is concerned about the increase in costs borne by the final consumers. As VAT is an indirect tax, it is transferable to final consumers. For example, a European consumer who initially purchases a product imported from China valued at €20 may have to pay €24.2 for the same product in Spain after the implementation on 1 July 2021.
There is a worldwide trend for regulation of VAT on imports. To demonstrate, some cross-border trading platforms in China require companies that ship products to pay VAT in advance for all merchandise.
How quickly will the final consumers adapt to the VAT regulations of electronic commerce in the European Union, especially in pandemic times? It is only a matter of time the end consumers adapt to these changes.
Written by Luz Deneb Martínez, Latin Department, CW CPA
Ecuador: Laws and Regulatory Changes for Entrepreneurs and Startups
Article presented by the firm of auditors and business consultants Audit Corporate and Tax Corporate, Member of Allinial Global
Contact Email: Diego Zambrano
The entrepreneurship law and regulatory changes in 2020 correspond to the creation and management of companies in various industries in Ecuador. Details of changes shall be in force in 2021, which led to noticeable results.
Organic Law of Entrepreneurship and Innovation
The Official Gazette Supplement No. 151, published on 28 February 2020 (Friday), focused on the Organic Law of Entrepreneurship and Innovation. A summary of the main aspects addressed by the standard includes:
- Creation of Simplified Stock Companies (SAS);
- Companies of Benefit and Collective Interest
At the time of adopting the status of a company of benefit and collective interest, a company is obliged to create a positive material impact on society and the environment, where an annual report is presented to the management;
- The definition of “entrepreneur” is provided, and the government entities are established to disseminate the procedures and applicable rates for entrepreneurs;
- It is arranged to develop work and contractual modalities to be implemented in entrepreneurial work, including part-time, legal benefits and others;
- Regulatory frameworks are established for crowdfunding, and other platforms in their different products, such as donations, pre-purchase, investment in shares, reimbursable financing;
- Limited companies are allowed to subsist with a single shareholder;
- The joint-stock company and the limited liability company may subsist with a single shareholder/partner. For its constitution, at least two contracting parties must participate;
- The existence of the position of the commissioner becomes optional. In accordance with the provisions of the statutes, Public limited companies may or may not have commissioners as an oversight body;
- A company will incur cause of dissolution due to losses, when these represent 60% or more of the equity and that this situation is maintained for more than 5 continuous years;
- In companies whose bylaws provide for the existence of a Board of Directors, the Legal Representative of the company may not be president or representative of that collegiate body;
- It is allowed that the financial statements presented to the tax authority are not presented to the Superintendency of Securities and Insurance Companies;
- Holding general meetings through telematic means is allowed;
- It is allowed to carry out capital increases under the compensation of credits, rights of attribution and absorption of losses; When a company registers operational losses and has reserves, these will be eliminated automatically;
- Voluntary and early dissolution does not require prior authorization from the Superintendency of Companies, Securities and Insurance. Therefore, the direct registration of that corporate act in the Mercantile Registry is allowed for the beginning of the liquidation that will be supervised by the control body. The change of name, change of address and modification of the company term do not require prior authorization either;
Less than 50% of the instruments proposed by the regulation to promote the creation of businesses in the country are operational. The Law defined the creation of new types of credit and companies, among others, but only the latter has been effectively operationalized with the creation of firms through Simplified Stock Companies (SAS).
From May 2020 to February 2021, more than 5,000 companies of this type were registered. Another benefit that the norm raises is to generate an employment contract that implies fewer costs for entrepreneurs, this type of instrument was generated last year through new work modalities with durations of only one year, with the cancellation of the eviction.
Hong Kong Budget for Fiscal Year 2021-22 during the times of Uncertainties
On 24 February 2021, the Financial Secretary of the Hong Kong Special Administrative Region, Mr. Paul Chan Mo-po, delivered the 2021-22 Budget Speech.
With the impacts of China-US tension, social incident, COVID-19 pandemic, Hong Kong is faced with a lackluster economy and a deteriorated labour market. Hong Kong expects a record deficit of HK$257.6 billion and HK$101.6 billion for 2020-2021 and 2021-22 respectively, meaning that there would be deficit for four consecutive years. The Financial Secretary’s 2021-22 budget is focused on supporting enterprises, supporting employment and relieving people’s hardship.
2021-22 Budget Highlights
We summarize the 2021-22 budget’s key highlights relating to salaries tax, profits tax, measures to smoothen livelihoods, support enterprises and achieve diversified economy, as follows:
a)HK$5,000 electronic consumption vouchers in instalments to Hong Kong permanent residents and new arrivals aged 18 or above
b) Salaries Tax and tax under personal assessment for 2020-21 will be reduced by 100%, subject to a ceiling of HK$10,000 (2019-20: HK$20,000). The reduction will be reflected in the final tax payable for the year of assessment 2020-21
c) The rate of Stamp Duty on Stock Transfers will be raised from the current 0.1% to 0.13% of the consideration or value of each transaction payable by buyers and sellers respectively.
a) Profits Tax for 2020-21 will be reduced by 100%, subject to a ceiling of HK$10,000 (2019-20: HK$20,000). The reduction will be reflected in the final tax payable for the year of assessment 2020-21
b) Concessionary low-interest loan
c) Extension six months of the Pre-approved Principal Payment Holiday Scheme
d) Waive rates for non-domestic properties for 2021-22, subject to a ceiling of HK$5,000 per quarter in first two quarters and HK$2,000 per quarter for remaining two quarters
Continue to implement relief measures announced last year
e) Waive the business registration fees for 2021-22
f) Water and sewage charges of non-domestic households: waive 75% of charges for every month, subject to a monthly cap of HK$20,000 and HK$12,500 respectively
Achieve diversified economy, Innovation and technology
a) Issue no less than $24 billion of Silver Bond and no less than $15 billion of iBond this year. Lower the eligible age for Silver Bond subscription from 65 to 60
b) Issue green bonds totalling $175.5 billion within the next 5 years, and plan to issue retail green bonds
c) Roll out Green and Sustainable Finance Grant Scheme to subsidise expenses on bond issuance and external review services
d) Strive for the launch of Southbound Trading of Bond Connect within this year, and enhance the domestic Central Moneymarkets Unit
e) Provide subsidy for Real Estate Investment Trusts to list in Hong Kong
f) Launch a Pilot Insurance-linked Securities Grant Scheme to subsidise issuance cost
g) Provide subsidy for Open-ended Fund Companies to set up in or re-domicile to Hong Kong
h) Review tax arrangements relevant to family office business
i) Earmark over $200 million to roll out “Knowing More About IT” Programme, subsidise primary schools to enhance students’ interests and knowledge in I&T and their applications through extra-curricular activities
j) Regularise the pilot scheme which subsidises students studying science and technology in local universities to enrol in short-term I&T related internships
k) Inject $9.5 billion into the Innovation and Technology Fund by two yearly instalments
l) Hong Kong Monetary Authority to consider enhancing its Fintech Supervisory Sandbox to reduce time for launching innovative financial products in the market
m) Press ahead with the development of the Hong Kong-Shenzhen Innovation and Technology Park in the Lok Ma Chau Loop
n) Continue to implement the Science Park expansion and Cyberport 5 development
o) Continue to support the development of 5G networks and applications
p) Commence progressively the operation of the first batch of about 20 R&D laboratories under the “InnoHK Research Clusters” in the first quarter of this year
CW welcome the Budget’s cautious and targeted measures, which pave the way to foster post-pandemic economic resilience and betterment of livelihood.
*For 2020-21, the profits tax is proposed to be reduced by 100%, subject to a ceiling of HK$10,000. (2019-20: HK$20,000)
- Salaries tax is charged at the lower of net chargeable income (Total Income – Deductions – Allowances) at progressive rates or net total income (Assessable Income – Deductions) at standard rate.
- Standard rate remains the same at 15%.
- Progressive rates are as follows:
*For 2020-21, the salaries tax and tax under personal assessment are proposed to be reduced by 100%, subject to a ceiling of HK$10,000. (2019-20: HK$20,000)
The standard rate (for non-corporate owners) remains at 15% for 2021-22.
Written by May Tung, Tax Advisory Services, CW CPA
Breaking News About Tax Matters Presented by Regulatory Entities in Colombia During February
Article presented by the firm of auditors and business consultants Alfredo López y Cía.
Member of Allinial Global
Contact Email: firstname.lastname@example.org
- The Council of State Contentious-Administrative Chamber
The section four ruled that the ICA, in commercial activities, states that this tax is effective in the municipality upon which the price and the goods to be sold are agreed and it is based on the principle of territoriality of the tax, and reassert the jurisprudence uttered by the same, in the following articles: Exp. 22817 dated 23 November 2018, Exp. 22614 dated 26 September 2018, Exp. 21681 dated 8 June 2016, of Exp. 18413 dated 29 September 2011 and Exp. 14852 dated 19 May 2005. It also states that, “the place where the commercial activities of sale of goods is carried out should be the one where the essential elements of the contract are specified, that is, the price (and within this, the form of payment) and the goods that are sold, regardless of the place where the orders are made.“ Similarly, this regulation states that the destination of the goods or the place where the sale contract is signed are not factors determining the establishment of carrying out the commercial activities.
- Clarification of Simplified Stock Companies issues
Another issue relevant to shareholders’ responsibilities in simplified stock companies (Sociedades de Acciones Simplificadas, “SAS“) was clarified by the superintendency of companies where the law states that shareholders of the SAS are not responsible for the obligations incurred by the company.
Article 2 of the Law 1258 of 2008 states that they would form a legal person other than their shareholder(s) once the SAS are registered in the commercial register. Therefore, following the provisions of the second paragraph of Article 1 of the same rule, except as provided in Article 42 of the law mentioned above on lifting the corporate veil, the shareholder(s) will not be responsible for the labor conditions, tax, or other obligations incurred by the company.
- Tax matters: Realization of income and payments based on shares
Regarding the realization of income and payments based on shares, the tax treatment applicable to payments based on shares is based on an employment relationship that is being executed. The income will be recognized when the option to acquire shares is exercised. If these shares are received as part of the employee’s compensation, the income will be recognized at the time they are delivered, when the employee appears as a shareholder of the company, or the entry is made into the account, whichever comes first. The realization of the income must be taken into account to determine the withholding tax.
- Tax matters: Sales Tax, Exempt Tax under Legislative Decree 551 of 2020
The Directorate of National Taxes and Customs (“Dian“) responds to the query on the validity and conditions of the VAT exemption for the importation and marketing of medical equipment and supplies.
The provisions of Legislative Decree 551 of 2020 came into force on 15 April 2020, as of its publication in Official Gazette No. 51,286, and are not applicable retroactively. The Decree establishes a temporary exemption for the import and sale in the national territory of 211 types of goods and medical supplies necessary and essential for the prevention, diagnosis, and treatment of the Coronavirus COVID-19.
For the VAT exemption to be applicable, those responsible must comply with the procedure established in Article 2 of Decree 551. Failure to comply with these requirements will lead to the non-application of the tax treatment of exempt goods. What is established in the Decree does not only apply from its publication date in the official gazette. Compliance with the requirements established in the standard must also be carried out for the exemption to be applicable.
- Deduction for difficult-to-collect debts
originated in a mandate contract without representation between financially related parties. The deduction for debts that are difficult to collect in a mandate contract is applicable for the principal where the debtors are hired by the agent. The liquid income for recovery of deductions originates in the materialization of any of the economic events described in Article 195 of the tax statute.
Your Simplified Annual Compliance Guide in Hong Kong
Are you considering setting up a company in Hong Kong? Perhaps you have a Hong Kong Company but find it confusing to keep up with the compliance. Has your accountant suddenly reached out to you with a new charge that you are not familiar with? This article is to clarify the basic responsibilities that your Hong Kong Limited Company shall take up every year.
Annual compliance in Hong Kong
Annual compliance refers to a set of responsibilities a company should assume once it has been established. You must observe these compliance requirements according to your company’s fiscal year-end and the anniversary date. In Hong Kong, every private company must comply with the obligations administered by these two government entities:
– Companies Registry
– Inland Revenue Department
COMPLIANCE WITH THE COMPANIES REGISTRY
The Companies Registry is the department in charge of registering local and non-local companies in Hong Kong. It maintains records of active and dissolved companies.
Every year, a company should deliver an Annual Return, which contains its particulars, such as the registered office, shareholders, directors, company secretary. If the company does not file the Annual Return after 42 days of the deadline, the company will have to pay penalties. Please see the Annual Return Form “NAR1(Private)_Specimen-e” for your reference.
Business Registration must be renewed upon its expiry date. Normally, if you have applied for a one-year Business Registration, we recommend preparing the renewal of the Business Registration before the anniversary of the company. Please see Business registration specimen for your reference.
Significant Controller Register (SCR)
To enhance the transparency of corporate beneficial ownership, a company
incorporated in Hong Kong must obtain and maintain up-to-date beneficial ownership information by keeping a Significant Controllers Register. The SCR register must be kept at its registered office address or a place in Hong Kong. In the latter case, the company must file a Form NR2 to the Companies Registry reporting the location of SCR. The Register should be open for inspection by law enforcement officers upon demand. Failing to do so will render the company and the responsible person of the company liable to fines.
COMPLIANCE WITH THE INLAND REVENUE DEPARTMENT
The company should prepare financial statements for each fiscal year. The periodicity of the reports will depend on the company and the need for the availability of financial information. The reports can be prepared on a monthly, quarterly, biannual, or annual basis.
Regardless of the size, companies in Hong Kong are required to audit their financial statements and present them together with a profit tax return to the Inland
Revenue Department. The audit should be performed on an annual basis.
Profits tax return (“PTR”)
Annual profits tax returns are normally issued to taxpayers on 1 April each year. Once a Profits Tax Return is issued, the company is required to lodge the completed PTR together with the profits tax computation and the duly signed audited accounts for the basis period. Please see “ebir51” regarding the format of the Profits Tax Return.
Hong Kong Salaries Tax is charged on the assessable income earned by an employee or an office holder in a year of assessment that runs from 1 April to 31 March of the following year.
As an employer, the company has the following reporting obligations to the Inland Revenue Department (“IRD”) if it anticipates that the company hires an employee who is likely to be chargeable to Hong Kong Salaries Tax.
i. Commencement return – The company has to file Form IR56E within 3 months of employing the employee
ii. Annual return – The company has to file Form BIR56A and IR56B. The annual return BIR. 56A is normally issued in early April and the filing deadline of the form (together with completed IR56B, where applicable) is within 1 month from the date of issue.
iii. Cessation return – The Company has to file Form IR56F (Employee who is about to Cease to be Employed) or IR56G (Employee who is about to Depart from Hong Kong) one month before the date of termination of the Philippines employee’s employment. IR56G has to be filed in the situation when the employee leaves Hong Kong for good or a substantial period of time usually in excess of 1 month. From the date of filing IR56G and until such time the employee has made tax clearance and can produce to the company a “letter of release” issued by the IRD, the company should withhold all amounts due to be paid to the employee (including salaries, commission, bonus, reimbursement of rent/expense, gratuity, money or money’s worth included).
Please note that the company does not have a tax withholding obligation except in the situation mentioned in (iii) above when the employee is about to depart from Hong Kong.
1. Understand the basic accounting and taxation system and practice in Hong
2. Review in-depth the service proposal you receive from the external accounting and secretarial services provider.
3. Establish a good habit of keeping and organizing business records from day one.
4. Don’t delay the declarations and reporting. This might lead you to the loss of information and records internally and the delay in presenting information to third parties like the banks, and penalties from the authorities.
5. For companies with a large number of transactions, it is important to prepare financial reports on a more frequent basis.
6. Review your financial reports. Once you receive the financial reports from your accountants, go through the information and seek clarifications if you have doubt. A responsible service provider will be able to answer your questions swiftly.
7. Keep your company statutory and business records up to date.
8. Update your bank at least once a year on the company status. Make sure your bank account has sufficient funds for bank charge deduction.
If you have any questions regarding your company’s responsibilities or how to
prepare the information, please get in touch with us and request a free consultation.
Contact: Ms. Lily Xiang, Accounting Manager
Written by Luz Deneb Martínez, Latin Department, CW CPA
Annual compliance in China
Follow the local compliance and keep your company up to date and in good standing with the authorities. Although 2020 has been a year with changes and benefits from the government, foreign–invested companies need to follow the basics:
- Annual Audit
- Corporate Income Tax Reconciliation
- Annual Reporting
The global economic landscape has suffered a significant change last year. Nevertheless, foreign companies in China should comply and follow local regulations to avoid penalties or deduction in their social credit points. One of the most critical steps in staying compliant is performing an annual audit.
Having your company audited by a qualified CPA will reduce the chance of being inspected by tax authorities and help to identify any problem in the company’s internal control and financial system.
Compliance in China for Foreign Invested Enterprises
It is important to note that China adopts the calendar year as the fiscal year for all companies and enterprises. There are three steps in following the annual compliance for Foreign Invested Enterprises:
- Annual Audit – to be completed by 30 April
- Corporate Income Tax Reconciliation – to be completed before 31 May
- Annual report to government authorities – to be filed in June each year
The Annual Audit should be prepared by a Certified Public Accountant in China, meaning an independent firm should be in charge of this process. The report will include the auditor’s review of the full fiscal year’s financial statements from 1 January to 31 December.
Why perform an audit?
Although it is not required to file the report to the Tax Bureau in China, the company will declare if the Audit has been performed. Bear in mind that the Tax Bureau can require the company to provide supporting documents such as audit reports at any time, so audit reports should be kept indefinitely by the company.
Performing an audit in China for foreign companies will be beneficial in other ways:
- It is an important tool when presenting information to the headquarters and shareholders about the company’s operation in China.
- An audit can bring a clear image of the management and the people in charge of the local operation.
- If the company needs to present information to potential investors, an updated audit report shows clarity in the business operation.
- In case a company expects to obtain credit for the operation, the audit report shows the financial strength to obtain help from banking or insurance institutions.
Corporate Income Tax Reconciliation
Before 31 May of each year, companies need to perform the Corporate Income Tax Reconciliation with the Tax Bureau. The reason for this process is to compare the income tax paid monthly or quarterly with the figures in the audited financial statements.
Adjustments of tax payable can occur in the following situations:
- Expenses that were expected to be deductible but the fapiao cannot be obtained, which is one of the most recurrent problems.
- Payments that were expected to be received from clients in the last quarter could be brought forward to the following year.
- With COVID–19, many clients have canceled orders, which should be reflected in the annual profit and corporate income tax calculation.
Annual Reporting to Government Authorities
In the month of June, the companies established in China should file a joint annual report. The annual report will provide key information of the company’s operation, structure, and activities to the different authorities. In recent years, and due to the government’s efforts to simplify the processes, the Annual Reporting is done in one single filing at the National Enterprise Credit Information, which will share the information with other government offices.
If you need any assistance in the annual compliance for 2020, contact us at email@example.com.
Written by Luz Deneb Martinez, Latin Department, CW CPA
Colombia and the significant changes in accounting and tax matters
In the search for a system of international approval, the process experienced by Colombia in all areas presents the best letter of introduction to join the Organization for Economic Cooperation and Development (OECD), reflecting that Colombia exercises good practices and that our companies have adequate corporate governance schemes, information, and management of companies in their standards. After seven years of the previous government’s accession process, Colombia becomes the 37th member of the organization, reflecting that the country has reached high standards in global public policy on 28 April 2020.
On the other hand, the accounting industry needed to be more dynamic and proactive with current accounting and tax regulations. The regulatory framework causes Public Accountants to improve their profiles as professionals and be even more competitive. The companies must keep their teams updated and pay particular attention to the Government and other high-impact entities such as the National Directorate of Taxes and Customs of Colombia DIAN. Since previously there was no route needed to follow in this field, the map was not very clear regarding compliance with Decree 2649 /2650, the provisions of each of the regulatory and control entities.
We must consider that the adoption of International Financial Reporting Standards (IFRS) led us to implement the International Standards on Auditing (ISA) in Colombia. It is a part of the evolution that our country is undergoing since it actively required the development of a globalized framework, making it necessary to standardize a common accounting and financial language to prepare financial statements. (Law 1314 of 2009).
The real challenge lies in the process of transition from the Latin model to the Anglo-Saxon model; determine its proper direction with all the impact that the country may have due to the participation of the States, companies and professionals who exercise independent Fiscal Auditing practices such as accounting firms, which are ratified in Decree 2420 on 14 December 2015. It is mentioned that accountants must venture into greater regulation and under a more international scheme.
It is clear that this tremendous effort for Colombian accountants translates into speaking the same language internationally, which allows us to be competitive not only locally, but also outside our territory. In addition to the fact that we are tax auditors (only applicable in Colombia), we provide higher quality work and rigorous compliance in terms of regulations for Colombian entities.
We must consider that the adoption of the IFRS in Colombia was part of our country’s evolution in the framework of globalization, characterized by free trade agreements, openness, and access to international markets. These are necessary for the standardization of an accounting and financial language to generate an increase in consulting services. Even though it is necessary to mention that this has gradually decreased, currently, only consulting services are performed to support regulatory updates under IFRS. Regarding ISA, Colombia is also starting with the applicability of ISA 705, already advanced for some sectors, given the importance of issuing an opinion including an emphasis on internal control, which could open more business opportunities for other service areas.
The exercise for business presents different difficulties to our country. Considering the current economic and social circumstances and Colombia as a country with greater participation by small and medium-sized enterprises, it is necessary to continue with the progress that has been achieved in accordance with the reforms that the country made to get where it is today. As they have been very important for the growth and development of our economy. Currently, the government has supported more than 34 reforms since 2006, according to the World Bank’s Doing Business 2018. The government continues to offer incentives for foreign investment and legal stability for investors, taking advantage of the free trade zones established in the region, which also have different tax benefits that may be attractive for future investors.
It is also important to consider that Colombia is currently, as part of the economic development program, promoting the areas that were affected by the armed conflict, given that it is in the Development Plan that addresses the primary needs of the country. This plan is designed and executed to achieve continuous growth and competitiveness.
Contributed by Johana Valencia
Alfredo López y Cia Ltda
(An Allinial Global Member Firm in Colombia)
About the Author:
Public Accountant from Universidad San Buenaventura de Cali, with International ACCA – Association of Chartered Certified Accountants accreditation for International Financial Reporting Standards IFRS. Currently, she is doing a Master in Business Administration with the European University of the Atlantic in Spain, has more than 10 years of professional experience in financial auditing, tax review, evaluation of internal controls, implementation of local and international accounting (full NIIF, Pymes and NICSP).
For more information about this article you can contact Ms. Johana Valencia from Alfredo López y Cia Ltda.
Tax Benefits and New Tax System For Micro-Enterprises In Ecuador
Contributed by Diego Zambrano, Tax Consulting and Practice Manager, Audit Corporate / Tax Corporate
A new tax regime for micro–enterprises was established in 2020 in Ecuador, which applies to those taxpayers (societies or natural persons), including entrepreneurs who fulfill the status of micro–enterprises, i.e. having 1-9 workers and an annual income of less than US$300,000. This regime applies to the following taxes: Income Tax (IR), Value Added Tax (VAT), and Excise Tax (ICE).
Taxpayers not included
Taxpayers engaged in activities related to the banana sector, construction contracts, or those whose economic activity involves the provision of professional services, liberal occupation, the relationship of dependency, as well as those who receive exclusively capital income may not be able to access this scheme.
Duration of the regime
Micro-enterprises will remain under this scheme as long as their status and characteristics in income and number of employees remain, in no case will the companies’ permanence be greater than 5 years. Then, they will subsequently be subject to the general regime.
The formal duties of taxpayers under this scheme include:
- Keeping accounts under SME standards (Small and Medium-sized Enterprises), in addition, they must submit declarations and annexes where appropriate.
- Keeping proof of sale that supports their operations for a period of not fewer than 7 years.
- Providing tax information to authorized officials for inspections or verifications and attending to the tax administration offices when required.
- Carrying out ICE, IR and VAT returns on a 16-monthly basis. If the taxpayer has unrecognized income under this scheme, he or she must also carry out the annual IR return.
PAYMENT AND TAX RETURN FEATURES
Income Tax (IR)
- Tax Base: The gross taxed income from business fewer commercial rebates or discounts and deferred tax adjustments will be considered.
- Income not considered: Financial income, asset revaluation, lottery prizes, raffles, royalties, double taxable income, inheritances, dividends, retirement pensions, or those obtained by the occasional disposal of movable and immovable property, or income detailed as not included under the scheme.
- IR Rate: The rate will be 2%, without the right to rebate or decrease.
- Withholdings at source: Taxpayers under this scheme will be subjected to a 1.75% withholding tax. If they have income under the general scheme (e.g. professional services) the retention they are required to make is based on the type of good or service that you sell outside the regime (8% or 10%).
- Six-monthly declaration: Taxpayers will pay the tax exclusively for income subject to this scheme in July and January.
- Annual Declaration: Only in the following cases should the IR’s annual return be additionally filed:
- Companies and permanent establishments of non-resident companies
- Natural persons with incomes other than Business Activity
- Natural persons who require requesting overpaid payment or filing the claim for improper payment.
Value Added Tax (VAT)
- Six-monthly return: Taxpayers will pay the tax in July (first semester) and January (second semester).
- VAT withholdings: Taxpayers under this scheme will not be withholding agents. In special cases in which they must retain, these values will be declared on a monthly basis (the SRI may include micro-enterprises as retention agents).
Excise Tax (ICE)
- Six-monthly return: Taxpayers will pay the tax in July (first semester) and January (second semester). In the event that they make a monthly declaration within the fiscal year, it must be maintained for the rest of the year.
- Taxpayers subject to this scheme who choose to submit the Simplified Transactional Annex (ATS) on a six-monthly basis. They must do so in accordance with the ninth digit of the Single Taxpayer Register (RUC), in the month following the end of the reported semester. For the semester from January to July, the ATS will be presented in August; for the semester from July to December, the ATS will be presented in February.
- The period for the submission of Annex ICE for the taxpayer that is subject to the micro-enterprise tax regime was established on a six-monthly basis. This addendum shall be submitted to taxpayers in accordance with the ninth digit of the RUC within the month following the end of the reported semester.
Benefits for Microenterprises
New micro-enterprises that start their economic activity from the validity of the “Organic Law for the Reactivation of the Economy, Strengthening the Dollarization and Modernization of Financial Management (year 2018)”, will be exempted from income tax for 3 years from the first fiscal year in which operational revenue is generated, provided that they generate net employment and incorporate national added value into their production processes.
The health contingency has knocked on the door worldwide and forced many companies to specialize or generalize activities, make the most of synergies, redistribute benefits, modify cost structure, process outsourcing, process optimization, etc.
If changes are made within the company or the business group to which they belong, the company results in a change in its assets, functions and risks, we are in the presence of a business restructuring.
According to OECD guidelines, company restructuring refers to the cross-border reorganization of commercial or financial relationships between associated companies, including the termination or substantial renegotiation of pre-existing agreements and, in consequence, whether accepted or imposed conditions that differ from those that would be agreed by independent companies exists. The profits of that company should be taxed accordingly.
Before any change within the group in relation to functions, assets and risks, it is important to take into account the current transfer pricing matter legislation which states that; transactions carried out between companies that are related parties must be entered into as if they were agreed with independent third parties in comparable transactions.
In case these changes are not agreed as with independent parties in comparable operations, the tax law empowers the tax authorities to apply the corresponding adjustments and to submit the imposition of profits obtained from the said business reorganization.
Therefore, it is relevant that if intercompany policies are modified or some types of intra-group restructuring fall into place, they comply with the arm’s length principle or “Arm’s Length” and, all in all, they have a valid and sustainable business reason to carry out the reorganization of functions, assets or risks, in which they demonstrate that benefits are flowing to the entity that carries out the said restructuring. Any change that occurs in the economic, commercial and operational relations, should take into consideration what it is mentioned on the tax legislation.
Written by Carlos Ramírez Gómez, Transfer pricing partner, LawBiz Consulting Group
In Hong Kong SAR, there is no statutory definition of what constitutes a charitable institution or trust of a public character (“Charity”) with a charitable purpose, nor is there a single piece of legislation which governs Charities in Hong Kong and how donations are applied. In 2017, the Hong Kong SAR Government’s Audit Commission reviewed various government departments’ supervisory measures on Charities and it advocated strengthening supervision thereon.
Four heads of charity
According to Section 88 of the Inland Revenue Ordinance (“IRO”), Charities should apply to the Commissioner of Inland Revenue if they wish to enjoy tax exemption. In processing tax exemption applications of Charities, the Hong Kong Inland Revenue Department (“IRD”) has all along made reference to the case law in the common law. In general, tax-exempt Charities must be of a public character and established solely for charitable purposes recognized by the law. According to past case law, “charitable purposes” include (a) relief of poverty; (b) advancement of education; (c) advancement of religion; and (d) other purposes of charitable nature that are beneficial to the community. These are commonly known as the “Four heads of charity”.
According to IRO S.88, where a trade or business is carried on by any Charity, the profits derived from such trade or business shall be exempt and shall be deemed to have been exempt from tax only if such profits are applied solely for charitable purposes and are not expended substantially outside Hong Kong and either: (a) the trade or business is exercised in the course of the actual carrying out of the expressed objects of such institution or trust; or (b) the work in connection with the trade or business is mainly carried on by persons for whose benefit such Charity is established.
Salient points from the revised Tax Guide
In April 2020, the IRD published a revised version of “Tax Guide for Charitable Institutions and Trusts of a Public Character” (“the revised Tax Guide”), giving more comprehensive explanations with examples to its earlier version in September 2019. For the revised Tax Guide, we would like to highlight some salient points:
- Indicia of carrying on business
- Primary purpose or ancillary trade/ business
- Financial investments
- Property letting
1. Indicia of carrying on business
Whilst the totality of facts would be considered, the IRD states that the key indicia in determining whether the activities carried on by the Charity amount to the “carrying on a business” are:
- The intention of carrying on a business;
- The nature of the activities performed, particularly whether they have a profit-making purpose;
- Whether such activities are repeated and regular or organized in a business-like manner;
- The size and scale of the Charity’s activities including the amount of capital employed; and
- Whether the activities are better described as a hobby or recreational activities.
2. Primary purpose or ancillary trade/ business
A charity can be exempt from profits tax in respect of the profits from a trade/ business that contributes directly to an expressed object of the Charity (i.e. a primary purpose of the trade/ business) and/ or an ancillary trade/ business. In the revised Tax Guide, sample activities are enlisted to illustrate what may be exempted from profits tax. It is specifically mentioned in the revised Tax Guide that a Charity’s trading transactions would not be regarded as ancillary simply because its purpose is to raise funds for the Charity.
3. Financial investments
The revised Tax Guide states that a Charity may invest in order to achieve a financial return so that it can further the Charity’s objects and, normally, such an investment is expected to be made in a proper and prudent manner to yield best return within acceptable level of risk. Also, the determination of whether the investments are of capital or revenue nature is a question of fact and degree. The investment mandate, pre-defined model portfolio and the “badges of trade” are all relevant factors to be considered.
4. Property letting
The guide clarifies that if a Charity’s property letting is not carried out in the course of the actual carrying out of its expressed objects, the rental income earned should be chargeable to profits tax.
The IRD’s clarified views on what income is exempt from tax would have significant impact on some Charities. We strongly recommend Charities to seek professional assistance to review their current tax position and consider if a restructuring is needed. This is not only for a Charity to preserve financial capabilities of deploying resources for charitable purposes, but to preserve its reputation.
For any enquiries, please contact our May Tung (T: 36430726: E: firstname.lastname@example.org ).
Written by May Tung, Tax Advisory Services, CW CPA