Q2 2021: Top indirect tax disputes

The second three months of 2021 were no quieter than the first quarter in terms of indirect tax and trade disputes. In Thailand, Toyota came under investigation for alleged bribery offences that could affect a $320 million tax dispute.

Meanwhile, India’s Authorities for Advance Ruling (AAR) came to differing conclusions about the applicable GST rate on flavoured milk, attracting more criticism of these authoritative bodies.

However, Indian taxpayers found cause for cautious celebration as rulings from the Madras and Chhattisgarh High Courts said that the Indian revenue service should not penalise buyers for sellers’ failure to remit GST.

At the same time in India, judges at the Bombay High Court disagreed over the GST liability of intermediaries such as agents and brokers, which could include multinational enterprises (MNEs) with subsidiaries in the country. Companies are likely to wait a long time for clarity.

In the US, the state of Maryland faced yet another lawsuit against its digital advertising tax, and the US and the EU reached a truce in a 17-year trade dispute over Boeing and Airbus. The US and the EU both agreed to remove tariffs worth $11.5 billion per year, dating back to 2019 and 2020.

The Supreme Judicial Court of Massachusetts, US, ruled on May 21 in the case of Oracle USA. vs. Commissioner of Revenue that Massachusetts taxpayers have the right to apportion sales tax on software among the states where they use that software.

“The decision does not expand the state law, but instead allows a seller to request a refund of the tax they collected after the sale,” explained Scott Peterson, VP of government relations at Avalara.

The state had argued that purchasers should have to provide an exemption certificate at the time of sale, to apportion the taxed income. “The court ruled the state process was valid, but incomplete as it effectively ruled out apportionment after the time of the sale,” added Peterson.

The case raised questions about the Commissioner of Revenue’s authority, and the decision is a set-back for Maryland that could have national implications across the US.

Rich Jones, a partner at Sullivan & Worcester, who argued Oracle’s case before the Massachusetts Supreme Judicial Court, said that the decision “represents a major win for software vendors and particularly their Massachusetts-based customers”.

The Gujarat Bench of the Authority for Advance Ruling (AAR) in India ruled on April 14 that flavoured milk counts as a “beverage containing milk” and is therefore liable for a 12% levy under GST.

The ruling supported decisions by the AARs in Tamil Nadu and Andhra Pradesh, but contradicted the conclusion drawn by the Karnataka AAR, that flavoured milk is liable for a 5% GST rate.

The Gujarat AAR was responding to a request for clarification from the Gujarat Cooperative Milk Federation. The federation sells flavoured milk beverages under the brand names Amul Kool and Amul Cool Cafe. A similar application was filed by Vadilal Industries for its product Power Sip.

AARs are quasi-judicial bodies that exist to offer clarity and advance rulings to taxpayers. However, AARs have attracted criticism for confusing taxpayers over food items including popcorn and oil, leading to uncertainty and increased compliance obligations for companies.

Rajat Mohan, a senior partner at AMRG and Associates, said that contradictory AAR rulings and overly technical interpretations of tax rates under GST law are leading to more litigation.

Meanwhile, Puneeth Gowda and Alfred Avinash, partners at the Indian financial services firm RASP and Associates, said that contradictions between AAR rulings will lead to “unfathomable loss” to businesses in India.

“The AAR under GST should be scrapped. We can’t have 30-odd institutions deciding on the same subject matter,” they said. “It's high time the learnings from income tax, service tax and central excise should be put to use, and an improved litigation policy should be carved out for GST.”

The case demonstrates the issues that arise when Indian jurisdictions take differing tax positions, and it will add greater weight to calls from taxpayers for the role of AARs to be reconsidered.

The telecoms companies Comcast and Verizon launched a lawsuit against the state of Maryland, US, on April 15 over its controversial tax on digital advertising.

The digital services tax (DST) has faced opposition since it made Maryland the first US state to introduce a digital advertising tax on February 11. Powerful groups including the US Chamber of Commerce and companies including Amazon and Facebook filed lawsuits against the tax in February, arguing that the tax is unconstitutional and that consumers would bear the cost of it.

Comcast and Verizon’s case hinges on similar arguments to previous lawsuits. The telecoms companies ask for the tax to be declared illegal under the Internet Tax Freedom Act, which prohibits discrimination against online business. Maryland does not tax print advertising and this leaves online advertising at a competitive disadvantage, claim critics of the tax.

As the first US state DST, Maryland’s tax will set a precedent for the rest of the country. Other states are watching closely as they consider introducing their own digital taxes, but as Maryland readies to battle yet another court case, its situation should act as a warning.

The European Court of Justice (CJEU) ruled on April 15 that EU member states can charge VAT on mobile telephone services used in that state, even if they are provided by a third-country operator.

The case concerned the South Korean telecommunications company SK Telecom, and some of its users who travelled to Austria. While there, they used roaming services, on which SK Telecom charged South Korean VAT at 10%. Austria, applying the effective use and enjoyment rule, argued that local VAT at 20% was payable on roaming services used within Austria.

The CJEU supported the Austrian authorities, stating that double-taxation and non-taxation rules pertaining to VAT concern only EU territory. If the roaming services were not subject to Austrian VAT, they would not be taxed at all in the EU, leading to non-taxation, according to the court.

In addition, the court said that taxing the services under Austrian and South Korean VAT would not constitute a case of double taxation. This is because the South Korean 10% VAT rate is not comparable to EU VAT, which has a minimum rate of 15%.

The case proved that EU member states can use the effective use and enjoyment rule to levy domestic VAT on mobile telephone services provided by a third-country operator but consumed in the member state. This is despite the argument that this could cause double taxation at the international level.

For telecommunications MNEs, the case could be significant. If other EU member states decide, like Austria, to adopt the effective use and enjoyment rule, third-country operators will be required to register for VAT in those member states where customers use roaming services. Tracking and compliance will require an investment of time and money.

“Ultimately, the CJEU decision illustrates the absurd results to which the EU VAT Directive's effective use and enjoyment rule can lead,” wrote Sérgio Vasques, founding partner of Lobo Vasques, for ITR. “The effective use and enjoyment criterion maybe can be relied on as a last resort, but only if it solves more problems than it creates.”

Thailand’s Court of Justice said in April that it has put Toyota under investigation after allegations that consultants hired by the Japanese carmaker tried to bribe officials in a tax dispute.

Toyota released a filing in March that stated it had reported possible cases of bribery to the US Department of Justice and Securities Exchange Commission.

According to the court, the bribery allegations relate to a tax dispute worth Bt10 billion ($320 million) between Thai tax authorities and Toyota Motor Thailand. It is alleged that consultants in the pay of Toyota may have bribed Thai officials and judges in a bid to overturn a tax judgment against the company.

The tax judgment in question pertains to imports of parts for Toyota’s Prius hybrid model. Toyota’s Thai subsidiary was accused in 2015 of understating import taxes by claiming that the cars were imported in broken-down parts. Under the Japan-Thailand Economic Partnership (JTEPA), this entitles the company to import tax rates of between 0% and 30%.

According to Thai authorities, the imported parts constituted completely knocked down (CKD) vehicles, which are treated as fully assembled cars under the law. This would make them liable for an 80% import tax.

Customs authorities ruled in 2015 that Toyota must pay a higher import duty, which Toyota subsequently and unsuccessfully appealed. The Thai Court of Justice has since accepted a petition to review the case.

The investigation over bribery further complicates an already hard-fought case. If the bribery allegations are found to be true, the company and its consultants could face civil or criminal penalties. In the meantime, the tax dispute is likely to be derailed by the investigation.

Two judges at the Bombay High Court reached contradictory rulings over the GST liability of intermediaries, including MNE subsidiaries, on June 9.

Exported goods and services are exempt from GST, but this does not apply to services provided by an intermediary, such as an agent or a broker, which are liable for GST at 18%.

In the case Dharmendra M. Jani vs. the Union of India and others, Justice Ujjal Bhuyan agreed with the petitioning taxpayer that the taxing of intermediaries under GST is unconstitutional. Yet in a contrary judgment, Justice Abhay Ahuja supported an earlier decision of the Gujarat High Court that the GST on intermediaries is in line with the Indian Constitution.

The case has been passed up to the Chief Justice at the Bombay High Court, but taxpayers are keen for a quick decision. Clarity on the GST liability of intermediaries is important for MNEs with subsidiaries in India and will inform investment decisions in the country.

However, tax directors told ITR that the stakes are high for both the taxpayer and the revenue authority. The case is likely to go all the way to the Indian Supreme Court.

The US and the EU agreed on June 15 to remove retaliatory tariffs on goods including wine, food, and machinery, relating to a 17-year trade dispute over subsidies for the MNEs Boeing and Airbus.

The disagreement is over subsidies for the airline companies, with each side accusing the other of unfairly assisting their domestic company. The tariffs, which will be removed for five years, had been suspended in March while both sides worked to reach a solution.

The tariffs began in 2019, when the World Trade Organisation (WTO) ruled that the EU support for Airbus violated trade rules, allowing the US to introduce tariffs worth up to $7.5 billion in annual trade. Around one year later, the WTO ruled that US support of Boeing was also illegal. The EU subsequently introduced tariffs on US goods worth approximately $4 billion.

The reconciliation between the US and the EU has been precipitated by President Joe Biden taking office as US President in early 2021. The powers are seeking to strengthen ties as they view China as a common rival.

Rulings by the Madras High Court and Chhattisgarh High Court emphasised that buyers are not at fault if the seller, having collected GST from the buyer, does not remit this to the Indian government.

Under Indian GST law, a buyer’s eligibility to claim input credits relies on the seller having remitted the GST to the revenue authority. In a minority of cases, the seller does not file a GST return and the buyer faces a loss of GST credits. Taxpayers told ITR that this results in a significant cost for MNEs operating in India.

Rulings by the Madras and Chhattisgarh High Courts questioned the fairness of the GST law and pointed out that the revenue authority should chase the seller for the GST payment, rather than penalising the buyer.

At Chhattisgarh, in the case M/s. Bharat Aluminium Company limited Versus Union of India and others, the court stayed an order that denied input tax credits to the petitioner due to a mismatch between the credits claimed by the buyer and the GST remitted by the seller.

The case decisions were welcomed by taxpayers, but some uncertainty remains. For example, there is the question of what happens when the payable GST is unable to be recovered from the seller. Nevertheless, the rulings are a step closer towards fairness for buyers who have previously been prevented from claiming input tax credits through no fault of their own.

The second quarter of 2021 brought some clarity for MNEs, as well as wins in the Oracle case in the US and the rulings from the Madras and Chhattisgarh High Courts in India. However, divergent rulings from judges and AARs in India have created more confusion for taxpayers. Meanwhile, the implications of the CJEU ruling against SK Telecom and the lawsuits against Maryland’s DST are ones to watch.