All VAT and more: TEI responds to the European Commission on place of supply rules for services: also urges Canada to adopt group loss rules and accelerate LCT repeal, recommends U.S. Supreme Court consider factor representation.

TEI recently filed comments with the European Commission on the consultation document, VAT-The Place of Supply of Services, issued May 2003. The European Chapter's Indirect Taxes Committee, working with the International Tax and Canadian Commodity Tax Committees, prepared the comments, which were approved by the Institute's Executive Committee.

TEI President Drew Glennie commended all involved in putting the comments together. "The consultation paper on place of supply was released at the end of May and the European Chapter took the lead in crafting the Institute's submission on a very tight time schedule. Everyone involved did a fantastic job," he said. The submission marked the second time in a month that TEI provided written comments to the European Commission, reflecting the Institute's increased advocacy in Europe. (TEI filed comments on the application of International Accounting Standards were published in the May-June 2003 issue of The Tax Executive.)

The consultation document proposes to base the place of supply of services on the location of the customer (a destination rule), rather than where the supplier is established (an origin rule). The proposed change would limit the instances where a supplier is required to register for VAT purposes and increase reliance on the reverse charge (or self-assessment) mechanism where a taxable person receives services from a person not located in the same Member State. Because it would ease administration, TEI applauded the move from the origin to the destination principle of taxation.

In its June 30 letter, TEI agreed that the initial focus for any changes in the place of supply rules for services should be limited to business-to-business (B2B) transactions. Because this focus will result in additional complexity in determining the correct place of supply for businesses involved in both B2B and business-to-consumer transactions, TEI urged the Commission to ensure that Member States fully appreciate the additional burden on businesses and guard against aggressive assertion of penalties.

TEI also contended that simplification of the existing rules must be the principal aim of any changes. It is imperative, the Institute said, that the Commission provide detailed guidance to minimize differing interpretations by EU Member States. Moreover, the goal of simplicity should prompt the EC to limit exclusions to the general rule.

TEI's comments are reprinted in this issue, beginning on page 319.

Canadian Loss Transfer System

On June 20, TEI submitted comments to Canadian Minister of Finance John Manley, urging the Canadian government to introduce a formal system to permit the sharing and utilization of tax losses and other tax attributes among groups of related corporations. TEl noted that a formal tax loss-transfer--or group tax loss relief--mechanism has been a matter of debate in Canada since the government eliminated the previous system in 1952. "The time for debate has ended; the time for action has arrived," TEI said.

Of 30 OECD countries surveyed in 2001, Canada was one of only four countries not to provide group tax loss relief directly. To be globally competitive, TEI said, Canada must not only continue its phased reduction of corporate tax rates, but also change its tax base, including adoption of a formal loss-transfer system. Specifically, the government should adopt a system that obviates entirely (or permits the simplification of) many transactions that are routinely carried out today. The corporate reorganizations and other transactions that are executed to permit the transfer or sharing of losses are costly, TEI said, often requiring companies to divert time and administrative resources from other projects and incur substantial expenses.

Even though Canada Customs and Revenue Agency administratively permits related parties to transfer losses through various techniques, the tax result in any particular case depends upon the agency's exercise of discretion, which engenders a degree of uncertainty for taxpayers. TEI argued in its comments that the adoption of a formal loss-sharing and transfer mechanism would complement the current administrative concessions and provide much needed certainty and stability.

TEI noted that in 1985 the Department of Finance proposed a system to allow transfers of losses between subsidiaries and their parents or between subsidiaries within a group. After reviewing the proposal's genesis and alternative loss-transfer approaches, the comments urged the Department of Finance to update its discussion paper, re-issue a revised proposal for public consultation, and develop draft legislation to implement the proposal. Moreover, the Institute's comments urge adopting initially a federal-only system, expanding the loss carryforward period, and setting the ownership threshold for loss transfers no higher than 90 percent.

TEI's comments are reprinted in this issue, beginning on page 324.

Canada's Large Corporation Tax to Be Repealed

Separately, TEI commended the Canadian government for introducing a motion to repeal the Large Corporation Tax. The Institute's comments, which took the form of a letter to Minister John Manley, recalled TEI's longstanding support for eliminating federal (and provincial) capital taxes such as the LCT. Because the LCT is a significant impediment to investment in Canada, TEI urged the government to consider accelerating the announced timetable for the levy's repeal.

TEI's letter is reprinted in this issue, beginning on page 318.

State and Local Tax: Factor Representation Required to Ensure Fair Apportionment 

On June 23, TEI filed a brief amicus curiae with the Supreme Court of the United States recommending that the high court take up the issue of factor representation. The case, which involves Unisys Corporation's challenge to Pennsylvania's tax system, addresses whether Pennsylvania's franchise tax scheme--which includes both the net worth and dividends received from subsidiaries of a taxpayer in the tax base, but uses only the taxpayer's own property, payroll, and sales in the apportionment formula--ensures against the proscribed taxation of extraterritorial income and value. In its friend-of-the-court brief, TEI argued that the Constitution does not permit apportionment of a consolidated or unitary multistate tax base without taking into account the corresponding apportionment factors of the businesses in the group generating the income or value comprising the tax base.

In computing Pennsylvania's franchise tax, Unisys calculated its tax base with regard to its own net worth and average income, using a three-factor apportionment formula taking into account its own payroll, tangible property, and sales for those years. On review, Pennsylvania increased the company's franchise tax by including the aggregate net worth of its hundred-plus subsidiaries and capitalized dividends received from these subsidiaries into the tax base; it did not, however, make corresponding adjustments to reflect the property, payroll, and sales of the subsidiaries in the apportionment factors.

TEI argued that because the state did not include in the denominator of the three-factor apportionment formula the property, payroll, and sales of the subsidiaries that produced that income and value, Pennsylvania's taxing scheme contravened the constitutional requirement of fair apportionment. The Unisys case presents the Supreme Court with an opportunity to address the factor representation issue that was acknowledged but not resolved by the Court in its 1980 decision in Mobil Oil Crop. v. Commissioner of Taxes

TEI's brief is reprinted in this issue, beginning on page 328.