Alice Jones: What VAT/GST problems does the digitalisation of the economy create?
Dimitra Koulouri: VAT/GST is a tax on final consumption based on the destination principle – meaning it allocates taxing rights to the jurisdiction of consumption. Identifying the place where consumption takes place in a purely domestic context is rather straightforward, and the same applies to imported goods because border checks provide an indication of where consumption takes place.
However, when it comes to international trade in services and intangibles, we cannot rely on border controls to determine the place of consumption. This could mean that market jurisdictions have no nexus or may be unable to make foreign sellers apply the VAT/GST on services provided to consumers in their jurisdictions.
The result is a gap between the obligation of the domestic suppliers to charge VAT/GST on sales to local customers and that of foreign suppliers. This issue is becoming increasingly prominent.
Alice: Are you seeing an increasing interest from countries in a digital VAT? Thailand recently chose to introduce an e-services VAT rather than a digital services tax (DST), for example.
Dimitra: A number of jurisdictions have promoted a VAT/GST digital solution instead of a DST, pending a G20/OECD Inclusive Framework solution to the tax challenges of digitalisation. The OECD’s VAT/GST solutions have proven to be low-hanging fruit as governments look to raise tax revenues, minimise economic distortions, and mitigate compliance and administration costs.
Alice: How does the OECD’s VAT/GST work on digital trade address the problems of a digitalised world?
Dimitra: This has been a key focus of our work for the last decade. The International VAT/GST Guidelines developed in 2015 set out principles for the consistent VAT/GST treatment of common cross-border transactions including the recommended mechanisms for the collection of VAT/GST on sales of digital products that were identified by the BEPS project.
Under those standards, online sellers are required to register and remit the VAT/GST in the jurisdiction where their customers are located using web-based solutions such as e-registration, e-filing, and e-payment.
The first guidance to promote an effective and efficient implementation of those standards was published in 2017 and concerned the organisation of a simplified vendor registration regime for suppliers that are not located in the taxing jurisdiction.
Then in 2019 the OECD published a second piece of guidance, focused on the role of digital platforms in the collection of VAT/GST on online sales.
Those solutions have been developed through an inclusive process that involves not only OECD members but also policy officials from over 100 jurisdictions, the business community, and academics.
Alice: Increasingly, tax authorities are making digital marketplaces like Amazon responsible for tax on sales that they facilitate. What is the OECD’s position on this?
Dimitra: Around 60-70% of online sales are made through digital platforms. From a tax authority’s perspective, making digital platforms liable for the VAT/GST on the sales that they facilitate reduces the costs and risks of administering, policing and collecting the tax. This is because it draws on a relatively small number of digital platforms that are largely compliant, rather than on large numbers of individual sellers. This approach also reduces the compliance costs for online sellers that are likely to face obligations in many jurisdictions.
The 2019 OECD report provides guidance to assist tax authorities with the design of a full VAT/GST liability regime for e-commerce marketplaces while recognising that whether a digital platform is indeed in a position to comply with such a regime will depend on its business and delivery model. It highlights also the importance of facilitating compliance for platforms and promotes simplified procedures.
Making platforms responsible for tax collection also helps with the collection of VAT/GST on imports of low value goods. There are increasing volumes of (small) packages of low value being imported from abroad by online buyers – customs authorities call it a “tsunami”.
The 2019 report recommends making platforms collect the VAT at the point of sale – in other words, before the goods reach the border – to avoid overwhelming the customs authorities, while protecting revenue and level the playing field with brick and mortars. The proper interaction of such a compliance regime with customs processes and systems will need to be ensured.
Alice: How has the uptake of the OECD’s guidance been?
Dimitra: OECD standards and guidance continue to influence VAT/GST reforms in a growing number of countries worldwide. Already, 69 countries have implemented, or enacted legislation for the implementation of OECD standards and guidance, including all OECD and G20 countries that operate a VAT/GST system.
Approximately 40 additional jurisdictions are implementing these standards or are considering doing so.
The OECD continues to support interested countries seeking to implement these recommended solutions. A Regional VAT Digital Toolkit for Latin American and Caribbean countries will be released in the coming month, followed by Regional Toolkits for Southeast Asia and Africa. The delivery of these projects is scheduled for the second half of 2021 and the first half of 2022 respectively.
We also continue to provide technical assistance to countries around the world, notably developing ones, in response to the growing demand for VAT and e-commerce capacity building.
Alice: What do you foresee happening in the future?
Dimitra: Evidence suggests that the pandemic is already transforming the economic landscape, and more economic actors and consumers are moving into the digital space. All these changes could open up further opportunities for digital trade in the coming years, and it is important for jurisdictions to ensure effective VAT collection on these sales.
In an increasingly globalised world, international consistency is crucial for achieving high compliance levels. We need to make compliance easier for online sellers and digital platforms that often face VAT obligations in multiple jurisdictions – one company could have tax liability in any of the over 170 countries with a VAT/GST.
Therefore, it is particularly important that the OECD’s standards represent a global consensus and can promote consistency across countries. Consistency is also likely to support tax authorities’ enforcement capacity by facilitating international administrative co-operation.
This is the second part of an interview with Dimitra Koulouri. The first part can be read here.
