The OECD endorsed the move for a destination-based principle in the BEPS Action 1. The report stated that: “For consumption purposes internationally traded services and intangibles should be taxed according to the rules of the jurisdiction of consumption.”
The taxation framework for electronic commerce was first put together by the OECD in 1998 and has since been a process of implementation, which has become one of the most prominent economic developments of the 21st century.
Piet Battiau, head of the consumption taxes unit at the OECD, explains that the OECD predicted early on that online trade and sales would boom at some point and that this would create taxation problems without synced guidelines across varying jurisdictions.
“It’s only over the last two to three years that the issue has become significant, primarily as B2C trade over the internet has boomed,” said Battiau. “Why B2C trade? Because B2B, in principle, is a tax on final consumption so final private consumption does not have a lot of revenue involved in B2B trade.”
“The key challenge was to implement that principle worldwide in a coherent and coordinated manner, and that is where we are today,” he added.
The two key elements of taxation on e-commerce are identifying the place of taxation, which is done on the basis of proxies, and collection mechanisms, which are proposed by the OECD in a B2C context, requiring sellers to register in the taxing jurisdiction and to remit the tax there.
A snap shot
The European Union (EU) has been the pioneer of adopting the destination-based principle, which is largely based on the OECD guidelines. They implemented the principle in 2003 for sales of e-services, telecom, broadcasting from third countries to consumers in the EU. It then adopted the principle for intra-EU sales in 2015.
Some jurisdictions outside of the EU, have also adopted the principle including Norway which was the first member state to adopt the destination-based principle.
Norway introduced VAT liability for foreign suppliers on July 1 2011, the collection system is known as VAT on e-services (VOES).
The South African revenue service (SARS) was the first jurisdiction outside of Europe to adopt the OECD’s principle of taxation on digital services.
On June 1 2014 South Africa implemented a 14% rate for all non-resident suppliers of electronic goods and services.
With 15 million South African users online and a projected 27 million users by 2019, according to Cisco Visual Networking Index, it is apparent that early implementation of taxation online will benefit countries’ revenue.
Increasing agreement among jurisdictions has been most prominent in the Asia-Pacific area, with countries like Australia, New Zealand, Japan, India, and South Korea all putting in place draft legislations for the taxation on e-commerce.
Australia will introduce a 10% GST on digital services from July 1 2017. Treasurer Scott Morrison introduced the draft law on February 10 2016.
Morrison said that the result of not taxing e-commerce, “is forgone GST revenue to the states and territories and [that it] places domestic businesses, which generally have to charge and remit GST on the digital products and services they provide, at a tax disadvantage compared to overseas businesses”.
The new GST is estimated to create A$350 million ($250 million) in revenue from 2017-2018, which will then gradually decrease, according to the Australia’s 2015 budget.
In addition, from October 1 2016, New Zealand’s 15% GST on e-commerce will be in force, as well as Japan’s 8% consumption tax, which will rise to 10% in April 2017.
Other countries that have released information regarding the potential application of taxes on e-commerce include: Albania, Canada, Indonesia, Israel, Morocco, Paraguay, Russia, Singapore, Switzerland, Thailand, Turkey and Uruguay.
A digital single market
“A key challenge for countries around the world is how to ensure proper collection of VAT on online sales,” said Battiau.
Since the European Union (EU) implemented the mini-one-stop-shop (MOSS) for the taxation of digital services, some member states have adopted the measures but differing legislations can create complex cross-border transactions.
Suppliers now have the choice to either register for VAT in each member state, which would require 27 separate VAT registrations, or register for MOSS.
To achieve agreement among, potentially, 160 countries is a challenge that Battiau has found to be getting easier as countries around the world begin to adopt the principle.
Aligning what countries have done and are going to do, in terms of an international standard on taxation in e-commerce, has been an initiative that the OECD has been working on with the business community.
It has put together a “technical advisory group” to try to achieve as much alignment as possible and then to make it as easy as possible for businesses to comply.
The next step is international cooperation, “so the second work-flow is to develop a framework for the administrative cooperation among governments in the VAT and GST area… that will enforce compliance”, said Battiau.
The rest of the world has not yet taken on the EU’s initiative with the MOSS and is still in the process of establishing similar systems for the taxation of digital goods and services.
Justin Whitehouse, senior tax partner at Deloitte, trusts that the differentiations in implementation across jurisdictions are not cause for concern.
The United Arab Emirates, along with the rest of the GCC, looks set to introduce a 5% VAT rate on goods and services, effective from January 2018, although no procedures have been disclosed regarding the taxation of e-commerce.
“The ministries in the GCC countries are staffed with intelligent people who will have read lots of [OECD] material,” said Whitehouse.
“Don’t forget that the United Arab Emirates in particular is very e-commerce savvy, so the chances of not having some processes and systems in place to ensure taxation and non-double taxation are quite low,” he added.
The European Commission (EC) and the rest of the world are aiming for simpler, more harmonised, e-commerce legislation.
The MOSS has not been avidly adopted across Europe although tax developments on digital services are still actively being discussed.
Whitehouse doubts that the GCC will adopt a MOSS-like system, but he does expect that they may undertake other actions to ease administration.
A similar initiative has been taken on by the EC. It has proposed a digital single market (DSM) as a part of its digital agenda that is built on better access for consumers and businesses to digital goods and services levelling the digital networks and investing in the growth of the digital economy.
The DSM was launched in May 6 2015, it includes 16 initiatives that are expected to be delivered by the end of 2016.
Andrus Ansip, vice president for the DSM, is certain that the program, “will give people and companies the online freedom to profit fully from Europe's huge internal market.”
