Just what the doctor ordered
The application of VAT to e-commerce is one of the most difficult problems for modern tax administrations to deal with and a major issue on the international tax agenda.
Cross-border business-to-consumer (B2C) transactions, in the form of low value consignments or the consumption of online services, are now part of the daily life of the population in the most developed economies and in a growing number of developing countries.
If controlling these operations is difficult enough for tax administrations endowed with the necessary technical and human resources, it proves all but impossible for less robust administrations. As a result, many developing countries where VAT had been making its way are now faced with a new risk of base erosion. Tax revenue grows as the middle class expands and middle classes everywhere are increasingly spending their money online.
Remedies to the problem have been much discussed and put to the test.
As for cross-border B2C trade in goods, it is critical that customs be spared the effort of monitoring an immense number of small consignments. The optimal solution is to demand VAT from the supplier, customs being a fallback only. Where possible, postal intermediaries can also be involved in assessing the tax.
For cross-border B2C services, the problem is much more difficult since there is no physical bottleneck that can be used for tax assessment. VAT can only really be claimed from suppliers and marketplaces, forcing them to register in the state of destination. Financial intermediaries may provide a safety valve for tax assessment as a fallback solution.
The implementation of these solutions requires the creation of simplified registration rules and dedicated interfaces that can facilitate the payment of VAT by non-resident suppliers, as well as access to information from financial intermediaries that allows monitoring the taxable operations performed by each foreign supplier.
Easier said than done
These remedies are not easy to apply, least of all in developing countries. First, getting non-resident suppliers to register requires a bargaining power that many states do not have. For larger markets such as Angola this may not prove too difficult. For smaller markets such as Cape Verde or Mozambique the strength to persuade suppliers in Europe, the US or China to register and declare tax regularly may be lacking. Second, obtaining information from payment services providers which is essential for tax control is not always easy in these jurisdictions, either because there is no tradition of the tax administration accessing financial information, or because there is fear of misuse.
Still, you must start somewhere. Countries such as Angola, Cape Verde and Mozambique, with growing urban middle classes and where e-commerce has become even more widespread as a result of the pandemic, are preparing to take their first steps, following the lead of other African nations such as Kenya or South Africa. It will be necessary to perfect VAT place of supply rules, set up simplified registration schemes, strengthen reporting rules and publicise the new regimes.
It makes sense to go about this stepwise, namely by first targeting a limited list of large suppliers, where the largest volume of transactions is concentrated, and then expanding the list as the tax administration becomes more robust. In the absence of negotiating strength to force non-resident suppliers of goods and services to register, the use of mechanisms to publicise non-compliant companies is also being considered, creating a reputational cost that could lead benchmark companies to comply with their obligations even where the markets involved are still small.
There certainly is an understanding in these countries that no solution will allow the whole of cross-border transactions that consumers now perform online to be brought within the taxable base. It is important, in any case, to quickly implement rules that operators and consumers get used to, proceeding, if needed, by trial and error, so that cross-border electronic commerce does not keep growing in a vacuum. Besides, recent times have shown that the explosion of cross-border online purchases of goods and services can create a significant competitive disadvantage for domestic businesses, adding insult to injury in the current crisis scenario.
It is true that tax administrations are better equipped to deal with the challenges of e-commerce in countries where the middle class is larger. But even in those countries there is always a mismatch, well evidenced by the pandemic: consumers change their habits faster than the tax administration.
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