GLOBAL DEVELOPMENTS

IN VAT/GST

OVERVIEW AND OUTLOOK

DAVID O’SULLIVAN

CONSUMPTION TAXES UNIT

• The importance of VAT/GST at International Level

• The role of the OECD in VAT/GST

• The VAT/GST Challenges of the digital economy

• The possible role of digital platforms for the collection of VAT/GST on online sales

Presentation Overview

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THE IMPORTANCE OF VAT/GST

AT INTERNATIONAL LEVEL

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Countries with VAT 1960 - 2018

• The number of countries that operate a VAT/GST continues to increase.

• All G20 countries operate a VAT/GST with the exception of the US

– Saudi-Arabia launched its VAT in 2018 – process of implementation for GCC countries

VAT/GST has spread globally

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170 countries now operate a VAT/GST

170 - 2018

Why has the VAT been so popular?

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Efficient> For generating revenue> At lower marginal cost than some other taxes> Relatively secure from fraud in a domestic market

Neutral> International trade: preferred alternative to custom

duties - does not affect the competitiveness of domestic firms to export

> Respects the Value chain

Pro-growth> Better than corporate or personal income taxes (but less efficient than property taxes)

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20.1% of total tax revenues - 6.8% as a share of GDP (on average)

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24.0

20.1

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1.1

9.18.4

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2.81.9

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Social security contributions Taxes on personal income,profits and gains

Value added taxes Taxes on corporate incomeand gains

Taxes on property Taxes on payroll

Tax revenue as % of total taxation Tax revenue as % of GDP

VAT is a key source of revenue for OECD countries

7Source: ICTD (2014), Working Paper 22

VAT

Some exciseCan be as

high as 50%

VAT revenue has grown around the world,

especially in low & middle income countries…

THE ROLE OF THE OECD IN VAT/GST

INTERNATIONAL STANDARD SETTER

o VAT/GST systems increasingly important for tax revenues.

o OECD seen as the standard setter and inclusive – high International participation at the Global Forum for VAT

o Clear need for standards to ensure that:

o Taxes accrue to the country of destination.

o That double taxation and double non-taxation is avoided.

o That burdens/obligations for business are minimised

• Dynamic process – need to meet the Tax Challenges Arising from Digitalisation

Overview of the role

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• Neutrality principle : core principle of VAT design

o VAT is a tax on final household consumption that is collected, but not borne, by businesses throughout the production and distribution process

o VAT should be neutral to businesses (i.e. to business decisions), except where specifically provided for in legislation (exceptions to remain as limited as possible)

o See the OECD International VAT/GST Guidelines – Chapter 2 (the “Neutrality Guidelines”)

• Destination principle : achieves neutrality in cross-border trade

o “For consumption tax purposes, internationally traded services and intangibles should be taxed according to the rules of the jurisdiction of consumption.”

o See the OECD International VAT/GST Guidelines - Chapter 3 (the “Guidelines on determining the place of taxation”)

The destination principle achieves VAT neutrality

in cross-border trade

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• The strong growth in trade in services/intangibles created challenges for VAT regimes

o Internationally traded services/intangibles cannot be subject to border controls and to well known customs procedure in same way as goods

• As these challenges became increasingly important, tax authorities started taking uncoordinated unilateral action, leading to increasingly serious complexity and policy risks

o Non-taxation: risk of under-taxation and loss of revenue - distortion of competition

o Double taxation: distortion of international trade

o Revenue risks and high compliance costs for businesses

Destination based taxation operated reasonably well

for many years but…

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• Global standard for the application of VAT/GST to international trade in services and intangibles

• Builds on international dialogue among OECD/G20 countries and other Partner countries plus the global business community and academia

• Consistency - Certainty

• Minimal compliance burden and administrative costs

• Soft law – Not legally binding

OECD International VAT/GST Guidelines

The global standard

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• Guidelines adopted by OECD / G20 countries

o G20 Finance Ministers in October 2015 – Cf. Report on Addressing the Tax

Challenges of the Digital Economy - BEPS Action 1)

o G20 Leaders in November 2015

• Endorsed as global standard by 100+ jurisdictions and international

organisations at OECD Global Forum on VAT in November 2015

• First OECD Recommendation in the area of indirect taxation (same legal status the Model Tax Convention and Transfer Pricing

Guidelines)

• First legal instrument in the area of VAT/GST that aspires to global coverage

The OECD International VAT/GST Guidelines

Overview including legal status

THE VAT CHALLENGES OF THE DIGITAL ECONOMY

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The collection of VAT in business-to-consumer (B2C) supplies of goodsand services form online sales is apressing issue that needs to beaddressed urgently to :

• protect tax revenue and

• level the playing field betweenforeign suppliers relative todomestic suppliers.

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VAT policy discussions in the context of the digital

economy focus primarily on B2C sales

• The collection of VAT on imports of low value goods

o Chapter 8.2.1

o Annex C

• The collection of VAT on cross-border B2C supplies of services

and intangibles

o Chapter 8.2.2

o Annex D

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BEPS Action 1 identified and addressed the key

VAT challenges of the digital economy

In the area of VAT… evidence is already available that countries are implementing the principles recommended in the 2015 BEPS Action 1 Report on indirect taxation, which have now been enshrined in the OECD International VAT/GST Guidelines (OECD, 2017[2]). Not only are these measures being adopted by a large number of countries, but they are already beginning to yield substantial additional tax revenues in the market jurisdiction, where these measures have been implemented.

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Tax Challenges Arising from Digitalisation – Interim Report

March 2018

Recognition of progress

• Over 50 jurisdictions, including the overwhelming majority of OECD and G20 countries, have adopted rules for the VAT treatment of B2C supplies of services and intangibles by foreign suppliers in accordance with the OECD International VAT/GST Guidelines.

– EU 28, Albania, Andorra, Argentina, Australia, Bahamas, Belarus, China, Colombia, Ghana, Iceland, India, Japan, Kenya, Korea, Mexico, New Zealand, Norway, Russia, Saudi Arabia, Serbia, South Africa, Switzerland, Tanzania and Turkey.

– Singapore has announced the introduction of taxation of B2C cross-border supplies of digital services with implementation on January 1, 2020, subject to the passing of legislation in Parliament.

• Many other jurisdictions are considering reform in light of the principles of the Guidelines.

– This is notably the case for Costa Rica, Indonesia, Israel, Malaysia, Singapore, Thailand, the Philippines, Tunisia, and a number of the Gulf Cooperation Council countries.

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Tax Challenges Arising from Digitalisation – Interim Report March 2018

Recognition of progress

• Australia to implement taxation of low value consignments sold via platforms with effect from 1 July 2018.

• EU agreed the VAT e-commerce package in December 2017 which will:

– extend vendor registration and remittance (MOSS) to online supplies of goods,

– remove the small consignments exemption,

– and make digital platforms liable for the tax.

• Other countries now looking at the role that digital platforms can play in the efficient and effective taxation of VAT/GST on online sales.

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Tax Challenges Arising from Digitalisation – Interim Report March 2018

Further reforms underway/under consideration

THE POSSIBLE ROLE OF DIGITAL PLATFORMS IN THE

COLLECTION OF VAT/GSTON ONLINE SALES

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• Global e-commerce becoming increasingly important.

– Estimates suggest B2C sales of US$ 2 trillion annually – growth of 10/15% .

– Based on an average VAT rate of 15%, this represents US$ 200 billion in tax revenues (Caveat - US operates a sales tax).

• Currently 1.6 billion online shoppers – estimated to rise to 2.2 billion in 2022.

• E-commerce is frequently facilitated by multi-sides platforms i.e. online marketplaces including the big players

– Platforms provides businesses with the possibility to trade cross-border which may not be possible via their own websites.

• Creates challenges for administrations (tax and customs) in terms of collection – non-taxation creates an un-level playing field.

• Countries already acting or are ready to act – need for guidance on ‘how’. 21

The possible role of digital platforms for the collection of VAT/GST

on online sales

• The OECD Working Party No.9 on Consumption Taxes (WP9) is currently analysing”:

i. the functions performed by digital platforms in online sales and delivery chains, and

ii. the possible role of platforms performing these functions in the collection of VAT on online sales including an overview of approaches implemented or considered by tax authorities around the world.

• It is anticipated that this work will result in a report which will include possible guidance and approaches based on good practice.

• This work is scheduled to be completed within 2018 and is not intended to delay or impinge on jurisdictions’ current domestic policy development and implementation strategies

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The role of Digital Platforms for the collection of VAT/GST on

online sales

• Practical guidance for countries who wish to consider the role of digital platforms.

• Recognition at WP9 that there is a spectrum of roles/actions – no one size fits all.

– Liability/collection models.

– Obligations – data sharing.

– Enforcement – e.g. joint and several liability

– Communication/cooperation between Govt.

• Involvement by digital platforms in the VAT/GST collection should be considered in light of effectiveness, efficiency and proportionality

• Impact on the value chain should be as limited as possible and respect neutrality principles - It should not overly disrupt behaviour or confer advantages/ disadvantages on platforms, between platforms or on direct suppliers.

• Work is proceeding in close consultation with the business and academic community through the Technical Advisory Group to WP9 (TAG)

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The role of Digital Platforms for the collection of VAT/GST on

online sales

Expected output from this work?

QUESTIONS?

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• The International VAT/GST Guidelines are available at: www.oecd.org/tax/consumption/international-vat-gst-guidelines.pdf

• The BEPS Action 1 Report on Addresing the Tax Challenges of the Digital Economy is available at www.oecd.org/tax/addressing-the-tax-challenges-of-the-digital-economy-action-1-2015-final-report-9789264241046-en.htm

• Tax Challenges Arising from Digitalisation – Interim Report March 2018 at http://www.oecd-ilibrary.org/taxation/tax-challenges-arising-from-digitalisation-interim-report_9789264293083-en

• OECD Tax Talks - https://oecdtv.webtv-solution.com/4646/or/webcast_oecd_tax_talks.html

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