selling goods and services in the digital economye.g., public bodies in india fall under b2c) 2017...

Selling goods and services in the digital economy

James Freed

Principal

KPMG LLP

Chicago, IL [email protected]

Andrew Street Global Indirect Tax / VAT Consulting

Professional Amazon Inc.

Chicago, IL [email protected]

mailto:[email protected]

mailto:[email protected]

2017 IPT’s Value Added Tax Symposium 2

Agenda

— Introduction

— Identifying foreign VAT/GST obligations on digital services

— Understanding VAT/GST compliance challenges

— Potential VAT/GST issues on imports of low value goods

— US sales and use tax issues

— Other challenges linked to digital economy


Introduction


Rise of the digital economy

Digital economy

— Economic activities enabled by

information and communications

technologies (ICT)

— It transcends the ICT sector

- While Internet, broadband, mobile

applications and IT services,

constitute its foundation, the digital

economy today encompasses all

sectors of the economy and society

— It permeates the world economy from

retail (e-commerce) to transportation

(automated vehicles), education

(Massive Open Online Courses), health

(electronic records and personalized

medicine), social interactions and

personal relationships (social networks)

2015 global economy

The 2015 economy as a share of gross

domestic product

2020 global economy

Forecast growth of the digital economy

Source: OECD, Digital Economy Outlook 2015 Source: Accenture, Digital disruption: the growth multiplier

22.5%

77.5%

$85,150bn

Digital economy

$19,159bn

Non-digital

$69,991bn

25.0%

75.0%

$98,490bn

Digital economy

$24,615bn

Non-digital

$73,875bn


VAT challenges related to the digital economy

VAT is a tax on consumption

— Most VAT laws were designed before Internet age

- Sales (especially retail) were made mostly domestic through brick and

mortar stores

— Consumption where vendor is for VAT purposes

— With shift to digital economy traditional VAT rules to determine place of consumption

result in loss of revenues for countries because

- Physical borders for consumers are eroding

- Move from consumption of tangible property to intangible property

- Shipping tangible property has become faster and cheaper

- Vendors are no longer required to be where consumers are

- The concept of vendor/service provider is morphing


Case study

ArtCo is a US company specialized in art education

— Historically, it provided in person art education classes as well as painting and

sculpture classes in its “campus” in Brooklyn, NY

— ArtCo was recently bought by a tech investor who brought in developers with a view to

spreading his love for art using modern technology

- Online classes sold on its website ArtCoWorld, either

— Live streaming of its in class content

— On-demand lessons

- An app, “Art-IT,” sold on major third party platforms that allows users to scan a work

of art and find all relevant information related to it

- Projects in development include

— Working with VRheadsetCo on developing virtual reality software that allows

users to prepare for the restoration of works of arts

— Creating a marketplace on ArtCoWorld that allows consumers to buy art supplies

from trusted vendors

— After initial success in the US, ArtCo is aiming at expending overseas with primary

focus on North America, Western Europe, South Africa, Australia, and New Zealand


Case study (continued)

Issues

— Determine ArtCo’s VAT/GST obligations depending on

- Location of sales

- Products sold

— Live streaming of classes

— On demand lessons

— Art-IT app

— VR software

— Online marketplace for art supplies

- Sales method

— Direct via website,

— Through third party platform

— Through ArtCo platform


Identifying foreign

VAT/GST obligations

on digital services


OECD position

OECD International VAT/GST Guidelines

— Soft law on preferred international standard for coherent and efficient application of VAT

— Endorsed by more than 100 jurisdictions

— Included in final Base Erosion and Profit Shifting (BEPS) package endorsed by G20 at Nov.

15-16, 2015 Summit

Source: OECD

Reverse-charge mechanism is the

recommended approach for collecting

the tax at destination

Reverse-charge may not be required if

the customer is entitled to full input tax

credit

Business to Business (B2B) Business to Consumer (B2C)

Non-resident vendor to register and

remit VAT in taxing jurisdiction

Simplified registration and compliance

(web-portal, e-payment…)

Non harmonized implementation


Determining VAT/GST obligations

Businesses involved in digital economy must perform an iterative process to

identify their global VAT/GST obligations

Where are

sales made?

Who is the

vendor for

VAT/GST?

What is

subject to

VAT/GST?

Who is the

customer?

Are sales

above a

registration

threshold?


Where are sales made?

List of foreign jurisdictions where sales are made

— Filter out all countries that:

- Have implemented special rules for

digital services

- Have announced upcoming changes

- Are considering rules changes

— For remaining countries verify that no standard

VAT rules trigger VAT obligations

- E.g., carrying on business test in Canada

— Consider impact on direct taxes

- Some jurisdictions are looking into creating

special PE rules for e-commerce

(e.g., Thailand)

— Perform a regular review of list as rules are

constantly changing


VAT/GST & digital economy – Global overview

Rules enacted within last year

Reforms under consideration

Rules already in place

European Union

Upcoming reforms


VAT/GST & digital economy – Global overview (continued) European Union

— Harmonized approach to VAT treatment of electronically supplied services and working

on Digital Single Market (reforming B2C remote sales of goods and services)

Examples of countries with existing VAT/GST rules for digital economy

— The Bahamas, Iceland, Norway, Switzerland, Albania, South Africa, Ghana, Tanzania,

Kenya, Japan, Korea, and New Zealand

Examples of countries that introduced specific VAT/GST rules in the last year

— India (Dec. 1, 2016 + GST Jul. 1, 2017); Serbia (Jan. 1, 2017); Taiwan (May 1, 2017);

and Australia (Jul. 1, 2017)

Examples of countries with upcoming reforms

— Belarus (Jan. 1, 2018); GCC countries (2018); Colombia (Jul. 1, 2018); Australia (Low

value goods rules Jul. 1, 2018); and Switzerland (low value goods rules Jan. 1, 2019)

Examples of countries considering reforms

— Thailand (draft law proposal under consideration); Singapore; Malaysia; Turkey; Costa

Rica; Argentina; and Russia (for low value goods)


Who is the vendor for VAT/GST?

Review the company’s sales strategy

— Contractual position

— Are sale made directly to customers or via an intermediary (e.g., electronic marketplaces)?

— Most jurisdictions have specific rules for sales via intermediaries

- Intermediary may be deemed to make sale and comply with VAT/GST rules

- Rules vary between jurisdictions (e.g., the EU and Australia) sometimes differentiating

between domestic and nonresident intermediaries

— Verify potential joint and several liability rules

Vendor

Electronic marketplace

Customer


Electronic Distribution Platforms (EDP)

Intermediary involved in the sale of online goods and services to the final consumer

— EDP liability to collect VAT/GST generally depends of involvement of EDP in sale; e.g.,:

- EDP authorizes payments

- EDP authorizes delivery

- EDP sets the terms and conditions of the sale

— Beyond EDP’s own collection obligation, risk of non-compliance by remote vendors

using EDP


What is subject to VAT/GST?

Review the products sold

— General definition (EU): Services delivered over the Internet or an electronic network,

essentially automated, involving minimal human intervention, and impossible to ensure

in the absence of information technology

— The scope of taxable transactions varies greatly among jurisdictions

- From limited content oriented transactions (e.g., South Korea) to all intangibles and

services (e.g., New Zealand)

- Examples of differences include:

— Sale of software: taxable in the EU, but not in South Africa

— Cloud storage services: taxable in India, but not in South Korea

— Consulting services: taxable in New Zealand, but not in Iceland

— Certain products may be subject to a reduced rate or exemption, e.g.,:

- E-books

- Education

- Gambling

— Challenges in VAT treatment determination for bundled services


Who is the customer?

Determine the VAT status of the foreign customer “on the other side of the

counter”

— Difference in B2B and B2C sales:

- Most jurisdictions apply rules only to B2C sales

(e.g., Iceland, Switzerland, EU,…)

- Some jurisdictions apply rules to B2C and B2B sales (e.g., South Africa)

- In absence of VAT registration obligation a VAT withholding mechanism

may apply (e.g., B2B sales in Russia, B2C sales in Colombia in 2018)

— Differences in definition of B2B and B2C:

- Most jurisdictions focus on VAT/GST registration status of customer

(e.g., E.U, New Zealand) to identify B2B sales

— In Japan, due to absence of VAT registration system, B2C

transactions are deemed to be sales of digital services that may be

used by consumers (e.g., sale of e-books)

- Potential “grey areas:” charities, educational bodies, public and

government bodies

— Some jurisdictions will clarify the status of specific customers

(e.g., public bodies in India fall under B2C)


Are sales above the registration threshold?

Registration thresholds and the type of sales that count

towards the calculation vary between jurisdictions

— Threshold range:

- Nil (e.g., EU, Russia)

- Low (e.g., ZAR 50,000 ($3,850) in South Africa)

- High (e.g., $100,000 in the Bahamas)

— Computation method, E.g.,:

- New Zealand: remote services provided by a non-resident

to New Zealand GST-registered businesses do not count

towards the registration threshold as these are not within

the scope of the tax.

- Switzerland: worldwide sales will be taken into consideration

for the computation of the CHF 100,000 ($99,500) threshold

effective Jan. 1, 2018.


Understanding

VAT/GST compliance

challenges


Understanding VAT/GST compliance challenges

Registration formalities Filing of returns

Collect customer information Invoicing

VAT

Compliance


Registration formalities Jurisdictions vary in their approach towards registration:

— Simplified registration (e.g., New Zealand, Russia, EU)

- In the EU, businesses may opt for an EU wide registration under the Mini One

Stop Shop

— Standard registration (e.g., Switzerland)

— Fiscal representative: not required (e.g., EU) v. required (e.g., Japan)


Filing of returns

The filing of returns under the new rules differ

significantly in relation to:

— When?

- Monthly, quarterly or annually depending on gross

receipts and type of business conducted

— Where?

- E.g., in the EU where the company is registered under

the MOSS and not where the customer is located

— What information should they include?

- Most jurisdictions only B2C sales

- Some jurisdictions may require B2C and all B2B sales

(e.g., Switzerland)


Invoicing

Requirement to issue VAT

compliant invoices vary

between jurisdictions:

— Not required (e.g., Korea)

v. required (e.g., India)

— Where required, invoices

must meet invoicing

requirements

Example: South Africa

— The name and VAT registration number of the electronic

services vendor

— The name and address of the electronic services recipient

— An individual sequential invoice number

— The date on which the tax invoice is issued

— A description of the electronic services sold

— The consideration in money for the sale in the currency

of any country. If the consideration is reflected in the

currency of:

- South Africa, the amount of the VAT charged or a

statement that it includes a charge for the VAT and

the rate at which the VAT was charged;

- any country other than South Africa, the amount

of the tax charged in ZAR or a separate document

issued by the electronic services vendor to the

recipient reflecting the amount of the tax charged

in ZAR

— The exchange rate used


Collect customer information

Vendors are generally required to identify the status and location of their customers

on a per-transaction basis based on customer information collected from ordinary

business processes

— Evidence required to identify the status of the customer

- E.g., the EU requires the VAT identification number or alternative evidence

— Several jurisdictions impose specific rules to determine customer location, e.g., in the

EU for B2C sales:

- A set of rebuttable presumptions for specific transactions

- For all others the requirement to determine the customer location based on two

non-contradictory pieces of evidence, including:

— Customer billing address, IP address, bank details, country code of the

SIM card used, location of the residential fixed land line, and other commercially

relevant information.


Other considerations

How will audits be

conducted?

Will tax authorities

exchange information?

Difference between B2B

and B2C sales?

How and when will VAT

be disclosed?

VAT inclusive

v. VAT exclusive?

Changes in contracts

or general terms and

conditions required?

Recordkeeping retention

(up to 10 years in the EU)

Format and location must

be taken into consideration

VAT & Digital

services

Data storage

Legal

Pricing Customer

experience

Tax authority

interaction


Potential VAT/GST

issues on imports of

Low Value Goods

(LVG)


Low value goods – Status and challenges

Current status

— Vast majority of countries

operate a VAT/GST low value

import relief

— Thresholds vary widely: from

EUR 10 ($10.5) in some EU

countries to AUD 1,000 ($769)

in Australia

— Rationale: collection costs

outweigh the revenue gained

Challenges

— Growing loss of revenue

— Growing risk of distortions of

competition with domestic

retailers

— Incentive for domestic sellers to

relocate offshore


OECD position

OECD addresses this challenge in BEPS Action 1, proposing 4 major options

— Collection by customs authorities

— Collection by resident purchaser

— Collection by non-resident vendor with simplified registration

— Collection by intermediary (e.g., postal operator, express carrier, e-commerce platform,

financial intermediaries)

Non harmonized implementation


VAT/GST on imports of low value goods

Several countries are considering (e.g., EU) implementing special rules for B2C

imports of low value goods, with Australia applying rules effective Jul. 1, 2018

— Mainly follow vendor collector model for B2C sales of services to draw online retailers

into VAT/GST net

- Simplified registration (e.g., MOSS under EU proposal)

- Include online marketplaces in scope of rules

- Extend rules to common carriers (e.g., mail delivery services, express carriers, etc.)

in case vendor or online marketplaces are not subject to registration obligation

— Increase focus on online platforms and fulfillment houses in VAT compliance related to

remote sales of goods

— Same iterative process as for digital services should be used when analyzing VAT

obligations related to remote sales of goods


US sales and use tax

issues


US sales and use tax issues

US sales and use tax issues pertaining to digital economy are similar to those for

VAT/GST

— Where are sales made

- Under US Supreme Court Quill remote vendors must have physical nexus with state

- States are trying to expand nexus standard such as:

— Click-through nexus: Presumption of nexus is generally established when an

in-state person posts a link to a retailer’s website on its own website and the

in-state person receives a commission or other consideration for sales made

through the link

- E.g., Hockey club website links to Website to raise funds

— Economic nexus: “Economic” presence sufficient to create nexus, no physical

presence required

- E.g., Nexus if seller earns over $250,000 annually from in-state sales

— Marketplace Provider Nexus: Imposes a collection obligation on marketplaces

with nexus in the state

— Use tax reporting requirements: requirement to (1) inform customer that sales may

be subject to use tax at time of sales; (2) provide to customer a summary of all

purchases made; (3) provide to tax authority information on customers and sales


US sales and use tax issues (continued)

US sales and use tax issues pertaining to digital economy are similar to those for

VAT/GST

— Who is the vendor

- In general liability is with remote seller

- States have recently started to imposed obligations on online marketplaces

and referrers

— What is subject to sales and use tax

- Challenges in determining taxability of what is sold (e.g., Digital goods)

- In general sales and use tax applies to sales of tangible personal property and

selected services

— Who is the customer

- Sales and use tax should apply to retail sales (i.e., B2C sales)

- Scope of retail sale generally broader than B2C definition for VAT/GST

— Obtain exemption certificate for sales to businesses

— Registration threshold

- No registration threshold, compliance required if

— Physical nexus standard is met

— Sales are taxable


MTC VDA for certain remote sellers

Multistate Tax Commission (MTC) is facilitating a limited-time voluntary disclosure

initiative for online sellers that use marketplace providers/facilitators to facilitate

sales in participating states

— Conditions

- Online sellers must use an online marketplace that facilitates sales by

1. Listing or advertising for sale by the online marketplace seller on a website,

tangible personal property, services, or digital goods that are subject to

sales/use tax;

2. Either directly or indirectly through agreements or arrangements with third

parties collecting payment from the customer and transmitting that payment to

the online marketplace seller; and provides fulfillment services to the online

marketplace seller.

- Online sellers cannot participate if they have previously registered to collect and

pay sales/use or income/franchise taxes or had any contact with the state

concerning liability or potential liability for those taxes


MTC VDA for certain remote sellers (continued)

— Participating states

- AL, AR, CO, CT, DC, FL, ID, IA, KS, LA, MA, MN, MO, NE, NJ, NC, SD, TN, TX, UT,

VT, WI

— Benefit

- Most states will not apply a lookback period

— Deadline: October 17, 2017


Other challenges

linked to digital

economy


Challenges of new disruptive business models

New VAT/GST

challenges

Crypto currencies

3D Printing

Crowdfunding Crowdsourcing

Block chain?

— Exempt (e.g., Hedqvist

case in EU). Taxable?

— Supply of goods

v. services?

— Taxable person?

— Valuation?

— Supply of goods

v. services?

— Taxable person?

— Exempt v. taxable?

— Valuation?

— Supply of goods v.

services?

— Taxable person?

— Exempt v. taxable?

— Valuation?

— New business

models?

— New compliance

models?


Q&A

selling goods and services in the digital economye.g., public bodies in india fall under b2c) 2017...

Documents