International plans for the taxation of digital services

Thu Dec 10, 2015

Tax jurisdictions across the world are implementing new rules on the taxation of digital services, akin to the new EU VAT rules introduced at the start of 2015.

EU VAT rules

In early December a draft digital VAT bill was passed in the Russian Duma. The bill effectively mirrors the EU VAT rules on the supply of digital services. Once this bill passes through the remaining legislative hoops it is planned to come into effect on January 1, 2017.

On October 7 the Australian Government released their draft digital GST plans. Their Antipodean neighbours, New Zealand, are also moving towards taxing digital services. A discussion document on a proposed online GST for suppliers providing digital services to consumers based in New Zealand has been prepared. This discussion document was sent to cabinet on Tuesday, August 18. Submissions on the tax change closed on September 25, 2015.

New Zealand has the second highest online shopping threshold among OECD member states. New Zealand-based online shoppers can make physical purchases up to NZ$400 before GST is applied. However, GST is not charged on imported digital services such as downloaded music, images, or streaming entertainment services.

The reasons for its potential introduction are a loss of potential tax revenue and domestic retailers losing out to foreign online companies.

The New Zealand Herald article quotes the New Zealand Retailers Association chief executive Mark Johnston saying: “[T]he Government was missing out on more than $200 million annually in tax revenue from online shopping at the current limit, but Deloitte tax partner Allan Bullot said the threshold had not been lowered due to the cost of tax collection being higher than the tax collected.”

In another New Zealand-based online GST report the country’s Prime Minister John Key says that he thinks people should have to pay tax on online services – citing new EU VAT rules as an example.

“In fact there’s about 12 jurisdictions around the world that do that including Europe. So it’s a well trodden path and it actually works. If you buy for instance Sky TV and you pay for that in New Zealand, you pay GST for the Sky services that you get. Why shouldn’t you pay if you take Netflix from offshore or something like that?”

This report from TVNZ also suggests that new GST will be 15% and in place by Christmas 2015. The New Zealand website stuff.co.nz stated that “charging GST on digital downloads and services will raise about $40 million a year, according to a government discussion paper.”

These are the conundrums faced by tax jurisdictions across the globe as they formulate plans to tax the burgeoning digital economy.

Taxation of the digital economy

The digital economy is ignorant of borders and in terms of regulation requires an international response.

This is why plans for the taxation of the digital economy are well underway worldwide with New Zealand being the most recent country to reveal plans for the taxation of ecommerce. The Indian central bank has also suggested a GST on ecommerce.

Some jurisdictions such as Norway, South Africa, Switzerland, and – more recently – the EU have already introduced taxation measures aimed at ‘levelling the playing field’ and recouping tax from non-domestic providers of digital services.

Australia recently introduced a measure aimed at taxing the digital economy. Australia expects to recoup $350m from a new 10% digital services GST introduced in their May 12 budget – the Treasurer Joe Hockey also confirmed that there would be no threshold attached to the new taxation rules.

Minister Hockey released a statement outlining the plans for a new goods and services tax (GST) on foreign digital service providers. This new tax which has been expected for quite some time has already been named the ‘Netflix tax’.

For some context the prevailing taxation situation in Australia was superbly encapsulated in an opinion piece by Alex Malley, CEO of the Certified Practising Accountants Australia, when he summed up the challenges that face Australian legislators:

The “inalienable truth” is that Australia’s tax system is not keeping pace with the activities of multinationals, suppliers of eservices and the demands of consumers in the digital, interconnected global economy.There are implications for revenue erosion and consequences for the competitiveness of Australian businesses.Australia’s “modern” tax system has evolved in fits and starts from around Federation when the emphasis was on taxing goods and commodities and quality infrastructure was dirt tracks, paddle steamers and the telegraph service.

And this is the problem for legislators the world over – the digital economy has emerged and blossomed, but legislative systems have stalled and not kept apace.

Here at Taxamo we have been shouting from the rooftops for quite some time about the fact that tax jurisdictions across the globe are planning to mirror the EU’s recent approach. Well, it’s happening and changes worldwide are gathering pace.

Genesis of new EU VAT rules

Most jurisdictions are taking their lead from the Organisation for Economic Co-ordination and Development (OECD) which released a report Addressing the tax challenges of the digital economy in late 2014.

EU VAT rules

Section 8.2.2 of this OECD report states that “past work carried out by international organisations, including the Organisation for Economic Co-operation and Development (OECD) and the European Union (see e.g. Annex A), and country experience indicate that the most effective and efficient approach to ensure an appropriate VAT collection on such cross-border B2C supplies of services and intangibles is to require the non-resident supplier to register and account for the VAT on these supplies in the jurisdiction of the consumer.”

The report also states that “a system that requires suppliers to collect and remit the tax may appear the only realistic alternative”, this recommendation reflects what the EU has implemented.

The current responsibility for the collection of the VAT on digital services in the EU falls on the shoulders of the supplier. In addition, the supplier must charge VAT on their supply based on the location of their end consumer. Crucial changes and, again, in line with OECD recommendations.

International plans to tax the digital economy

So, we have identified the EU approach and the genesis of taxation idea being OECD recommendations. What plans are in place across the globe?

Russia

In early December a draft digital VAT bill was passed in the Russian Duma. The bill effectively mirrors the EU VAT rules on the supply of digital services. Once this bill passes through the remaining legislative hoops it is planned to come into effect on January 1, 2017.

It was previously reported (in March 2015) that the Russian finance ministry was looking to mirror the EU VAT rules. This is a good article explaining Russian motives here.

Australia

Australia introduced a new 10% GST on digital services in their 2015 Budget, and plans to introduce it after consultation in July 2017. The Australian Treasurer Joe Hockey stated that the new rules were an attempt to level the playing field as it was unfair that domestic suppliers were charged GST and non-domestic suppliers were not. A Sydney Morning Herald exclusive outlined the ethic of the new GST stating that:

Championed by Assistant Treasurer Josh Frydenberg, the change will apply GST to imports of so-called “intangibles” such as downloaded books, music, videos and software. The GST already applies to imported parcels worth more than $1000.

Australian retailers have long complained about the taxation loophole for foreign suppliers, saying it puts them at a disadvantage compared with their overseas competitors. On April 1, the Australian Tax Office (ATO) boss Chris Jordan said that tech companies are the ‘most aggressive’ in profit shifting.

This Sydney Morning Herald editorial from March 24 outlined why Australia was considering this new taxation. News of Finance Minister’s Joe Hockey’s plan had been distilled as targeting Netflix, but could also have applied to search engine revenue and digital advertising.

India

Proposed overhaul of the indirect taxation of e-commerce. India’s Central Bank (the Reserve Bank of India) has suggested a new GST on e-commerce. The reasons why the Indian Central Bank would propose such a tax are clear:

As more and more Indians are getting on to the internet for their shopping needs, the e-commerce industry is set to grow and command a larger share of the consumer’s retail wallet. According to a 2014 PwC survey on e-commerce, the size of the e-retail sector is poised to be $10-20 billion by 2017-2020.

Sunil Jain, partner at law firm J. Sagar Associates, said more research is needed before taxing e-commerce.

We are still debating and a huge amount of research is required as to how, why and who should tax e-commerce. There is very little inventory based model in actual operation—it is basically about the market place. My understanding is that instead of chasing sales tax- or VAT-related defaults, we should treat them as some kind of service providers or limited sellers and apply a small percentage of tax on them.”

Any new GST is expected to come into effect on April 1, 2016. More detail here.

More recently the Delhi government has adjusted how eCommerce platforms collect and remit VAT from local online sellers. The Delhi government realised that some platforms were collecting VAT but not remitting this revenue to the government. On September 4, the Delhi government issued this press release in relation to the collection and remittance of VAT by local online sellers.

Japan

A new 8% consumption tax on B2C eCommerce supplies by foreign companies to Japanese consumers came into law on October 1, 2015. The Japanese government also created a registration system whereby foreign eCommerce suppliers must designate a tax agent in Japan for the purpose of remitting the tax collected.

Makiko Kawamura, Partner, DLA Piper, Japan, posted a very informative post on the Japanese consumption tax plans here.

We have posted a previous blog on the Japanese plans for taxing B2C eCommerce here.

The Japanese National Tax Agency also keeps an updated foreign business registration list.

Norway

Norway has been the pioneer when it comes to the taxation of the digital economy with rules introduced back in July 2011. These regulations dictate that digital services supplied by non-established vendors to consumers in Norway (B2C) are subject to Norwegian VAT and the vendor must calculate, collect, and pay the VAT. The taxation system is known as VOES (Vat on e-Services).

As an alternative to ordinary VAT registration, vendors may opt to use a simplified registration scheme. More information here.

The Norwegian Tax Administration has its own web page for the simplified scheme for non-established vendors supplying electronic services to consumers in Norway.

At the September 2015 EU finance minister FISCALIS meeting in Croke Park, Dublin, Guri Stange Lystad of the Norwegian tax administration, explained the success of VOES which has accumulated €283.5m since it was introduced in 2011.

Revenue since introducing VOES is at least 2.55 billion Norwegian Kroners (€283.5 million; $316 million) — IntlTaxReview (@IntlTaxReview) September 9, 2015

Korea

In July 2015 a 10% digital services VAT came into force in Korea. The Korean National Tax Service’s English language website provides great detail, including the following advice: “Where a foreign business operator supplies any electronic service (“e-service”) to the Republic of Korea (“Korea”), the e-services are deemed to be supplied within Korea. Therefore, the foreign supplier shall file and pay Value Added Tax on the e-service providing from July 1, 2015.”

A foreign taxpayer should access the NTS website and apply for registration within 20 days from its first day of business. If, for example, this first day of business is prior to October 1, 2015, the taxpayer may apply for registration by October 20, 2015.

There’s also critical information on penalties if there is no payment of VAT on the due date: “A tax payment notice will be issued where the payment is not made by the due date. Where a taxpayer fails to make the payment by the due date, its penalty tax will be a 3% of the unpaid tax. Where the taxpayer still fails to make the payment, 1.2% of penalty tax will be imposed on every one month.”

Switzerland

On January 1, 2015, Switzerland introduced a reduced rate for electronic newspapers and magazines in February 2015. Online editions of newspapers and magazines are now taxed at the reduced rate, as is currently the case already in the printed editions. More detail is available here.

New Zealand

Seeking to adopt a similar approach as their Antipodean neighbours Australia. The 2015 New Zealand budget takes place on May 21 and the belief is that a GST on the supply of digital services to NZ-based consumers will be introduced.

At present in New Zealand, GST is not charged on these digital services, such as music, films, and games downloaded or streamed from overseas providers. The New Zealand Revenue Minister Todd McClay has asked officials to look at the measures other countries were taking to collect GST-type taxes, saying they appeared to be increasing the amount of tax collected. Again, this is a key point for all countries aiming to tax the digital economy: it is about increasing their tax base.

Canada

Plans are in place to introduce a ‘Netflix’ tax in an effort to protect Canadian streaming content. Here’s a good piece on the situation. Indeed, the topic has also become a hot issue in the 2015 Canadian government elections. Candidate Stephen Harper has even released a video outlining his opposition to such a tax. Netflix is on target for some 4m Canadian subscribers by end of 2015 and the proposed tax on streaming and digital services is estimated to raise CA$55m. The idea behind the streaming video tax is to support domestic Canadian content creators.

Morocco

Morocco’s VAT laws have also changed in relation to how digital services are to be taxed. For example, from September 10, 2015, Google Play revealed that they will now collect and remit the VAT due on apps downloaded from the Google Play store. The news here applied to the fact that Morocco was listed alongside Norway and Albania is this change of business practice. Here is some more detail (courtesy of @VATlib) on how U.S. companies are advised when supplying digital services to Moroccan customers.

Israel

In April 2015 the Israeli Tax Authorities (ITA) issued a draft circular dealing with taxation implications for foreign e-businesses supplying digital services to customers based in Israel. More from Ernst & Young here.

Paraguay

Paraguay has revealed plans for a 10% VAT on eCommerce by end of 2015. As with all of the above tax jurisdictions the motivation behind introducing the new rule is to level the playing field between international and domestic online retailers. Foreign online retailers are not subject to VAT, a discrepancy viewed as unfair by the Paraguayan Government. South Africa New rules on the taxation of B2C eCommerce have been in place since June 2014. Indeed, South Africa were one of the pioneers when it came to introducing new taxation rules to apply to the digital economy.

As of March 2015 some 80 foreign businesses had registered as part of the new regulations – this number was deemed to be a success. More on the South African approach here.

Singapore

The tax regulators in Singapore have opted for a simple regime for its domestic consumption-based GST whereby the medium through which a transaction occurs does not alter the taxability of the transaction. A supply of goods or services made via the internet, or any other electronic media, is treated at par with that made via traditional methods. Accordingly, while the seller of the goods discharges applicable GST on the sale of the goods, the eCommerce player hosting the virtual marketplace is required to pay GST only the service fee received by it. More information here.

Thailand

Also looking at plans to tax e-commerce. Currently, foreign digital commerce operators who do not have a taxable presence in Thailand are not required to register for VAT in Thailand. It is the responsibility of the payer of income in Thailand to self-assess and remit the VAT to the Revenue Department. More information here.

Uruguay

Uruguay has also joined the conversation around taxing digital services. A report in early October 2015 in El Observador outlined how the National Association of Uruguayan Broadcasters (Andebu) had raised the issue of an unfair marketplace when competing with the likes of international streaming players such as Netflix and Spotify.

The Directorate General of Taxation (DGI) in Uruguay is now assessing the possibility of a VAT that could raise an estimated $2m per year from Netflix alone.

Turkey

Plans have been floated to impose an eCommerce tax on social media advertising and streaming services. More detail here.

Albania

Introduced new rules on January 1, 2015, on the B2C supply of digital services to Albanian consumers. Regulations effectively mirrors the EU VAT rules approach: more detail here.

Indonesia

There’s a 10% tax on online shopping, regulations are currently being drawn up. More information here.

Note: Taxamo content is created for guidance only, please consult your local tax advisor.

Contact us to find out more about our solution