Digital tax trends indicate a move to destination-based taxation. We like to keep those affected up-to-date so here’s a list of countries planning such changes.
The common thread in international digital tax trends is the move from a supplier-based taxation to one based on the consumer’s location, or destination-based taxation.
The Organisation for Economic Co-Operation and Development (OECD) has already approved the destination-based principle in Action 1 of the October 2015 release of their Base Erosion and Profit Shifting (BEPS) report. On page 224 of this report the OECD states that: “For consumption purposes internationally traded services and intangibles should be taxed according to the rules of the jurisdiction of consumption.”
Here we have compiled a list of the tax jurisdictions that are planning to introduce new laws on the consumption of digital services (note: click on country name for more details).
In a significant move, revealed in early April 2016, the Israeli Tax Authority (ITA) proposes to change its VAT legislation so that foreign tech firms have to register in Israel to account for VAT on digital services sold to Israeli consumers.
Reuters carried the news on Monday, April 11, and it was then picked up across the wires with a report in The Guardian stating:
Under new guidelines issued by the Israel Tax Authority on Monday, foreign companies that operate websites and sell various services such as advertising and brokerage will be subject to 17% VAT as well as income tax on their activities in Israel. Companies expected to be affected include Alphabet’s Google, Facebook, Amazon and eBay. These and other companies that do a lot of business in Israel will be required to register with authorities as an approved enterprise so that transactions are liable for VAT. Until now, a foreign company’s income from providing services in Israel was only subject to tax if it was generated in Israel. A company would be liable for tax only if its activity rendered it a ‘permanent establishment’.
The key change from the ITA is to the definition of ‘permanent establishment’ to now include online businesses, where the economic activity of the foreign digital service supplier is via the internet.
Some background: On March 13 this year the ITA revealed draft legislation covering inbound eCommerce and digital services supplied to Israeli residents.
According to Globes, an Israeli business website, the draft legislation states that “a foreign resident who provides a digital service or operates an online store through which a digital service is provided will have to register as a business in Israel in a special register that will be maintained for the purpose, and will also be obliged to file a report with the Tax Authority attached to the tax payment that arises from it. The report will state the total price of transactions in the reporting period and the VAT due on them, and the Tax Authority director will be entitled to issue a tax demand to the foreign resident if the report submitted turns out to be incorrect.”
Previously, in April 2015, the ITA had issued a draft circular – titled ‘Activities of Foreign Companies through the Internet’ – dealing with taxation implications for foreign e-businesses supplying digital services to customers based in Israel. More from Ernst & Young here.
That circular stated that a foreign digital service company (non-resident in Israel) with significant business in Israel would be obliged to register for the collection and remittance of VAT to the ITA as ‘an authorized dealer’, and would have to pay VAT on its transactions.
The draft circular was distributed on foot of a 2014 Israeli petition to the High Court challenging the existing tax situation regarding foreign digital service companies with consumers in Israel.
The 2014 Israeli High Court ruling stated: “We learned from the State’s response that the parties responsible for enforcing the law are working on the formulation of a professional circular on this subject… and there is therefore no need to respond at this time to the allegations raised in the petition.”
On July 1, 2017, Australia is set to introduce a new 10% GST on digital services downloaded and consumed by Australian residents.
On Wednesday, February 10, 2016, the draft laws were introduced with Treasurer Scott Morrison telling The Australian Parliament:
It ensures Australian businesses selling digital products and services are not disadvantaged relative to overseas businesses that sell equivalent products in Australia.”
In Australia’s 2015 Budget the new GST was estimated to be worth AUD$350m between 2017 and 2018: $150m in 2017-18, and $200m in 2018-19.
Under the current law, digital products and services imported by consumers are not subject to the GST. This results in forgone GST revenue to the States and Territories and 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.”
When revealing the planned digital GST the then Australian Treasurer Joe Hockey stated that the new rules were an attempt to level the playing field between domestic and non-domestic, international, suppliers. It was deemed to be 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.
On October 1, 2016, New Zealand will introduce a new GST rate aimed at taxing the supply of digital services by overseas-based companies.
The new GST to be introduced by New Zealand will be set at a rate of 15% on all sales over NZ$60,000 (within a 12-month period) supplied by foreign digital service merchants. This threshold on sales has been introduced to align with New Zealand’s existing GST threshold for physical goods. Merchants supplying digital services to New Zealand-based consumers must also collect two non-conflicting pieces of evidence to prove the location of their consumer.
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. New Zealand Revenue asked officials to look at the measures other countries were taking to collect GST-type taxes. They did so as the success of other systems increased the amount of tax collected. This potential increase in the tax base from the introduction of such consumption-based rules is a key point. The endgame for all jurisdictions planning new rules to tax the digital economy is about increasing their tax base.
On January 1, 2017, Russia plans to reveal a new VAT on the supply of digital services to Russian consumers.
The new rules were flagged in early December 2015 when 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 had been 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.
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.
Plans to introduce a ‘Netflix tax’ have been proposed in Canada in what is an effort to protect native streaming content. Here’s a good piece on the situation.
The Canadian government first explored the potential of such a tax, based on the consumer’s location, in their 2014 Budget. The topic also became a hot issue in the 2015 Canadian government elections. Candidate Stephen Harper even released a video outlining his opposition to such a tax.
Netflix was 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.
Plans have been floated to impose an eCommerce tax on social networks, social media advertising, and streaming services. More detail here.
At a G20 tax event in Istanbul in May 2015 the country’s then Finance Minister Mehmet Şimşek, now Deputy Prime Minister of Turkey, said: “We believe that social media companies must pay the taxes if they earn money here. There are many social media and internet companies which earn money in almost all countries, but they do not pay taxes there, but only where they are based. We need to solve this problem, as any economic activity should be taxed anywhere in the world.”
The online market in Turkey is estimated at $1 billion.
In February 2016 the Singapore government was urged to tweak their digital GST rules.
Kor Bing Keong, Partner, GST Services, Ernst & Young Solutions LLP, urged the Singapore Government to do so in their 2016 Budget.
The non-taxation of supplies made by overseas service providers through the digital economy does not only create a GST leakage to the government but also a price disadvantage to domestic suppliers, resulting in an uneven playing field,” stated Kor.
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.
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 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.
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