Across the globe indirect VAT/GST rules are being amended to ensure that foreign digital suppliers become liable for the collection and remittance of these taxes.
This pace of change, from a taxation perspective, is rapid. In the first half of 2017 alone Russia, Serbia, Taiwan, India, and Australia all amended their indirect taxation laws (or in India’s case introduced a whole new system).
The Organisation for Economic Co-Operation and Development (OECD) has already approved the destination-based principle in Action 1 of its Base Erosion and Profit Shifting (BEPS) 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.” Numerous tax jurisdictions are taking their lead from the OECD recommended approaches to taxing the digital economy.
Here we provide a list of tax jurisdictions that are planning to extend their VAT/GST laws to the consumption of cross-border digital services:
A draft bill to tax international e-commerce transactions went through a consultation process in July 2017. The key proposals of the legislation are as follows:
- A foreign company selling intangible goods or rendering services through electronic media to a person that is not registered for VAT in Thailand will be required to register for VAT, subject to the provisions in the Revenue Code.
- The owner of a website or application through which a foreign company sells intangible goods or renders services will be treated as an agent of the foreign company for VAT purposes.
- Importation of tangible goods worth less than THB 1,500 (circa GBP£35.00, EUR€38.00, USD$44.00) will no longer be exempt from VAT.
- A foreign company operating an e-commerce business with a local domain in Thailand which receives payment in Thai baht, transfers money from Thailand, or meets other conditions prescribed by the Director General will be treated as having a permanent establishment (PE) in Thailand subject to corporate income tax.
- Income from online advertising, providing space on a webpage and other income to be prescribed in a Ministerial Regulation derived by a foreign company operating an e-commerce business will be subject to withholding tax at the rate of 15%.
Belarus will amend its VAT system in January 2018 to extend to digital services supplied by foreign-based companies to customers based in Belarus.
The Belarus implementation follows on the heels of its neighbour Russia where new rules were introduced in January 2017. The expectation is that the rules designed in Minsk will resemble those introduced by Moscow.
As is the case with other implementations worldwide, foreign-based digital service providers with customers in Belarus will have to register with the local tax authority, collect VAT (currently 20%) on their sales, and remit this tax to the tax authority.
3. GCC (Gulf Cooperation Council)
The six members of the Gulf Cooperation Council (GCC) plan to introduce a VAT system in January 2018. The six member states of the GCC are Saudi Arabia, Kuwait, the United Arab Emirates (UAE), Qatar, Bahrain, and Oman.
The introduction of a VAT system in each of the GCC member states is an opportunity for innovation. These States have a chance to design systems from scratch to tax the digital economy. And this is what they are doing.
The Saudi Arabian tax authority recently opened up a consultation process on how best to design its new VAT system. The final rule design will, along with those from the five other GCC member states, be available later in 2017 ahead of its introduction in January 2018.
The place of consumption rules will apply as per the recently revealed GCC framework agreement. Taxamo understands that there will be no threshold and that the VAT registration process must take place via a local tax agent.
Bangladesh was on the verge of extending its VAT system to digital services supplied by non-resident companies on July 1, 2017. The new rules actually went live before a series of internal political issues arose and the rules were halted.
Here at Taxamo we have been following developments in Bangladesh very closely. You can learn more about what happened and what is planned here.
Major tax reform is on the agenda in the Philippines with the taxation of foreign-supplied digital services firmly in the sights of the tax authority there.
Since 2016 Philippines Bureau of Internal Revenue (BIR) has been drawing up plans aimed at taxing the digital economy.
One of the points of focus for the Philippine tax authorities are companies that sell services via social media sites such as Facebook and Instagram. The services covered in any potential piece of legislation would attract value-added tax (VAT), the current VAT rate in the Philippines is 12%.
The BIR was set the task of collecting P2.026 trillion (circa USD$42.6 billion) in taxes in 2016, P2.315 trillion (circa USD$48.6 billion) in 2017, and P2.558 trillion (circa USD$53.8 billion) in 2018.
In a broader sense it is clear that interested parties in the Asia-Pacific region are moving towards the introduction of destination-based taxation of business-to-consumer eCommerce. According to the ‘Philippine E-Commerce Roadmap’, finalised and released in January 2016, the Asia-Pacific region was expected to become the world’s largest eCommerce region with 33.4% of total global sales in 2015.
In Singapore supplies of digital services to customer based there are currently untaxed as the rule bases taxation on where the supplier is located. This scenario, of course, is the type of reform that has occurred in numerous jurisdictions worldwide. Singapore is assessing its options in this regard.
Back 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.
In an illustration of how serious Singapore is about taxing the digital supplies of foreign companies the topic made the 2017 Budget. Here’s a good summary of the issues as they relate to 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.
The place of consumption rule is already in place in Vietnam. However, VAT is withheld at source by the Vietnamese party to the contract. This applies unless the foreign contractor has registered for tax purposes in Vietnam.
Vietnam is also assessing its options in relation to the extending taxation of the digital economy. The Vietnamese Government have already stated that they back the OECD’s BEPS proposals and their next step is to choose their approach.
According to various reports the Vietnamese tax agency is liaising with other entities, such as banks, so as to obtain information about unreported transactions by non-resident digital companies. The target of this particular move are social media sites and messaging services.
An internal government document revealed in January 2017 raises the possibility of a Canadian sales tax on foreign-supplied digital services. This is different from a previous Canadian plan to add a levy on content, such as Netflix, to protect native streaming content.
The 2017 government document — as reported by CBC — stated that the lack of such a tax “not only represents a significant loss of potential tax revenue for government, but it can also place domestic digital suppliers at an unfair competitive disadvantage.”
This mirrors the reasoning behind introducing such rules, and it is reflected in moves by tax authorities across the globe. These implementations are an attempt by native tax authorities to level the playing field between foreign and domestic digital service suppliers.
The Canadian government first explored the potential of such a digital services tax, based on the consumer’s location, in their 2014 Budget.
The topic also became a hot issue in the 2015 Canadian government elections. Conservative candidate Stephen Harper even released a video outlining his opposition to such a tax.
A August 2017 report from respected Canadian think-tanl, the C.D. Howe Institute, has recommended that Canada amend its Excise Tax Act to apply to businesses that supply digital goods and service for consumption within Canada.
The report states that: “There is no reason for Canada to delay reform any longer at the expense of Canadian businesses and the national economy.” It also adds: “Canada should make foreign companies equal to domestic companies, tax-wise, with the same registration and reporting requirements.”
For more detail on this report click here.
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.
A report in The Guardian stated: “Under new guidelines issued by the ITA, 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.”
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, 2016, 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.”
Rules governing the cross-border supply of digital services from a non-resident company to residents in Colombia are already been introduced.
Colombia is now looking at ways to enforce these rules. The Colombia rules that were introduced on January 1, 2017, differ slightly from other examples as they intend to target the payment service provider (PSP) of the digital service supplier.
In the case of B2C supplies from a non-resident company to a Colombian resident this means that credit and debit card issuers and other payment processors may have to withhold Colombian VAT before payment is made from the resident to the supplier. The rules will not apply until January 1, 2018.
Malaysia looks set to become the latest tax jurisdiction to seek a levelling of the playing field between traditional and digital businesses by amending their GST system to tax foreign-supplied digital services.
In mid-September 2017 Royal Malaysian Customs Department director-general Datuk Seri Subromaniam Tholasy told reporters after a GST conference in Malaysia that:
“We are amending a few of the tax laws, especially with regard to the GST to collect taxes from foreign companies that offer digital services in Malaysia. Taxes from the digital economy… we can easily collect a couple of billions of ringgit (MYR). It runs into several billions. Nobody knows how big the monster is out there. Once we amend the law and look into the details we would know for sure.”
It is expected that Malaysia October 2017 budget will herald the introduction of changes that will see the GST system extend to cover digital supplies from foreign-based companies. More information here on our dedicated Malaysia blog.
Note: Taxamo content is created for guidance only, please consult your local tax advisor.