As the economy continues to digitalise problems arise when it comes to the effective and consistent collection of VAT/GST on cross-border sales. That is why recent guidance from the Organisation for Economic Cooperation and Development (OECD) on the matter is most welcome.
The OECD guidance revealed in late October 2017 identifies two approaches, contractual and deemed supplier, as the most effective collection mechanisms of VAT/GST from foreign-based suppliers. The information in the OECD report is most welcome and provides tax jurisdictions with significant clarity.
This OECD guidance builds on recommended approaches outlined in Action 1 of the seminal October 2015 BEPS report. Since the publication of BEPS tax jurisdictions across the globe — including India, Russia, Taiwan, Australia, New Zealand, and Serbia — have amended their tax rules on how cross-border supplies of digital services are treated.
From January 2018 Saudi Arabia, the United Arab Emirates (UAE), and Belarus will follow suit with Bahrain predicted to do likewise in mid-2018. Prior to the publishing of the final BEPS report a number of other jurisdictions – including the EU, South Korea, Japan, and South Africa – had amended their consumption tax legislation to bring cross-border supplies of digital services into scope.
Here at Taxamo, we are aware of dozens of other tax jurisdictions that are reassessing their existing consumption tax laws.
Effective collection mechanisms
The key achievement of the OECD guidance is that it produces a clear definition of effective collection mechanisms. This definition is derived from an assessment of existing global implementations in addition to communicating with key market stakeholders. This guidance has rubber-stamped the mechanisms that work, from both the supplier-side and the tax jurisdiction side.
First, let’s discuss what effective collection mechanisms for VAT/GST are included in the OECD guidance. It distinguishes between two collection mechanisms:
1. Contractual approach
This collection mechanism approach is based on the relevant contractual and related arrangements between the supplier and an Intermediary. In recognising the contractual approach — one that is already in place in various laws across the globe — the OECD ensures that the collection of VAT/GST provides certainty and becomes less complex. Tax authorities can, as a result, treat the Intermediary as satisfying the supplier’s VAT/GST compliance obligations.
2. Deemed supplier approach
This approach deems that the Intermediary to be the supplier for VAT/GST compliance purposes. This recommended approach will also limit the cost of compliance.
The report states that such an approach is “being implemented increasingly in the context of digital trade”. From Taxamo’s experience in dealing with tax jurisdictions across the globe, we can vouch for this statement. We know that this approach is already enshrined in existing legislation across the globe. This means, for example, that marketplaces are responsible for the collection and remittance of VAT/GST on digital sales made via their platform. We will discuss these pieces of legislation later in this blog.
Limiting compliance costs
This guidance, however, is not just about a consistent approach. This is also about reducing the cost of VAT/GST remittance from the supplier’s side.
In the press release announcing the guidance, the OECD state that: “The new implementation guidance will support enhanced compliance levels while limiting compliance costs for digital suppliers by promoting the consistent and coherent implementation of these collection mechanisms across jurisdictions.”
Taxamo, for example, acts as an Intermediary in the supply chain and takes on the digital VAT/GST liabilities of affected digital service suppliers. The fact that we take on the liability removes the cost of determining the consumer’s location, calculating the correct VAT/GST rate, as well as the costs associated with the collection, filing, and settlement of the VAT/GST due with the relevant tax authority.
Legislative implementations worldwide
1. European Union (rules implemented in January 2015)
In the EU’s VAT Mini One-Stop Shop (MOSS) legislation Article 9a of the explanatory notes outlines how marketplaces are obligated to collect VAT on sales from their platform to EU-based consumers.
Article 9A states that “where electronically supplied services are supplied through a telecommunications network, an interface or a portal such as a marketplace for applications, a taxable person taking part in that supply shall be presumed to be acting in his own name but on behalf of the provider of those services unless that provider is explicitly indicated as the supplier by that taxable person and that is reflected in the contractual arrangements between the parties.”
To be regarded as the provider of these electronically supplied services then the following criteria should be met:
- The invoice issued by each taxable person taking part in the supply must identify the services and the supplier
- The bill or receipt issued to the customer must identify the services and the supplier
2. New Zealand (October 2015)
Section 60C of New Zealand’s GST legislation makes specific reference to ‘electronic marketplaces’. An electronic marketplace is “operated via a website, internet portal, gateway, store, distribution platform or other similar marketplace.” It excludes a marketplace that solely processes payments.
Section 60C, more specifically, deals with non-resident electronic marketplaces. The legislation states that it “applies to supplies of remote services made to a person resident in New Zealand through an electronic marketplace operated by a non-resident. The section treats the operator of the electronic marketplace, as opposed to the underlying supplier, as making the supply in the course or furtherance of a taxable activity.”
The legislation continues, stating that section 60C will not apply when:
- The documentation provided to the recipient identifies the supply as made by the underlying supplier and not the marketplace; and the underlying supplier and the operator of the marketplace have agreed in a document signed by them that the supplier is liable for the payment of tax; and
- The electronic marketplace does not:
- Authorise the charge to the recipient;
- Authorise the delivery to the recipient; or
- Set the terms and conditions under which the supply is made.
3. South Korea (October 2015)
In article 532 of the South Korean VAT Act, there is reference to the third party article (Article 96 (2) of the Enforcement Decree of the VAT Act)
Article 532 states that “where the non-resident without having a domestic place of business provides the E-Services in South Korea through any of the following third parties (including the non-resident without having a domestic place of business in South Korea), the third party shall be deemed to provide the relevant E-Services in South Korea:
- A person who operates an open market or other equivalent place to provide services to enable E-Services transactions through an information and communications network;
- A person who collects the transaction amount from the purchaser and pays it to the seller as a person performing the intermediation roles in E-Services transactions;
- A person prescribed by Presidential Decree, who participates in E-Services transactions in a manner similar to the above (i) and (ii) (currently, not separately regulated).
4. Australia (July 2017)
Australia’s GST legislation makes specific reference to the GST obligations of Electronic Distribution Platforms (EDPs). In the section on GST on supplies made through electronic distribution platforms it is clearly stated that an EDP, an online marketplace, is obliged to collect and remit GST to Australia’s tax authority.
5. India (July 2017)
In India, the relevant information on the role of intermediaries in the supply chain is Chapter 5, Section 14, of the Integrated Goods and Services Tax Act.
India’s GST law refer to Online Information and Database Access or Retrieval Services, or OIDAR. It states that on supply of the OIDAR services “by any person located in a non-taxable territory and received by a non-taxable online recipient, the supplier of services located in a non-taxable territory shall be the person liable for paying integrated tax on such supply of services.”
Chapter 5, Section 14, of India’s GST law adds that in the case of the supply of OIDAR services “by any person located in a non-taxable territory and received by a non-taxable online recipient, an intermediary located in the non-taxable territory, who arranges or facilitates the supply of such services, shall be deemed to be the recipient of such services from the supplier of services in non-taxable territory and supplying such services to the non-taxable online recipient except when such intermediary satisfies the following conditions, namely:
- The invoice or customer’s bill or receipt issued or made available by such intermediary taking part in the supply clearly identifies the service in question and its supplier in non-taxable territory
- The intermediary involved in the supply does not authorise the charge to the customer or take part in its charge which is that the intermediary neither collects or processes payment in any manner nor is responsible for the payment between the non-taxable online recipient and the supplier of such services
- The intermediary involved in the supply does not authorise delivery; and
- The general terms and conditions of the supply are not set by the intermediary involved in the supply but by the supplier of services.”
6. Saudi Arabia (January 2018)
In Article 47 of Saudi Arabia’s VAT Implementing Regulations there is specific reference to the role of intermediaries in the supply chain.
Article 47(2) states that “in cases where electronically supplied services are supplied in the Kingdom through an online interface or portal acting as intermediary for a non-resident supplier, the operator of the interface or portal is presumed to purchase the services from the non-resident supplier and to supply those same services in his own name for the purposes of the law and these regulations. The operator of the interface or portal is liable to pay tax on any such supply.”
Terminology is important
Across the globe we are aware of different terms for the concept of a third party collecting VAT/GST. As you can see from our examples above the terms vary between using the word ‘Intermediary’ (e.g. in India and Saudi Arabia); to Electronic Distribution Platform (e.g. Australia), and to Marketplace (e.g. E.U.).
The key point is that all three terms refer to the same concept of the third party that is treated as the deemed supplier in the supply chain. It is interesting to note that in the most recent pieces of legislation (Indian GST and the GCC framework) they both use the same terminology as the OECD report: Intermediary.
How Taxamo helps
At Taxamo we take on the VAT/GST liability in respect to compliance with international digital tax rules.
Our aim is to support every country which brings in destination-based VAT/GST for digital sales.
We know every business is different, we use this knowledge to create bespoke solutions for each partner.
We look after your global tax liabilities so you can continue to sell your services.
Note: Taxamo content is created for guidance only, please consult your local tax advisor.