A seminal moment in global digital taxation is upon us.
The Organisation for Economic Co-Operation and Development (OECD) has introduced new guidelines endorsing place of consumption rules.
In publishing the ‘International Value Added Tax (VAT)/Goods and Services Tax (GST) Guidelines’ the OECD are further building on work that started in Ottawa, Canada, back in 1998. Eighteen months ago, in November 2015, the initial guidelines were included as part of Action 1 of the Base Erosion and Profit Shifting (BEPS) report released by the OECD in relation to the tax challenges of the digital economy. The approach outlined in those guidelines in BEPS has now been formalised.
BEPS was instigated by the OECD, and G20 countries, to tackle tax planning strategies that – in practice – enabled international businesses to shift profits to low or no-tax location. The practice allowed businesses to lower their tax bill, leaving tax authorities out of pocket.
Since the BEPS process began there has been ongoing engagement between the OECD’s Technical Advisory Group (TAG), intergovernmental bodies, and business organisations to distill outstanding issues and provide updated recommendations, which are now contained in the guidelines.
Destination principle of taxation
The new guidelines recommend taxing cross-border digital sales via a system designed around the destination principle.
The destination principle, according to the OECD, means that “internationally traded services and intangibles should be taxed according to the rules of the jurisdiction of consumption (Guideline 3.1, p38).”
The OECD also believes that the revenue from a cross-border B2C supply of a digital service should accrue to the jurisdiction where the final consumption of the supply takes place, even if the supplier has no presence in that jurisdiction.
New digital tax systems
It is important to understand that even though the guidelines are designed as recommendations they are, de facto, the framework that international tax jurisdictions will use to modify and modernise their systems to harness tax income from the digital economy.
The rules have been met with agreement from domestic digital businesses as they are now on an equal pricing footing with international businesses. This is down to the fact that via these new rules both foreign and domestic suppliers have to charge and pay VAT/GST. The existing implementations have been deemed a success and more countries are set to follow.
Currently, over 50 tax jurisdictions have implemented such rules with others (such as Israel, Turkey, the Gulf Cooperation Council (GCC), Singapore, Indonesia, and Malaysia) flagging their impending introduction.
Since the turn of the year there has been a spike in activity related to such destination-based indirect tax rules: all taking their lead from OECD recommendations. Since January 1 Russia and Serbia have gone live with Taiwan (on May 1) and Australia (July 1) set to follow suit.
With the publication of the guidelines it is now expected that many jurisdictions considering the rules will also modify their tax system to mirror these guidelines.
These guidelines also highlight the necessity to boost the enforcement capacity of tax authorities. The guidelines propose enhanced international cooperation in tax administration in the field of indirect taxes, with a specific focus on the exchange of information and on assistance in recovery.
The guidelines state that: “Mutual administrative assistance is a key means to achieve the proper collection and remittance of the tax on cross-border supplies of services and intangibles by non-resident suppliers.”
How Taxamo can help
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.