Hints for how VAT-type taxes might evolve
The global economy has changed dramatically over the past number of years. Rapidly evolving technologies have disrupted and transformed traditional business models to the point that the "digital economy" can no longer be viewed as separate and distinct from the "traditional economy".
VAT-type taxes (including GST) have not been immune from this disruption. One of the most daunting challenges for VAT arising from the digital economy is whether governments can tax cross-border supplies that are delivered remotely by a supplier who has no physical presence in the customer's jurisdiction.
The Organisation for Economic Co-operation and Development ("OECD") has been at the forefront of developing guidance to address these VAT challenges. In 2017, the OECD published the International VAT/GST Guidelines, which was endorsed by the Council of the OECD and the G20.
The OECD's International VAT/GST Guidelines present a set of internationally agreed guidelines on the application of national VATs to international trade and, in particular, trade involving services and intangibles. The guidelines include recommended principles and mechanisms to address the challenges of collecting VAT on cross-border sales of digital products that were identified in the OECD/G20 Project on Base Erosion and Profit Shifting (BEPS). The guidelines endorse the destination principle as the international norm, and recommend taxing business-to-business (B2B) and business-to-consumer (B2C) transactions in the country in which the customer resides. The guidelines further recommend that, for B2C services, the non-resident vendor should register for and charge VAT in the country in which the customer is located. For B2B services, the guidelines suggest that the business recipient should self-assess VAT through a reverse charge or similar mechanism.
The Council of the OECD and the G20's endorsement of the guidelines has jumpstarted the process of adapting VAT rules to the challenges of the digital economy. A significant number of jurisdictions have, or are in the process of, implementing new rules, including Australia, New Zealand, the 28 member states of the European Union (EU), Singapore, South Africa and the member states of the Gulf Cooperation Council. While the rules that these countries are adopting largely conform to the OECD guidelines, there are some significant differences across jurisdictions.
Also, a number of countries, including Australia, New Zealand and EU member states, have (or are in the process of instituting) rules that require non-resident vendors of non-commercial goods to charge, collect and remit VAT in the country of importation. In some circumstances, the e-marketplace or carrier of the goods will be required to account for the VAT, rather than the non-resident supplier.
Many tax jurisdictions' response to the challenges of the digital economy has also extended to sub-national levels of government. In the United States, further to the Supreme Court's decision in Wayfair, more than 25 states have already introduced, or soon will introduce, "economic nexus" tests that will affect vendors that are not resident in a state and that do not have "physical nexus." Under these tests, these vendors will have to register and account for state sales and use taxes that arise from remote sales of taxable goods (and in some instances, services or intangibles) made to purchasers in certain states. Moreover, some jurisdictions are introducing rules to force the e-marketplace to collect and remit the sales and use tax in some states. In Canada, starting January 1, 2019, the province of Quebec will require many non-resident suppliers and operators of e-marketplace with no significant presence in Quebec to register and account for the provincial VAT (QST) on supplies of specified services and intangible made to Quebec consumers. A supply of goods may also be subject to new QST rules if the non-resident supplier is registered for GST/HST purposes.
The situation with the Canadian GST/HST is markedly different from these global trends. Currently, Canadian consumers are required to self-assess the GST/HST on taxable services and intangibles acquired from an unregistered non-resident supplier, although we understand few consumers comply with this requirement. Requiring consumers to self-assess VAT on imported digital supplies is widely viewed as ineffective, and the Canadian experience certainly would appear to support that view.
Within this context, the Canadian government invited comments in its 2014 federal budget on ways that the government could ensure the effective collection of GST/HST on e-commerce sales that foreign-based suppliers make to residents of Canada, and whether it should adopt the approach taken in some other countries. Since then, however, the government has demonstrated a reluctance to require unregistered non-resident suppliers to account for GST/HST on digital supplies of services and intangibles made to consumers. The popular refrain is that there will be no "Netflix tax".
Notwithstanding the political dynamics, it may be only a matter of time before Canada joins the growing global trend of requiring non-resident suppliers to account for a jurisdiction's VAT on digital supplies made to consumers. There is growing pressure within Canada to address the issue and level the GST/HST playing field between Canadian and foreign suppliers of digitized services and intangibles. In April 2018, for example, the House of Commons Standing Committee on International Trade recommended that the government apply sales taxes on tangible and intangible products sold by domestic and foreign firms, including sales through e-commerce platforms.
Canada has endorsed the aforementioned OECD's International VAT/GST Guidelines, which notes that the self-assessment mechanism does not offer an appropriate solution for collecting VAT on B2C supplies of services and intangibles from non-resident suppliers. Instead, the guidelines' recommended approach is to have the non-resident vendor register for, and charge, VAT. Against this backdrop, it is fair to conclude that it is not a question of whether Canada will follow the approaches taken by a growing number of countries with a VAT/GST, but when it will implement similar changes.
For more information, contact your KPMG adviser.
Information is current to January 15, 2019. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500.