That VAT on cross-border supplies is a complex area may not be news to many.
That VAT on cross-border supplies is a complex area may not be news to many. Yet, stating that an avid photographer may have VAT obligations in different parts of the world if his pictures are made available on a website and downloaded at a fee, may sound appalling to some.
What about an 18-year-old tech- savvy student who develops a successful app in her bedroom and makes it available on the net? Traditionally, VAT applies where the consumption occurs following the so-called destination principle. In cross-border transactions involving tangible property, this is achieved by not taxing exports and imposing VAT in the country of import.
Applying the destination principle to services and intangibles is more challenging because of the difficulty in identifying the jurisdiction of consumption and the potential compliance obligations of a multijurisdictional seller.
As a rule of thumb, most jurisdictions have traditionally applied two rules to sales of services and intangibles. For business-to-business (B2B) transactions, VAT is due in the country of the customer, whereas for business-to-consumer (B2C) transactions, VAT is due in the country of the vendor.
These rules were developed when most VAT systems were originally implemented and consumers purchased goods and services primarily from domestic vendors or brick-and-mortar stores.
Since writing these traditional rules, the ‘digital revolution’ disrupted traditional business models and transaction taxes, whether called VAT, GST or otherwise, have swept the globe with their introduction in more than 170 countries.
KPMG International has published the results of its 2017 survey on VAT/GST (goods and services tax) and cross-border supplies of services around the world. The survey covers 54 countries (including Malta), except the US given it has a State-based sales tax system.
Five key themes emerge from the survey. Firstly, whereas there is broad alignment among countries to uniformly apply a consumption-based taxation principle to digital services, non-implementation or variations in implementation mean that the rules remain far from harmonised. For instance, what is an electronic service in the EU may not be so in South Africa but may/may not become taxable in Brazil.
Secondly, the EU has a significant advantage in the application of the OECD measures through its recent years’ efforts to harmonise the VAT rules and simplify the VAT collection across the trading bloc. Thankfully, a number of countries have, however, responded by streamlining VAT registration/filing processes and/or by introducing turnover thresholds below which non-resident service providers would not be required to register in the country of destination.
The third key theme depicts the broadening scope of services being taxed. A trend noted is that whereas some early adopters tended to tax a narrow or specific scope of services, recent adopters like Australia, New Zealand and Russia have cast their net wider.
Fourthly, whereas reverse charge is the most common mechanism for collecting VAT on cross-border B2B supplies, some countries apply withholding tax regimes whereby VAT is withheld by businesses from the price paid to their service providers. Withholding systems tend to be more commonly used among communist/socialist and/or countries with currency controls like China.
Lastly, there are novel ways through which governments are trying to enforce the collection of VAT on digitised services. For example, within the EU, online marketplaces like app stores are required to account for VAT both on own sales and on sales they facilitate for other vendors through their platforms.
Other countries like Italy, UK, Poland and Romania are in different stages of consulting/ adopting ‘split payment’ methods for collecting VAT, requiring purchasers or potentially payment-processing companies to effectively divert the VAT included in the purchase price directly to a separate bank account.
The KPMG Survey clearly highlights the high levels of inconsistency in the implementation of rules on taxation of cross-border supplies of services and makes it apparent that, more than ever before, businesses operating in the digital sphere need to monitor VAT/GST developments around the globe to ensure that their tax obligations are duly attended to.
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