There is a growing list of examples of double taxation and of double non-taxation arising in supplies of digital services. In the authors’ view, this is due to a lack of clarity in the OECD VAT/GST Guidelines as being adopted by various countries, or at the very least, they are areas in which the guidelines could and should be updated to mitigate the risk of tax authorities taking conflicting approaches.
The OECD Guidelines seek to delineate between “on-the-spot supplies” and “remote supplies” in the context of identifying the appropriate place of taxation of B2C transactions32. On-the-spot supplies are those which “…are physically performed at a readily identifiable place and that are ordinarily consumed at the same time and place where they are physically performed in the presence of both the person performing the supply and the person consuming it." 33 Not surprisingly, the OECD Guidelines recommend these supplies being subject to VAT in the place of performance of the service.
'Remote supplies,' according to the OECD Guidelines, should be taxed based on the “consumer’s usual residence”, defined in clause 3.123 as follows: “The jurisdiction in which the customer of a B2C supply has its usual residence is generally where the customer regularly lives or has established a home. Such customers are not considered to have their usual residence in a jurisdiction where they are only temporary, transitory visitors (e.g., as a tourist or as a participant to a training course or a conference).”
Examples given of “on-the-spot-supplies” include “services physically performed on the person (e.g., hairdressing, massage, beauty therapy, physiotherapy); accommodation; restaurant and catering services; entry to performances, trade fairs, and parks; and attendance at sports competitions.34
All of this may be taken to suggest that the appropriate place of taxation for B2C supplies of booking services is the place at which the customer usually resides, being the given rule for “remote supplies”. However, there are certain contra-indicators in the OECD Guidelines. Specifically, footnote 34 provides: “Similarly, where countries treat the supply of a ticket or right of entry as a separate supply, they are encouraged to determine the place of taxation by reference to the place where the underlying supply of service is performed.” 34
Ultimately, the overriding objective of place of taxation rules for B2C supplies is, according to clause 3.5 of the OECD Guidelines, “to predict, subject to practical constraints, the place where the final consumer is likely to consume the services or intangibles supplied.”
We briefly explore three areas in which there is a high degree of conflict between how jurisdictions treat these services for VAT purposes resulting in potential instances of double taxation or non-taxation.
Online booking services
The first area is the treatment of online booking services, such as when a consumer goes online to book a hotel, car rental, or ticket to an event such as a show, concert, or similar production. By their very nature, these are all commonly occurring travel experiences, so that the potential (or even likelihood) that the consumer as a resident of country A may be making the booking while in country B for consumption in country C is very real.
There seems little doubt that the appropriate place of supply for the underlying supply of the hotel accommodation, car rental or event (as opposed to the 'arranging' or booking service) is the location in which that service is consumed.35 However, the appropriate position from a policy perspective with respect to the arranging or booking service itself relating to these underlying supplies is less clear. Some jurisdictions36 treat the arranging service as taking place where the underlying supply will be consumed, on the basis that it is a cost component of the underlying supply.
If, say a consumer in China is booking a hotel to stay on their vacation in the UK, should China or the UK be the taxing authority to collect the VAT on the booking service? Related to this, is the nature of a booking service a one-off supply linked to the act of booking almost instantly an accommodation, or an ongoing supply linked to the ongoing use of the underlying accommodation?
There is perhaps a greater tendency to assume that the place of supply for booking services relating to hotel accommodations should be where the underlying supply of the accommodation itself is consumed, given its relationship with real property in that jurisdiction. However, is that still the appropriate policy outcome when we deal with a booking service for a car rental in which the vehicle is collected from one European country and dropped-off in another? And what about a booking service paid for entry to an online event?
It should also be noted that the nature and payment flow of the fees for the booking service may give rise to further complications because those fees may be explicit to the consumer (i.e., added to the customer’s invoice), or they may be implicit in the sense they are economically absorbed by the underlying supplier of the accommodation, car rental, or event, or perhaps even a combination of both.
Whatever the precise fact pattern, the simple fact remains that the place of supply of the booking service is, in some jurisdictions, the location of the accommodation, car rental, or event, while in others, it is the location of the consumer at the time the booking service is provided. For instance, Italy considered fairly early that the activities carried out by online platforms that put people seeking accommodation in contact with people offering it shall be included within the scope of intermediation relating to real estate, and thus be taxable where the real estate is located and not where the consumer renting the property is located.37 However, the EU VAT Committee appeared at least initially to take a contrary view as it considered that only those intermediation services that require an active involvement of the intermediary which goes beyond the automated supply provided, with the use of only minimal human intervention, should qualify as intermediation services and thus not as digital services.38 This could easily lead to contradictory positions in which EU Member States with more travelers to other Member States (e.g., Nordic countries) could consider the intermediation services to be a digital service taxable where the traveler is established, but Member States hosting more travelers (e.g., Southern Europe) would apply VAT where the accommodation is located.
Given these complexities, especially in light of the growing market in peer-to-peer transactions, countries have started to adopt clear rules regarding the treatment of accommodation intermediation services. Canada, for instance, introduced an explicit liability for accommodation platforms who facilitate taxable supplies of short-term accommodation in Canada that are made by suppliers who are not registered for the GST/HST effective 1 July 2021.39 This includes when an accommodation platform operator charges the guest who is renting the short-term accommodation in Canada a service fee or commission for the services it provides in helping the guest to find and book accommodation and in facilitating the transactions between the guest and the supplier of the accommodation in Canada. However, most jurisdictions have not introduced clear rules.
On one reading of the OECD Guidelines, if the customer in China books a hotel accommodation or car rental in the UK through an intermediary, the booking service should be taxed in China, because it is the “usual” residence of the customer. The customer’s appearance in the UK would, in all likelihood, be transitory.
In practice, many of these issues are likely to be resolved through measures being applied to collect VAT from digital platforms. The proposed shift in countries such as New Zealand40 to requiring the collection of VAT on the underlying supply by the digital platform will effectively result in the booking service being amalgamated with the underlying supply, and the place of supply of the booking and actual use of the accommodation will be inseparable from one other. Similarly, in discussions in the EU as part of the “VAT in the Digital Age” proposals, the digital platform is being deemed to sell the underlying accommodation, car rental or access to the event, in which case differentiating the booking service from the underlying service may not be feasible, thus potentially increasing the risk of double taxation or non-taxation at a global level if other countries do not follow the same approach. Before adopting such rules, requiring unanimous consent of the 27 Member States, the EU would first have to carefully consider the consequences of broadening its current buy/sell deeming provision for digital services intermediaries to a broader set of services. The VAT Expert Group for instance recently highlighted potential issues between the deemed supplier regime and the upcoming SME changes, the consequences of the platform becoming the supplier, the impact on SME thresholds, the deemed supplier model and the travel agents scheme, and the exemption forof short-term accommodation rental.41
Another example that can be problematic as to the appropriate place of supply is advertising services. If we assumed for present purposes that most advertising services will be business-to-business (B2B) transactions, the question which arises is whether the appropriate place of supply is the location of the business recipient, or the location(s) in which the advertising is viewed/consumed. If it is the former, then it is certainly easier to implement from a systems/process design perspective.
This issue tends to manifest itself in the context of zero-rating rules applied by the origin country from which the advertising service was provided. Assume a digital platform based in Singapore sells advertising space to a UK company, should zero-rating be negated on the basis that the advertising is viewed by consumers based in Singapore?
The example of Singapore is relevant here. Prior to 1 January 2022, the entitlement to zero-rate advertising services depended on the place of circulation of the advertisement, specifically at least 51 percent of the circulation needed to be outside Singapore.42 However, from 1 January 2022 forward, the place of supply is where the customer and direct beneficiary belong. Generally, this means the party contracting for placement of the advertising. As such, advertising sold to a non-resident entity may be zero-rated, even though the advertisement targets Singaporean customers.
It is interesting to note that the change in position adopted in Singapore was in response to compliance difficulties, especially for online media sales.43 In particular, tracking revenues through to advertising viewership is beyond the scope of most enterprise resource planning (ERP) systems. However, such a clear-eyed approach is unlikely to be followed by all countries. For instance, in many Latin American jurisdictions the zero-rating of “exported” services is subject to a strict use and enjoyment approach such that advertising services (even traditional ones) provided to a foreign customer will attract local VAT if the advertising is targeted to the local market. Adopting Singapore’s approach would thus require not only adapting the VAT rules for online advertising but would more broadly necessitate a review of zero-rating rules for exports of services generally. In the absence of such a holistic review of the export zero-rating rules, it is thus likely that the cases of double taxation will only increase with new avenues of digital advertising.44
The third and perhaps most challenging sourcing issue is around telecommunications services. The key question to be asked is whether there is a need to harmonize the special rules many jurisdictions have for telecommunications services with those of the digital economy measures. Commercially, the distinction between 'telecommunications services' and 'digital services' is illusory.
The main telecommunications services area driving questions of double taxation is roaming services. To that end, should roaming services be taxed in the jurisdiction in which the consumer is ordinarily based for which there would typically be a domestic VAT charge, or the jurisdiction in which the consumer is travelling when the roaming occurs?
The New Zealand government recently undertook a consultation in this area, with a view to amending the law from 1 October 2020; the new measures were actually implemented on 1 April 2022.
Interestingly, the purported rationale for considering amendments to the law was a desire by the New Zealand government to ensure consistency with the OECD VAT/GST Guidelines, which places it as an outlier among OECD member countries. More specifically, the consultation proposals put forward in New Zealand were designed to ensure that:
- Outbound roaming services provided to New Zealand customers would be subject to New Zealand GST; and
- Inbound roaming services provided to non-residents would no longer be subject to GST.
The proposal seems to produce precisely the opposite outcome that would be expected under the destination principle underlying the OECD VAT/GST Guidelines. Put simply, the New Zealand approach seems to assume roaming services are 'remote services,' rather than 'on-the-spot services'. From a pure tax policy perspective, it would seem an almost inescapable conclusion that the appropriate place of supply for roaming services is the place where the service is used or enjoyed because that is where it is consumed in this case. This is an example where the use of an alternative proxy would seem to be warranted.45
The proxy used in the New Zealand example ensures that the service is taxable regardless of whether the consumer activates mobile roaming or uses a SIM card purchased in the foreign jurisdiction.46 Such inequity is even more apparent when the foreign jurisdiction applies a use and enjoyment approach to roaming services. For instance, the ECJ recently held that Member States (in this case Austria) may opt to apply the use and enjoyment place of supply rules for roaming services provided in that Member State by a mobile phone operator established in a non-EU country to its customers who are also established in a non-EU country, regardless of the tax treatment to which those services are subject under the domestic tax law of that non-EU country.32 Therefore, a New Zealand traveler to Austria would be subject to double taxation due to the combination of the New Zealand rules and the Austrian use and enjoyment rules.
In summary, whenever there is inconsistency in the application of the destination principle, opportunities for double non-taxation arise, though perhaps more commonly, punitive consequences in the form of double taxation arise. While the OECD VAT/GST Guidelines are only soft law and it falls upon individual jurisdictions to implement adequate rules reflecting the destination principle, they also play an indispensable role in providing a global standard that jurisdictions should strive to meet to avoid cases of double taxation or non-taxation. There is thus a clear need to update the OECD VAT/GST Guidelines to consider a range of examples referenced in this paper. Alternatively, jurisdictions (or the OECD) may reduce the incidence of double taxation by inspiring themselves from the US states which allow some form of credit or deduction for sales tax already paid in another state.48 However, such an approach would be a departure from current principles where only the country in which the tax was incurred grants a credit or a refund and would likely encounter significant roadblocks in a global context.
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32 OECD VAT/GST Guidelines (2017) at 3.114.
34 It may be argued that while the price paid for a ticket is for the underlying supply (being entry to the relevant event or venue), the price paid for a booking service may be separate. This will be fact dependent. It is increasingly common for ticketing providers to charge separate booking fees – see for example the ECJ cases of Bookit (C-607/14) and National Exhibition Centre (C-130/15).
35 For example, the OECD VAT/GST Guidelines indicate that the place of supply for accommodation services should be where the service is physically performed – i.e. the place of the accommodation.
36 For example, see section 38-360 of Australia’s GST law.
37 Ministerial Circular Letter no. 24 (12 October 2017).
38 GUIDELINES RESULTING FROM THE 107th MEETING of 8 July 2016 DOCUMENT D – taxud.c.1(2017)1402399 – 914.
39 See e.g., Canada Revenue Agency, GST/HST for digital economy businesses – Platform-based short-term accommodation.
40 See e.g., New Zealand Inland Revenue Department, The role of digital platforms in the taxation of the gig and sharing economy.
41 VAT Expert Group 31st Meeting, VEG No 107, VAT and the platform economy - Focus on specific issues (June 10, 2022).
42 See IRAS e-Tax Guide entitled “GST: Guide for Advertising Industry”, 4th edition, published 20 December 2021.
43 See Minister for Finance Budget 2021 announcement.
44 For instance, how should an advertisement targeted at a specific physical market displayed in the Metaverse be taxed?
45As is contemplated in Guideline 3.7 of the OECD VAT/GST Guidelines.
46 The consultation paper even draws attention to this apparent inequity from a New Zealand GST perspective when it cites the example of a New Zealand customer avoiding the imposition of GST by inserting a foreign SIM card into their mobile phone whilst travelling, whereas a New Zealand customer in the same situation activating mobile roaming would be subject to GST.
47ECJ, Case C- 593/19, SK Telecom Co. Ltd (15 April 2021).
48See e.g., Hellerstein, State Taxation (WG&L), 18.09. Credit for Sales or Use Taxes Paid to Other States.