The digital economy has seen the rise of digital intermediaries, which are often referred to as online marketplaces, digital platforms, or electronic distribution platforms. These digital platforms have become an essential link between businesses themselves, between businesses and consumers, and even between consumers.98 They have become the modern version of the town square marketplace — a one-stop shop to buy, sell, and exchange goods and services. Policymakers relatively quickly understood the central role marketplaces were playing and developed ways to deputize them in the VAT collection mechanism.
Here again, the EU was at the forefront as it started in 2015 by deeming digital platforms to buy the digital services from the initial supplier and resell them to the consumer.99 Consequently, only the digital platform that is last in contact with the end consumer is liable to collect VAT in the Member State where the consumer is located. Since this is a deeming provision, the EU rules allow digital platforms to rebut the presumption if the identity of the initial supplier is clearly established and the digital platform does not set the general terms and conditions of the supply, does not authorize the delivery of the digital services, and does not authorize the charge to the customer. However, intermediaries who facilitate the payment only are excluded from the deeming provision. The concept of digital platform liability for VAT is thus very broad, and very few intermediaries are not caught by the deeming provision.100
Australia, among others, took a slightly different approach. Instead of deeming the digital platform to perform a buy-sell operation, Australia simply shifts the GST collection obligation to the digital platform. However, Australia includes similar conditions as in the EU to be considered a digital platform liable for GST.101 The difference between the two approaches can be explained by the need for the EU to find a way to accurately and consistently tax domestic supplies, intra-EU supplies, and inbound supplies from non-EU countries, while Australia focuses only on inbound transactions.
A few other jurisdictions, mainly in Latin America, have not focused on digital platforms but have instead deputized financial intermediaries (e.g., banks) to ensure that VAT is collected on inbound digital services.102 Under this model, the tax authorities establish a list of non-resident businesses considered to fall within the VAT digital services rules and the local financial intermediary of the consumer is responsible for “withholding” the respective VAT amount from the consumer and remitting it directly to the tax authority. While this system offers simplified VAT collection, it is not the preferred approach by the OECD as it has many challenges.103 For one, it relies on the tax authorities to maintain the list of non-resident digital providers whose services are subject to tax. This ultimately creates a list of winners and losers and requires tax authorities to understand all the business models of these non-resident providers. Business providing a mix of in and out of scope services could easily be caught by the listing and thus see services being subject to VAT withholding even though certain service offerings are not in scope of the VAT rules for digital services. Moreover, consumers can easily circumvent the rules if they use a foreign financial intermediary. Finally, these rules put a heavy burden on financial intermediaries who are not always well placed to act as tax collection agents, as shown by recent pushback in Paraguay to proposals requiring financial intermediaries to withhold non-resident income tax (INR) on digital services provided by non-residents.104 In Vietnam, financial intermediaries are listed as potential tax collection agents, but these rules have not yet been implemented, leaving non-resident e-commerce providers required to register for taxes.105
Since the adoption of these “early” digital platform rules, more than half of the countries that have introduced VAT rules aimed at the digital economy have also adopted specific digital platform rules following either the EU or Australian approach. However, not all countries have put in place such rules (e.g., Colombia, Japan, and Uganda). In those jurisdictions, digital platforms could still be held liable under general agency principles in the VAT law. Even in countries that have implemented digital platform rules, their application is not harmonized and clear, making it difficult for digital platform operators and third-party suppliers using them to determine which party is liable for VAT. Indeed, the VAT obligations of digital platforms may vary depending on whether the transaction is a domestic transaction or inbound transaction or the nature of the vendor and the consumers [i.e., is it a B2B, B2C or consumer-to-consumer (C2C) transaction]. For instance, while digital platforms in the EU are liable for VAT regardless of where the third-party supplier is located, the Australian rules apply only to inbound transactions, thus requiring platform operators to distinguish between domestic and inbound supplies.
In addition, as the digital economy expands and creates new business models in which platforms continue to play a central role, policymakers are using the initial success of the digital platform rules to further expand their obligations by introducing new information reporting requirements, expanding the VAT collection requirements to non-digital services, or even expanding the tax collection obligations to other types of taxes.
As digital platforms play a central role in the exchange between service providers and users, policymakers assume that these platforms collect all essential transaction-level details that would allow tax authorities to collect any tax levied. Based on this assumption, the OECD adopted the Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy in July 2020.106 Under the Model Rules, operators of digital platforms are required to collect information on the income realized by those offering accommodation, transport, and personal services through platforms and to report the information to tax authorities. Australia,107 New Zealand,108 and the UK,109 among other countries, are currently considering implementing these reporting rules. The EU implemented its own set of reporting rules in March 2021 under Council Directive (EU) 2021/514 (DAC7).110 They extend the EU tax transparency rules to digital platforms and introduce an obligation for platform operators to provide information on income derived by sellers through platforms effective 2023. While the OECD model rules and DAC7 generally align, the scope of the activities reportable under DAC7 is broader; for example, it includes the sale of goods as a reportable activity, which is only optional under the OECD model rules.111 The EU also added a further layer, requiring EU-based payment service providers to keep records and report information on payees established in or outside the EU that receive cross-border payments from EU payers effective from 2024.112 While this new reporting obligation does not go as far as the Latin American financial intermediary withholding requirements, the scope of entities qualifying as payment processors subject to the reporting requirement goes beyond the traditional concept of payment processor and could include more traditional digital platforms subject to the Second Payment Services Directive.113
If this information sharing fails to achieve the desired tax collection goal, or tax authorities don’t have the tools for effective collection of taxes, policymakers may be tempted to deputize even more digital platforms as their VAT collector of choice by expanding the collection obligation to services other than digital services. Examples of this can be seen in the EU and New Zealand, among other places, where recent consultations were held regarding the taxation of the digital platform economy or sharing economy. Such an expansion is likely inevitable given that individuals can now leverage the tools of the digital economy to provide a wide array of services that until very recently were the purview of regular businesses (e.g., accommodation, transport, advertising, professional services, etc.). Given this multiplication of economic operators who can often provide their services remotely and the lack of resources of tax authorities, it is only natural for policymakers to look at digital platforms, who act as the central link between providers and consumers, to act as tax collector. Such obligations could be expanded even further to other taxes such as income taxes, as demonstrated by Mexico, which requires digital platforms to withhold income tax (in addition to VAT) on the revenues earned by individuals using the platform to sell goods or services.114 Extending the VAT collection rules on digital platforms to purely domestic transactions would also seem a likely step; the OECD initially contemplated this, but they seem to have dropped it in the final version of guidance.115
It is also important to recognize that the concept of a “digital platform” is only growing. For many traditional businesses, establishing their online presence as the platform used in their given area of specialization is often seen as the holy grail. Some examples already having an impact is with online banking platforms and securities trading platforms. We also see a growing number of bespoke platforms that allow users to trade in specialist items such as retro sneakers, art, and antiquities.
The expansion of digital platform obligations may be inevitable as policymakers likely think that all digital platforms have all the data required and have the means to act as a deputized tax authority in all the countries in which they operate.116 This is likely because policymakers know and focus only on large, well-known digital platform operators without fully grasping the diversity in business models and sizes of these operators.117 However, imposing broad requirements would severely increase the barrier to entry for new operators into the digital platform business as startup digital platforms rarely consider in their business models that they will also have to be a seconded tax authority. These requirements would further increase costs for users (sellers and customers alike) as someone will have to finance the increased compliance cost these operators face to act as captive outposts of the tax authorities. The importance of imposing reasonable thresholds on digital platforms before VAT collection obligations are imposed, cannot be overstated.
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98 See e.g., OECD, The Role of Digital Platforms in the Collection of VAT/GST on Online Sales (20 June 2019).
99 See e.g., European Commission, Explanatory notes on the place of supply of TBE services (3 April 2014).
100 The legality of the deeming provision is currently being challenged before the CJEU in Fenix International Limited (Case C-695/20). On September 15, 2022, the CJEU published the nonbinding Opinion in this case arguing that the implementation of the deeming provision followed the appropriate legislative process.
101 See e.g., ATO, If you are an electronic distribution platform operator, available at https://www.ato.gov.au/Business/International-tax-for-business/GST-on-imported-goods-and-services/How-to-charge-GST/If-you-are-an-EDP-operator/
102 Currently Argentina, Costa Rica, Ecuador, and Paraguay operate such a form of financial intermediary system In addition, in Colombia non-resident taxpayers can opt-in to such a system while Chile just recently introduced a financial intermediary system for those non-resident businesses who have not registered for and complied with their VAT obligations in the country.
103 See e.g., OECD, The Role of Digital Platforms in the Collection of VAT/GST on Online Sales (20 June 2019).
104 Paraguay - Tax Authority Requires All Non-Resident Digital Service Providers to Register, Regardless of Whether They Have a Representative in Paraguay (4 April 2022), News IBFD.
105 Orbitax, Vietnam Tax Authority Posts Letter to Foreign E-Commerce Providers (3 May 2022).
106 OECD, Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy (3 July 2020).
107 KPMG Australia, Status of legislation to implement a reporting regime for the “sharing economy” (19 October 2021).
108 Inland Revenue of New Zealand, The role of digital platforms in the taxation of the gig and sharing economy (10 March 2022).
109 HMRC, Agent Update: issue 96 (19 May 2022).
110 Council Directive (EU) 2021/514 amending Directive 2011/16/EU on administrative cooperation in the field of taxation (22 March 2021), L 104/1.
111 KPMG Malta, DAC 7 – New reporting obligations for digital platforms.
112 European Commission, E-commerce: Council adopts new rules for exchange of VAT payment data (18 February 2020).
113 M.E. van Hilten & G. Beretta, The New VAT Record Keeping and Reporting Obligations for Payment Service Providers, 31 Intl. VAT Monitor 4 (2020), Journal Articles & Opinion Pieces IBFD.
114 See e.g., KPMG Mexico, What new rules apply to digital services provided by foreign residents without PE? (22 May 2020).
115 See OECD, The Role of Digital Platforms in the Collection of VAT/GST on Online Sales (20 June 2019).
116 US states have followed nearly the same pattern with platforms when it comes to sales tax. Every state has said platforms are required to collect (under conditions in which nearly every platform qualify) by either just saying they are required to collect or terming them as retailer. States are further beginning to expand to certain fees, accommodations, car-sharing and certain reporting obligations being imposed on them.
117 See e.g., OECD, Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy (3 July 2020).