We are in the eye of the storm.

In the years running up to 2020, policymakers around the world embarked on a journey to tax the digital economy under indirect taxation systems such as a value added tax (VAT) or goods and services tax (GST).1 They did so by reference to several fundamental principles established by the Organisation for Economic Co-operation and Development (OECD) International VAT/GST Guidelines. First, indirect taxes should be applied to digital business activities on a basis equivalent to that of traditional businesses, so as to ensure a level playing field.2 Second, indirect taxes should be applied and collected in the jurisdiction in which the consumption of the relevant good or service takes place.3 Third, when the supplier of a digital service does not have a presence in the jurisdiction in which consumption takes place, it should be required to register and account for the VAT in that jurisdiction (often under a simplified compliance approach).4 Fourth, the prevalence and ease of internet shopping means that the exemption thresholds for collecting VAT at the border arising from consumers purchasing low value goods online from overseas should be lowered, reconfigured or even eliminated.5 Fifth, in many jurisdictions the obligation to collect and remit the VAT could, as an administrative measure, be imposed on the digital platform instead of the vendors whose goods or services are being sold on the platform and imported into the jurisdiction of the consumer.6

Each of these principles is designed to be consistent with, and give practical effect to, the laudable aim of taxing final consumption expenditure in the jurisdiction where the consumer is located. This is described as being the ‘overarching’ purpose of a VAT in the OECD International VAT/GST Guidelines.7

Tax authorities started to realize that these measures were highly effective in raising revenues. With just a hint of hubris, the European Commission reported revenues for the first 6 months of €6.8 billion (US$7 billion) from new measures designed to deal with cross-border business-to-consumer (B2C) online shopping introduced in July 2021, with almost €700 million (US$728 million) representing new VAT revenue.8 Likewise, the Australian Taxation Office initially budgeted to receive AU$350 million (US$246 million) in revenues over 4 years from its GST digital economy measures9, but in fact realized revenues of AU$355 million (US$250 million) in 2017-18 alone, rising to AU$990 million in 2020-21 (US$700 million).10

In the period from roughly 2015 to 2022, new measures to tax the digital economy under indirect tax systems have also spread around the world at a rapid pace, reportedly reaching over 100 countries.11

The storm began with the initial phase of implementation. However, as Hugh Bonneville said, “...when you are in the eye of the storm, you are often not aware of the whiplash around you.”

The central thesis of this article is that whilst the taxation of final private consumption is an appropriate policy setting for transactions in the digital economy, there is substantial risk of these measures misfiring when measured against the generally accepted principles of tax policy.13  In this article, we intend to demonstrate that VAT measures introduced to deal with the digital economy are on the cusp of a new and far more volatile period. We will show that while tax authorities around the world were very successful with the initial measures to tax the digital economy under a VAT, we are in the eye of the storm. Not far ahead on the horizon is considerable turbulence. Our fear is that policymakers have been buoyed by their early successes and risk significant overreach as a result. They vastly underestimate the impact of their measures as we move from a phase that was designed to capture (only) the largest digital services providers around the world into everyday businesses embarking on their digitalization journey.

Let’s move forward into the future of VAT in a digital world through the below eight propositions. By their very nature as propositions, they are not intended to provide any guarantees to future outcomes.


Eight propositions on the future of indirect tax

Future of indirect tax proposition 1
Future of indirect tax proposition 2
Future of indirect tax proposition 3
Future of indirect tax proposition 4
Future of indirect tax proposition 5
Future of indirect tax proposition 6
Future of indirect tax proposition 7
Future of indirect tax proposition 8


In this paper we will use the term VAT. It is taken to include a GST, Sales and Service Tax (Malaysia), Consumption Tax (Japan) and in accordance with the definition used by the OECD in its annual ‘Consumption Tax Trends’, it includes “any national tax that embodies the basic features of a value added tax by whatever name or acronym it is known”.

2 Guideline 2.2, OECD (2017), International VAT/GST Guidelines, OECD Publishing, Paris.

3 Guideline 3.6, OECD (2017), International VAT/GST Guidelines, OECD Publishing, Paris, though technically the guidelines apply only to services.

4 Paragraph 3.132 and following, OECD (2017), International VAT/GST Guidelines, OECD Publishing, Paris.

5 Originally proposed in the Report on Action 1 “Addressing the Tax Challenges of the Digital Economy” of the OECD/G20 Base Erosion and Profit Shifting Project (“2015 BEPS Action 1 Report”), OECD, 2015.

6 OECD (2019), “The role of digital platforms in the collection of VAT/GST on online sales”, OECD, Paris.

7 Paragraphs 1.2 to 1.4, OECD (2017), International VAT/GST Guidelines, OECD Publishing, Paris.

8 “New VAT rules for e-commerce: Updated revenue figures point to a successful implementation”, Directorate-General for Taxation and Customs Union, European Commission, 23 May 2022.

9 The Honourable Joe Hockey MP, Treasurer, Press Release entitled “Strengthening our Taxation System”, 11 May 2015.

10 Australian Taxation Office, “GST administration annual performance report: 2020-21”, released February 2022.

11 Richard Asquith of VAT Calc reported on LinkedIn there were 99 countries as of 11 April 2022. More have since been added.

12 English actor born 1963, as cited in www.imdb.com

13 See The Ottawa Tax Framework Conditions, which are helpfully set out in the OECD VAT/GST Guidelines.