Modernisation and digitisation have made doing business globally easy and seamless. Today, it’s easy to order goods and services from any location worldwide from the comfort of your home. Gone are the days you had to go to the market to get whatever you wanted. Due to this, governments are auditing activity regarding the VAT rules around the digital economy.
As a result, policymakers in the world decided to tax the digital economy under an indirect taxation system. It includes value-added tax or goods and services tax (GST). So, what’s its future in the globalised economy?
What have policymakers proposed regarding indirect taxes on the digital economy?
The principle by policymakers for future indirect taxation:
- Indirect taxes must be applied to digital business activities equivalent to traditional businesses. They concluded this to ensure a level playing ground for everyone.
- The taxes must be applied and collected in the jurisdiction where goods and services are consumed.
- If suppliers of digital services have no presence in a jurisdiction where consumption occurs, they need to register and account for VAT there.
- Prevalence and ease of shopping online mean an exemption threshold for collecting VAT at the border. Therefore, for consumers buying low-value goods online overseas, the VAT should be lowered, reconfigured or eliminated.
- In various jurisdictions, the obligation to collect and remit VAT can be an administrative measure imposed on digital platforms rather than imposed on vendors whose goods and services are sold on the platform and imported into the jurisdiction of the consumer.
The principles created consistent and practical effects aiming at taxing final consumption expenditure in the consumer’s jurisdiction. The purpose of a VAT in the OECD International VAT/GST guidelines is to be all-embracing.
What happens to established digital economy players?
Some established digital economy players have managed their registration and compliance obligations globally. It might not be perfect, but compliance with the guidelines is impossible, even with a reasonable risk mitigation strategy. So, what is the quick inventory where divergence issues frequently arise in indirect taxes?
1. Customer location information
Jurisdictions obtain inconsistent custom location details to determine where to account for the VAT. For instance, the EU sourcing approach requires two or more no contradictory pieces of evidence, such as IP address and banking details.
However, whether the country has been doing this for years, it’s never uniform. Moreover, it is tough for digital businesses to maintain multiple rule sets within their systems and processes. Some businesses only use a single criterion to determine consumers’ location because of challenges in reconciling and resolving inconsistencies. Although compliance with these regulations is like a dream, there are no liabilities for non-compliance. Therefore tax authorities need to be cautious before assessing liabilities in this area. Especially if:
- VAT is being dealt with for those transactions
- All the transactions have been allocated to jurisdictions using a reasonable, consistent methodology.
It doesn’t make sense to reallocate the VAT for transactions carried out with a consumer in one country to that of another. That means compliance becomes even harder.
2. B2B V B2C sales
Another Major issue is distinguishing B2B and B2C. A higher number of tax authorities in less developed countries inflict VAT registration and compliance on non-residents involved in B2B transactions. This approach is unfair and should be rejected because it needs to be consistent with good policy design. Non-residents registering VAT accounts and domestic businesses do not impose unnecessary compliance costs.
What authorities need to do is develop public databases where it’s easy to check the VAT status of service recipients. In addition, create application program interfaces to ease and automate the verification process. Failure to try and incorporate these will be subverting their own compliance goals.
3. Registration approach/Threshold
VAT registration approaches differ considerably worldwide. However, some countries apply “nil” thresholds or low approaches that do not achieve and balance compliance costs with tax being collected. On the other hand, other countries are applying different approaches for domestic businesses compared to non-resident businesses. It creates an even ground as the pr approaches are different.
4. Tax invoicing
Most countries apply digital economy measures only to B2C transactions. However, many jurisdictions need a customer to get a tax invoice even though the consumers cannot recover VAT. So, there’s no need to get one and go through the complex invoicing guidelines. Such measures can be tough to implement for companies that sell to more than 100 countries.
Additionally, the rise of e-invoicing and digital reporting regulations brings a new challenge for digital participants. Today only a few countries do not require non-established businesses to use e-invoicing or digital reporting. But this is an area that is growing and requires monitoring.
5. Filing processes
Digital economy participants, as per suggestions, are required to prepare a simplified compliance return. However, today the filing obligations are growing rapidly, and digital platforms are liable to file three returns as per the EU. They include Import One-Stop Shop (IOSS), One Stop Shop (OSS) for services (non-EU scheme) and OSS for goods (EU scheme). On the other hand, other countries need to fill in supplemental reports.
Traditional businesses make a conscious decision to enter certain jurisdictions and have to comply with tax rules there. However, it’s the opposite for digital businesses because they put their products or services online. So they don’t have time to meet these obligations. However, compliance obligations and tax revenues must be balanced globally with business compliance costs. As a result, it’s becoming tough for traditional businesses to switch to the digital space because of numerous challenges.
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