Most international trade is subject to VAT and the interaction between the different VAT regimes operating in over 170 countries can have a major impact in either facilitating or distorting trade. Ensuring greater coherence between VAT systems by reference to internationally agreed principles is therefore needed to ensure certainty and minimise risks of double taxation or non-taxation. The International VAT/GST Guidelines and related guidance developed by the OECD through an inclusive dialogue and endorsed by over 100 jurisdictions and international organisations have established common principles for the consistent VAT treatment of the most common types of international transactions.
Consumption taxes
Value added tax, or VAT, is a tax on final consumption, widely implemented as the main consumption tax worldwide. It is levied on the value added at each stage of production and distribution of goods and services then passed along and ultimately paid by the end consumer. The growth in cross-border online shopping is driving increased interaction among national VAT systems. This necessitates international coordination, to address risks of non-and-double taxation that can harm both tax revenues and level playing fields between competing businesses.
Key messages
The growth in online sales by non-resident merchants to private consumers creates significant challenges for VAT systems. Traditional VAT rules and collection mechanisms lack the ability to effectively collect VAT when the vendor is not physically in the same jurisdiction as its customers, leading to no or too little VAT being levied. In the absence of VAT reforms to address these challenges, digital trade growth causes increasing VAT revenue losses and unfair competitive pressure on domestic businesses. The OECD helps countries to implement these reforms based on internationally agreed rules and mechanisms. To date, over 100 jurisdictions, including an important number of developing economies, have successfully implemented reforms based on this policy framework.
VAT is an important source of revenue for most jurisdictions, particularly in developing economies where it often accounts for over 25% of total tax revenues. Safeguarding these vitally important VAT revenues in economies that are being transformed by digitalisation and globalisation is crucial to strengthen domestic resource mobilisation and generate revenues necessary to finance sustainable development. Drawing on its expertise and experience, the OECD develops detailed technical guidance and assists interested jurisdictions in the effective implementation of a comprehensive VAT digital strategy.
Context
The growing adoption of VAT globally
Since it was first adopted in a handful of countries in the late 1960s, VAT has spread rapidly around the world, transforming tax systems almost everywhere and becoming a major source of revenue in 174 countries. The expansion of VAT owes much to its inherent neutrality and efficiency, whether applied domestically or internationally, compared with other forms of taxation.
VAT as a key revenue source worldwide
VAT plays a significant role as a primary revenue source for countries. It is often the largest source of tax revenue for low-income and developing countries, constituting, on average, a quarter or more of their total tax revenue. Safeguarding these vitally important VAT revenues in economies that are being transformed by digitalisation and globalisation is a policy priority for many governments worldwide.
