This chapter considers regimes that impose a liability on digital platforms for the VAT/GST due on the online sales in which these digital platforms play a role. Section 2.2 of the chapter considers the full VAT/GST liability regime, which makes the digital platform fully and solely liable for assessing, collecting and remitting the VAT/GST due on online sales it facilitates. It includes an analysis of the key aspects and design considerations associated with the scope and operation of the full VAT/GST liability regime both from the perspective of tax administrations and digital platforms and focuses further on a range of considerations associated in particular with the operation of such a regime for online sales connected with the importation of low-value goods (i.e. goods below the customs exemption threshold). This regime has been implemented or is under consideration by a growing number of jurisdictions. Its overarching key policy objective is to reduce the costs and risks for tax authorities of administering, policing and collecting VAT/GST on the ever increasing volumes of online sales, by drawing on the relatively limited number of platforms that facilitate large shares of online sales and that are capable of complying with the VAT/GST obligations in respect of these sales. Section 2.3 of this chapter recognises that tax authorities may wish to consider introducing variations of a liability regime that do not impose a full VAT/GST liability on the digital platforms for the tax due on online sales they facilitate. It briefly considers some alternative approaches in this context.
The Role of Digital Platforms in the Collection of VAT/GST on Online Sales
Chapter 2. The digital platform as the person liable for the VAT/GST on online sales (platform VAT/GST liability regimes)
Abstract
2.1. Introduction
Facing the increasingly important challenge of securing the effective collection of VAT/GST on online trade, an increasing number of jurisdictions have implemented or are considering implementing a regime that imposes a liability on digital platforms for the collection and payment of VAT/GST on the online sales in which these platforms play a role. In this context, there is a broad spectrum of liability obligations that may be assumed by digital platforms either on a mandatory or on a voluntary basis.
These liability obligations may include, without being limited to, treating the digital platform as fully and solely liable for the VAT/GST due on the online sales it facilitates; or as liable for facilitating the VAT/GST collection and payment in the name and on behalf of the underlying supplier that uses this platform to carry out its online sales; or as jointly and severally liable for the VAT/GST due on online sales together with the underlying supplier.
It is reasonable to expect that the design and implementation of a VAT/GST liability regime for digital platforms will reflect the differences in policy and legislative environments, in administrative practice and culture and tax authorities’ distinct challenges and priorities. In addition, differences in platforms’ functions and configurations are likely to affect platforms’ capacity to assume and comply with a specific liability obligation. Moreover, policies may be subject to changes to reflect ongoing developments in markets involving digital platforms.
This chapter therefore is not intended to present or recommend a one-size-fits-all approach for designing and implementing a liability regime for digital platforms. Its core objective is to assist jurisdictions that consider introducing a liability regime for digital platforms to design and operate such a regime. There is much to be gained from analysing the key features of such a regime and identifying possible options and best practices in designing and operating it. A coherent implementation of liability regimes for digital platforms across jurisdictions is likely to enhance the levels of compliance while lowering compliances costs and administrative burden and addressing issues of double or non-taxation. Consistency is also likely to support tax authorities’ enforcement capacity by facilitating international administrative co-operation.
This chapter takes into account the experiences of jurisdictions that have implemented a liability regime or are in the process of doing so, and the feedback from the business community, including from digital platforms.
Section 2.2 of this chapter considers the full VAT/GST liability regime, which makes the digital platform fully and solely liable for assessing, collecting and remitting the VAT/GST due on the online sales it facilitates. This section covers the following aspects:
The basic operation of this regime;
The indicators for identifying whether a digital platform could be enlisted under the full VAT/GST liability regime and other aspects of designing the scope of such regime;
Information needs that are considered relevant when operating under the full VAT/GST liability regime;
The VAT/GST collection and payment process under this regime;
Overarching policy design considerations with respect to the regime;
A range of additional policy design considerations focused on the operation of the regime for online sales connected with an importation of low-value goods.
Section 2.3 of this chapter recognises that tax authorities may wish to consider introducing variations of a liability regime that do not impose a full liability on the digital platforms for the VAT/GST due on online sales they facilitate. It briefly considers some alternative approaches in this context.
2.2. Full VAT/GST liability regime
2.2.1. Overview
Under the full VAT/GST liability regime, the digital platform is designated by law as the supplier for VAT/GST liability purposes. Under this regime, the digital platform is solely and fully liable for assessing, collecting and remitting the VAT/GST on the online sales that go through the platform, to the tax authorities in the jurisdiction of taxation, in line with the VAT/GST legislation of that jurisdiction. This liability regime is limited to VAT/GST obligations only. It does not deal with any other liability aspects for digital platforms beyond VAT/GST, such as for instance product liability.
Box 2.1. A full VAT/GST liability regime
Figure 2.1 and the following paragraphs (1 through 5) provide a description of the basic operation of a full VAT/GST liability regime.
Figure 2.1. Basic operation of a full VAT/GST liability regime
Note: the sequence of numbers assigned in the diagram is for identification only. It is not intended to indicate the timing of a specific step in chronological order.
Source: OECD analysis.
The above graph has been numbered to indicate the following:
1. Assume that a supplier (hereafter the underlying supplier) makes an online sale through a digital platform to a customer in the jurisdiction of taxation.
2. Under the full VAT/GST liability regime for digital platforms, the digital platform through which the sale was carried out is fully and solely liable for the VAT/GST with respect to the sale (hereafter the underlying sale), in accordance with the full liability regime in the jurisdiction of taxation. This regime defines the conditions for the application of this regime, including the type of involvement of the digital platform in the underlying sale that triggers the application of this regime. The basic mechanics for the collection and payment of the VAT/GST under this regime are as follows:
the digital platform assumes full VAT/GST liability as if it has effected the underlying sale to the customer itself. Tax authorities may wish, however, to consider limiting the VAT/GST liability risk under this regime for digital platforms that they consider to have acted in good faith and to have made reasonable efforts to ensure compliance;
the underlying supplier is in principle relieved from any VAT/GST liability on the supply to the customer, to avoid double taxation. Tax authorities may wish, however, to safeguard the possibility to claim the VAT/GST on the underlying sale from the underlying supplier, particularly in cases of fraudulent behaviour of the underlying supplier and as a means to limit compliance risks for platforms that have acted in good faith and have made reasonable efforts to ensure compliance;
in order to avoid a break in the staged collection chain, the full VAT/GST liability regime may treat the digital platform as having received the supply from the underlying supplier and having supplied it onwards to the customer in the jurisdiction of taxation. Each of these supplies is then subject to the appropriate VAT/GST rules, including invoicing and reporting requirements. Such an approach allows the underlying supplier and the digital platform to process the sale for VAT/GST purposes, incl. the deduction of the associated input VAT/GST by the underlying supplier and the entry of an input transaction that corresponds to the output transaction into the digital platform’s VAT/GST accounts;
it is recognised that an approach whereby the digital platform is deemed to have received the supply from the underlying supplier, and to have supplied it onwards to the customer, may in certain cases – this could include cases whereby the deemed supply by the underlying supplier is treated as wholly domestic for VAT/GST purposes, with an obligation for the underlying supplier to collect and remit the VAT/GST in the jurisdiction of taxation and a right for the digital platform to deduct/recover this same amount of VAT/GST in that same jurisdiction - entail cash flow costs for digital platforms (from having to pay VAT/GST to the underlying supplier) and revenue risks for tax authorities (i.e. the risk of generating recoverable VAT/GST for digital platforms that needs to be collected from underlying suppliers). Tax authorities may therefore wish to consider treating the supply by the underlying supplier as zero-rated; or to implement a reverse-charge regime where this is compatible with the domestic VAT/GST rules. Alternatively, tax authorities could also consider disregarding the supply by the underlying supplier for VAT/GST purposes and only focus on the deemed supply by the digital platform to the customer. It is recognised, however, that deviations from normal VAT/GST rules may themselves also create complexity for compliance and administration. Disregarding the supply by the underlying supplier for VAT/GST purposes could for instance create complexity in respect of the supplier’s right to deduct the associated VAT/GST. The operation of rules that deviate from normal VAT/GST operation could also create complexity in a cross-border context, e.g. where one jurisdiction disregards the supply by the underlying supplier for VAT/GST purposes while the other requires the application of the normal rules in accordance with the staged collection process;
each of these supplies is supported by the appropriate documentation covering full value chain for VAT/GST auditing purposes in accordance with the full liability regime in the jurisdiction of taxation. Jurisdictions are encouraged to put in place, as appropriate, simplified documentation and reporting requirements. The principles and guidance as set out in the report on the Mechanisms for the Effective Collection of VAT/GST (the “Collection Mechanisms Report”) (OECD, 2017[1]) also apply in principle to the fulfilment of a digital platform’s VAT/GST liability under the full liability regime (see further under Section 2.2.5).
3. The full VAT/GST liability regime should not have any impact on the right of the underlying supplier to deduct the associated input VAT/GST, i.e. the underlying supplier should retain the right to input VAT/GST deduction according to normal rules. It is up to the jurisdiction concerned to design the appropriate mechanism to that end (see also point 2 above; see further Chapter 2 of the Guidelines – Neutrality of value added taxes in the context of cross-border trade (OECD, 2017[2])).
4. The customer can make the payment for its purchase either to the digital platform or to the underlying supplier. If the payment is made to the digital platform then the digital platform will remit the VAT/GST component to the tax authority in the jurisdiction of taxation. If the payment is made to the underlying supplier, the digital platform will need to recover the VAT/GST component from the underlying supplier in order to remit it to the tax authorities in the jurisdiction of taxation.
5. The digital platform is fully and solely liable for assessing, collecting and remitting the VAT/GST due on the underlying sale and for any other related VAT/GST compliance obligations as required in the jurisdiction of taxation.
Section 2.2.8 provides an overall assessment of the regime both from the perspective of tax authorities and from the digital platforms. It is recognised that the primary policy motivation for tax authorities to consider introducing a full VAT/GST liability regime for digital platforms is to reduce the costs and risks of administering, policing and collecting VAT/GST on the ever increasing volumes of online sales, by drawing on the relatively limited number of platforms at this time that facilitate large shares of online sales and that are capable of complying with the VAT/GST obligations in respect of these sales. These administrative costs and risks are likely to be significantly lower than in a scenario where taxes would need to be collected on individual sales from the large number (potentially millions) of underlying suppliers. At the same time, such a regime could potentially reduce the compliance costs for the underlying suppliers who are likely to face multi-jurisdictional obligations. This chapter discusses a number of approaches that could facilitate and encourage compliance by digital platforms and further mitigate their associated compliance burden and risks.
Several jurisdictions have already implemented or are considering implementing a full VAT/GST liability regime for the taxation of cross-border services and intangibles. A growing number of jurisdictions are considering the implementation of such a regime for the collection of VAT/GST on imports of low-value goods.
It is acknowledged that tax authorities need to take into account a range of additional aspects when designing a full liability regime for the collection of VAT/GST on supplies of goods compared to a regime that is focused on supplies of services/intangibles. Key differences are likely to include the relationship between the underlying suppliers and the digital platform(s) in the supply chain and in order fulfilment; the determination of the place of taxation; the possible application of multiple VAT/GST rates, particularly in respect of supplies of goods; the process for remitting the tax and the interaction with customs authorities and border procedures when goods are imported. The analysis below considers those key differences in further detail (see Section 2.2.7).
2.2.2. What are “digital platforms” for the application of a full VAT/GST liability regime? – Which indicators could be relevant for the application of the full VAT/GST liability regime?
Indicators based on functions performed by the digital platforms
As pointed out earlier, this report does not try to define the term "digital platform", as it is a concept that is likely to evolve over time. This report effectively uses the term "digital platform" as a generic term to refer to the actors in online sales that carry out the functions that can be considered essential for their enlistment by tax authorities in the collection of VAT/GST on online sales. These can generally be described as the platforms that enable groups of customers (typically buyers and sellers) to interact directly and to enter into transactions, through the use of information technology. These actors have been at the heart of the explosive growth of online trade over recent years. Jurisdictions that have enlisted such actors in the collection of VAT/GST on online sales, or that are considering doing so have used several terms to denominate these actors, including: “platforms”, “(online) marketplaces”, or “intermediaries”.
In keeping with this approach, this section focuses on the possible criteria that a tax authority could use when determining the digital platforms it wishes to enlist in the collection of VAT/GST under a full VAT/GST liability regime. The starting point for this is to consider what is required for a digital platform to be able to comply with the obligations of a full VAT/GST liability regime. Whether a digital platform is indeed in a position to comply with such a regime may often depend on its business and delivery model, and a specific analysis and consultation with individual platforms may be required in certain cases. This section, however, explores the functions performed by digital platforms and other indicia that can generally be assumed to allow a digital platform to operate under a full VAT/GST liability regime.
As regards a digital platform’s capability to comply with the VAT/GST obligations under a full VAT/GST liability regime, it is reasonable to assume that a platform will be in a position to comply with these obligations if:
the platform holds or has access to sufficient and accurate information as required to make the appropriate VAT/GST determination; and
the platform has the means (is able) to collect the VAT/GST on the supply.
Bearing in mind these two key requirements for digital platforms to be reasonably able to comply with a full VAT/GST liability regime, tax authorities may develop more specific guidance on the digital platforms that they consider to be in scope of such a regime. This could be achieved by reference to the functions performed by digital platforms that are indicative of these platforms’ capability to comply with VAT/GST obligations under a full VAT/GST liability regime.
The Annex A provides a non-exhaustive list of examples of functions that have been considered by tax authorities as relevant for determining whether or not a digital platform is capable of complying with the full VAT/GST liability regime.
It is for tax authorities to decide on the level of detail they want to go into when providing indicators of digital platforms’ inclusion in the scope of such a regime. Possible approaches include the use of list(s) of functions that are considered indicative of a digital platform’s capability to take on the full VAT/GST liability obligation (i.e. a positive list); and/or of digital platform’s inability to take on the full VAT/GST liability obligation (i.e. a negative list). The use of detailed indicators for platforms’ inclusion in, or exclusion from, a full VAT/GST liability regime has the advantage of enhancing certainty for digital platforms and tax authorities. It may be challenging, however, for tax authorities to keep such detailed indicators up-to-date in light of the rapid evolution of e-commerce business models and of information technology and the capability it provides to digital platforms to comply with VAT/GST obligations under a full VAT/GST liability regime. This could result in an uneven playing field, where some digital platforms remain out of scope of a full VAT/GST liability regime on the basis of the indicators defined by a tax authority, although they are in fact in a similar position to platforms that are covered by the regime and have the capacity to comply with it, e.g. through the implementation of new technologies that are not yet reflected in these indicators.1
Against this background, tax authorities may wish to build in some flexibility when designing and implementing the indicators for the inclusion of digital platforms under a full VAT/GST liability regime. Apart from neutrality considerations, which require that digital platforms that are in a similar situation are treated equally, a flexible approach also allows tax authorities to give due consideration to the proportionality aspect. For example, a platform may meet the criteria for the imposition of a full VAT/GST liability regime on the basis of the functions it performs, whereas the application of this regime would in fact result in disproportionate compliance burden given the platform’s technological or financial capabilities. This may be the case for small and medium digital platforms and for start-ups. Tax authorities may therefore consider a flexible approach that provides the possibility for a digital platform to prove on the basis of compelling evidence that a full VAT/GST liability obligation would be disproportionate. This would still leave the possibility for tax authorities to enlist such platforms for another role in the VAT/GST collection process, e.g. an information sharing obligation. To avoid potential risks of uneven treatment of platforms that are in similar situation, it is recommended that such a flexible approach be based on clear and robust criteria and any exclusion from the full VAT/GST liability regime be reviewed regularly so as to reflect any changes in the technological or financial capacities of the digital platform concerned.
To further increase certainty, tax authorities may wish to make a digital platform’s exclusion from a full VAT/GST liability obligation subject to additional conditions. These conditions could include that the digital platform that is granted the exclusion from the regime enters into an agreement with its underlying suppliers that explicitly confirms the underlying suppliers’ obligation to collect and remit the VAT/GST on their supplies made via the digital platform and to fulfil all other associated VAT/GST obligations.
Overarching principles for designing indicators for the full VAT/GST liability regime
When setting the indicators for digital platforms’ eligibility for a full VAT/GST liability regime, tax authorities may also wish to consider the following broader policy aspects:
It is advisable that any indicators for the eligibility of digital platforms for a full VAT/GST liability regime are based on functions rather than on types of platforms or business models. There are innumerable types of digital platforms and their business models may often be unique and in constant evolution. Despite this variation and flexibility, however, digital platforms generally build their activities on a number of key functions. Building indicators based on functions performed by digital platforms, rather than on their business models, is likely to be more future-proof and to encourage greater consistency in the tax treatment of platforms performing similar functions irrespective of the business and delivery models used. These indicators will need to take into account the differences between the supply of goods and the supply of services/intangibles;
To address cases where more than one digital platform in a supply chain is eligible for a full VAT/GST liability regime, tax authorities could consider applying hierarchy rules;
Any approach for defining the digital platforms’ eligibility for a full VAT/GST liability regime will need to be reviewed regularly in light of technological and commercial developments to ensure their efficiency and effectiveness;
Consulting with the business community is essential for the design and the effective and more efficient operation of a full VAT/GST liability regime. Such consultations are necessary for tax authorities to acquire a thorough understanding of digital platforms’ capability to take on the full VAT/GST liability obligation, in light of the functions performed by these platforms without creating compliance and administrative burdens that are disproportionate to the revenues involved and to the overall policy objective of introducing such a full VAT/GST liability regime;
It is important to provide clear and easily accessible information, preferably on-line, on the indicators for digital platforms to fall under the full VAT/GST liability regime.
2.2.3. Other aspects of designing the scope of a full VAT/GST liability regime
This section examines a range of key considerations for tax authorities when scoping the full VAT/GST liability regime for digital platforms in the VAT/GST collection process.
Foreign digital platforms (i.e. operated by non-residents) vs. domestic platforms
In principle, it should not matter whether the digital platform is operated by a resident or by a non-resident of the taxing jurisdiction. Consideration might be given however to the fact that enforcement might be more challenging against foreign digital platforms, and tax authorities might consider introducing additional (reasonable and proportionate) safeguards to reduce risks of non-compliance where appropriate.2 Additional consideration might also be given to how domestic rules currently applicable to domestic digital platforms may interact with conditions imposed under the full VAT/GST liability regime.
Foreign suppliers and/or domestic suppliers?
In principle, the introduction of a full VAT/GST liability regime for digital platforms could be considered primarily for the collection of VAT/GST on supplies by an underlying supplier that is not located in the taxing jurisdiction, recognising that it may be more challenging for a tax authority to enforce compliance on (potentially millions) of foreign underlying suppliers.
However, limiting the scope of the full VAT/GST liability regime to transactions carried out by underlying suppliers that are not located in the taxing jurisdiction is likely to create compliance complexities for digital platforms (incl. the need to operate compliance processes that distinguish between domestic and foreign suppliers) and audit challenges for tax administrations (incl. checking the location of underlying suppliers and, for domestic suppliers, whether these have remitted the local VAT/GST on the sales that they carried out through the digital platform). These considerations might support the application of the full VAT/GST liability regime to all the relevant transactions irrespective of the location of the underlying supplier.3 Alternatively, tax authorities that limit the scope of a full VAT/GST liability regime to supplies by foreign underlying suppliers, may consider allowing digital platforms to agree with their domestic underlying suppliers that the platform will be fully liable for the VAT/GST obligations in respect of the supplies made by these underlying suppliers.
Services/intangibles and/or goods?
Services and intangibles: specific services (e.g. digital/electronic services) vs. all services
A number of jurisdictions have chosen to limit the scope of the full VAT/GST liability regime to digital platforms that intervene in what can broadly be described as remote digital/electronic supplies by foreign suppliers.4
This approach to focus on specific types of services may have been motivated by the objective of ensuring the effective collection of VAT/GST on supplies in sectors where tax revenue was considered to be most at risk while aiming to avoid changes for suppliers and tax administrations in areas where there is no compelling need to deviate from existing collection regimes.
The reliance on digital platforms for VAT/GST collection may also be motivated by the fact that digital supply chains are often long and complex, and that suppliers in this chain may not be aware of the roles of the various parties in the chain. An approach that relies on the digital platform to collect and remit the tax that is due on the ultimate supply to the end customer may be expected to provide an efficient solution for tax administrations – and the experiences of jurisdictions who have already adopted this model appear to support and confirm that expectation.
Broadening the scope of this regime to cover other types of services (such as transportation or accommodation services as well as other “on-the-spot” supplies i.e. non- remotely delivered supplies) appears theoretically possible. It requires, however, a careful balancing of a number of considerations including the potential disadvantage of applying this regime for supplies where there may be no need to deviate from the full VAT/GST liability at the level of the underlying supplier. Moreover, the treatment of those supplies may be particularly relevant in the context of the so-called “sharing” and “gig” economy area (as also mentioned in Chapter 1, Section 1.3.3.) where both tax authorities and the business community have identified a clear need for further internationally agreed standards and guidance and WP9 is considering developing further work in response to this request as a matter of priority. This will be the subject of a separate report.
Imported goods: low-value goods vs. all goods
The following paragraphs consider the possible introduction of a full VAT/GST liability regime for the collection of VAT/GST on the supplies of goods from online sales that are directly connected with an importation of these goods. It focuses primarily on the online sales of imported low-value goods (as defined by the taxing jurisdiction), which has increasingly become a pressure area for tax and customs authorities worldwide. The 2015 BEPS Action 1 Report analysed this issue and the possible policy responses in some detail (OECD, 2015[1]).This report found that one of the main VAT/GST challenges of the digital economy related to the importation of low-value parcels from online sales which are treated as VAT/GST exempt in many jurisdictions. Many jurisdictions apply an exemption from VAT/GST for imports of low- value goods as the administrative costs associated with collecting the VAT/GST on the goods are likely to outweigh the VAT/GST that would be collected. The values at which these exemption thresholds are set vary considerably but regardless of the threshold value, jurisdictions around the world have seen a significant growth in the volume of imports of low-value goods on which no VAT/GST is collected. The 2015 BEPS Action 1 Report acknowledged that this had “resulted in decreased VAT/GST revenues and the growing risk of unfair competitive pressures on domestic retailers who are required to charge VAT/GST on their sales to domestic consumers. It also creates an incentive for domestic suppliers to relocate to an offshore jurisdiction in order to sell their low-value goods free of VAT/GST” (OECD, 2015[1]). These exemption thresholds were generally established before the advent and growth of the digital economy, and the 2015 BEPS Action 1 Report recognised that a review may therefore be required to ensure that they are still appropriate (OECD, 2015[1]). The 2015 BEPS Action 1 Report also considered that improving the efficiency of processing imports of low-value goods and of collecting the VAT/GST on such imports, could allow governments to lower or remove these VAT/GST exemption thresholds and address the issues associated with their operation (OECD, 2015[1]).
Against this background, the 2015 BEPS Action 1 Report presented and analysed a range of possible alternative approaches for a more efficient collection of VAT/GST on the importation of low-value goods (OECD, 2015[1]). An approach whereby the VAT/GST on imports of low-value goods from online sales would be collected and remitted by digital platforms was identified as presenting great potential. The assessment of this collection model in the 2015 BEPS Action 1 Report is reproduced in Box 2.2.
Box 2.2. 2015 BEPS Action 1 Report on the possible role of digital platforms in the collection of VAT/GST on low-value imports
Transparent e-commerce platforms: transparent e-commerce platforms are platforms that provide a trading framework for vendors but that are not parties to the commercial transaction between the vendor and the purchaser. These platforms generally have access to the key information that is needed for assessing the VAT/GST due in the country of importation of low-value goods. Some of the leading marketplaces already provide tax compliance services to their vendors. A model where VAT/GST on imports of low-value goods would be collected and remitted by such transparent e-commerce platforms on behalf of non-resident vendors could provide an efficient and effective solution, provided it is combined with sufficiently simple compliance regimes and with fast-track processing. It is recognised, however, that these e-commerce platforms may often still need to implement systems changes to ensure a sufficiently efficient and effective VAT/GST collection and remittance process. When e-commerce platforms do not have a presence in the country of importation, enhanced international and inter-agency (tax and customs administrations) co-operation would be required to help ensure compliance by these platforms.
Source: Addressing the Tax Challenges of the Digital Economy, Action 1 – 2015 Final Report, p. 125 (OECD, 2015[1]).
Data suggest that such imports of low-value goods represent the vast majority of packages that reach the borders from online trade, and create increasingly significant logistical challenges for customs authorities to process. Parcel volume increased from 44 billion in 2014 to 65 billion in 2016 across 13 major markets5 and continues to increase at a growing rate that is calculated to be 17-28% each year between 2017 and 2021 (Pitney Bowes, 2017[2]). This increase has been facilitated by technological innovation, which have dramatically increased digital platforms’ and underlying suppliers’ capacity to deliver goods to customers worldwide against increasingly lower costs and within increasingly shorter delivery times (Pitney Bowes, 2017[2]).
Against this background, a full VAT/GST liability regime for digital platforms is being considered by a growing number of jurisdictions as a potential approach to increase the efficiency and the effectiveness of VAT/GST collection on imported low-value goods. These measures typically focus on the collection of VAT/GST on imports of low-value goods, i.e. imports with a value below the de minimis threshold for customs duties.6 Against this backdrop, the focus of full VAT/GST liability regimes on imports below the de minimis customs threshold is essentially motivated by the consideration that a requirement for digital platforms to collect and remit the VAT/GST on imports of low-value goods will limit or remove the need for customs authorities to intervene in revenue collection processes for imports that are not subject to customs duties. This is expected to lower the cost of collection of VAT/GST on imports of low-value goods significantly. It also allows customs authorities to fully allocate their resources and capacity on the other key roles they perform, notably to ensure the safety and security of the value chain (e.g. detection and prevention of the unlawful movement of illicit and counterfeited goods). VAT/GST on imports of goods above the customs threshold can then (continue to) be collected together with customs duties and taxes under normal customs procedures with imports of goods that are directly connected to online sales.
Sales of goods that were previously imported into the taxing jurisdiction and that are already in that jurisdiction at the time of the supply (for example, goods that were imported and stored in warehousing facilities or fulfilment houses before the time of supply) are not covered here. Such supplies will generally constitute a domestic supply. The role of digital platforms in collecting the VAT/GST on such domestic supplies will depend on a broader set of considerations concerning the scope of the full VAT/GST liability regime and its possible interaction with other measures (e.g. measures targeting the fulfilment houses - see Chapter 4).
B2B and B2C supplies
In cases where the domestic VAT/GST rules do not distinguish between B2B and B2C supplies, the full VAT/GST liability regime could apply for the collection of VAT/GST on both categories of supplies performed via a digital platform.
Where a jurisdiction distinguishes between B2B and B2C supplies for the collection of VAT/GST on inbound supplies, the implementation of a full VAT/GST liability regime would generally not be intended to affect/replace the operation of existing collection mechanisms for inbound B2B supplies. The latter are typically based on self- assessment (i.e. reverse-charge mechanisms or absence of the obligation to remit the tax in cases where the business customer has a full right to deduct the input tax) or involve the right to defer the payment of tax to a later stage (e.g. in the context of the importation of goods).
Where different VAT/GST rules are applied for B2B and B2C supplies, such as different rules for determining the place of taxation and for collecting the tax, knowing the status of the customer (business or non-business) is indispensable for determining the correct VAT/GST treatment of a supply. This needs to be recognised when designing and implementing a full VAT/GST liability regime for digital platforms in the collection of VAT/GST on online sales: digital platforms that have a full VAT/GST liability obligation for supplies carried out through the platform will need clear guidance from tax authorities on how to make the distinction between the B2B and B2C supplies where required, thereby recognising that these platforms should be allowed to rely on the basis of information to which they have access or to which they can be reasonably expected to have access when making such a distinction.
Against this background, jurisdictions are encouraged to rely on the guidance concerning the indicia for determining customer status included in the Collection Mechanisms Report (OECD, 2017[3]).
Where a digital platform, acting in good faith and having made reasonable efforts to obtain the appropriate evidence, is unable to establish the status of its customer, a presumption could be applied that the customer is a non-business customer, in which case the rules for B2C supplies would apply. Such an approach would be in accordance with the Guidelines (OECD, 2017[4]). What may be considered as reasonable efforts will generally depend on the circumstances. For example, if the customer provided a VAT/GST registration or identification number that has proven to be invalid e.g. when checked on-line via the relevant website of the tax authorities, the digital platform may presume that the customer is a non-business and apply the rules for B2C supplies.
2.2.4. Information needs that are considered relevant when operating under the full VAT/GST liability regime
To make the correct tax determination under the full VAT/GST liability regime, digital platforms should in principle be able to rely on information that is known or can reasonably be obtained at the time when the tax treatment of the supply must be determined (see under Section 2.2.5, the analysis on the taxing point).
It may be considered reasonable that digital platforms operate under the assumption that the underlying suppliers that are selling through their platform are businesses unless they have information to the contrary. Other key information elements that can be considered as relevant for digital platforms to make the correct VAT/GST determinations under the full liability regime may include:
Customer status (if taxing jurisdiction already differentiates between B2B and B2C);
The nature of the supply;
Elements to determine the place of taxation and/or the applicable VAT/GST collection regime;
VAT/GST exemption threshold for VAT/GST registration and/or collection purposes (if in place);
The value of the supply and the applicable VAT/GST rate;
The taxing point (i.e. the point at which VAT/GST liability arises).
These information elements may be either known to digital platforms or could be obtained.
Platforms could be allowed to rely on a “business systems approach”, i.e. on business systems and processes that provide a reasonable basis for the platform to calculate its VAT/GST liability. Moving to a business systems-based approach will normally require tax authorities to acquire a good understanding of the relevant digital platforms’ business model and their business and tax compliance systems, so that tax authorities can properly validate the reliability of platforms’ systems and assess the platforms’ compliance through systems-based audits.
It is crucial that the tax authorities ensure that platforms have access to updated information concerning their obligations and compliance processes, to give them the capacity to comply in a timely fashion with their obligations in the taxing jurisdiction. Jurisdictions are therefore encouraged to make available on-line all information necessary to register and comply as well as the relevant and up-to-date information that foreign digital platforms are likely to need in order to make their tax determinations (e.g. systems where the digital platforms may validate in a timely manner the validity of a VAT/GST registration number that was provided by the customer and identify applicable VAT/GST rates). Jurisdictions that are in a position to make this information available in machine readable format, are encouraged to do so. This is likely to substantially facilitate compliance by reducing the need for human intervention and manual input. This is expected to be especially helpful in facilitating compliance for digital platforms that face obligations in multiple jurisdictions.
It is reasonable to expect that digital platforms have implemented appropriate measures to ensure the accuracy and reliability of the information on which their tax determination is based, including where that information is collected from underlying suppliers or third parties. Jurisdictions may consider implementing a rule that reduces or eliminates digital platforms’ liability for mistakes resulting from reliance on inaccurate information, if they can supply evidence of their good faith and of their reasonable efforts to secure the accuracy and reliability of the information on the basis of which they have acted. What is considered as “reasonable efforts” is for tax authorities to decide and is likely to depend on circumstances.
2.2.5. VAT/GST collection and payment process under the full VAT/GST liability regime
Under the full VAT/GST liability regime, the digital platform is in principle required to assess, collect and remit the VAT/GST to the tax authorities and comply with the VAT/GST reporting and other obligations as required under the VAT/GST rules in the taxing jurisdiction.
A crucial element in the design of a full VAT/GST liability regime for digital platforms is the definition of the taxing point, i.e. the time at which the digital platform is required to account for the VAT/GST on the supplies carried out through its platforms for which it has VAT/GST liability. Such a specific definition of the taxing point is required, recognising that the application of the standard rules for determining the taxing point are likely to create significant complexity for digital platforms under the full VAT/GST liability regime. Indeed, this regime requires the digital platform to account for the VAT/GST on supplies going through its platform without being the actual underlying supplier – it may therefore not always have all the information that is required to determine the taxing point according to standard rules (e.g. time of actual supply, performance or delivery, time of receipt of payment(s) by the supplier…) and, where it has this information, it is likely to create undue compliance burden for digital platforms to make that individual determination for each of the potentially millions of supplies for which it has VAT/GST liability. A practical solution for this problem is to define the taxing point at the time at which the confirmation of the payment is received by or on behalf of the underlying supplier. This is the time at which the payment has been accepted or authorised by or on behalf of the underlying supplier. This does not necessarily mean that the actual money transfer has been made. The diagram in Annex B provides a simplified illustration of a basic payment processing cycle.
In the area of imports of low-value goods the definition of the taxing point by reference to the time of confirmation of the payment, which is generally at a time prior to shipping or arrival of goods at the border, creates the opportunity to move the collection of the VAT/GST on the supplies of imported goods from online sales away from the border (which is currently the general practice), and thus to limit or remove the need for customs authorities to intervene in the VAT/GST collection on these imports of low-value goods (see further analysis in Section 2.2.7 below).
Moving the taxing point to the time of confirmation of payment both for the supply of services and for the supply of goods may simplify compliance under the full VAT/GST liability regime, particularly for digital platforms that intervene in the online supply of both goods and services.
A range of possible scenarios is conceivable for the practical process of collecting and remitting the VAT/GST by a digital platform under a full VAT/GST liability regime. The main distinction is between the scenario where the customer pays the VAT/GST- inclusive price to the platform and the scenario where the customer pays directly to the underlying supplier.
Where the customer pays the purchase price inclusive of VAT/GST through the digital platform, the digital platform will in principle remit the VAT/GST component to the tax authorities in the taxing jurisdiction and the balance (sales price minus any fees and commissions) to the underlying supplier
If the customer pays the purchase price inclusive of VAT/GST directly to the underlying supplier, the digital platform will need to recuperate the VAT/GST component from the supplier (plus any fees and commissions). Tax authorities are encouraged to consider implementing an appropriate bad debt relief arrangement to limit the potential risk of default by underlying suppliers in remitting the VAT/GST to the digital platform provided that the digital platform has made reasonable efforts to ensure compliance.
Care will need to be taken to avoid a cascading effect in the latter case, i.e. to avoid VAT/GST being applied on the recovery of the VAT/GST amount by the digital platform from the underlying suppliers, while applying the normal VAT/GST rules to the commission and/or fees collected by the digital platform for its services from the underlying supplier.
The highest levels of compliance by digital platforms are likely to be achieved if compliance obligations in the jurisdiction of taxation are limited to what is strictly necessary and supported by appropriate simplification. The Collection Mechanisms Report describes the main available mechanisms for collecting the VAT/GST from foreign suppliers, focusing on the simplified registration and compliance mechanism, and provides guidance for the effective operation of this mechanism in practice (OECD, 2017[3]). The principles and guidance set out in this report also apply, in principle, to the fulfilment of a digital platform’s VAT/GST liabilities under the full VAT/GST liability regime. When a digital platform facilitates both goods and services into a particular jurisdiction, the simplified registration and compliance system could be used for both kinds of supplies. This would reduce the administrative and compliance costs of the registration mechanism. This would reduce the administrative and compliance costs of the registration mechanism.
Annex C to this report recalls the basic features of such a system.
Taking into account that digital platforms may also sell directly to customers as well as facilitating online sales by underlying suppliers, jurisdictions may wish to consider separate VAT/GST registrations for these different types of supplies. Such separate VAT/GST registrations may assist with audit and reporting obligations.
The proper interaction of such a simplified registration and compliance regime with customs processes and systems will need to be ensured.
The registration of a digital platform in a taxing jurisdiction that forms part of a group of countries bound by a common tax and/or customs framework (e.g. the European Union), may be further facilitated through a “one-stop shop” arrangement. Under such an arrangement, the digital platform could register in one member country to fulfil its compliance obligations under the full VAT/GST liability regime in all member countries, including remitting the tax in the country of registration followed by a transfer of the tax to the country of registration to the country of taxation (e.g. the country of final destination of the imported item).
2.2.6. Overarching policy design considerations with respect to the full VAT/GST liability regime
The design and implementation of a full VAT/GST liability regime for digital platforms is likely to differ across jurisdictions, taking into account differences in policy and legislative environments, administrative practice and culture, and tax authorities’ distinct challenges and priorities. Differences in platforms’ functions and size are also likely to affect platforms’ capacity to assume and comply with the regime.
While recognising that the design of full VAT/GST liability regimes is likely to differ across jurisdictions, tax authorities are encouraged to ensure as much consistency as possible in an international context. Consistency among country approaches is key in achieving high compliance levels, notably by reducing compliance costs and improving the quality and performance of compliance processes. This is particularly important for full VAT/GST liability regimes for digital platforms, which are likely to be faced with multi- jurisdictional obligations in respect of supplies that are carried out by third-party suppliers.
Against this background, this section discusses a range of overarching policy design considerations that jurisdictions are encouraged to consider when designing and implementing a liability regime for digital platforms:7
Promote compliance by limiting VAT/GST compliance obligations to what is strictly necessary to facilitate the compliance process. The highest levels of compliance under a full VAT/GST liability regime are likely to be achieved if compliance obligations for digital platforms are limited to what is strictly necessary to ensure the correct and effective collection of the VAT/GST on online sales. This is especially important for non-resident platforms. Where compliance procedures are too complex, their application for non-resident digital platforms may lead to non-compliance or to certain digital platforms declining to serve customers in certain jurisdictions. The compliance processes should be therefore as simple and efficient as possible. Where possible, simplified registration and compliance regimes such as those as presented in the Guidelines (OECD, 2017[4]) and the Collection Mechanisms Report (OECD, 2017[3]) are expected to enable digital platforms to more easily comply with their liability obligations;
Consult with the business community including by reaching out to relevant digital platforms as well as other actors in the supply chain that are likely to be affected by the regime. Such consultations allow national authorities to acquire a thorough understanding of the functions of digital platforms that are likely to be relevant in the collection and remittance of the VAT/GST and of digital platforms’ capabilities to take on a liability obligation. Consultations are also likely to enhance digital platforms’ understanding of their obligations under a liability regime and to benefit their overall compliance. In the area of low-value goods, and given the interaction with customs procedures, jurisdictions are encouraged to also consult with all the stakeholders involved in the import process (e.g. postal operators; couriers; customs brokers, etc.) so as to identify how the full VAT/GST liability regime could work best with existing reporting systems and current cross-border business practice and address any associated challenges in a collaborative and proactive manner;
Publicise the introduction of the regime(s) widely and provide adequate lead time when introducing the regime(s), to leave sufficient time for the national agencies involved as well as digital platforms to adjust their processes and systems. Some of the leading platforms already provide tax compliance services to their underlying suppliers. However, there are many platforms that would need to develop and implement considerable system changes to ensure appropriate levels of efficiency, certainty and effectiveness. In the area of low- value goods in particular the implementation of the regime may involve changes to work practices of border agency offices as well as the redesign of customs clearance systems. Depending on the situation, any changes might be best achieved through a phased implementation and/or grand-fathering provisions for supplies for which the VAT/GST liability was triggered before the law came into effect for both the digital platforms and the national authorities involved. Annex D includes an indicative illustration of such a phased implementation;
Clearly define the VAT/GST obligations of the underlying supplier, notably in its relationship with the platform. This includes clear rules on the VAT/GST status of the relationship between the underlying supplier and the digital platform and the associated compliance obligations (invoicing, reporting etc.);
Ensure that the liability regime does not have any impact on normal VAT/GST deduction rules at the level of the underlying supplier;
Provide guidance on the operation of registration thresholds and/or sales thresholds, where such thresholds have been implemented. Where a threshold exists in the jurisdiction of taxation, it is important to be clear whether it is set at the level of the platform or at the level of each underlying supplier. There may be difficulties for the digital platform in monitoring thresholds at the level of each underlying supplier, particularly as the underlying supplier may have a multi-channel sales strategy using multiple platforms plus perhaps a direct channel of sales. The application of a threshold at the level of the digital platform eliminates that complexity, which is particularly important for small and start-up platforms. The application of a threshold at the level of the platform is also likely to reduce the compliance burden for underlying suppliers, particularly for SMEs and micro-enterprises. On the other hand, the application of a threshold at the level of the digital platform may create a disadvantage for underlying suppliers that are below a registration or sales threshold, but whose sales become subject to VAT/GST when made through a digital platform (because the digital platform will often have exceeded the threshold).8 It is recognised that striking the appropriate balance between the efficiency of the VAT/GST collection on online sales and avoiding or limiting any competitive (dis)advantage for certain categories of underlying suppliers or platforms is a challenging task that requires careful consideration. The key policy considerations concerning the possible implementation of thresholds are covered in more detail in Chapter 2 of the Collection Mechanisms Report (OECD, 2017[3]). These may also serve as a reference point when considering the possible operation of thresholds under a full VAT/GST liability regime;
Consider the need for rules to limit compliance risks for platforms acting in good faith and having made reasonable efforts to ensure compliance, particularly in respect of the information on which platforms have based their tax determination. Digital platforms have to rely on information provided by underlying suppliers and third parties to comply with their VAT/GST obligations under a full VAT/GST liability regime. There is therefore an expectation for platforms to operate meaningful due diligence processes in respect of the accuracy and the reliability of this information. The application of a rule that reduces or eliminates digital platforms’ liability for mistakes resulting from reliance on inaccurate information, if they can supply evidence of their good faith and of their reasonable efforts to secure the accuracy and reliability of the information, offers a balanced approach towards facilitating compliance;
Consider trade-related issues. The neutrality of VAT/GST to international trade through the implementation of the destination principle is an important valuable property of this tax, particularly in the context of international trade. Under the destination principle, no VAT/GST is levied on exports, and imports are taxed at the same rate and according to the same rules in the jurisdiction of destination as if they had been domestic production. There is thus no advantage in buying from a low/no tax jurisdiction; nor do high and/or multiple VAT rates distort the level or composition of a country’s exports (see further Chapter 2 of the Guidelines – Neutrality of value added taxes in the context of cross-border trade) (OECD, 2017[4]). A full VAT/GST liability regime for digital platforms is in principle expected to facilitate cross-border sales by simplifying compliance with foreign VAT/GST rules for underlying suppliers. Tax authorities should nonetheless ensure that, in accordance with the Guidelines, the domestic design and operation of such a regime is consistent with the application of the destination principle and does not unduly affect the international neutrality of VAT/GST (OECD, 2017[4]). Guideline 2.6 recognises that specific measures may be required for transactions involving foreign businesses – this also applies to digital platforms (OECD, 2017[4]). This Guideline clearly indicates, however, that such measures should not create a disproportionate or inappropriate compliance burden. Tax authorities are therefore encouraged to take due account of the approaches for a consistent design of full VAT/GST liability regimes and for limiting compliance complexity as outlined in this report;
Ensure close co-operation/coordination between the VAT/GST and customs authorities. The application of the full VAT/GST liability regime for the collection of VAT/GST on supplies that are connected with an importation of low-value goods is likely to require changes to both the tax administration and customs processes (see Section 2.2.7). The close co-operation between the VAT/GST and customs national authorities is of great importance for a successful design and implementation of the regime, and should commence from the very early stages of the design of the regime. The need for this co-operation is also recognised by the WCO Framework of Standards;
Complement the design of the full VAT/GST liability regime with robust international administrative co-operation and the implementation of a risk based compliance strategy as appropriate. It is recognised that any reform to improve the efficiency of the collection of VAT/GST under the full VAT/GST liability regime will need to be complemented with enhanced administrative co-operation between tax authorities to enforce compliance. This co-operation should include the exchange of information which would be helpful for identifying parties in a supply/import process, monitoring the value of sales/imports, and assessing whether the proper amounts of VAT/GST have been collected from purchasers and remitted to the tax authorities in the taxing jurisdiction (see further Chapter 4, Section 4.5). Effective risk management approaches include the preparation of risk indices or risk profiling standards as well as the use of technological means to identify non-compliant digital platforms, which may enable national administration to adopt a proactive rather than a reactive response to supply chain risks while facilitating legitimate trade (see further Chapter 4, Section 4.7).
2.2.7. Additional policy design considerations for full VAT/GST liability regimes for online sales connected with an importation of low-value goods
Basic operation of a full VAT/GST liability regime for online sales connected with imports of goods
Recognising that the operation of the full VAT/GST liability regime on imports of low-value goods involves an additional range of considerations and policy decisions, not least to ensure a proper coordination with customs processes, this section provides some further insights to support the policy analysis and design for tax authorities when considering reform in this context. This section complements Section 2.2.6.
While customs procedures are subject to a number of common standards, each country has its own customs clearance procedures in place. These procedures generally follow similar patterns: when a low-value good is imported, the person liable to pay the duties and taxes is the recipient of the goods mentioned on the customs declaration (the “importer of record” or the “declarant”). Under the traditional model for the collection of import VAT/GST, the tax is assessed at the time of importation, i.e. at the border, by the customs authorities in line with customs procedures. For imports of goods from online sales, the customs clearance procedure is typically carried out by the express couriers or postal operators that are involved in transporting the goods, as declarants. Figure 2.2 illustrates the operation of the Traditional Collection Model and Annex E provides further information.
Figure 2.2. Traditional collection model
Source: Addressing the Tax Challenges of the Digital Economy, Action 1- 2015 Final Report (OECD, 2015[1]).
Against the above background, a key design consideration for tax and customs authorities is to ensure the proper operational compatibility of customs processes (as described above) with full VAT/GST liability regimes for digital platforms in the collection of VAT/GST on imports of low-value goods from online sales.
It is useful to recall at the outset that this report recommends that the taxing point under the full VAT/GST liability regime be situated at the time at which the confirmation of the payment is received by or on behalf of the underlying supplier. For a supply that involves an importation of low-value goods, this taxing point is likely to be at a time prior to shipping or arrival of goods. This approach is consistent with the WCO Cross-Border E-Commerce Framework of Standards.9 This creates the opportunity to move the collection of the VAT/GST on the supplies of imported goods from online sales away from the border, and thus to limit or remove the need for customs authorities to intervene in the VAT/GST collection on these imports while allowing them to focus on key tasks concerning the safeguarding of health and security. This is particularly attractive for imports of goods that are subject to import VAT/GST but that have a value below the de minimis customs threshold, i.e. low-value goods10 (see further 2015 BEPS Action 1 Report, Annex C) (OECD, 2015[1]).
To achieve this outcome, the full VAT/GST liability regime that imposes and obligation on digital platforms to assess, collect and remit the VAT/GST on supplies of imported low-value goods from online sales needs to include a measure that removes the obligation to pay import VAT/GST at the border on the relevant goods.
Box 2.3. Full VAT/GST liability regime – operation of imports below customs threshold
Figure 2.3 and the accompanying commentary (1 through 8) illustrate the functioning of a VAT/GST collection and remittance process for imports of goods under a full VAT/GST liability regime in more detail.
Figure 2.3. Operation for imports below customs threshold
Note: the sequence of numbers assigned in the figure is for identification only; it is not intended to indicate the timing of a specific step in chronological order.
Source: OECD analysis.
The above graph has been numbered to indicate the following:
1. Assume an online sale of goods (underlying sale) below the de minimis customs threshold (low-value goods) by a supplier (underlying supplier) through a digital platform to a customer in the jurisdiction of taxation. The good will be imported in the jurisdiction of taxation pursuant to the sale.
2. Under the full VAT/GST liability regime for digital platforms, the digital platform that has facilitated the sale is fully and solely liable for VAT/GST compliance with respect to this sale, i.e. the digital platform assumes full VAT/GST liability as if it has effected the underlying sale itself (instead of the underlying supplier).Tax authorities may wish to consider limiting the VAT/GST liability risk under this regime for digital platforms that they consider to have acted in good faith and to have made reasonable efforts to ensure compliance (see further Section 2.2.1, number 2 in Box 2.1).
3. The full VAT/GST liability regime does not intend to have any impact on normal VAT/GST deduction rules at the level of the underlying supplier as determined by the applicable national legislation, i.e. any deductibility rights at the level of the underlying supplier – according to normal rules - are retained. It is up to the jurisdiction concerned to design the appropriate mechanism to that end (see further Chapter 2 of the Guidelines – Neutrality of value added taxes in the context of cross-border trade (OECD, 2017[2])).
4. The customer can make the payment for its purchase either to the digital platform or to the underlying supplier. If the payment is made to the underlying supplier, the digital platform will need to recover the VAT/GST component from the supplier in order to remit the VAT/GST to the tax authorities in the jurisdiction of taxation. Tax authorities are encouraged to consider implementing an appropriate bad debt relief arrangement to limit the potential risk of default by underlying suppliers in remitting the VAT/GST to the digital platform provided that the digital platform has made reasonable efforts to ensure compliance.
5. In order for the digital platform to calculate the appropriate amount of VAT/GST due on the underlying supply, the digital platform may have to require the underlying supplier to provide certain additional information other than what the digital platform routinely collects in its normal course of business.
6. Under the full VAT/GST liability regime in the jurisdiction of taxation the digital platform assesses the VAT/GST due on the sale of the low-value goods and collects and remits it to the competent authorities (it is acknowledged that tax and customs authorities may be housed under one entity and therefore VAT/GST will have to be remitted to that entity). The imported goods will need to be declared at the border under the traditional customs procedures by the “importer of record” or the “declarant” (usually transporters such as express couriers or postal operators). The associated importation process could be designed and operated as follows:
The imported goods are not subject to any customs or other duties, since their value is below the de minimis customs threshold. Their sale is subject to VAT/GST, and under the country’s full VAT/GST liability regime for digital platforms, it is the relevant platform’s liability to collect and remit this VAT/GST to the relevant authorities in the jurisdiction of taxation. Since it is obligated to remit the VAT/GST on the sale of the imported low-value goods, it is not required to remit the VAT/GST on the importation of these goods at the border. The importation of these goods will thus be disregarded/exempted for VAT/GST purposes. Suitable customs arrangements and processes will need to be in place to efficiently identify the imports that are covered by the full VAT/GST liability regime at the time of their arrival at the border. Checks with respect to undervaluation/misclassification of imported goods will still need to be made by customs authorities as is currently the case.
In order to collect and remit the VAT/GST in the jurisdiction of taxation, the digital platform is required to register in the jurisdiction of taxation/importation and declare and remit the VAT/GST there in accordance with the applicable rules in the jurisdiction. It is suggested that digital platforms are allowed to register via a simplified registration and compliance mechanism (or ‘pay-only’ regime) as recommended by the Guidelines (OECD, 2017[2]) and the Collection Mechanisms Report (OECD, 2017[1]).
Tax authorities together with customs authorities need to ensure that the full VAT/GST liability regime clearly sets out the requirements for the exemption of the VAT/GST on the importation of the goods that are covered by the full VAT/GST liability regime. This will require the necessary documentation accompanying the imported goods, including a valid VAT/GST registration number of the digital platform that is liable for the VAT/GST on the supply of the imported goods from the online sale that it has facilitated, as well as other elements confirming the “VAT/GST-paid” status of the imported goods (the requirement of more than one element for confirming the VAT/GST-paid status of the imported good may mitigate e.g. VAT/GST registration number accompanied by a unique identifier per consignment could mitigate the risk of any fraudulent use of those elements).
If these conditions for exemption at the border are not fulfilled, then the goods are held at the border and the normal customs procedure will apply, i.e. VAT/GST will be due upon importation according to current procedures by the “importer of the good” or the “declarant”.
7. To ensure that the information required to support the “VAT/GST-paid” treatment at the border is made available to customs authorities in a timely manner, the liable digital platform needs to ensure that this information is passed on through the logistics chain (e.g. to the postal services or express couriers if goods are delivered through this channel). Alternatively, or in addition, the digital platform might have to make this information available to the underlying supplier (e.g. electronically), to include it the documentation provided up the delivery chain (postal services, transporters, etc.).
8. Customs authorities and tax authorities will need to have a mechanism in place to facilitate administrative co-operation, including the timely exchange of information (see further under Section 2.2.6).
Given that the full VAT/GST liability regime moves away from the traditional customs process of collecting the VAT/GST at the border, specific care should be given to ensuring compliance by digital platforms under the full VAT/GST liability regime. This is not only required to protect VAT/GST revenues11 but also to avoid competitive distortion for compliant platforms if compliance would not be properly enforced against non-compliant platforms.12 Tax authorities are encouraged to adopt a two-pronged approach whereby, on the one hand compliance is facilitated and encouraged by simplifying procedures and by providing additional incentives for digital platforms to comply, and on the other hand, creating a deterrent for non-compliance.
Chapter 4 to this report considers a range of measures that tax authorities can take to further maximise VAT/GST compliance in respect of online sales, including sales that that are connected with the importation of low-value goods.
The following paragraphs look in some further detail at specific aspects and options for facilitating and encouraging compliance by platforms.
Fast-track customs clearance
Goods treated under a full VAT/GST liability regime will still need to be inspected by customs authorities for safety and security reasons as well as other risks related to drugs, intellectual property rights (IPR) and illicit trade including mis-declaration and undervaluation of the imported goods. One way to further incentivise compliance with the full VAT/GST liability regime for digital platforms is to provide fast-track processing of the goods that are covered by this regime to compliant digital platforms, as trusted parties. Speed of delivery is a crucial factor for online sales. A fast-track procedure therefore provides a strong incentive for digital platforms to comply with a full VAT/GST liability regime for online sales that are connected with the importation of these goods. Imports of goods sold on-line through non-compliant digital platforms in the taxing jurisdiction or that do not comply with the full VAT/GST liability regime do not benefit from fast-track processing and remain subject to the normal customs procedure.
Such a fast-track process requires the implementation of secure methods for identification of the goods that are covered by the full VAT/GST liability regime, i.e. goods for which VAT/GST has already been accounted for by the digital platform (or that have been declared by the digital platform in a periodic return). Timely data exchange between customs and tax authorities as well as other actors within the supply chain e.g. express couriers and postal operators, facilitated by modern information technology, and appropriate risk assessment processes will facilitate such fast-track processing of goods covered by a full VAT/GST liability regime for digital platforms at the border. The speed of data delivery and its quality assurance are likely to be crucial conditions for a successful operation of fast-track processing under a full VAT/GST liability regime. It is acknowledged that the implementation of information exchange processes and risk assessment systems and the reforms of customs processes may require significant investment in time and resources, both for customs and tax authorities and for the digital platforms and other stakeholders (such as postal services and express couriers). Careful planning of such a reform and the provision of sufficient lead time for its implementation are likely to be crucial for its success.
It should be noted, however, that reform towards the implementation of full VAT/GST liability regimes for the importation of goods from online sales with fast-track processing is aligned with commercial trends in online trade whereby digital platforms and other stakeholders such as express couriers continuously seek solutions to enhance the efficiency of delivery for their underlying suppliers. The efficient organisation of goods at the border is a crucial element in this context. The implementation of such a full VAT/GST liability regime for online sales of imported good, with fast-track processing for compliant (trusted) digital platforms, is also likely to reduce the risks of fraud and non-compliance at the border, including inadvertent or deliberate undervaluation and mis-declaration.
Ongoing work at the WCO and at other fora, such as the Universal Postal Union (UPU),13 is expected to further facilitate the operation of full VAT/GST liability regimes for digital platforms in respect of imported goods with fast-track customs processing. This work is developed as a response to the recognition that the existing customs processes are no longer adjusted to the online trade environment. Indeed, as the volume of consignments that arrive at the border has exploded as a consequence of booming online trade, it has become increasingly impossible to inspect every individual consignment at the border on the basis of information provided on paper forms and to establish tax liabilities at the time of arrival at the border in the taxing jurisdiction. This work by the WCO and other fora includes:
The development and implementation of standards for the exchange of advance electronic data to enhance the efficiency of risk management and customs processes at the border;
The introduction of co-operation frameworks between national agencies supported by technology, such as the creation of a Single Window,14 to facilitate a co-ordinated response to safety and security risks stemming from cross-border e-commerce;
The development of simplified clearance procedures and Authorised Economic Operator Programmes and Mutual Recognition Arrangements/Agreements in the context of cross-border e-commerce, including leveraging the role of intermediaries to enable micro-enterprises, SMEs and individuals to benefit from the opportunities of online trade.
Annex F outlines a number of these international regulatory e-commerce developments.
Minimising risks of double taxation
Full VAT/GST liability regimes are, for the time being, mainly being considered by tax authorities for the collection of VAT/GST on imports of goods that are below the de minimis customs threshold. (see Imported goods: low-value goods vs. all goods under Section 2.2.3). VAT/GST on imports of goods above the customs threshold then continues to be collected together with customs duties and taxes at the time of importation in accordance with normal customs procedures. The operation of such a dual collection regime could create risks for double taxation of VAT/GST in some limited circumstances. Such a risk of double taxation could arise where the value of an imported good is calculated differently for customs purposes than for VAT/GST compliance purposes.15 Or where the digital platform collects VAT/GST on a sale of multiple low-value goods to a single customer in the taxing jurisdiction, and then choses to transport these goods in a single consignment that is then valued above the de minimis customs threshold, triggering the collection of VAT/GST by customs authorities on importation in the taxing jurisdiction. Also currency fluctuations could cause double taxation, when a good is under the low- value threshold in the currency of the jurisdiction of taxation at the time of purchase but is then above the low-value threshold when imported. Moreover, the absence of adequate proof that “VAT/GST was paid” under a full VAT/GST liability regime for digital platforms when goods are declared at the border may lead to double taxation.
Jurisdictions are therefore carefully considering such risks of double taxation, taking into account the specific design of their full VAT/GST liability regime for digital platforms, and to develop approaches to address these risks. These approaches could include: (i) allow the digital platform not to collect and remit any VAT/GST prior to the importation (i.e. the VAT/GST will then be collected at the border through normal customs procedures), if it has a reasonable belief based on common industry or commercial practices that the multiple goods will be grouped together (e.g. because the digital platform is also responsible for the shipping of the goods or is informed by the person who organises the shipping that goods will be consigned as a single parcel); (ii) allow digital platforms for purposes of determining whether a good is below the customs threshold, to use as a basis the transaction value i.e. the price actually paid on-line by the customer; (iii) allow digital platforms to use reasonable and coherent internal business exchange rates which are based on averages over time of the official rates (with built-in tolerance for small differences) (see further Chapter 3, Section C.4.3. of the Collection Mechanisms Report) (OECD, 2017[3]); (iv) provide the possibility for the declarant to provide customs authorities with appropriate evidence that VAT/GST has been paid on the low-value goods portion in that consignment and pay only the outstanding amount (if any).
VAT/GST adjustments and corrections including for returned goods
There may be instances where adjustments and corrections are required in respect of the VAT/GST accounted for by a digital platform under a full VAT/GST liability regime for online sales of imported goods. This can occur where goods are refused or simply returned by the customer. This customer will in principle request a refund of the price for these goods, inclusive of VAT/GST. The refund process for this amount of VAT/GST may present challenges, particularly where the VAT/GST has been collected and remitted to the tax authorities by a digital platform under the full VAT/GST liability regime whereas the refund of the price inclusive of VAT/GST is requested from and/or made by the underlying supplier.
Where proof of goods being returned is required to substantiate such adjustments (i.e. proof that the goods have effectively left the taxing jurisdiction), it may be difficult for the digital platform to produce such proof, particularly when the digital platform is not involved in the return process. This is for instance the case in a scenario where goods are returned directly to the underlying supplier, with a requirement of this underlying supplier to refund the VAT/GST-inclusive price to the customer. The VAT/GST included in this price will have been collected and remitted to the tax authorities by the digital platforms, and the underlying supplier will therefore have to claim that amount back from the digital platform. The latter may not always have the proof of goods being returned to substantiate a refund claim for this VAT/GST from the tax authorities in the taxing jurisdiction.
While there is a responsibility for digital platforms and underlying suppliers to organise the matter of refused and returned goods, including the VAT/GST aspects, so that they can deal with these scenarios efficiently, and acknowledging the need for tax authorities to minimise risks of fraudulent VAT/GST refund claims, tax authorities are encouraged to consider possible approaches to facilitate VAT/GST adjustments/refunds to digital platforms under a full VAT/GST liability regime. This would essentially include: the permission for digital platforms, subject to certain conditions, to make the necessary adjustments in their VAT/GST return for VAT/GST remitted under the full VAT/GST liability regime, i.e. to claim back any overpaid VAT/GST resulting from these adjustments or to carry these VAT/GST amounts forward for a reasonable period to offset against future VAT/GST liabilities; allowing digital platforms to base refund claims on (copies of) documentation provided by their underlying suppliers concerning proof or re-export of the returned goods (such as import and/or export declaration and/or proof of order cancellation); establishing electronic refund systems based on reconciliation of data concerning the imported and the returned shipment (if taxes and duties have already been paid) as considered by the WCO.
2.2.8. Overall assessment of the full VAT/GST liability regime
The performance of a full VAT/GST liability regime for digital platforms in the collection of VAT/GST on online sales is likely to depend on its implementation in practice and on the specific economic, legal, administrative circumstances of the jurisdiction that implements this regime (see further Section 2.2.6. above).
It is recognised in general that the application of a full VAT/GST liability regime has the potential to improve the effectiveness of the collection of VAT/GST, as it is likely to reduce costs and risks of tax authorities by drawing on a limited number of platforms that represent large sales of online sales and that are capable of complying. Administrative costs and risks are likely to be significantly lower and compliance levels higher than in a scenario where taxes would need to be collected from potentially millions of underlying suppliers.
In the area of imports of low-value goods, the operation of the regime creates opportunities for governments to remove or reduce import VAT/GST exemption thresholds if they wish to do so. Moreover, moving the collection of VAT/GST on the supplies of imported low-value goods from the border, as recommended by the regime, limit or remove the need for customs authorities to intervene in the VAT/GST collection on these imports while allowing them to focus on key tasks concerning the safeguarding of health and security as well as other risks related to drugs, intellectual property rights (IPR) and illicit trade including mis-declaration and undervaluation of the imported goods. Ongoing developments at other fora, notably at the WCO, are expected to further facilitate the operation of the regime.
The application of a full VAT/GST liability regime requires changes to the tax administration and customs procedures as well as to the business systems to ensure effective VAT/GST compliance. The time required for these changes should be reflected adequately in the implementation timeframe for the regime. Any additional compliance costs on digital platforms could be minimised through some form of simplified registration and compliance regimes. Compliance could be further facilitated and encouraged by providing additional incentives for digital platforms to comply and, on the other hand, by creating a deterrent for non-compliance (e.g. through the implementation of a fall-back rule whereby goods for which no VAT/GST has been accounted for under the full VAT/GST liability regime are stopped at the border and are processed according to normal customs processes). Rules which limit compliance risks for platforms acting in good faith and having made reasonable efforts to ensure compliance could also further facilitate compliance for digital platforms.
The enforcement of compliance under the full VAT/GST liability regime should be further supported through enhanced international administrative co-operation including relevant arrangements in the customs area as appropriate.16 (see also Chapter 4)
Greater consistency among country approaches will further facilitate compliance processes particularly by digital platforms that are faced with multi-jurisdictional obligations as well as support effective international co-operation in the administration and enforcement.
2.3. Other liability regimes for digital platforms in the collection and payment of VAT/GST on online sales
Tax authorities may wish to consider such regimes as an alternative to a full VAT/GST liability regime, to complement a full VAT/GST liability regime for the VAT/GST collection on supplies that are not covered by such a regime, or as an intermediary step towards a full VAT/GST liability regime. Alternative regimes could involve either a role for digital platforms in facilitating the collection and payment of VAT/GST on online sales, without relieving the underlying supplier from its VAT/GST liability (see further Chapter 3, Section 3.5), or the imposition of joint and several VAT/GST liability on digital platforms together with the underlying supplier (see Chapter 4).
As with the full VAT/GST liability regime, the desired objective under each of these regimes is to ensure that VAT/GST is paid efficiently and effectively to the taxing jurisdiction. The key difference between the regimes discussed in this section and the full VAT/GST liability regime discussed in Section 2.2 is that the underlying suppliers are not relieved from their VAT/GST liability. Tax authorities will still need therefore to monitor the underlying suppliers. Nevertheless, these regimes allow tax authorities to indirectly target non-registered foreign suppliers, and may therefore offer a balanced means by which to ensure compliance. These regimes are further analysed in Chapters 3 and 4.
References
[2] OECD (2017), International VAT/GST Guidelines, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264271401-en.
[1] OECD (2017), Mechanisms for the Effective Collection of VAT/GST - OECD, OECD, Paris, http://www.oecd.org/ctp/consumption/mechanisms-for-the-effective-collection-of-vat-gst.htm.
[3] OECD (2015), Addressing the Tax Challenges of the Digital Economy, Action 1 - 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264241046-en.
[4] Pitney Bowes (2017), Pitney Bowes Newsroom | Pitney Bowes Parcel Shipping Index Reveals 48 Percent Growth in Parcel Volume since 2014, http://news.pb.com/article_display.cfm?article_id=5784 (accessed on 3 April 2018).
Notes
← 1. Digital platforms that perform similar functions in the eyes of the underlying suppliers and customers, will be in competition with each other and there will be an ease of switching from one to the other by the underlying suppliers and customers.
← 2. This emphasises that enforcement of compliance by foreign digital platforms can be further supported through enhanced international administrative co-operation and exchange of information (see also Chapter 4).
← 3. Subject to conditions mentioned in Box 2.1.
← 4. These typically include the following categories of supplies: digital content purchases (downloads of e-books, videos, apps, games, music); subscription-based supplies of content (news, music, streaming of video, online games); supplies of software services and maintenance (anti-virus software, digital data storage, software); licensing of content; telecommunication and broadcasting services.
← 5. Australia, Brazil, Canada, China, France, Germany, India, Italy, Japan, Norway, Sweden, United Kingdom and United States
← 6. Please see endnote 5 in Chapter 1.
← 7. This Section is followed by Section 2.2.7 that discusses an additional number of considerations that are of particular relevance to the operation of the regime on low-value imports.
← 8. It could be argued however that underlying suppliers may only have access to certain markets by selling through prominent digital platforms, particularly to foreign markets, which counterbalances the disadvantage of the application of a registration/sales threshold at the level of the platform.
← 9. See Section III of the WCO Cross-Border E-Commerce Framework of Standards on Fair and Efficient Revenue Collection that states that: “In cooperation with Tax authorities alternative collection models should be considered (e.g. vendor model, intermediary or consumer/buyer collection model) to move away as appropriate from the current transaction based duty/tax collection approach where duties and taxes are assessed and collected at the border, towards an automated account-based approach that may involve collection of duties and taxes prior to shipping or arrival of goods.”
← 10. The goods whose value exceed the customs threshold would continue to be processed under existing border collection procedure and taxes and duties would be collected by the customs authorities.
← 11. Once the goods are released into free circulation it may be difficult to trace them.
← 12. For example, avoiding the risk that underlying suppliers are leaving the compliant digital platforms and selling to the taxing jurisdiction through a non-compliant digital platform.
← 13. The Universal Postal Union (UPU), with its 192 member countries, is the primary forum for co-operation between postal sector players. It sets the rules for international mail exchanges and makes recommendations to stimulate growth in mail, parcel and financial services volumes and improve quality of service for customers.
← 14. Under a Single Window, information on shipment/imports is provided at one single point which is accessible by all national agencies concerned.
← 15. Depending on national legislation, the value of an imported good may be calculated differently for customs and for VAT/GST collection purposes. This brings an element of risk in terms of determining whether an imported good qualifies as a low-value good, i.e. below the de minimis customs threshold, for the application of a full VAT/GST liability regime for the collection of VAT/GST on online sales of imported goods.
← 16. The WCO has developed a number of instruments and tools supporting exchange of information (e.g. Nairobi Convention, the Model Bilateral Agreement on Mutual Assistance and the Global Network Customs (GNC)). Based on these instruments, customs administrations have entered into bilateral or multilateral agreements/arrangements for the exchange of information.