Those about to binge on the latest season of their favourite TV series online are probably blissfully unaware of the tax battle taking place over cross-border digital supplies. The businesses supplying such services, however, would tell you a different story.
Increasingly, countries around the world are making new rules to ensure that items bought by consumers over the internet are subject to sales tax, even when the supplier is based in another country.
Often dubbed Netflix taxes, these measures are generally extensions of existing VAT regimes, designed to close what governments see as a major loophole that deprives treasuries of substantial amounts of tax, while allowing foreign suppliers to undercut domestic businesses on price.
Only a relative handful of jurisdictions have legislated for such changes so far. These include Australia, Japan, New Zealand, Russia, South Africa, and Taiwan. But others are sure to follow. Indeed, Netflix taxes have been given added impetus by the OECD’s base erosion and profit shifting project (BEPS), which has proposed that countries remove VAT exemptions for low-value consignments and introduce taxation on business-to-consumer supplies of certain electronic services in the location of the consumer.
The Destination Principle
However, this is easier said than done.
It is a well-established norm that VAT systems operate on the “destination principle,” whereby VAT on cross-border supplies is levied in the jurisdiction of final consumption. But in the nebulous world of the digital economy, supplies ranging from consultancy to financial services, film, software, and gaming, and much more besides, can easily be purchased by a customer in one country from a business located in another without a national border or customs official ever being involved.
The crucial question is, then, how can VATs and GSTs be enforced on such supplies? After all, entrusting shoppers with declaring and remitting tax on purchases is hardly likely to be the most reliable enforcement mechanism.
In short, the answer is to make businesses themselves responsible, according to those now dictating the international tax agenda. This is because they are more likely to have the administrative systems in place to track VAT liability and account for such, and special procedures can be introduced to ease the additional compliance burden.
Such a system is already in place in the European Union, where supplies of telecommunications, broadcasting, and electronic services have been subject to destination VAT since January 1, 2015. The EU has attempted to mitigate the compliance burden inherent with accounting for VAT in up to 28 member states by introducing a central portal for reporting and paying VAT on intra-EU supplies, known as the mini one stop shop (MOSS).
The system’s has received mixed reviews. Unsurprisingly, the EU claims the regime has been successful, with EUR3bn in VAT having been declared through the VAT MOSS. However, others say that the reforms have been disastrous for small traders, who have been overwhelmed with the additional compliance requirements, and have either voluntarily gone out of business or been forced out.
A Hard Choice
If, anecdotally at least, traders have experienced troubles complying with new VAT rules in an integrated market like the EU, this does not bode well for those businesses supplying services digitally from one non-EU jurisdiction to another, where the rules are a good deal more fragmented and divergent.
In such circumstances, business really only have two options: attempt to comply with the frenetic pace of changes to VAT and GST rules worldwide, or like many small traders in the EU, cease supplying to those jurisdictions where the compliance burden could be more trouble than it’s worth.