Tax Policy & Controversy Briefing
OECD: International VAT and GST Guidelines move to the next stage
How to apply VAT and GST in international cross-border contexts.
For a number of years, the Organisation for Economic Cooperation and Development (OECD) has been working on guidelines on how to apply value-added and generation-skipping taxes (VAT, GST) in an international cross-border context. In this article, we discuss the OECD’s recent consultation process and the likely future development of the VAT/GST Guidelines.
Launch of the consolidated version of the VAT/GST Guidelines
During the OECD’s first Global Forum on VAT on 7 and 8 November 2012 in Paris, businesses, academics and country representatives unanimously came to the conclusion that there is a strong need for internationally agreed-upon principles on VAT. The OECD’s work in this area reached a first milestone in February 2013 with the publication of the consolidated version of the OECD International VAT/GST Guidelines (the Guidelines) on the place of taxation for cross-border supplies of services and intangibles in a business-to-business (B2B) context.
The Guidelines are intended to consist of a set of framework principles that countries can implement in their national legislation. The key objective of the process is to build the largest possible worldwide consensus on using the Guidelines as the future international standard for applying VAT to cross border trade with the view to minimizing risks of double taxation and unintended non-taxation.
As part of the process, the OECD invited interested stakeholders to provide comments on the draft consolidated VAT Guidelines before 4 May 2013. The text of the draft consolidated VAT Guidelines as well as the comments that the OECD received from a number of businesses, interested parties and professional firms, including EY, have now been published and they may be found in full on the OECD website.
An analysis of the comments shows that there is a broad agreement among commentators with the approach and general orientation of the Guidelines. Notwithstanding this general agreement, there seem to be three main areas where changes or additional guidance information are still needed:
1. Definition of “establishment”
Chapter 3 of the draft consolidated VAT Guidelines addresses the place of taxation for cross border supplies of services and intangibles supplied to businesses that have establishments in more than one jurisdiction. Together with other commentators, in our response, we reminded the OECD that unless the Guidelines have a clear definition of the meaning of “an establishment” for VAT purposes, double or non-taxation can result if two jurisdictions involved in a supply apply different definitions of establishment. The result could be either that both jurisdictions seek to attract the place of supply (so the transaction is taxed in both countries) or neither country provides a place for taxation because the existence of an establishment is denied.
As a possible solution to this issue, we recommended that the OECD should examine in more detail to what extent the broadly accepted and well-known definition of “permanent establishment” used in the OECD Model Tax Convention could also serve as a definition for indirect taxes. In our view, using this definition would allow a better alignment between direct and indirect taxes as it would remove the current mismatch between the different definitions which can result, for example, in a company having an establishment for VAT purposes in a country even if it does not have a permanent establishment for income tax purposes. As such, aligning the definitions could significantly simplify the situation for businesses and tax administrations alike.
2. Recharge Allocation Arrangements
The draft Guidelines addresses the case where a customer acquires services for use by other establishments, requiring the customer to recharge the other establishment(s) for using the services or intangible. This internal recharge is treated as consideration for a supply within the scope of VAT. In general, the commentators supported this approach. However a number of concerns were raised in respect of the scope of this method and aspects of its implementation. In particular, we expressed the concern that applying the recharge method to determine the right to tax may trigger other, unwanted consequences that have nothing to do with the place of taxation (e.g., affecting the right to input VAT recovery). In addition, we and other commentators requested that the OECD provide further guidance on the valuation on any internal charge as adopting this approach is likely to raise valuation issues and possible transfer pricing implications, particularly if the chosen approach differs between the jurisdictions involved.
3. Guidelines on types of services to which a specific rule for place of supply could apply
Deciding where a supply of services should be taxed is a difficult issue. Ideally, taxation occurs at the place of consumption but where is a service “consumed”? Generally. VAT legislation adopts a series of proxy tests that seek to ensure that VAT applies in the most appropriate place. For example, it is very difficult to determine where an international telephone call is “consumed”, so the proxy for taxation may be to apply tax in the country where the caller is located.
It is common understanding that the proposed main rule for determining the place of taxation for services under the Guidelines is the place where the customer is located and that this rule should be applied as broadly as possible. But the Guidelines recognize that there are specific services which may require alternative rules. The Guidelines suggest a two-step approach to determine which jurisdiction has the taxing rights over a supply of a service:
- The first step is to test whether the main rule leads to an appropriate result under the criteria of the Guidelines.
- The second step applies if the main rule does not lead to an appropriate result. In that case, the use of a specific place of supply rule for that service might be justified. In this context, the Guidelines mention services related to immovable property as an example of a likely exception. They indicate that these supplies should be taxed at the place where the property is located.
We and other commentators agree with this approach but we would welcome more guidance in this area. After all, double taxation (or non-taxation) currently arises precisely because two jurisdictions apply different proxies to determine the place of supply. We therefore suggested in our comments that the OECD should provide an exhaustive list of all types of services which would not fall under the main rule in order to provide the highest level of clarity and certainty for business.
The OECD is currently updating the draft Guidelines in the light of the responses received and incorporating necessary changes. With this the work on B2B services will come in its final stage and it is expected that the consolidated VAT/GST Guidelines will completed and presented at the second meeting of the OECD Global Forum on VAT, which will take place on 17 and18 April 2014 in Tokyo, Japan.
In the longer term, the OECD will then move onto to developing VAT/GST Guidelines on the place of taxation for cross border supplies of services supplied to final consumers (B2C) as well as developing anti-abuse provisions and provisions on mutual cooperation and dispute resolution.
We will continue to report on progress in this publication on the VAT/GST Guidelines. We will continue to help the OECD in developing the Guidelines further and to contribute our opinions and insights on these topics, based on our experience of working with clients from around the world, to the expert group which was set up to assist the OECD Member States’ delegates in their work.
 See July 2013 edition of this publication at www.ey.com/tpc
For additional information with respect to this article, please contact the following:
- Claudio Fischer
Tax Policy & Controversy
+41 58 286 3433