Indirect tax legislative developments
The far-reaching business changes in the digital economy are challenging existing indirect tax rules, creating uncertainty for taxpayers and concern for tax administrations. In response, many governments are introducing new laws, changing where VAT/GST applies and who is responsible for charging the tax. Some countries are introducing new indirect taxes, and customs regulations and trade agreements are also changing and being interpreted in new ways.
Governments want to safeguard their indirect tax revenues and protect domestic businesses by preventing distortions of competition, but at the same time, they want to promote international trade. Finding tax rules that meet these needs is a balancing act and individual countries currently apply different approaches to applying consumption taxes to remote sales of goods and, in particular, services.
Key indirect legislative developments
- VAT/GST and sales taxes applied to digital services: A growing number of countries are introducing specific VAT/GST rules to apply tax to supplies of digital services provided by nonresidents. Countries that have recently introduced VAT/GST rules in this area or that have announced plans to do so include the EU Member States, Japan, Norway, South Africa, Albania, South Korea, Australia and Canada. In the US, individual taxing jurisdictions are also taking action on the digital economy and there are efforts to introduce multistate taxation in this field. In some cases, digital activity may be caught through the addition of new taxes. The impact of these changes is discussed in more detail below.
- New VAT/GST systems: An increasing number of countries are either introducing new VAT or GST systems to replace or reform their existing consumption tax regime (generally, a single stage sales tax or a collection of taxes). Countries that have recently introduced a new VAT/GST or that have plans to do so include the Bahamas, Malaysia, Tanzania, China, Puerto Rico, Egypt, the Gulf Cooperation Council (GCC) states and India. The introduction of new consumption tax regimes creates uncertainty for all businesses, but this is especially the case for nonresidents that supply goods or services into a country or for businesses with fast-changing business models.
- Changes to the Union Customs Code: Changes to the Union Customs Code of the EU will have a substantial impact on businesses that import goods into the EU as it there will be substantial changes in the field of customs valuation. This provision will have an impact on all business sectors that import goods with high dutiable values. For the digital economy, one of the key provisions is that the new legislation widens the scope of the royalties and license fees that are to be included in the customs value to prevent the undervaluation of goods. In particular, many trademark royalties that are currently exempt from duty will become dutiable additions to value.
Other tax policy developments
- International VAT Guidelines: On 6 November 2015 the OECD published its International VAT Guidelines for cross-border trade, aimed at establishing a set of internationally recognized principles in this area. Although the Guidelines are not legally binding, they are influential and may lead to further legislative change as countries align their consumption tax rules to them.
- EU Consultation: The EU is concerned about the impact of its current VAT/GST rules for e-commerce on the progress of the digital economy. On 25 September 2015, the European Commission issued a press release announcing the launch of a public consultation to help identify ways to simplify VAT payment procedures for cross-border e-commerce transactions in the EU. The consultation ran until 18 December 2015, but the results are not yet available.
The pace of change — what is right today may be wrong tomorrow
The VAT/GST developments that apply to the digital economy are happening at a dizzying pace. Since 2014, many countries have adopted or announced the adoption of a VAT or GST to replace a single stage sales tax and others have adopted (or announced plans to adopt) new VAT/GST rules for digital services. Our digital tax developments map summarizes some of the most recent changes.
Increasingly, governments are not giving taxpayers a great deal of advanced notice before these changes come into force. As a result, it is hard for companies to keep abreast of the changes, but it is vital that they do so. And they must consider the impact on their businesses including their systems, contracts, pricing, invoicing and customer interface. They must also comply with new tax obligations and consider the impact on compliance and reporting, tax controversy and tax planning.
- Webcast replay: major changes to the Union Customs Code
- Union Customs Code and the digital economy
- Digital tax developments map