When they implemented the VAT exemption thresholds for imports of low value goods, jurisdictions generally attempted to find the appropriate balance between the administrative and compliance costs of taxing low value imports and the revenue loss and potential competitive distortions that the exemptions may create. However, these exemption thresholds were generally established before the advent and growth of the digital economy and a review may therefore be required to ensure that they are still appropriate.
If the efficiency of processing imports of low value goods and of collecting the VAT on such imports could be improved, governments may be in a position to lower these VAT exemption thresholds and address the issues associated with their operation. Against this background, WP 9 of the OECD CFA, with the Associates in the BEPS Project participating on an equal footing with the OECD countries, carried out work on possible options for a more efficient collection of VAT on imports of low value goods. A report was prepared on the basis of the outcome of this work outlining and assessing the main available approaches for improving the efficiency of collecting the VAT on such imports, which could allow governments to reduce or remove the exemption thresholds should they wish to do so (the Low Value Imports Report). This report does not set forth recommendations or guidelines but rather provides an analysis of possible approaches for improving the efficiency of the VAT collection on imports of low value goods. It assesses the available options or combinations of options for governments to consider depending on their domestic situation and their exposure to imports of low value goods.
The Low Value Imports Report focuses only on the collection of VAT on imports of low value goods, not on the collection of customs duties. Both the import VAT and the customs duties are generally collected by customs authorities and most countries also operate a de minimis threshold for customs duties, which is often higher than the VAT exemption threshold. Against this background, the report explores models for collecting import VAT that would limit or remove the need for customs authorities to intervene in the VAT collection for imports that are not subject to customs duties. This is expected to lower the cost of collection of VAT on low value imports significantly. VAT on imports of goods above the customs threshold could (continue to) be collected together with customs duties and taxes under normal customs procedures. It is however recognised that customs authorities will keep an important role to play, notably for ensuring the safety and security of the value chain (e.g. detection and prevention of the unlawful movement of illicit and counterfeited goods).
The Low Value Imports Report identifies four broad models for collecting VAT on low value imports and it assesses their likely performance. These models are:
(1) the traditional collection model;
(2) the purchaser collection model;
(3) the vendor collection model; and
(4) the intermediary collection model.
The distinction between these collection models is essentially based on the person liable to account for the VAT. The traditional collection model is the model that is generally applied currently for the collection of duties and taxes at importation, and that is often combined with a VAT exemption for imports of low value goods. The other three models present possible alternative approaches for a more efficient collection of VAT on the importation of low value goods. The operation of these models and their likely performance are summarised in the following paragraphs.
(1) The traditional collection model
The traditional collection model, where VAT is assessed at the border for each imported low value good individually, is generally found not to be an efficient model for collecting the VAT on imports of low value goods. This is certainly the case in the absence of electronic data transmission systems to replace the existing paper based and manual processes.
The efficiency of the traditional collection model may improve over time, as and when electronic systems for pre-arrival declaration and electronic tax assessment and payment are implemented worldwide to replace paper based and manual verification processes. These new electronic processes are already prevalent in the express carrier environment where they have resulted in considerable efficiency gains. The consistent use of such electronic systems would improve the efficiency of the traditional collection model for both tax administrations and vendors. Their worldwide implementation might allow the removal of the current VAT exemption thresholds. The Low Value Import Report notes, however, that these systems are not yet available to process the import of the considerable numbers of low value goods that are moved by postal services. These electronic processes for the postal environment are still under development and may only be available in the medium term.
(2) The purchaser collection model
A model relying on the purchaser to self-assess and pay the VAT on its imports of low value goods is not likely to provide a sufficiently robust solution for an efficient collection of the tax. Although the purchaser collection model is likely to involve only limited compliance burden for vendors, the level of compliance by purchasers is expected to be low and this model would be highly complex and costly for customs and tax administrations to implement and operate.
(3) The vendor collection model
A model requiring the non-resident vendors to charge, collect and remit the VAT in the country of importation could improve the efficiency of the collection of VAT on low value imports and thus create opportunities for governments to remove or reduce import exemption thresholds if they wish to do so. While a vendor collection model would create additional burden for non-resident vendors, these can be mitigated by complementing this model with a simplified VAT registration and compliance regime similar to the one suggested in the context of the OECD International VAT/GST Guidelines on B2C supplies of services and intangibles (B2C Guidelines). When a vendor supplies both goods and services into a particular jurisdiction, the registration system applied under the B2C Guidelines could be used for both kinds of supplies. This would reduce the administrative and compliance costs of the vendor registration. Going further, possible fast-track processing could be made available in customs for low value goods that are imported under this model. The Low Value Imports Report points out that the implementation of such a model is likely to involve considerable changes to existing customs and tax collection processes and systems, and that enhanced international and inter-agency (tax and customs administrations) co-operation would be required to help ensure compliance by non-resident vendors under this model.
(4) The intermediary collection model
A model where VAT on imports of low value goods would be collected and remitted by intermediaries on behalf of non-resident vendors could improve the efficiency of the collection of VAT on such imports and thus create opportunities for governments to remove or reduce import exemption thresholds, assuming that such intermediaries would have the required information to assess and remit the right amount of taxes in the country of importation. The VAT collection by intermediaries would involve minimal compliance burdens on vendors. It may, however, come at an additional cost that may be passed on to the purchaser. This model may be particularly effective when the VAT is collected by intermediaries that have a presence in the country of importation (e.g. express carriers, postal operators and locally implemented e-commerce platforms). The intermediaries’ understanding of local tax and customs rules and procedures could provide benefits to both vendors and tax administrations.
Four main types of intermediaries are identified:
• Postal operators: in the postal operators environment, information is limited and is mostly collected and transmitted on paper forms. Most postal operators do not have the appropriate systems in place to manage the assessment and collection of VAT on importation of low value goods. Electronic collection and transmission processes are being developed but the postal system would still require substantial adjustment to operate an efficient VAT collection model.
• Express carriers: in the express carriers environment, electronic data collection and transmission systems that enable an efficient collection and remittance of import VAT are most often already in place and such VAT collection and remittance to the authorities by express carriers is already common practice. A model whereby nonresident vendors could rely on express carriers to collect and remit the VAT on imports of low value goods could provide an efficient and effective solution, provided it is combined with sufficiently simple compliance regimes and with fast-track processing.
• 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 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 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 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.
• Financial intermediaries: they do not collect the necessary information for the assessment and payment of the VAT on low value imports and the development of a model relying on these intermediaries to collect and remit the import VAT would involve deep changes in the data collection processes. It is therefore considered unlikely that financial intermediaries could play a role in a more efficient collection of VAT on imports of low value goods.
The assessment of the models outlined above suggests that a range of possible approaches are available for increasing the efficiency of the collection of VAT on low-value imports for countries to choose from, depending on national policy decisions and specific circumstances.
Jurisdictions could opt for a combination of models. For instance, an optional vendor collection model could be combined with an intermediary collection model (which may notably allow small and medium size businesses to comply more easily), whereby the vendor as well as the intermediary would benefit from a simplified VAT registration and compliance regime designed and operated in conformity with the system applied under the B2C Guidelines. Both models could be combined with further simplification arrangements, such as fast-track processing in customs. To increase compliance, these models could be combined with a fallback rule whereby VAT would be collected under the traditional collection model (possibly from the final consumer), e.g. if VAT has not been paid either under the vendor or intermediary collection models. Risks of undervaluation or mis-description by foreign vendors of imported goods should be considered for the assessment of the models or combination of models.
The implementation of these models or a combination of them allow jurisdictions to remove or lower the VAT exemption thresholds, should they wish to do so.
It is recognised that any reform to improve the efficiency of the collection of VAT on low value imports will need to be complemented with appropriate risk assessment and enhanced international administrative co-operation between tax authorities to enforce compliance.