Recommended approaches for addressing the key challenge of collecting the VAT on the sales of digital products to private consumers by non-resident suppliers were developed by the OECD and G20 in the context of work on the International VAT/GST Guidelines (the “Guidelines”). These Guidelines were developed as a future global standard to address issues of double taxation and unintended non-taxation resulting from inconsistencies in the application of VAT to international trade. Their scope is not limited to the trade of digital products and covers trade in services and intangibles more generally. The Guidelines present a separate solution for business-to-business trade (B2B) and business-to-consumer (B2C) trade, recognising that VAT systems often employ different mechanisms to collect the tax for these categories of transactions. The recommended approach for addressing the challenge of collecting the VAT on the sales of digital products to private consumers by non-resident suppliers is included in the Guidelines that deal specifically with B2C.
The B2C Guidelines present a set of standards for determining the place of taxation for B2C supplies of services and intangibles, in accordance with the destination principle. They provide that the jurisdiction in which the customer has its usual residence has the right to collect VAT on remote supplies of services and intangibles, including digital supplies by offshore suppliers. This standard allows suppliers and tax administrations to predict with reasonable accuracy the place where the services or intangibles are likely to be consumed while taking into account practical constraints. The implementation of these standards aims at ensuring that VAT on such supplies in the market jurisdiction applies at the same rate as for domestic supplies. This ensures the even playing field between domestic and offshore suppliers, so that there is no tax advantage for foreign companies based in low or no tax jurisdictions selling to final consumers relative to domestic companies.
Regarding the key issue of the collection of VAT in the destination country, the B2C Guidelines indicate that, at the present time, the most effective and efficient approach to ensure the appropriate collection of VAT on cross-border B2C supplies is to require the non-resident supplier to register and account for VAT in the jurisdiction of taxation. The B2C Guidelines recommend that jurisdictions consider establishing a simplified registration and compliance regime to facilitate compliance for non-resident suppliers – see table in the separate link below. The highest feasible levels of compliance by non-resident suppliers are likely to be achieved if compliance obligations in the jurisdiction of taxation are limited to what is strictly necessary for the effective collection of the tax. Appropriate simplification is particularly important to facilitate compliance for businesses faced with obligations in multiple jurisdictions. At the same time, in considering simplified registration for VAT purposes, it is important to underline that registration for VAT purposes is independent from the determination of whether there is a permanent establishment (PE) for income tax purposes. Recognising that a proper balance needs to be struck between simplification and the need of governments to safeguard the revenue, the B2C Guidelines indicate that it is necessary that jurisdictions take appropriate steps to strengthen international administrative co-operation, which is a key means to achieve the proper collection and remittance of the tax on cross-border supplies of services and intangibles by non-resident suppliers.
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