VAT collection on cross-border services: case study

Business scenario

Consider an example of online suppliers of streaming digital content such as movies and television shows. The supplies are made mainly to consumers who can access the digital content through their computers, mobile devices and televisions that are connected to the Internet. Suppliers that are established in the same jurisdiction as their customers are required to collect and remit that jurisdiction’s VAT on the supplies. If the supplier is a non-resident in the market jurisdiction, issues may arise in the absence of the standards as set forth in the B2C Guidelines. If taxing rights on the streaming services were allocated to the supplier’s jurisdiction at the rate applicable in that jurisdiction, then domestic suppliers of competing services in the market jurisdiction could face potential competitive pressures if the supplier of the digital content is established in a jurisdiction that applies no VAT or a VAT with a lower rate than that of the market jurisdiction. In that case, no VAT or an inappropriately low amount of VAT would be collected and none of the VAT revenue would accrue to the jurisdiction where the final consumption takes place. On the other hand if taxing rights were to be allocated to the jurisdiction where the customer is resident but with no suitable mechanism available to collect the VAT in this jurisdiction, no VAT will actually be paid.

Possible solutions

Under the B2C Guidelines, it is recommended that

(i) the jurisdiction of the usual residence of the customer will have the right to levy VAT on the supply of the digital content,

(ii) the foreign seller will be required to register for VAT in that market jurisdiction under a simplified registration and compliance regime, and

(iii) the foreign seller will be required to charge and collect the VAT in that jurisdiction at the same rate as for domestic supplies.

These Guidelines recognise explicitly that it is necessary to reinforce taxing authorities’ enforcement capacity through enhanced international co-operation in tax administration in the field of indirect taxes. They recommend that such co-operation be enhanced through the development of a common standard for the exchange of information that is simple, minimises the costs for tax administrations and businesses by limiting the amount of data that is exchanged, and which can be implemented in a short timeframe.