One of the peculiarities of indirect taxes is that they are very strongly intertwined with the economy. Their tax object usually is an economic transaction, such as the sale of a good or the provision of a service. If the nature of these transactions or the way that such transactions are handled change, this immediately has a strong impact on indirect taxation.
The challenge of e-commerce
A striking example of such a change that has disrupted indirect taxes is the boom of e-commerce. E-commerce may be defined as trading in products or services using computer networks, such as the internet.
In the mid-1990s, the internet became widely available. The world started to be only “one click” away. This change had a huge influence on the behavior of consumers as it became possible to buy a wide range of goods online without going to a store. It further enabled consumers to purchase services from abroad without paying VAT that would have been levied on the same service purchased locally.
Over the last few years, e-commerce has been the fastest-growing sector in many countries. It is expected that the internet economy will account for 5.3% of GDP in the G-20 countries in 2016.
Such an important development implies big changes: it can lead to a distortion of competition between local vendors and foreign vendors, and it can have a significant impact on VAT revenues, particularly in relation to scenarios involving sales to final consumers (B2C transactions).
The international community reacted quickly to this new reality, and already in 1998, the OECD Member States agreed on the Ottawa principles on the taxation of e-commerce:
• Rules for the consumption taxation of cross-border trade should result in taxation in the jurisdiction where consumption takes place.
• An international consensus should be found on which supplies are held to be consumed in a jurisdiction.
• For the purpose of consumption taxes, the supply of digitized products should not be treated as a supply of goods.
• Where a business acquires services and intangible property from suppliers outside the country, countries should examine the use of reverse charge, self-assessment or other equivalent mechanisms.
• Countries should develop appropriate systems to collect tax on the importation of physical goods, and such systems should not impede revenue collection and the efficient delivery of products to consumers.
Rapid development of the internet economy
Recent efforts to evolve taxation
However, the taxation of electronic services remained a patchwork in most countries. In recent years, governments around the world have become active in implementing new rules, realizing that incomplete legislation causes significant losses in revenue.
Recent examples of how the digital economy is influencing VAT law include changes in the EU that introduced new rules on as of 1 January 2015 for the place of supply of B2C electronic services. These services are now subject to tax where the customer is established or resident (instead of where the supplier is established), which requires foreign service providers to register and pay VAT in the EU Member State of the consumer.
But it is not just in the EU that the changes are being felt; similar rules have been or will shortly be introduced in Albania, Angola, Japan, South Africa and South Korea.
The United States faces specific challenges in this regard. US states apply their own consumption taxes, most of which are single-stage taxes on the sale of goods. In order to keep up with the rapid development of the internet economy, a number of states and the federal government successfully enacted legislation that requires “remote sellers” (e.g., vendors who sell taxable goods to customers in other states) to collect and remit tax on multistate sales.
Even more recent is the trend to apply sales and use taxes to transactions involving non-tangible goods (e.g., remote access and electronically delivered software, digital music and books). Equally, the treatment of specified IT service transactions, including data processing, “cloud computing” and “information services,” continue to face scrutiny from state lawmakers. And a number of states have announced that they are considering expanding their sales and use tax laws to cover a wide range of service transactions.
Most notably, lawmakers in California, in late 2014, announced that they would seek to tax nearly all service transactions within the state (except health care and education-related services) to offset a proposed decrease in the personal income tax rate. It remains to be seen if such measures will succeed.
Another interesting development in the digital age is the use of virtual currencies such as bitcoin. Although it is clear that the use of these currencies to conclude transactions triggers many VAT/GST questions, only very few tax authorities have clear views on how they should be treated. The Australia, Singapore and United Kingdom tax authorities have issued guidelines on the VAT treatment of bitcoins and other crypto-currencies.
According to current guidelines, in Australia, bitcoin transactions are treated like barter transactions with similar taxation consequences. From a GST perspective, businesses need to charge GST when they supply bitcoins, and they may be subject to GST when receiving bitcoins in return for goods and services.
In the UK, income received from bitcoin mining activities is generally treated as outside the scope of VAT as the activity does not constitute an economic activity for VAT purposes. Income received by bitcoin miners for other activities will generally be exempt from VAT, as are charges over the value of the bitcoin for arranging transactions. In Singapore, virtual currencies are treated as a supply of services for GST purposes, which do not qualify for GST exemption.
It appears that the positions being adopted by these different countries are not consistent, and that pattern may be expected to continue. Some countries have banned bitcoins outright (e.g., Russia and Vietnam).
Furthermore, other country tax authorities are currently assessing the tax treatment, and additional country-specific guidance is expected going forward (from both an indirect and direct tax perspective). This lack of global consistency may lead to a number of challenges for businesses operating in this market.
This article is included in EY´s Indirect tax in 2015.
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