VAT Changes Continue to Hit Global E-Commerce Providers
Nick Hart, Senior Director, Indirect Taxes, Radius
Tax authorities in countries around the world continue to change value-added tax (VAT, or GST) rules to try and capture revenues from the e-commerce sector. The new rules are designed to level the playing field between international and domestic operators in this space while (authorities hope) unlocking a gold mine of tax revenue.
Taiwan is the latest country to implement such changes. Foreign e-commerce companies with annual sales to the Taiwanese consumer market that exceed NTWD480,000 ($16,000) are required to register for VAT in Taiwan, charge and collect VAT on their local supplies and file bimonthly VAT returns.
Taiwan’s new rules apply only to business-to-consumer supplies of online services such as film streaming, music downloads and gaming subscriptions. Suppliers of such electronic consumer services have the option of registering for VAT in Taiwan directly or through a local agent. Overseas businesses that operate in the business-to-business market are not affected by the new provisions.
The implementation of the new VAT rules in Taiwan has been challenging for authorities and potential taxpayers, reflecting a broader trend of growing pains in jurisdictions that have not previously required non-resident entities to register for local VAT or GST. On the date of Taiwan’s rollout, authorities were still ironing out key elements of the new provisions. This prompted them to introduce a transitional period, giving foreign registrants until December 31, 2018 to fulfill some of the new requirements.
Similar Provisions in Australia
Similar new rules take effect in Australia on July 1, 2017. On that date, international providers of digital services will need to be registered for and collect goods and services tax in relation to supplies made to the Australian consumer market. Australian authorities are introducing a simplified GST registration process under the new plan. Enforcing VAT rules on electronic transactions is difficult, and authorities hope a registration process that is free from significant administrative burdens and costs will encourage compliance.
Online B2C services are not the only area of e-commerce that is subject to scrutiny and change in Australia. The country is scheduled to abolish its low-value imports threshold for online consumer goods that can enter Australia free of GST.
Under current legislation, Australia imposes import GST only on imports valued above AUD$1,000 AUD ($746). The online consumer market in Australia is dominated by these low-value purchases. A 2011 government study cited by the consumer advocate group Choice.com, for example, indicates that over 76 percent of online purchases are valued at under AUD$100. Not surprisingly, the proposed measure to abolish the threshold is causing concern among electronic retailers and consumers, and a Senate committee is negotiating with the government to delay implementation for a year.
The Australian government portrays the new law not primarily as a tax revenue generator, but as an effort to protect and stabilize the local retail sector, which has lobbied hard for the changes after years of watching commerce migrate online.
However, some economists have argued against the new rule, saying it will be complex and expensive to administer, burdening citizens while raising little money for the government.
Whether the measure will change Australian shopping habits remains to be seen. According to Choice.com, most Australian consumers who shop on foreign websites already save more than the additional 10 percent they could be charged with the new GST, with 68 percent saving more than 15 percent and 43 percent saving more than 25 percent. In any case, the decision to shop online is based more on convenience than saving money, the organization says.
Changes in the European Union
The European Commission is particularly active in seeking new ways to tax the digital economy. In December 2016 it published a report that outlines draft proposals for revising and simplifying the EU’s e-commerce VAT landscape. The proposals emphasize the importance of small operators rather than e-commerce giants such as Apple and Google. They also consider the electronic retail market position within a context that has previously been applied to electronically supplied services.
One proposal looks to revise the EU’s current distance selling rules. These rules require online retailers to register separately for VAT in each EU member state where they deliver goods. This proposal seeks to expand the concept of the current Mini One Stop Shop (MOSS) to cover the e-retail supply of goods. Some estimate that the new system, if implemented as outlined in the draft proposals, could reduce the administrative burden to businesses paying VAT taxes by 95 percent.
The European Parliament's Economic and Monetary Affairs Committee last month issued amendments to the draft proposals. The most striking amendment seeks to make intermediaries liable for bringing to account VAT due on online sales of products in the B2C market. The rule would apply only intermediaries of a certain size. But it’s an indication of the innovative, enforceable and efficient ways that authorities are seeking to tax the e-commerce sector.
The draft plans being discussed by the European Commission also seek to allow EU member states to align the VAT rates of online books, magazines and newspapers with those of print publications, which are generally considerably lower. Such plans could put an end to the much-debated and -contested VAT-rate position of e-books.
The indirect tax-rule changes in Australia and Taiwan, along with the EU’s continued review of indirect taxation, are part of an ongoing global trend to levy VAT for supplies in the B2C e-commerce sector based on the location of consumers rather than vendors. These efforts also seek to address how to best enforce new rules and how to hold noncompliant vendors accountable.
A host of nations have already implemented VAT or GST taxes on foreign e-commerce sales occurring within their local jurisdictions, including Russia, Japan. South Korea, New Zealand and South Africa. Canada and Singapore are considering measures.
Further developments and revisions to local tax codes can be expected as governments worldwide seek to maximize tax revenues from electronic B2C transactions and keep pace with the continued growth and development of the e-commerce sector.
E-commerce companies doing business in foreign consumer markets need to be vigilant about keeping up with tax laws in every country where they have customers purchasing their products and services. If they don’t need to register and pay VAT taxes now, chances are they soon will.
To hear Nick present on how US companies can ensure they're not leaving money on the table, watch his webinar VAT 201: Beyond the Basics.