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Digital taxation in the global economy - collection of VAT and GST through online marketplaces

For most of the last decade, and even before then, the online business environment has been similar to the Wild West. Around the world, transactions have occurred with very little regulatory supervision, and this state continues to persist today. To remedy the situation, the Organisation for Economic Co-operation and Development (OECD) hosted the Global Forum on VAT from the 20th to the 22nd of March in Melbourne. The main item on the agenda was the topic of digital taxation.

Background on the digital taxation forum

With delegates from more than 100 regional and international jurisdictions, the forum hoped to tackle how VAT and GST revenues would be collected in an increasingly digitised world. One of the primary objectives the forum hoped to achieve is a more level playing field between online sellers and traditional sellers while tackling other problems such as fraud and non-compliance.

The current report on recommended measures builds on the 2015 document, Addressing the Tax Challenges of the Digital Economy, Action 1, which also looked at the collection of VAT on cross-border transactions.

Delegates agreed on a few important measures that will serve as solutions to these problems.

  • Some initiatives will make online marketplaces liable for the collection of VAT and GST on sales made by traders through their platforms.
  • Improved data-sharing mechanisms and greater cooperation between tax authorities have also been encouraged.

Targeting online marketplaces is a highly pragmatic option since around 66% of cross-border online sales are made through these platforms. This allows the authorities to dedicate their resources to monitoring the e-commerce marketplaces, rather than the millions of individual sellers operating on the web.

The issue here is that the delegates simply endorsed the new rules addressing digital taxation. This is, in many ways, not a binding agreement compelling governments to implement the recommended measures. The OECD is merely providing assistance on digital taxation as opposed to concrete directives. While the OECD works on writing the global tax rules, most nations have decided to walk the path alone.

Examples from around the world

There are examples of countries already taking the initiative to fix their current systems, rather than waiting for a global consensus. Bangladesh has imposed value-added tax charges on digital advertisements on social media sites, setting the rate at 15%. Companies such as Facebook and YouTube will be affected, but the regulatory burden in this instance is on the banks, where they’ll be collecting the charges from advertisers with specific directives from the National Board of Revenue.

In Europe, France has taken the initiative to construct a digital taxation policy since the EU has not been able to devise a unifying structure agreed upon by all member states. The French government is currently working on a proposal that would tax the local revenues of companies like Facebook, Uber, and Airbnb. They’re keen on a 3% rate applying to multinationals that make over €750 million worldwide and more than €25 million domestically in France.

The Czech Republic is also working on a digital taxation policy, which is slightly different from the French plan. The Finance Ministry is planning a 7% charge targeting ads and the sale of personal data. The authorities are set to see tax revenues of CZK 5 billion annually, with a proposed mid-2020 implementation date.

The absence of a global or even regional consensus has prompted governments around the world to debate and formulate their own policies. While all the plans are inherently similar, they do vary on components like the rate charged, or what specific element is to be scrutinised. For more information on what particular countries are up to with their unilateral measures, this article from Bloomberg is a good starting point.

Key takeaways

Digital taxation is an area that governments are just now coming to terms with. The regulatory climate governing online transactions is going to undergo radical changes in the coming years, and the above examples present how this will unfold.

VAT4U, in its own way, is helping businesses and authorities confront one aspect of the tax landscape. Through an automated cloud platform, we allow companies to recover VAT on business expenses, minimising the burden of compliance firms experience. See how our platform works and try it out for free.

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