International Services: A global shift in VAT/GST tax | KPMG | Malta

International Services: A global shift in VAT/GST taxation

International Services: A global shift in VAT/GST tax

Businesses involved in the cross border supply of services should be aware that a global shift is taking place in the way such services are taxed from a VAT/GST perspective. This shift essentially seeks to tax supplies of services where they are consumed. It affects supplies of services to businesses (B2B), in particular multi-location enterprises engaged in VAT/GST exempt activities such as financial services. It will also bring about radical changes for remote suppliers of electronic services to consumers (B2C) which have traditionally remitted VAT/GST to the Tax Authority where they have established their business. Going forward such suppliers may be required to register and remit VAT/GST in consumer markets even where they have no physical presence or nexus there. These changes give rise to significant VAT/GST compliance obligations for businesses as well as a range of commercial and legal issues.

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What is prompting change?

The massive growth in the digital economy has exposed a large number of weaknesses in tax systems. In its September 2014 report “Addressing the Tax Challenges of the Digital Economy”, the Organisation for Economic Cooperation and Development (OECD) has highlighted 3 areas of e-commerce where no VAT/GST, or an inappropriately low amount, is being charged and collected. 

  • Digital & telecoms services supplied to private consumers (B2C) by remote sellers
  • The procurement of services by VAT exempt business using Head office/branch structures
  • Use of low value importation relief to avoid VAT on goods ordered online 

Given the importance of VAT/GST revenue to countries as well as the international commitment to avoiding abusive tax practices, governments have started to change their rules on the taxation of services in an effort to ensure they get their fair share of VAT/GST.

What is changing?

Digital & Telecoms Supplies to Consumers (B2C) – The OECD is currently drafting international place of supply guidelines for B2C supplies of services which will include changes in the way in which digital and telecoms services are taxed. It will recommend that VAT/GST should be paid where the customer consuming these services is resident and that collection is best achieved by requiring suppliers of such services to register and remit VAT in their customer’s jurisdiction. This is a radical shift from the current position adopted by most countries and it will give rise to wide ranging and significant issues for remote suppliers. The OECD B2C guidelines have been released for consultation from 18 December 2014 until 20 February 2015 and should be finalized by the end of 2015. It is hoped that these guidelines will be flexible enough to cater for new and innovative e-commerce business models and products.

Supplies to VAT Exempt Businesses. The OECD finalized its B2B International service guidelines in April 2014 and they have already been endorsed by over 100 countries. They recommend that B2B supplies should be subject to VAT/GST where the business receiving the service is based and that the business customer should self-assess and pay the relevant VAT/GST. Although many countries already adopt this approach, there is renewed focus on ensuring that VAT exempt businesses are also subject to these rules and the potential to exploit mismatches in taxation are phased out. To minimize VAT planning, guidance has been provided by the OECD on determining the appropriate taxing jurisdiction for services procured by multi-location entities for consumption/use by their establishments in multiple jurisdictions. 

 

Changes are happening now 

Many governments are not waiting for the OECD to develop guidelines on B2C supplies, enhanced exchange of information or dispute resolutions mechanisms but are already changing their VAT/GST rules to help ensure that tax is collected where digital services are consumed.

How will this impact your Business?

Commercial 

  • B2C Pricing (Universal or Differential)
  • B2B Pricing & Contracts  

Customer Impact 

  • Buying Experience (more clicks)
  • Potential Price Increases  

Legal 

  • Platforms – Principal or Agent?
  • Collection & Storage of Customer Data 

Systems 

  • Track & Validate Customers and Locations
  • Enhanced Customer Data Management  

Compliance 

  • Multiple Registrations
  • Invoicing – different rules, languages and currencies
  • Tax Audit
  • Outsource?

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