Selling goods and services in the digital economy

Size: px

Start display at page:

Download "Selling goods and services in the digital economy"

Kelley Charles
6 years ago
Views:

Selling goods and services in the digital economy James Freed Principal KPMG LLP Chicago, IL jfreed@kpmg.

1 Selling goods and services in the digital economy James Freed Principal KPMG LLP Chicago, IL Andrew Street Global Indirect Tax / VAT Consulting Professional Amazon Inc. Chicago, IL streandr@amazon.com

2 Agenda Introduction Identifying foreign VAT/GST obligations on digital services Understanding VAT/GST compliance challenges Potential VAT/GST issues on imports of low value goods US sales and use tax issues Other challenges linked to digital economy 2017 IPT s Value Added Tax Symposium 2

3 Introduction 2017 IPT s Value Added Tax Symposium 3

4 Rise of the digital economy Digital economy Economic activities enabled by information and communications technologies (ICT) It transcends the ICT sector - While Internet, broadband, mobile applications and IT services, constitute its foundation, the digital economy today encompasses all sectors of the economy and society It permeates the world economy from retail (e-commerce) to transportation (automated vehicles), education (Massive Open Online Courses), health (electronic records and personalized medicine), social interactions and personal relationships (social networks) 2015 global economy The 2015 economy as a share of gross domestic product 77.5% 2020 global economy Forecast growth of the digital economy 75.0% $85,150bn $98,490bn 22.5% 25.0% Digital economy $19,159bn Non-digital $69,991bn Digital economy $24,615bn Non-digital $73,875bn Source: OECD, Digital Economy Outlook 2015 Source: Accenture, Digital disruption: the growth multiplier 2017 IPT s Value Added Tax Symposium 4

5 VAT challenges related to the digital economy VAT is a tax on consumption Most VAT laws were designed before Internet age - Sales (especially retail) were made mostly domestic through brick and mortar stores Consumption where vendor is for VAT purposes With shift to digital economy traditional VAT rules to determine place of consumption result in loss of revenues for countries because - Physical borders for consumers are eroding - Move from consumption of tangible property to intangible property - Shipping tangible property has become faster and cheaper - Vendors are no longer required to be where consumers are - The concept of vendor/service provider is morphing 2017 IPT s Value Added Tax Symposium 5

6 Case study ArtCo is a US company specialized in art education Historically, it provided in person art education classes as well as painting and sculpture classes in its campus in Brooklyn, NY ArtCo was recently bought by a tech investor who brought in developers with a view to spreading his love for art using modern technology - Online classes sold on its website ArtCoWorld, either Live streaming of its in class content On-demand lessons - An app, Art-IT, sold on major third party platforms that allows users to scan a work of art and find all relevant information related to it - Projects in development include Working with VRheadsetCo on developing virtual reality software that allows users to prepare for the restoration of works of arts Creating a marketplace on ArtCoWorld that allows consumers to buy art supplies from trusted vendors After initial success in the US, ArtCo is aiming at expending overseas with primary focus on North America, Western Europe, South Africa, Australia, and New Zealand 2017 IPT s Value Added Tax Symposium 6

7 Case study (continued) Issues Determine ArtCo s VAT/GST obligations depending on - Location of sales - Products sold Live streaming of classes On demand lessons Art-IT app VR software Online marketplace for art supplies - Sales method Direct via website, Through third party platform Through ArtCo platform 2017 IPT s Value Added Tax Symposium 7

8 Identifying foreign VAT/GST obligations on digital services 2017 IPT s Value Added Tax Symposium 8

9 OECD position OECD International VAT/GST Guidelines Soft law on preferred international standard for coherent and efficient application of VAT Endorsed by more than 100 jurisdictions Included in final Base Erosion and Profit Shifting (BEPS) package endorsed by G20 at Nov , 2015 Summit Non harmonized implementation Business to Business (B2B) Reverse-charge mechanism is the recommended approach for collecting the tax at destination Reverse-charge may not be required if the customer is entitled to full input tax credit Business to Consumer (B2C) Non-resident vendor to register and remit VAT in taxing jurisdiction Simplified registration and compliance (web-portal, e-payment ) Source: OECD 2017 IPT s Value Added Tax Symposium 9

10 Determining VAT/GST obligations Businesses involved in digital economy must perform an iterative process to identify their global VAT/GST obligations Where are sales made? Are sales above a registration threshold? Who is the vendor for VAT/GST? Who is the customer? What is subject to VAT/GST? 2017 IPT s Value Added Tax Symposium 10

11 Where are sales made? List of foreign jurisdictions where sales are made Filter out all countries that: - Have implemented special rules for digital services - Have announced upcoming changes - Are considering rules changes For remaining countries verify that no standard VAT rules trigger VAT obligations - E.g., carrying on business test in Canada Consider impact on direct taxes - Some jurisdictions are looking into creating special PE rules for e-commerce (e.g., Thailand) Perform a regular review of list as rules are constantly changing 2017 IPT s Value Added Tax Symposium 11

12 VAT/GST & digital economy Global overview Reforms under consideration Upcoming reforms Rules enacted within last year Rules already in place European Union 2017 IPT s Value Added Tax Symposium 12

13 VAT/GST & digital economy Global overview (continued) European Union Harmonized approach to VAT treatment of electronically supplied services and working on Digital Single Market (reforming B2C remote sales of goods and services) Examples of countries with existing VAT/GST rules for digital economy The Bahamas, Iceland, Norway, Switzerland, Albania, South Africa, Ghana, Tanzania, Kenya, Japan, Korea, and New Zealand Examples of countries that introduced specific VAT/GST rules in the last year India (Dec. 1, GST Jul. 1, 2017); Serbia (Jan. 1, 2017); Taiwan (May 1, 2017); and Australia (Jul. 1, 2017) Examples of countries with upcoming reforms Belarus (Jan. 1, 2018); GCC countries (2018); Colombia (Jul. 1, 2018); Australia (Low value goods rules Jul. 1, 2018); and Switzerland (low value goods rules Jan. 1, 2019) Examples of countries considering reforms Thailand (draft law proposal under consideration); Singapore; Malaysia; Turkey; Costa Rica; Argentina; and Russia (for low value goods) 2017 IPT s Value Added Tax Symposium 13

Who is the vendor for VAT/GST? Review the company s sales strategy Contractual position Are sale made directly to customers or via an intermediary (e.g., electronic marketplaces)?

14 Who is the vendor for VAT/GST? Review the company s sales strategy Contractual position Are sale made directly to customers or via an intermediary (e.g., electronic marketplaces)? Most jurisdictions have specific rules for sales via intermediaries - Intermediary may be deemed to make sale and comply with VAT/GST rules - Rules vary between jurisdictions (e.g., the EU and Australia) sometimes differentiating between domestic and nonresident intermediaries Verify potential joint and several liability rules Vendor Electronic marketplace Customer 2017 IPT s Value Added Tax Symposium 14

15 Electronic Distribution Platforms (EDP) Intermediary involved in the sale of online goods and services to the final consumer EDP liability to collect VAT/GST generally depends of involvement of EDP in sale; e.g.,: - EDP authorizes payments - EDP authorizes delivery - EDP sets the terms and conditions of the sale Beyond EDP s own collection obligation, risk of non-compliance by remote vendors using EDP 2017 IPT s Value Added Tax Symposium 15

minimal human intervention, and impossible to ensure in the absence of information technology The scope of taxable transactions varies greatly

jurisdictions - From limited content oriented transactions (e.g.

16 What is subject to VAT/GST? Review the products sold General definition (EU): Services delivered over the Internet or an electronic network, essentially automated, involving minimal human intervention, and impossible to ensure in the absence of information technology The scope of taxable transactions varies greatly among jurisdictions - From limited content oriented transactions (e.g., South Korea) to all intangibles and services (e.g., New Zealand) - Examples of differences include: Sale of software: taxable in the EU, but not in South Africa Cloud storage services: taxable in India, but not in South Korea Consulting services: taxable in New Zealand, but not in Iceland Certain products may be subject to a reduced rate or exemption, e.g.,: - E-books - Education - Gambling Challenges in VAT treatment determination for bundled services 2017 IPT s Value Added Tax Symposium 16

(e.g., Iceland, Switzerland, EU, ) - Some jurisdictions apply rules to B2C and B2B sales (e.g., South Africa) - In absence of VAT registration obligation a VAT withholding mechanism may apply (e.

17 Who is the customer? Determine the VAT status of the foreign customer on the other side of the counter Difference in B2B and B2C sales: - Most jurisdictions apply rules only to B2C sales (e.g., Iceland, Switzerland, EU, ) - Some jurisdictions apply rules to B2C and B2B sales (e.g., South Africa) - In absence of VAT registration obligation a VAT withholding mechanism may apply (e.g., B2B sales in Russia, B2C sales in Colombia in 2018) Differences in definition of B2B and B2C: - Most jurisdictions focus on VAT/GST registration status of customer (e.g., E.U, New Zealand) to identify B2B sales In Japan, due to absence of VAT registration system, B2C transactions are deemed to be sales of digital services that may be used by consumers (e.g., sale of e-books) - Potential grey areas: charities, educational bodies, public and government bodies Some jurisdictions will clarify the status of specific customers (e.g., public bodies in India fall under B2C) 2017 IPT s Value Added Tax Symposium 17

Are sales above the registration threshold? Registration thresholds and the type of sales that count towards the calculation vary between jurisdictions Threshold range: - Nil (e.g., EU, Russia) - Low (e.

18 Are sales above the registration threshold? Registration thresholds and the type of sales that count towards the calculation vary between jurisdictions Threshold range: - Nil (e.g., EU, Russia) - Low (e.g., ZAR 50,000 ($3,850) in South Africa) - High (e.g., $100,000 in the Bahamas) Computation method, E.g.,: - New Zealand: remote services provided by a non-resident to New Zealand GST-registered businesses do not count towards the registration threshold as these are not within the scope of the tax. - Switzerland: worldwide sales will be taken into consideration for the computation of the CHF 100,000 ($99,500) threshold effective Jan. 1, IPT s Value Added Tax Symposium 18

19 Understanding VAT/GST compliance challenges 2017 IPT s Value Added Tax Symposium 19

20 Understanding VAT/GST compliance challenges Registration formalities Filing of returns VAT Compliance Collect customer information Invoicing 2017 IPT s Value Added Tax Symposium 20

21 Registration formalities Jurisdictions vary in their approach towards registration: Simplified registration (e.g., New Zealand, Russia, EU) - In the EU, businesses may opt for an EU wide registration under the Mini One Stop Shop Standard registration (e.g., Switzerland) Fiscal representative: not required (e.g., EU) v. required (e.g., Japan) 2017 IPT s Value Added Tax Symposium 21

22 Filing of returns The filing of returns under the new rules differ significantly in relation to: When? - Monthly, quarterly or annually depending on gross receipts and type of business conducted Where? - E.g., in the EU where the company is registered under the MOSS and not where the customer is located What information should they include? - Most jurisdictions only B2C sales - Some jurisdictions may require B2C and all B2B sales (e.g., Switzerland) 2017 IPT s Value Added Tax Symposium 22

23 Invoicing Requirement to issue VAT compliant invoices vary between jurisdictions: Not required (e.g., Korea) v. required (e.g., India) Where required, invoices must meet invoicing requirements Example: South Africa The name and VAT registration number of the electronic services vendor The name and address of the electronic services recipient An individual sequential invoice number The date on which the tax invoice is issued A description of the electronic services sold The consideration in money for the sale in the currency of any country. If the consideration is reflected in the currency of: - South Africa, the amount of the VAT charged or a statement that it includes a charge for the VAT and the rate at which the VAT was charged; - any country other than South Africa, the amount of the tax charged in ZAR or a separate document issued by the electronic services vendor to the recipient reflecting the amount of the tax charged in ZAR The exchange rate used 2017 IPT s Value Added Tax Symposium 23

24 Collect customer information Vendors are generally required to identify the status and location of their customers on a per-transaction basis based on customer information collected from ordinary business processes Evidence required to identify the status of the customer - E.g., the EU requires the VAT identification number or alternative evidence Several jurisdictions impose specific rules to determine customer location, e.g., in the EU for B2C sales: - A set of rebuttable presumptions for specific transactions - For all others the requirement to determine the customer location based on two non-contradictory pieces of evidence, including: Customer billing address, IP address, bank details, country code of the SIM card used, location of the residential fixed land line, and other commercially relevant information IPT s Value Added Tax Symposium 24

25 Other considerations Recordkeeping retention (up to 10 years in the EU) Format and location must be taken into consideration Data storage Tax authority interaction Legal How will audits be conducted? Will tax authorities exchange information? VAT & Digital services Changes in contracts or general terms and conditions required? Difference between B2B and B2C sales? How and when will VAT be disclosed? Customer experience Pricing VAT inclusive v. VAT exclusive? 2017 IPT s Value Added Tax Symposium 25

26 Potential VAT/GST issues on imports of Low Value Goods (LVG) 2017 IPT s Value Added Tax Symposium 26

27 Low value goods Status and challenges Current status Vast majority of countries operate a VAT/GST low value import relief Thresholds vary widely: from EUR 10 ($10.5) in some EU countries to AUD 1,000 ($769) in Australia Rationale: collection costs outweigh the revenue gained Challenges Growing loss of revenue Growing risk of distortions of competition with domestic retailers Incentive for domestic sellers to relocate offshore 2017 IPT s Value Added Tax Symposium 27

28 OECD position OECD addresses this challenge in BEPS Action 1, proposing 4 major options Collection by customs authorities Collection by resident purchaser Collection by non-resident vendor with simplified registration Collection by intermediary (e.g., postal operator, express carrier, e-commerce platform, financial intermediaries) Non harmonized implementation 2017 IPT s Value Added Tax Symposium 28

29 VAT/GST on imports of low value goods Several countries are considering (e.g., EU) implementing special rules for B2C imports of low value goods, with Australia applying rules effective Jul. 1, 2018 Mainly follow vendor collector model for B2C sales of services to draw online retailers into VAT/GST net - Simplified registration (e.g., MOSS under EU proposal) - Include online marketplaces in scope of rules - Extend rules to common carriers (e.g., mail delivery services, express carriers, etc.) in case vendor or online marketplaces are not subject to registration obligation Increase focus on online platforms and fulfillment houses in VAT compliance related to remote sales of goods Same iterative process as for digital services should be used when analyzing VAT obligations related to remote sales of goods 2017 IPT s Value Added Tax Symposium 29

30 US sales and use tax issues 2017 IPT s Value Added Tax Symposium 30

31 US sales and use tax issues US sales and use tax issues pertaining to digital economy are similar to those for VAT/GST Where are sales made - Under US Supreme Court Quill remote vendors must have physical nexus with state - States are trying to expand nexus standard such as: Click-through nexus: Presumption of nexus is generally established when an in-state person posts a link to a retailer s website on its own website and the in-state person receives a commission or other consideration for sales made through the link - E.g., Hockey club website links to Website to raise funds Economic nexus: Economic presence sufficient to create nexus, no physical presence required - E.g., Nexus if seller earns over $250,000 annually from in-state sales Marketplace Provider Nexus: Imposes a collection obligation on marketplaces with nexus in the state Use tax reporting requirements: requirement to (1) inform customer that sales may be subject to use tax at time of sales; (2) provide to customer a summary of all purchases made; (3) provide to tax authority information on customers and sales 2017 IPT s Value Added Tax Symposium 31

32 US sales and use tax issues (continued) US sales and use tax issues pertaining to digital economy are similar to those for VAT/GST Who is the vendor - In general liability is with remote seller - States have recently started to imposed obligations on online marketplaces and referrers What is subject to sales and use tax - Challenges in determining taxability of what is sold (e.g., Digital goods) - In general sales and use tax applies to sales of tangible personal property and selected services Who is the customer - Sales and use tax should apply to retail sales (i.e., B2C sales) - Scope of retail sale generally broader than B2C definition for VAT/GST Obtain exemption certificate for sales to businesses Registration threshold - No registration threshold, compliance required if Physical nexus standard is met Sales are taxable 2017 IPT s Value Added Tax Symposium 32

33 MTC VDA for certain remote sellers Multistate Tax Commission (MTC) is facilitating a limited-time voluntary disclosure initiative for online sellers that use marketplace providers/facilitators to facilitate sales in participating states Conditions - Online sellers must use an online marketplace that facilitates sales by 1. Listing or advertising for sale by the online marketplace seller on a website, tangible personal property, services, or digital goods that are subject to sales/use tax; 2. Either directly or indirectly through agreements or arrangements with third parties collecting payment from the customer and transmitting that payment to the online marketplace seller; and provides fulfillment services to the online marketplace seller. - Online sellers cannot participate if they have previously registered to collect and pay sales/use or income/franchise taxes or had any contact with the state concerning liability or potential liability for those taxes 2017 IPT s Value Added Tax Symposium 33

34 MTC VDA for certain remote sellers (continued) Participating states - AL, AR, CO, CT, DC, FL, ID, IA, KS, LA, MA, MN, MO, NE, NJ, NC, SD, TN, TX, UT, VT, WI Benefit - Most states will not apply a lookback period Deadline: October 17, IPT s Value Added Tax Symposium 34

35 Other challenges linked to digital economy 2017 IPT s Value Added Tax Symposium 35

36 Challenges of new disruptive business models Crypto currencies Exempt (e.g., Hedqvist case in EU). Taxable? New business models? New compliance models? Block chain? New VAT/GST challenges 3D Printing Supply of goods v. services? Taxable person? Valuation? Supply of goods v. services? Taxable person? Exempt v. taxable? Valuation? Crowdsourcing Crowdfunding Supply of goods v. services? Taxable person? Exempt v. taxable? Valuation? 2017 IPT s Value Added Tax Symposium 36

37 Q&A 2017 IPT s Value Added Tax Symposium 37

Summary of key findings

Summary of key findings 1 VAT/GST treatment of cross-border services: 2017 survey Supplies of e-services to consumers (B2C) (see footnote 1) Supplies of e-services to businesses (B2B) 1(a). Is a non-resident 1(b). If there is