How to Capture VAT from Offshore Sellers: New Guidance for Governments

Implications of OECD VAT Guidance for Businesses

On Oct 24, the Organisation for Economic Co-operation and Development (OECD), released further guidance on how countries can implement effective VAT collection systems for cross-border trade, particularly concerning digital/electronic supplies. Business should take particular note of this development as history proves that OECD guidance, particularly in this space, leads to significant country-specific legal changes that will have to be addressed to continue to be compliant.

Regulations No Longer Confined by Borders

Governments around the world are struggling to keep up with new business models and expansion of global trade in our digital economy. As the technology landscape changes and e-commerce grows, governments are experiencing an ever-widening gap between collected and available tax revenue, otherwise known as the “tax gap.” The OECD has been actively developing analysis and suggested policies for countries to implement to ensure equal and fair tax treatment as global trade and in particular digital services and supplies has grown significantly and continues to expand at a rapid rate. Their intent is to provide governments best practices in how to design tax regimes that effectively and fairly tax commerce properly sourced to their jurisdiction.

To that end, Mechanisms for the Effective Collection of VAT/GST Where the Supplier Is Not Located in the Jurisdiction of Taxation details recommended approaches to help governments implement effective and efficient collection mechanisms for cross-border trade.  The guidance represents an expanded discussion of the recommended approaches included in both the BEPS Action 1 report and the International VAT/GST Guidelines, previously released by the OECD.

The guidelines are broken out into three chapters:

• Chapter 1: Options for collecting VAT from suppliers outside the jurisdiction, policies and design issues
• Chapter 2:  Policies and design issues for registration-based collection systems                                         
• Chapter 3: Covers designs and practical applications for creating and operating simplified registration and collection systems

Proactively Addressing VAT Collection for Cross-Border Trade

While the guidelines are written with tax authorities in mind, the business community can and should review the guidelines as a way to understand how governments are changing systems and policies to keep up with these new business models. The publishing of BEPS Action #1 leads to a swath of countries enacting concrete changes to their tax rules (South Africa, South Korea, Russia, New Zealand, Australia) just to name a few. In a world where regulations are becoming increasingly borderless and fundamental compliance rules can change with relatively short notice, organizations can no longer afford to take a reactive approach. The need for processes and systems that are adaptable and global in nature is critical. Deploying an intelligent compliance solution represents the best path to success.