The VAT Evolution and Why It’s So Complex Part II: Three Focus Areas for VAT

In Part I of our series on the VAT Evolution, we explored the motivations of tax authorities and governments around the world to embrace digitization and technology of a method of increasing revenue collection and shrinking tax gaps. More information on this topic can also be found by downloading your free copy of our IDC sponsored report, Taming the Value-Added Tax Beast with Technology.

In this second entry, we’ll look at three areas that are attracting a lot of attention among regulators as they continue to adjust to account for new markets, service offerings and business processes. The three areas include:

• eCommerce
• Digital services
• Cross-Border commerce

The pace of eCommerce is accelerating

With the rise of companies like Amazon and the move by many consumers to the convenience of online shopping, the fact that eCommerce is growing is not a surprise. However, the pace at which it is growing has outdistanced even the most optimistic of expectations.

Data from eMarketer suggests that worldwide retail e-commerce sales posted a 27.6% growth rate for the year, with sales reaching well over $4 trillion. That tally is projected to reach $5 trillion in 2022.

This level of growth is causing tax authorities to re-examine the rules governing eCommerce transactions and what level of documentation is required. There is now a complex situation to manage for online sellers that are entering new markets without the benefit of experience in managing taxes across international lines.

Digital services and the global economy  

The selling of digital goods and services is redefining the way the global economy works. The day of walking into a Best Buy or Target and buying software off the shelf or a music CD are largely a thing of the past. Today, when you want software or media, you can simply download it to the device of your choice with the push of a button. This has created a scenario for governments where these potential revenue streams need to be accounted for. How big is the digital services market getting? A few examples:

• The market for video streaming services grew by more than 37% in 2020.
• Music streaming services like Spotify and Apple Music accounted for more than 80% of all revenue in 2020.
• Video conferencing services like Microsoft Teams, Zoom, and Google Meet boasted a combined 500 million active users in 2020.

The added complexity of cross-border commerce

Businesses are taking advantage of the speed and ease of selling their products online and are facing new tax compliance challenges associated with moving products around the globe. The growing volume and variety of ecommerce adds complexity to transactional tax compliance.

By 2025, 40% of cross-border ecommerce B2C sellers will adopt a merchant-of-record model enabled by global networks of localized payment acceptance methods.

Cross-border online sales worldwide are expected to increase by 15–20% year over year. Leading the way are the United Kingdom, Germany, Italy, and Spain.

As eCommerce continues to grow and dominate the retail sector with merchandise being available to ship from any location to another, the complexity of VAT will continue to grow.

Be sure to read our first blog in this series, The VAT Evolution and Why It’s so Complex Part I: Thinking Globally and Part III: Why Global Solutions Matter to IT. And don’t forget to download your complimentary copy of Taming the Value-Added Tax Beast with Technology.