VAT Trends: A Shift Toward Destination Taxability for Certain Cross-Border Transactions

Sovos
June 16, 2021

As detailed within our annual report VAT Trends: Toward Continuous Transaction Controls, there’s an increasing shift toward destination taxability which applies to certain cross-border trades.

In the old world of paper-based trade and commerce, the enforcement of tax borders, between or within countries, was mostly a matter of physical customs controls. To ease trade and optimise resources, many countries have historically applied ‘de minimis’ rules. These set specific limits (e.g. EUR 10-22 applied in the European Union) below which imported goods had an exemption from VAT.

Cross-border services, which couldn’t, or not easily, be checked at the border would often escape VAT collection altogether or be taxed in the country of the service provider. There has been a huge increase in cross-border trade in low-value goods and digital services over the last decade. As a result, tax administrations are taking significant measures to tax these supplies in the country of consumption/destination. 

VAT treatment of B2C digital/electronic supplies by foreign suppliers

Since the 2015 publication of the OECD/G20’s Base Erosion and Profit Shifting (BEPS) Project Action 1 Report on Addressing the Tax Challenges of the Digital Economy, most OECD and G20 countries have adopted rules for the VAT treatment of B2C digital/electronic supplies by foreign suppliers. The International VAT/GST Guidelines issued in conjunction with the Project Action 1 Report recommend the following approaches for collecting VAT/GST on B2C sales of electronic services by foreign suppliers:

  • The country of the customer will have the right to levy VAT on the supply
  • The foreign seller must register for VAT in the customer’s country under a simplified registration and compliance regime, and
  • The foreign seller must collect and remit VAT

Many industrialised and emerging countries have since passed laws on this OECD guidance; most apply to B2C transactions only, although some of these jurisdictions have imposed obligations that apply or could apply to both B2B and B2C transactions.

For low value goods, the OECD has made similar recommendations providing for both a vendor and an intermediary-based collection model. The destination-based taxability trend affects many different areas of consumption tax, including the following examples.

  • US sales and use tax – the South Dakota v. Wayfair decision
  • The European Commission’s 2018 proposals for a ‘definitive’ VAT system
  • EU e-commerce package and digital services
  • Latin America

EU E-Commerce VAT Package and Digital Services

The EU has been gradually introducing new rules for VAT on services. This is to ensure more accurately accrues to the country of consumption. From 1 January 2015, and as part of this change, where the supply of digital services is taxed changes. It will be taxed in the private end customer’s EU location, has their permanent address or usually resides. These changes sit beside the introduction of the One Stop Shop (OSS) system which aims to facilitate reporting for taxable persons and their representatives or intermediaries. Under the EU e-commerce VAT package scheduled to take effect from 1 July 2021, all services and all goods including e-commerce based imports are subject to intricate regulations that include changes to the way customs in all Member States operate.

With this shift toward destination taxability for certain cross-border transactions it’s key that companies fully understand the impact. That is not only on their business processes but also comply with changing rules and regulations.

Take Action

Get in touch to discuss your VAT obligations for cross-border trade. To find out more about the future of VAT, download our report VAT Trends: Toward Continuous Transaction Controls.

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

Sovos

Sovos is a leading global provider of software that safeguards businesses from the burden and risk of modern transactional taxes. As VAT and sales and use tax go digital, businesses face increased risks, costs and complexity. The Sovos Intelligent Compliance Cloud is the first complete solution for modern tax, giving businesses a global solution for tax determination, e-invoicing compliance and tax reporting. Sovos supports more than 7,000 customers, including half of the Fortune 500, and integrates with a wide variety of business applications. The company has offices throughout North America, Latin America and Europe. Sovos is owned by London-based Hg. For more information visit www.sovos.com and follow us on LinkedIn and Twitter.
Share This Post
Share on facebook
Share on twitter
Share on linkedin
Share on email

Latin America Mexico VAT & Fiscal Reporting
July 23, 2021
What You Need to Know About the Fintech Ecosystem in Mexico

While many Latin American countries have begun to implement taxation on digital services, Mexico is currently leading the charge and has established a strong track record that other countries are hoping to match. Chile and Ecuador have both recently passed similar legislation with hopes of finding similar success and attracting more global fintech brands.  The […]

North America ShipCompliant
July 23, 2021
DtC Shipping Essentials: Customer Aggregate Volume Limits (CAVL)

Direct-to-consumer (DtC) shipping has numerous rules and regulations that shippers must adhere to in order to stay compliant. Customer aggregate volume limits (CAVL) discern how much of a certain type of alcohol a single licensee can ship in a given period of time to select individuals within a state. CAVL can seem like a fairly […]

North America Tax Information Reporting
July 22, 2021
Expansion to Statutory Schedule Y

As we pass the midpoint of the year, many companies are already looking toward year end, trying to ready themselves for various new reporting requirements. Among those is the expansion to statutory Schedule Y where newly adopted Part 3 will join the family and require disclosures on related party insurer members of a holding company […]

North America ShipCompliant
July 22, 2021
The Data: Wine DtC Shipments and Off-Premise Retail (June 2021 Special Report)

As we enter into the summer months, wine direct-to-consumer (DtC) shipments are still shifting in response to a tumultuous year. While the industry has largely righted itself, it remains essential to pay attention to marketplace data to keep pulse on that continued change.  Nielsen is collaborating with Wines Vines Analytics and Sovos ShipCompliant to provide […]

North America Tax Information Reporting
July 21, 2021
5 Reasons to Attend Sovos’ Insurance and Regulatory Summit

Sovos is the industry leader in U.S. insurance accounting and reporting, education and software. From our expert level instructors, to our industry best-in-class software and support, to our customized high-quality training, Sovos helps you meet your organizational goals. Being the industry leader requires staying ahead of industry changes in insurance accounting and financial reporting.  To […]