This blog is an excerpt from Sovos’ annual VAT Trends report.
Governments are increasingly putting liability for reporting and/or paying VAT on platforms that already process many taxable transactions and associated data flows, instead of putting such liability on each individual taxable person transacting on such platforms.
Why is this happening?
With the introduction of continuous transaction controls (CTCs) to all businesses of all sizes – and in a growing number of countries to transactions between small and even occasional or ‘gig economy’ vendors and local consumers – tax administrations are creating a colossal dependency on the availability and performance of their online services to not adversely affect their economies and citizens’ wellbeing.
Network or computer processing problems must be excluded at any cost, and therefore governments will be facing an unprecedented and growing operational challenge. In addition, governments are facing new administrative, process, organisational and backend system challenges as a result of placing VAT reporting and remittance obligations on non-established vendors of goods and services.
Consequently, a natural result of a tax administration’s digital transformation journey is a massive need for investment across the board to adequately process, analyse and sometimes approve huge numbers of transactions and reports.
What does this mean to me?
To ease this burden, tax administrations have in the past decade started looking for ways to distribute some or all these responsibilities to third parties. The basic principle has generally been to find economic actors who are already natural aggregators of transactions, and which have the scale, technology and organisational strength making them suitable for either centralising VAT reporting or CTC platform integration on behalf of taxable persons in their ‘network’ – or even to take on the processing and approvals of such business data on the tax administration’s behalf.
Sometimes this transfer of operational and legal responsibility is voluntary – as is the case with so-called ‘PACs’ in Mexico and countries that have modelled their CTC approach on that – and sometimes it’s not. Key examples of a transfer of reporting and payment liability are in the area of B2C marketplaces. For example, the EU E-commerce VAT Package contains far-reaching presumptions, in several common e-commerce scenarios, that the marketplace rather than the connected vendor is the responsible supplier from a VAT perspective.
Similar legislation exists in many countries in Latin America and, increasingly, worldwide. In conjunction with such requirements, governments around the world are also placing direct reporting obligations on credit card and other payment service providers. This trend is already well established in Latin America and other regions including the EU have already passed legislation to increase such reporting obligations. The combination of consumer payment data and marketplace or vendor VAT reports gives tax administrations the possibility to tighten controls via data mining and triangulation.
However, this trend is not limited to B2C transactions and e-commerce. As mentioned, Mexico pioneered the ‘PAC’ model for CTCs including B2B transactions a decade ago, and this concept of accrediting or obligating technology vendors that already manage business transactions has since become popular in many countries around the world. Most notably, the PEPPOL framework that finds its origin in European public procurement is evolving to add a CTC dimension to the ‘access point’ concept. Tax administrations in Europe – one key example, at the time of writing, being France – and Asia are actively considering ways in which the benefits of standardising B2B and B2G transactions using PEPPOL or PEPPOL-inspired frameworks can be combined with CTC responsibility for different kinds of transaction management software or service providers.