More states are working to enhance VAT collection on e-commerce and digital services. That’s according to the OECD’s Consumption Tax Trends 2020 report. The report notes that several countries – both inside and outside the OECD – are adopting the organisation’s guidelines on digital VAT.
Businesses should therefore anticipate changes to digital VAT regulations, and prepare accordingly.
According to the report, VAT has become the largest source of consumption tax in OECD countries. It stands to reason that global tax authorities will continue to work to enhance VAT regulation processes, with a particular focus on the role of technology on global trade.
Businesses that provide services online, or sell goods through a digital platform, need to keep a close eye on regulatory developments in every country to which they supply those goods or services.
Digital services VAT for a digital world
Social distancing led to a decline in consumer spending in many markets during 2020.
However, many consumers turned to streaming services and other digital services as alternatives to attending public events.
Global VAT regulations are gradually catching up with the new digital reality.
In several jurisdictions, foreign digital service vendors are not yet required to charge VAT. Those foreign companies thus have a clear potential advantage over local digital services companies. The absence of digital services VAT on foreign digital services companies also entails significant lost revenue for tax authorities.
In response, several countries have now imposed digital services VAT on foreign companies. More countries can be expected to follow suit.
Companies that provide digital services to customers in global markets should therefore pay careful attention to proposed changes to VAT regulations.
Enhancing e-commerce regulations
The rate of e-commerce transactions had been accelerating prior to 2020.
Social distance due to the Covid-19 crisis increased the trend, with a spike in online shopping evident in many markets.
As the OECD report notes, the surge in e-commerce underscores the need to effectively regulate VAT on online goods and services.
Already, several countries have tightened regulations pertaining to small packages ordered on online platforms.
In many cases, low-value items purchased online from foreign businesses had not been subject to VAT. The exemptions date back to regulations formulated before online shopping existed.
New regulations, adopted by a number of states, imposes VAT on such packages. The regulations are designed to create a level playing field for local and foreign vendors, and to enhance revenue collection.
Prepare for digital services VAT now
VAT has become the predominant source of consumption taxes, and digital VAT is an increasingly important component of VAT collection in general.
Countries that neglect to create regulatory frameworks especially designed to address digital services and e-commerce VAT risk market distortions and lost revenue.
Therefore, businesses can expect enhanced digital VAT regulations to become the new normal. Businesses that provide digital services or sell goods online need to prepare accordingly.
Disclaimer: Reproduced/Adapted with permission from VATGlobal.