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VAT and online sales

This is a very good item on the wider business implications of proposed changes in Europe to the VAT treatment of online digital media sales.

http://performance.ey.com/2014/02/20/vat-change-online-sales-just-tax-concern/

Cheers

Iain

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Global VAT alignment edges closer

At the Global Forum on VAT in Tokyo last week 86 countries signed up to the first agreed framework for applying VAT to internationally traded services and intangibles. The new guidelines set out core VAT principles to be applied when taxing services and intangibles, will ensure more consistency between countries, will reduce double taxation and will protect the neutrality of business to business (“B2B”) transactions.

While an important step in the right direction, the more vexing question of how to tax internationally traded business to consumer (“B2C”)services and intangibles has been left for another time.

The Global Forum on VAT occurs under the umbrella of the OECD and provides a platform for global discussions on VAT. The first session took place in November 2012. Last week was the second occasion academics, tax administrators. business representatives and others were invited to discuss VAT policy trends and developments.

The main output from this latest session was a set of new OECD Guidelines on applying VAT across borders.

The Guidelines can be downloaded from the the OECD website – here: http://www.oecd.org/ctp/consumption/international-vat-gst-guidelines.htm

The focus of the Guidelines is B2B transactions. They discuss place of supply rules, the well known “destination principle” (B2B services should be taxed in the country where the customer is located) and mechanisms available to countries to allow non established foreign businesses to recover VAT incurred there.

None of this is startling news for New Zealand. We’re already ahead of this stuff thanks to our super charged GST system. Just this month we’ve seen a new streamlined registration and GST recovery system come into place for overseas businesses incurring GST here.

The really challenging question for New Zealand, and every other country with a VAT, is how do you tax B2C services and intangibles traded across borders? Unlike goods there’s no border control in place to capture internationally traded services and there’s no existing registration system to collect the tax from the customer/consumer.

This really is the more urgent question in my view. Countries are attempting to deal with the issue on their own (eg South Africa and the EU) but global cooperation and alignment are critical. Some States in the USA have implemented mechanisms to apply state taxes to inter-state B2C online sales (such as e-books) and the latest evidence suggests these measures are improving the sales of local bricks and mortar retailers at the expense of online retailers such as Amazon.

Last week’s Forum in Tokyo urged the OECD to finalise work on the VAT treatment of B2C services in time for the next Global Forum on VAT in November 2015. That seems like a long time to wait, but as we all know, achieving global consensus on anything is a slow process.

Cheers

Iain

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“Australia should follow NZ GST”?

NZ’s GST is certainly the most efficient form of VAT in the world.

The “VAT Revenue Ratio” is used by the OECD as a measure of VAT efficiency. The average in the OECD is about 50%.

The least efficient is Turkey’s VAT at about 30%. NZ ranks top at a little more than 95%, followed closely by Luxembourg.

Australia’s VAT Revenue Ratio is around 45%.

The Australian Treasury Secretary thinks they can learn from NZ’s GST and argues for a further shift in Australia from income taxes to GST. See: http://www.stuff.co.nz/business/world/9900014/Aussies-should-follow-our-GST-lead

If efficiency is the goal then the evidence seems compellingly in favour of the Secretary’s argument.

However, political realities seem to pull most countries in the opposite direction.

Yes VAT is spreading around the world as the tax of choice for governments but, increasingly those governments are voting for multiple rates, exemptions and zero rating when designing their version of VAT.

When the GFC hit we saw governments making greater use of reduced rates to stimulate activitiy. There is now a growing trend to use penal VAT rates as policy tools to discourage certain “undesirable” consumption (e.g for environmental reasons). Policies like these make a VAT system less efficient but they also make it more politically acceptable and relevant.

Perhaps the questions are: how long can NZ resist these political pressures and is it more likely we will follow the Aussie lead?

Iain