Taxation and the digital economy
Article 5 minute read

Taxation and the digital economy

17 February 2022

The digital economy has proven to be a source of difficulty and concern for tax administrations and tax regulators. Furthermore, the global pandemic has served to highlight these challenges, given that the online buying and selling of goods and services has hit even greater heights.

The principal concerns regarding the taxation of the digital economy were identified and examined by the OECD in late 2015, and its guidelines have continued to evolve ever since. In short, OECD has tried to address three main areas:

  • How digital goods and services are taxed
  • How digital goods and services are reported
  • Who bears responsibility for tax revenue collection related to digital goods and services

As such, the OECD has come up with a set of rules and guidelines that have been gradually adopted by most countries. The solutions that have been suggested by OECD are as follows:

  • Implement a “place of taxation” rule based on the principal residence of the consumer. For example, if goods are purchased by an individual residing in Mexico, then they should be taxed in Mexico, in accordance with the local rules.
  • Introduce a requirement for non-resident digital suppliers to register and account for VAT/GST on “remote” digital sales. The actual tax registration requirements take different forms. Some countries require VAT/GST registrations and/or local tax representatives, while other countries prefer to apply a withholding tax mechanism in an attempt to better control the flow of tax revenues.
  • Introduce a simplified collection and compliance mechanism whereby digital platforms become liable for VAT/GST. This seems to be a popular option, particularly in Europe.
  • Complement the operation of the simplified collection and compliance regime with the implementation of a modern risk-based compliance strategy and robust administrative cooperation. Tax administration requires detailed transactional reporting and the validation of data with counterparties.

Additional complications for cross-border platforms

The OECD has identified another potential challenge: because digital platforms operate across multiple jurisdictions, there are risks in terms of compliance with national reporting regulations in each country. There is also an additional burden on digital platforms in terms of coping with various reporting formats and the requirement to report different information, depending on the jurisdiction in question. 

Recently, the OECD has issued new rules in terms of the reporting to be undertaken by digital platforms. The minimum requirements are as follows:

  • Platforms must collect information to accurately identify who the seller is and where they are based, as well as how much they have earned on the platform over an annual period
  • Platforms must verify the seller’s information to ensure it is accurate
  • Platforms must report the information, including the seller’s income, to the tax authority annually by 31 January
  • Platforms must also give that information to the sellers, so that they can use it to help them complete their tax returns
  • Tax authorities then exchange information with other tax authorities where the sellers are resident (or rental property is located)
  • The information is used by tax authorities to ensure that sellers are complying with their tax obligations and to tackle non-compliance if they are not
  • Tax authorities must enforce the rules and see that platforms are operating them correctly, and there may be penalties for non-compliance.

Jurisdictional variation and non-compliance

More than 60 countries around the globe have adopted the OECD guidelines and have incorporated them into their legislation. However, the manner in which they have done this, the extent of coverage and the consequences for non-compliance can vary widely.

For example, the registration requirements can vary from being imposed on each digital goods and services provider, to registrations only being imposed after certain revenue thresholds have been met, as is the case in Thailand. There are also jurisdictions, such as Vietnam, where there are no registration requirements for providers, but rather the customers (in case of B2B) or commercial banks (in case of B2C) are responsible for declaring and withholding the tax.

Tax reporting requirements may also differ, from simply issuing invoices, like in Saudi Arabia where an e-commerce application is responsible for issuing the sale invoice, to more comprehensive reporting that could cover either some areas of the transaction, or full disclosure and reporting, such as in the Czech Republic where reportable information includes selected information about the platform, its operator, sellers and effected transactions.

As for the consequences of non-compliance, these can range from light punishments to hefty penalties. In Mexico, for example, the definition of digital services is quite comprehensive and has been enlarged to include intermediation by or between third parties and intermediation services in the transfer of second-hand personal property. The consequences of not complying with registration and reporting obligations are quite severe and can go as far as a temporary block in access to the digital service. Sanctions of temporary blocking apply to the failure to register in due time before local tax authorities, to appoint a legal representative, inform of a local domicile, or obtain an e-signature.

Additionally, temporary blocks can also be applied in cases where non-residents fail to pay VAT to the State, or tax returns (eg, for payments, information returns, etc.) are not submitted in due time for three consecutive months or two consecutive quarters.

In other countries, such as the Czech Republic, there are significant financial consequences for failing to report in accordance with local requirements. Fines can go as high as €60,000 for each individual breach.

Talk to TMF Group

Any company selling online should be aware of the local rules and regulations, of the local tax registration requirements and of the local reporting requirements, given the potentially significant consequences upon a business. 

TMF Group’s combination of global reach and multi-disciplinary local expertise means accurate, consistent and timely international tax compliance everywhere you need it.

If you need any assistance or guidance on any of the issues related to digital tax outlined above, make an enquiry today.

Written by

Emine Constantin

Global Solutions Director, Accounting & Tax

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