Article 31 – The Tax Challenges of the Digital Economy

Broader indirect tax challenges In our 31st article in a series of articles on the tax challenges of the digital economy, we shall be providing you hereunder with a brief overview on the broader indirect tax challenges raised by the digital economy and the options to address them. Cross border trade of goods, services and intangibles, […]

Written By Stephen Balzan

On July 25, 2016
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Broader indirect tax challenges

In our 31st article in a series of articles on the tax challenges of the digital economy, we shall be providing you hereunder with a brief overview on the broader indirect tax challenges raised by the digital economy and the options to address them.

Cross border trade of goods, services and intangibles, creates challenges for vat systems, in particular where such products are acquired by private consumers from consumers abroad. The main challenges relate to (i) the imports of low value parcels from online sales which are treated as vat exempt in many jurisdictions, and (ii) the strong growth in the trade of services and intangibles, particularly sales to private consumers, on which often no or an inappropriately low amount of vat is levied.

  1. the imports of low value parcels from online sales which are treated as vat exempt in many jurisdictions

Countries with a VAT system, collect vat on imports before goods are released from customs.  However many jurisdictions with a VAT system apply an exemption for imports of low value goods as the administrative costs associated with the collection of vat on such goods outweighs the actual vat to be collected.  The threshold on which no vat will be paid varies from country to country but when such thresholds were set, internet shopping did not exist.

The main challenges arise from the ability of businesses to structure their affairs in such a way so as to benefit from such exemptions and therefore sell goods and services to customers online without the payment of VAT, which creates unfair competition pressures against domestic businesses who would have to charge vat on their domestic supplies.

Thus businesses selling low value goods online could restructure their affairs in such a way in which low value goods are instead shipped to its consumers from an offshore jurisdiction and therefore benefit from the vat exemption.

This exemption has resulted in decreased vat revenues and the possibility of unfair competition between domestic suppliers and other suppliers who sell online.  The concern is not only the immediate loss of revenue and the unfair competitive pressures but also the incentive that is created for domestic suppliers to locate or relocate to an offshore jurisdiction in order to sell their low value goods free of vat.  This would also have a negative impact on employment (both existing and also the possibility of creating new employment opportunities) and direct tax revenues.

The difficulty lies in striking a balance between the need for appropriate revenue protection and avoidance of distortions of competition and the need to keep the cost of collection proportionate to the relatively small amount of vat collected.

In our next article, we shall be focusing our attention on how this challenge i.e. the collection of vat on imports of low value goods may be addressed.

How can we help?  

For further information, please contact one of the firm’s tax partners, Stephen Balzan on [email protected] or Elaine Camilleri [email protected]. ACT can help you understand the changes to the tax rules and how these can impact your business.  

Apart from its offices in St. Julian’s Malta, ACT operates from a second office in Gozo, which is situated in the capital city of Victoria.  For an appointment in our Gozo office, please call on 00356 21378672 or send us an email on [email protected]. 

Disclaimer: This article contains general information only and is not intended to address the circumstances of any particular individual or entity. ACT, by means of this article is not rendering any accounting, business, financial, investment, legal, tax, or other professional advice or service. This article is not a substitute for such professional advice, nor should it be used as a basis for any decision or action that may affect your finances or your business. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. Before making any decisions or before taking any action that may affect your finances or your business, you should consult a qualified professional adviser. ACT shall not be responsible for any loss whatsoever sustained by any person who relies on this article.