Article 32 – The Tax Challenges of the Digital Economy

Broader indirect tax challenges In our 32nd 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 how the challenge related to the collection of vat on imports of low value goods may be addressed. As stated in the previous articles, […]

Written By Stephen Balzan

On August 1, 2016
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Broader indirect tax challenges

In our 32nd 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 how the challenge related to the collection of vat on imports of low value goods may be addressed.

As stated in the previous articles, the vat exemptions on the imports of low value goods which we have today were introduced prior to the advent of the digital economy.  Thus it is appropriate to review whether such exemptions are still appropriate. If the efficiency of processing imports of low value goods and collecting vat therefrom could be improved, the right balance could still be struck between the administrative and compliance costs of taxing low value imports and the revenue generated therefrom.

Working Part 9 of the OECD CFA produced a report entitled ‘The Low Value Imports Report’, which identifies four broad models for collecting VAT on low value imports.  These are:

  1. The traditional collection model – A model where VAT is assessed at the border for each imported low value good individually.    This is not generally found to be an efficient model for the collection of vat due to the lack of electronic data transmission systems.  Should such systems be introduced worldwide, to eventually replace the existing paper based and manual processes would result in considerable efficiency gains.   
  2. The purchaser collection model – A model whereby the purchaser would be expected to self-assess and pay the vat on the importation of low value goods.  This is likely to result in limited compliance by the purchasers and would be highly complex and costly for customs and tax administrations to implement and operate.
  3. The vendor collection model – A model which will require the non-resident vendors to charge, collect and remit the vat in the country of imitation, which could improve the efficiency of vat collection on the importation of low value goods.  This system could however create additional burdens for non-resident vendors, which could however be mitigated by complementing this model with a simplified vat registration and compliance regime.
  4. The intermediary collection model – A model where vat on the importation of low value goods would be collected and remitted by intermediaries on behalf of non-resident vendors, assuming that such intermediaries would have the required information to assess and remit the right amount of taxes in the country of importation.  Four main types of intermediaries wee identified i.e. postal operators, express carriers, transparent e-commerce platforms and financial intermediaries.

The implementation of these models or a combination of them will allow jurisdictions to remove or lower the VAT exemption thresholds.  However it is recognized that for this to happen, any reform to improve the efficiency of the collection of vat on the importation of low value goods must be complemented with appropriate risk assessment and enhanced international administrative cooperation between tax authorities so as to enforce compliance.

In our last two articles, we shall be focusing our attention on

  1. the second challenge for vat systems, in particular where products are acquired by private consumers from non-resident suppliers i.e. 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;
  2. The manner in which the second challenge will be addressed.

These last two articles will bring to an end our articles in a series of articles which the tax team of ACT has written on addressing the tax challenges of the digital economy. 

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.