Article 33 – The Tax Challenges of the Digital Economy

Broader indirect tax challenges In our 33rd 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 second challenge for vat systems, in particular where products are acquired by private consumers from non-resident suppliers, on which often no or an […]

Written By Stephen Balzan

On August 8, 2016
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Broader indirect tax challenges

In our 33rd 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 second challenge for vat systems, in particular where products are acquired by private consumers from non-resident suppliers, on which often no or an inappropriately low amount of vat is levied.

The second challenge relates to the fact that the digital economy has increasingly allowed the delivery of B2C services and intangibles by businesses from a remote location to consumers around the world without any direct or indirect physical presence of the suppler in the consumer’s jurisdiction.  Such supplies often result in no or inappropriately low amount of vat being collected.

There are two approaches to apply VAT on such cross border supplies of services and intangibles over the internet. The first approach allocates the taxing rights to the jurisdiction in which the supplier is resident.  Under such approach, the non-resident supplier will charge vat at the vat rate applicable in the jurisdiction in which he is resident.  The non-resident supplier may however opt to be established in a jurisdiction in which no or a low rate of vat applies, which rate would ultimately be lower than that applicable in the jurisdiction of consumption.

This would therefore mean that domestic suppliers of competing services could face competitive pressures from non-resident suppliers.  Domestic suppliers are required to collect vat on their domestic supplies while non-resident supplies can structure their affairs in such a way so as to collect no or an inappropriately low amount of vat.

The second approach would be to allocate the taxing right to the jurisdiction in which the consumer is resident, often referred to as ‘the destination principle’.  However as seen in previous articles, it is challenging to enforce an effective collection of vat where the private consumer would have to assess himself. Rather it would be more effective to require the non-resident supplier to register, collect and pay vat in the country of consumption.  This has proved to be largely effective in view of the fact that the majority of online cross border sales are carried out by the big giants who would want to be seen that they are compliant with the laws and regulations applicable in the country of consumption.  However without implementing a suitable mechanism to collect vat in the jurisdiction of consumption, it is unlikely that vat would be paid.

Against this background, jurisdictions are increasingly looking at ways of how to ensure an effective collection of vat on services and intangibles acquired by resident consumers from suppliers abroad over the internet, in line with the destination principle, requiring the non-resident supplier to register, collect and pay vat in the country of consumption.

It is also however likely that non-resident suppliers will fail to register for vat purposes in the country of consumption.  Thus a well functioning means of international cooperation between tax authorities is necessary otherwise there will be a loss of vat revenue and potentially unfair competitive pressures on domestic suppliers.

In our next article, we shall be focusing our attention on how this challenge i.e. the low or no vat collected from sales by non-resident suppliers to private consumers may be addressed.

The next article 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.