Surviving regulatory change: the OECD VAT/GST workStéphane BuydensVAT Policy Advisor Organisation for Economic Cooperation and Development

SURVIVING REGULATORY CHANGE: THE OECD VAT/GST WORK

Stéphane BuydensVAT Policy Advisor

Organisation for Economic Cooperation and Development

Growing importance of VAT

Growing interaction among VAT systems

Rate increases

Base broadening

Improve « efficiency »

Combat fraud – Reduce VAT Gap

160 countries

20% of world’s tax revenue

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Figure 1: Share of developing economies(1) In world exports of services, 1995-2014

5Source: Consumption Tax Trends 2014

Evolution of the tax mix 1965 - 201234 OECD countries unweighted average

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• Address risks of double non-taxation in current systems

• Governments need money but also fairness of the tax system

• Need for consistent rules to fix deficiencies

• 15 actions around three main pillars: – The coherence of corporate tax at international level.– Realignment of taxation and substance

– Transparency, coupled with certainty and predictability

• Also targeted work

• Digital economy,

• Multilateral instrument to implement the BEPS measures

• Mainly in the direct taxes area

BEPS Actions

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BEPS

Hybrid Mismatch

TransparencyAdministrative Cooperation

CFC

Interest deductions

Permanent Establishment

Transfer Pricing

Dispute resolution Digital

Economy

VAT

VAT/GST Guidelines

Exchange of information & AdministrativeCooperation

VRR

StatisticsCTT

Low value goods

BEPS – VAT Connections

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Imports of low value goods

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Need for a Global standard

Need for a Standard• Increase certainty • Reduce administration and compliance

costs

No border controls for services

Lack of coherence• Non-taxation/Double taxation• Revenue risks /distortions• Compliance costs, uncertainties

International VAT/GST Guidelines

• Cross-border trade in services and intangibles

• Political commitment (as opposed to “hard law”)

• Guidance (Not detailed tax legislation)• Connected with BEPS• Consensus approach: G20 – Global Forum

on VAT

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Building on core VAT design principlesNeutrality principle • The burden of VAT should not lie on businesses except where explicitly provided

for in legislation• Equal treatment of economic operators & minimal impact on business decisions• Non discrimination between foreign and domestic businesses, flexible approach,

proportionalityDestination principle– Internationally traded services and intangibles should be taxed according to the rules

of the jurisdiction of consumption

Goal

Achieve international VAT neutrality for cross border trade in services and intangibles

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Place of taxation rules

B2BGeneral Rules

Single Location Entities

Multiple Location Entities

Customer Location (Permanent business presence)+Business Agreement

Direct deliveryDirect useRecharge+Business arrangement

B2B & B2CSpecific Rules

Immovable PropertyDirect connection with a specific property

Place where the immovable property is located

Evaluation Framework

Difficult to determine customer status & location Examples• Admission to trade fairs• Passenger tranport • Place of performance

B2CGeneral Rules

On the Spot

Physical performance atidentifiable place and

consumed at the same time and place in the presence of both the

supplier and customer.

Place of physical performance

Other

e.g. internet supplies

Usual residence of the customer

Guidelines - Decision tree

• Certainly - Simplicity (anticip. consequences)• Efficiency (compliance costs)• Neutrality (guidelines)• Effectiveness (right amount - right place)• Fairness (minimise fraud-avoidance

+ Significantly better results (limited appl.)

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Supplies to multiple location entities - Recharge

Country E

Supplier

SZero-rate

Reverse charge

R/C R/C R/CR/C

Country D

system

MNE Sub

Client

MNEHQ

Country Csystem

MNE Branch

Country B Country Asystem

MNE Branch

system

MNE Branch

“Recharge Arrangements”

Bring within scopeBusiness Agreements

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Collection mechanisms

• Reverse-charge mechanism is the recommended approach for collecting the tax at destination.

• Reverse-charge may not be required if the customer is entitled to full input tax credit

B2B

B2C

• Non-resident supplier to register and remit VAT in taxing jurisdiction

• Simplified registration and compliance (web-portal, e-payment…)

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Next steps• OECD Council Recommendation (2016)• Implementation packages

Collection mechanisms – operational issues Policy issues

• Implementation EU – Iceland - Norway - Switzerland South Africa Japan - South Korea Australia - New Zealand Israel, etc

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Imports of low value goods

Imports of low value goods

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• Current situation– Exemption thresholds in most countries (from USD 9 to 850)– Rationale: collection costs outweigh the revenue gained

• Challenges– Growing losses of revenue, distortions of competition, Incentive for

relocation

• Action– BEPS Action 1 Report recommends examination of possible options – Many countries are considering reform to reduce/remove thresholds

Imports of low value goods

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• BEPS Report• Key outcomes

– Need to consider all stakeholders– Strong connection with customs & postal environment– Assessment of available options

Traditional collection methodPurchaser collectionVendor collectionExpress carriersFinancial intermediaries

– Combination of models possible

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