In brief

There has been a significant shift in global consumer shopping trends over the last few years, with an intentional and noticeable swing toward online shopping and e-commerce. The ease by which consumers can complete e-commerce transactions with their mobile, tablet or laptop devices makes it an attractive sales channel when compared to its brick-and-mortar store counterparts. Coupled with the impact of the COVID-19 pandemic and restrictions imposed against free movement, online shopping has become the preferred shopping option for billions of consumers globally.

This change in consumer spending trends has prompted businesses to open online sales channels and make use of online marketplaces to remain competitive. It is rare today for businesses not to have an online presence, whether it entails managing its own website, listing on an online marketplace such as Amazon, or opening a store front on a social media platform such as Instagram. Businesses and individual suppliers of goods and services are now able to connect in real time to billions of potential consumers. Cross-border transactions have significantly increased as a result.


  1. Turkish Supreme Court's new unfavorable precedent on the virtual PE issue
  2. Increasing challenges for e-commerce providers in the GCC - Where are we going?
  3. Key takeaways

The rapid growth of e-commerce transactions creates additional complexities for tax authorities in effectively administering tax and enforcing VAT compliance, especially on non resident suppliers of e-commerce transactions. This is on the basis that non resident suppliers may not have any physical presence in the jurisdiction in which their goods or services are being sold.

As a result, tax authorities have to keep pace with the rapid developments in technology and the change in the way businesses operate, and ensure that their local VAT legislation and supporting guidance documents address any gaps that may exist due to the increase in e-commerce transactions and supply of new and often complex electronic services.


Turkish tax courts and regional administrative courts have for a long time consistently held that a website, per se, does not constitute a permanent establishment (PE) in Türkiye with respect to both domestic and international tax legislation, thereby confirming the ultra vires nature of the virtual PE claim of the Turkish Tax Authority (TTA). While taxpayers were holding their breath for the Supreme Court's final appraisal on those disputes, the Supreme Court recently started to issue unfavorable decisions by taking a pro-state and political approach. We therefore advise all digital companies operating in Türkiye to closely follow the course of virtual PE disputes and consult their advisers on how to deal with any ongoing virtual PE assessments/disputes and on recommended actions to take to mitigate any virtual PE risk for open years.


Tax authorities around the world are struggling to keep pace with the acceleration of e-commerce and the changing ways in which consumers are increasingly acquiring goods and services. This has led to global measures proposed by the Organization for Economic Co-operation and Development (OECD) to create a mechanism for the taxation of the digital economy. What this means is that suppliers will need to consider their tax obligations in jurisdictions where they may have no physical presence. GCC legislators have taken strides in creating a fluid framework to allow for the digital economy to be captured as part of the taxing rules and places the onus on suppliers to determine the place of supply of the respective electronic services based on the global principle of "use and enjoyment." In this article, we will delve deeper into the complexities that have arisen as a result of the change in consumer behavior for e-commerce providers and what it means for tax authorities in the region.

Turkish Supreme Court's new unfavorable precedent on the virtual PE issue

Background on the virtual PE issue

In the face of the inadequacy of conventional domestic and international tax regimes toward the global digital economy's accelerating growth, Türkiye's first major attempt to tax the digital economy was to conduct tax audits on several nonresident digital companies operating in Türkiye.

Since 2017, the TTA argued during those tax audits that companies' websites or other digital platforms, per se, can constitute a PE in Türkiye without requiring a physical presence (such as a server) in Türkiye. Based on these virtual PE assertions, the TTA made significant tax assessments on nonresident digital companies in terms of corporate income tax, advance tax (a type of advance corporate income tax), dividend withholding tax and VAT, along with tax-loss penalties and delay interest.

In the lawsuits filed against the TTA by nonresident digital companies that faced virtual PE assessments, the first-degree tax courts unanimously canceled those assessments on the grounds that those companies do not have a physical fixed place of business in Türkiye, as required under Article 5 of the applicable double tax treaties (confirming the illegality of the virtual PE claim). Some of those decisions had already been upheld by the regional administrative courts.

Moreover, almost all of the first-degree tax courts drew the same conclusion within the scope of the lawsuits filed by many Turkish taxpayers regarding the 15% withholding tax liability for online advertising services received from abroad. In those lawsuits, the courts evaluated whether the nonresident companies providing online advertising services to Türkiye from abroad have a PE in Türkiye, and they unanimously concluded that a physical presence is required to qualify as a PE in Türkiye under the applicable double tax treaties. These decisions have also been consistently upheld by the regional administrative courts.

However, while taxpayers were holding their breath for the Supreme Court's final judgment on those disputes, the Supreme Court's Tax Circuit No. 4 started to issue its first decisions in October 2022 and disappointed the taxpayers by concluding that a webpage or any other digital platform can itself constitute a PE in Türkiye.

Supreme Court's long-awaited decision

The Supreme Court's negative precedent on the virtual PE issue was met with heavy criticism from taxpayers and tax practitioners due to its ungrounded reasoning.

Indeed, in the decision given by the Supreme Court's Tax Circuit No. 4, the court: (i) first accepted that double tax treaties should prevail over the domestic legislation under the Turkish Constitution; (ii) referred to OECD endeavors to find a mutual solution to tackle taxation of the digital economy along with member countries' unilateral measures taken in this regard; and (iii) unreasonably concluded that it is sufficient for a fixed place of business to constitute a PE under Article 5 of the applicable double tax treaties if this place is suitable for carrying out commercial, industrial, agricultural or professional activities (i.e., a PE would also exist for the commercial activities conducted on digital platforms).

However, the OECD's studies within the scope of BEPS Action Plan 1 on Tax Challenges Arising From Digitalization confirmed that the current PE definition under the double tax treaties requires a fixed and physical presence, thus new nexus rules are required for the new business models driven by advanced technology, and these new rules have not been finalized or implemented yet.

Similarly, unilateral measures taken by Türkiye to tax the digital economy (e.g., the introduction of the VAT liability on electronically supplied services from abroad effective as of January 2018 and digital services tax effective as of March 2020) also clearly demonstrated the illegality of the virtual PE claim since none of these measures would be needed if websites, per se, were considered PEs under current domestic and international tax legislation.

In this sense, while the decision referred to both the OECD's and member countries' efforts to tackle the taxation of the digital economy, it completely disregarded the fact that those international and domestic efforts actually underscore that a website cannot solely constitute a PE under "current" domestic legislations and double tax treaties.

Moreover, the Supreme Court's approach also violated the constitutional principle of the "legality of taxes," which ensures that fiscal burdens such as tax obligations can only be introduced by "law" and, therefore, tax provisions (such as the PE definition) cannot be broadly and arbitrarily interpreted by the TTA.

In this sense, the baseless reasoning of this negative precedent showed us that the Supreme Court's Tax Circuit No. 4 adopted a pro-state and political approach on the taxation of the digital economy. Indeed, this decision was given unanimously by the five Supreme Court judges (none of the judges gave a dissenting opinion based on the legal grounds that were approved by numerous first-degree courts and regional administrative court judges).

Its impact on nonresident digital companies operating in Türkiye

Supreme Court decisions are not "binding" under Turkish law and this negative precedent is also not final.

Indeed, from a procedural perspective, as the Supreme Court's Tax Circuit No. 4 contradicted the regional administrative courts, those case files will be sent back to the regional administrative courts whereby the courts will issue either: (i) a compliance decision in line with the Supreme Court; or (ii) a persistence decision whereby the courts will insist on their original position on the illegality of the virtual PE claim. In the case of a persistence decision, the case will be sent to the Supreme Court's Assembly of Tax Circuits, consisting of the chief judges of all of the tax circuits of the Supreme Court and any other available judges from those tax circuits. This assembly's decision will be final.

At first, our expectation was that: (i) the first-degree tax courts and regional administrative courts would continue to issue favorable decisions in ongoing disputes regarding virtual PE assessments and online advertising withholding tax despite the unfavorable Supreme Court precedent; and (ii) if their decisions are canceled by the Supreme Court, the regional administrative courts would insist on their original favorable position and those cases would eventually be concluded in favor of taxpayers at the Supreme Court's Assembly of Tax Circuits level.

However, we have recently started to receive new decisions from both regional administrative courts and first-degree tax courts within the scope of ongoing lawsuits whereby the courts approved the TTA's virtual PE claim by explicitly referring to the Supreme Court Tax Circuit No. 4's precedents. In other words, those decisions indicated that the majority of regional administrative courts would issue compliance decisions in line with the Supreme Court Tax Circuit No. 4 and therefore, the virtual PE issue will be concluded in favor of the TTA.

Still, although the Supreme Court is the last step of the ordinary legal remedies, there is also an exceptional remedy called "individual application to the Constitutional Court." Indeed, as the "duty to pay taxes" is regulated under the Constitution and considered to be correlated with the "right to property" protected by the Constitution, disputes arising from tax obligations can also be subject to an individual application before the Constitutional Court. Therefore, we expect that the virtual PE issue may be subject to the Constitutional Court's review, especially within the scope of withholding tax disputes on online advertising services.

Meanwhile, it is still uncertain how the Supreme Court's Tax Circuit No. 3 (the other circuit in the Supreme Court handling the withholding tax disputes, which is known to make fairer and more technically based judgements) would rule on the virtual PE issue. If the Supreme Court's Tax Circuit No. 3 rules in favor of taxpayers, the chance of success in the Constitutional Court would increase.

Given these updates, we advise all companies operating digitally in Türkiye to closely follow the course of virtual PE disputes and consult their advisers on: (i) how to deal with any ongoing virtual PE assessments (for example, whether the soon-to-be-enacted tax amnesty would be beneficial or whether a MAP procedure should be initiated); and (ii) recommended actions that can be taken to mitigate any virtual PE risk for open years. Indeed, we may expect the TTA to be more aggressive in its upcoming PE audits conducted on nonresident digital companies.

Increasing challenges for e-commerce providers in the GCC - Where are we going?

Goods sold via online marketplaces

In most instances, where e-commerce transactions involve the supply of a physical good, tax authorities are able to adequately track and enforce VAT compliance as the goods have to be physically imported into the final destination and delivered to the end consumer. The close relationship between Customs and VAT means that physical goods will seldom result in a VAT revenue loss for tax authorities. Import VAT will be paid at the Customs entry point and sufficient documentary evidence will exist to support the respective VAT treatment and payment, whether it is made at the Customs entry point or deferred to be paid as part of the VAT return. These additional checks and balances equally apply where there is exportation of goods.

Where non resident GCC suppliers sell physical goods to GCC resident customers, the transfer of ownership generally occurs before the goods are shipped to the customer and VAT will be due upon importation. In these scenarios, international courier companies are tasked with shipping and delivery of goods and will also be responsible for paying any import VAT associated with the importation of the goods, which will later be recovered from the end consumer upon actual delivery. In this way, the non resident GCC supplier of goods avoids having to register for VAT in the GCC on the basis that there is someone in the GCC member state who is responsible for paying the import VAT.

Electronic services sold via the online marketplaces

An e-commerce transaction generally involves three distinct parties:

  • A supplier (which may not be resident in any GCC member state)
  • An online marketplace (e.g., Amazon, Etsy, eBay) that facilitates the sale of goods or services from a supplier to a customer and allows a transaction to be completed through its online platform (i.e., the online marketplace acts as an intermediary or agent in respect to the sale transaction)
  • A customer (which will usually be resident in a GCC member state)

There are two distinct issues when it comes to the supply of electronic services via online marketplaces:

  1. Determining the place of supply of electronic services
  2. The challenges of VAT compliance obligations and enforcement by the tax authorities

Determining the place of supply of electronic services

GCC tax authorities use the principle of "use and enjoyment" to determine the place of supply in respect of electronic services. When the customer uses and enjoys the electronic service in the GCC, the place of supply will be in the GCC member state, which in turn triggers a VAT obligation.

Determining the place where the customer uses and enjoys a service seems fairly easy when it comes to services linked to a specific location, but this becomes more complex where consumers are able to obtain services from anywhere in the world via online marketplaces. The use of virtual private networks or other location-masking software makes pinpointing the most accurate location of the online consumer even more challenging.

GCC VAT legislation provides a variety of indicators that can be used as guidance, including the following:

  • The internet protocol address ("IP address") used by the customer to receive the service
  • The country code of the SIM card used by the customer to receive the service
  • The customer's address as stated on the VAT invoice or other documents used for billing
  • Details of the customer's bank account or credit card
  • Other information of a commercial nature

In practice, obtaining sufficient evidence to prove the place of use and enjoyment is challenging and requires the following concerns, among others, to be addressed:

  • Is meeting one criterion sufficient to prove the customer's location?
  • What if conflicting pieces of information is obtained, such as when the customer's IP address places them in one location while the bank account details states a different location?
  • How many checks are expected to be completed by the supplier?

It is generally supported that the type of evidence to support the place of use and enjoyment should be sufficient to enable an "objective reasonable person" to draw the same conclusion as the supplier.

Complexities of VAT compliance obligations and enforcement by the tax authorities

Where a non resident GCC supplier enters into business-to-business (B2B) transactions, the liability for VAT reporting will be shifted to the VAT-registered recipient, who would declare VAT using the reverse charge mechanism. This avoids the scenario of the non resident GCC supplier having to register for VAT in a jurisdiction where they have no physical presence.

In reality, however, the vast majority of electronic services are generally used and enjoyed by individual customers, and in these business-to-consumer (B2C) scenarios, the individual consumers are likely not to be registered for VAT, shifting the responsibility for VAT back to the non resident GCC supplier. This places an obligation on the non resident GCC supplier, who may have no physical presence in any GCC member state, to register and pay VAT from the moment a B2C supply is made, bearing in mind that there is no VAT registration threshold for non resident suppliers.

The existing GCC VAT legislation does not contemplate the practicalities of consumer-to-consumer (C2C) transactions either. Together with the shift in consumer shopping trends, there has also been a significant increase in the number of individual suppliers of electronic services (e.g., content creators, musicians, software developers who have decided to freelance and sell their services directly to consumers). The most effective sales channels for these C2C supplies is via an online marketplace, which will advertise the electronic services and facilitate the online payments and delivery of electronic services between the two parties.

Online marketplaces act as disclosed agent

The existing GCC VAT legislation places a VAT compliance obligation on the individual marketplace suppliers, which creates an administrative burden for them and is further compounded when electronic services are supplied to individuals within each of the existing four implementing GCC member states (i.e., Kingdom of Saudi Arabia, United Arab Emirates, Sultanate of Oman, and Kingdom of Bahrain), creating four separate VAT registration and compliance obligations.

It also creates practical challenges for the tax authorities in trying to enforce VAT compliance on the many individual marketplace suppliers. Coupled with the fact that VAT is a self-assessment tax and the responsibility for transparent and complete VAT reporting lies with the non-GCC individual marketplace suppliers, the risk that VAT revenue losses may arise is significant. Tax authorities simply do not have the bandwidth and resources to effectively enforce VAT compliance in these scenarios. Having a single point of contact for all supplies of electronic services would ease the burden of administration for individual marketplace suppliers as well as the tax authorities.

It would be more effective for the tax authorities to hold the online marketplace responsible for VAT reporting and compliance with respect to the supply of any electronic services via the respective platform, as online marketplaces would already have a VAT registration obligation in the GCC. This is the case in the European Union where the tax authorities have moved the liability for VAT reporting to the online marketplaces (irrespective of whether these online marketplaces are undisclosed agents) from 1 July 2021, which reduces the risk of VAT revenue losses where individual suppliers fail to register and properly account for VAT on electronic services transactions.

Online marketplaces act as undisclosed agent

Where online marketplaces act as undisclosed agents in respect to electronic services, the supply is deemed to take place twice, that is: (1) between the non resident GCC individual marketplace supplier and the online marketplace; and (2) between the online marketplace and the end consumer. This places a VAT registration and reporting obligation on both the non resident GCC individual marketplace supplier and the online marketplace in respect of a single supply of C2C electronic services.

UAE Ministry of Finance announces new recordkeeping requirements for e-commerce transactions

The need for the tax authorities to have better control and oversight on e-commerce transactions and the respective tax revenues has prompted the UAE Ministry of State for Financial Affairs to issue Ministerial Decision No. 26 of 2023 on the Criteria and Conditions for Electronic Commerce for Purposes of Keeping Records of Supplies Made in February 2023. This new reporting requirement is applicable to taxpayers whose taxable e-commerce supplies exceeds AED 100 million in a 12-month period.

The UAE Tax Authority issued VAT Public Clarification VATP033 ("Public Clarification"), which outlines the amendments to Article 72 of the UAE VAT Executive Regulations and describes how e-commerce transactions should be split into emirate-wise reporting for purposes of submitting the VAT return.

This new requirement places an obligation on taxpayers to quantify all e-commerce transactions by the emirate in which the supplies are received. This will likely improve the allocation of tax revenue generated from e-commerce sales between the various emirates and allows the tax authority to better enforce VAT compliance obligations.

In line with Ministerial Decision No. 26 of 2023, a supply of goods and services would be considered a supply of an electronic service via an electronic commerce medium where all of the following criteria and conditions are met:

  • The goods and services are listed or advertised on an electronic commerce medium (this is met where sufficient information is provided to inform a purchase, including description of goods and services, price information, etc.).
  • The goods and services are ordered through the electronic commerce medium, regardless of whether or not the payment is made online (this is met when the order is fully executed on the online platform even if the consumer is redirected to a secure external payment link).
  • In the case of a supply of goods, the goods are delivered to a location specified by the customer where this location is not owned by the supplier nor operated by that supplier (this condition will not be met when the customer elects to pick up goods at the supplier's location).
  • In the case of a supply of services, the services are provided, or the right to receive the services is granted to the customer with minimal or no human intervention (this condition is not met where there is human intervention with use of a chatbot).

In line with the Public Clarification, the place where the supply of goods or services is received will be deemed to be the residential address of the consumer or the establishment most closely connected to the supply in the case of a business customer.

Undisclosed agent

The Public Clarification clarified that in terms of VAT liability, where the electronic commerce medium operates as an undisclosed agent, the supplier shall be regarded as supplying the goods or services to the electronic commerce medium, and the electronic commerce medium shall be regarded as supplying the same goods or services to the customer. Therefore, the operator of the electronic commerce medium shall be required to consider the supply to the end customer when determining the value of taxable supplies made through e-commerce. This scenario places an obligation on both the supplier and the operator to undertake emirate-wise reporting for e-commerce transactions.

Incidental supplies

Activities that support online transactions, such as payment systems, logistics for the delivery of goods and other similar platform services fall within the remit of an electronic commerce supply of goods, as long as these ancillary services are provided by the same supplier of goods. The principles of supply of more than one component as stipulated in Article 4 of the UAE VAT Executive Regulations will apply.

Threshold and timeline

This new e-commerce reporting obligation is effective from 1 July 2023 or the first tax period following the calendar year in which the AED 100 million threshold was exceeded. This information will be provided as an underlying declaration and split between e-commerce and non-e-commerce standard rated supplies, and sufficient information must be maintained by the qualifying supplier of e-commerce transactions to evidence the particular emirate in which the supply was actually received.

The UAE Tax Authority has imposed an obligation on taxpayers who expect to fall within the ambit of this reporting requirement to inform them by 15 March 2023 via email.

This new recordkeeping requirement would place an additional reporting burden on suppliers of e-commerce transactions and on online marketplaces, who may have to assist suppliers using the respective platforms with relevant customer location information split into the emirate-wise reporting. Online marketplaces may have to now update their internal controls, processes and systems to be able to track the location of the consumers so that they are able to relay this information.

Key takeaways

Given the existing GCC VAT legislation on e-commerce and electronic services, together with the recent development in the UAE with respect to e-commerce reporting, we advise all online marketplaces operating in the GCC to: (1) internally discuss and plan for the scenario whereby they may be held accountable for the VAT reporting obligations in respect to the supply of electronic services made via their platforms; and (2) consider their obligations on e-commerce emirate-wise reporting and whether any enhancements are required to be able to produce this information and provide it to the suppliers using the respective platform.