On 12 April 2017, the OECD published its new International VAT/GST Guidelines. The Guidelines were completed and published previously in November 2015. It was cited in the OECD's work in Action 1 of the BEPS Project in relation to addressing the tax challenges of the digital economy. The Guidelines were also previously endorsed by the OECD Council in the Recommendation of the Council on the Application of Value Added Tax/Goods and Services Tax to the International Trade in Services and Intangibles, C(2016)120, on 27 September 2016.
At the outset, it must be noted that the Guidelines do not prescribe rules that jurisdictions must follow. The OECD states that jurisdictions remain sovereign with respect to the design and application of their laws. Instead, the Guidelines merely identify certain objectives, and suggest the means that jurisdictions can use to achieve them.
The Guidelines endorse the destination principle for the imposition of VAT, also known as GST, ie, tax should be ultimately levied only on the final consumption that occurs within the taxing jurisdiction.
In particular, the Guidelines focus on internationally traded services and intangibles and state that the destination principle should apply to such supplies. In other words, for the cross-border supply of services and intangibles, VAT/GST should be levied in the consumer's jurisdiction, rather than the supplier's jurisdiction. In light of the difficulties that may be faced in applying the destination principle to services and intangibles, the Guidelines provide place of taxation rules for determining the place of taxation for business-to-business (B2B) and business-to-consumer (B2C) cross-border supplies of services and intangibles.
For B2B supplies, the Guidelines recommend the implementation of a reverse charge mechanism, ie, the business customer is responsible for paying VAT/GST instead of the non-resident supplier. For B2C supplies, the Guidelines recommend that non-resident suppliers be required to register and account for VAT/GST in the jurisdiction of taxation (based on the destination principle) under a simplified registration and compliance regime, even if it is not located in the jurisdiction of taxation.
The Guidelines also provide recommendations for mutual co-operation among tax administrations, in order to facilitate a consistent interpretation of the recommendations in the Guidelines, particularly in respect of neutrality and place of taxation, so as to minimize double taxation or double non-taxation, and the potentially resulting disputes. The Guidelines recommend, among others, that existing mechanisms, such as the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, and the various bilateral double taxation treaties and exchange of information treaties, can be used by tax administrations for mutual co-operation, information exchange and mutual assistance.
With the publication of the Guidelines and the increasing growth and challenges of the digital economy, many jurisdictions around the world have responded and/or are responding to this through the adoption of the recommendations provided under the Guidelines (specifically in relation to the destination principle and the cross-border supply of services and intangibles). In Asia, Japan (since May 2015), South Korea (since 1 July 2015), New Zealand (since 1 October 2016), and Taiwan (since 1 May 2017) have already implemented the Guidelines, whereas Australia will be implementing GST on the international sales of services and digital products provided to Australian consumers from 1 July 2017. Other Asian countries, such as Thailand, Singapore and Malaysia, are also studying how they can implement GST on the cross-border supplies of services and intangibles in their respective jurisdictions. Even though the Guidelines have provided some consistency in the application of VAT/GST on cross-border supplies of servics and intangibles, there are further challenges which have arisen. In Asia, this is more pronounced as there is a lack of uniformity in the application of the recommendations provided under the Guidelines in the various jurisdictions (eg, an inconsistent definition and scope of digital services and the different manner in which a simplified VAT/GST registration is operationalized in each jurisdiction). This has resulted in additional costs and complexity to the offshore supplier who has to comply with the different rules and compliance requirements under the various jurisdictions it operates in. It will be interesting to note whether further guidance will be provided by the OECD going forward.