International indirect tax guide

In the past two years we have seen events that have changed the way we work, and more importantly from an indirect tax point of view, the way we purchase and receive goods and services as consumers. As a result, Value Added Tax (VAT) and Goods and Services Tax (GST) is growing in its complexity and application, as the traditional goods and services model is replaced with digital content; virtual consumption and seamless international trade flows.

We are seeing many changes relating to registration requirements, digital reporting requirements, the approach to audits and compliance by tax authorities and the approaches to taxing the digital economy. There are numerous challenges facing businesses, and below we have set out some of the key international indirect tax trends that we and our clients are seeing and facing. Indirect tax has become a genuine commercial conversation now. Whilst there appears to be a trend for corporate income tax rates being lowered, VAT, GST and sales tax rates are generally increasing.

Tax authorities are realising that taxing revenue and actual transactions can raise more revenue than simply focusing in on profit, which can often be subjective and subject to manipulation. Put simply, it’s easier to tax the transactions that create the outcomes, rather than the outcomes themselves. When the transaction tax base is expanded to move out of the ‘physical’ and into the ‘virtual’, the reach of the indirect tax is extended significantly, and revenue collections grow accordingly. It is no wonder that numerous territories are looking to introduce or re-shape existing VAT/GST systems.

The development in technology over the last decade has fuelled a boom in e-commerce that has drastically changed the way consumers buy goods and services. Most of today's suppliers can sell to consumers without any local presence. This has led to an increasing number of businesses and online marketplaces, with little to no shop fronts or brick-and-mortar presence serving customers based all over the world.

In 2015 the Organisation for Economic Co-operation and Development (OECD) recommended that indirect tax regimes should be updated to cope with the ever-evolving digital economy to retain their purpose as a consumption tax. Following its initial report in 2015, numerous countries re-examined the scope of their indirect tax regime and extended them to subject digital services and Low-Value Goods supplied by non-resident businesses to tax.

The European Union was one of the first movers but over recent years this has become a genuine trend. It seems that almost every quarter another country announces new legislation targeting non-resident supplies of digital services and / or Low-Value Goods. This is particularly a growing trend we are seeing with emerging countries in the APAC region.

In their report, the OECD also made recommendations on how countries should design and implement the rules to effect the taxation of digital services and Low-Value Goods. Whilst most countries extended the scope of their regime based on these recommendations, the detailed rules and mechanisms implemented differ country-to-country (eg definition of 'digital services', registration thresholds, definition of 'Low-Valued Goods' etc ). These differences amplify the challenges that businesses and marketplaces face when identifying how to manage and mitigate their overseas registrations and compliance obligations.