Background (1/2) 1998: OECD Ottawa Conference on Consumption Taxation in the context of E-Commerce ...

Background (1/2) 1998: OECD Ottawa Conference on Consumption Taxation

in the context of E-Commerce 2006: OECD launches a project related to the issuance of

international VAT/GST guidelines February 2010: Release of OECD VAT/GST guidelines on

the place of taxation for public consultation October 2010: Approval of guidelines on the place of

taxation by OECD Committee on Fiscal Affairs (CFA) December 2010: Release of OECD draft guidelines on

neutrality June 2011: Approval of guidelines on neutrality by CFA

Background (2/2) Purpose of OECD VAT guidelines: Assistance on applying VAT to

cross-border trade Development of the guidelines: By CFA’s Working Party 9 on

Consumption Taxes. Guidelines are developed with the assistance of Technical Advisory

Group (TAG) made up of government and business representatives. TAG comprises of 3 Task Teams (TT):

TT1: Dealing with the Guidelines on place of taxation- B2B supplies

TT2: Dealing with the application of Neutrality Guidelines TT3: Working on specific Rules for determining the place of

taxation OECD VAT Guidelines serve as “soft law”

Assumptions

All supplies are B2B

All supplies are legitimate and with economic substance

All supplies are between separate legal entities with single locations only

Fundamental principles for charging VAT on internationally traded services and intangibles

A. Destination principle: “For consumption tax purposes internationally traded services and intangibles should be taxed according to the rules of the jurisdiction of consumption”.

B. Neutrality principle: “The burden of value added taxes themselves should not lie on taxable businesses except where explicitly provided for in legislation”.

A. Guidelines for the application of Destination Principle (1/5)

Guideline 1: For consumption tax purposes, internationally traded services and intangibles should be taxed according to the rules of the jurisdiction of consumption

Guideline 2 (“Main rule”): For B2B supplies, the jurisdiction in which the customer is located has the taxing rights over internationally traded services or intangibles

Guideline 3: The identity of the customer is normally determined by reference to the business agreement


Guideline 2 (Main Rule) - Effect on the Supplier

Applying the main rule will not be influenced by the fact that the Supplier: Supplies the customer who supplies onwards the

services to a third party Renders the services to a third party that is not the

Customer under the business agreement Is paid by a third party that is not the Customer

under the business agreement


Guideline 2 (Main Rule) – Effect on the Customer

The Customer will have to account for any VAT due under the reverse-charge mechanism where that is consistent with the overall design of the national VAT system. Such obligation shall not be affected by the fact that: The Customer supplies onwards the services or

intangibles to a third party The service or intangible is not rendered to the customer The customer does not pay for the supply


Guideline 2 (Main Rule) – Effect on Tax Administrations

The determination of the place of taxation of a service or intangible for VAT purposes should be decided for each supply individually. It will therefore not be influenced by: Any subsequent onward supply or lack of such supply The mere rendering of the service or intangible to a

third party business other than the customer The direction of the payment flows and the identity

and location of the customer


Guideline 3 – What is a “Business Agreement”? Business Agreements consist of the elements that

identify the parties to a supply and the rights and obligations with respect to such supply. They are generally based on mutual understanding.

The term “Business Agreement” is not restricted to a contract and is wide in its application (e.g. it may include purchase orders, invoices, audio recordings, telephone conversations, e-mails, etc.).

On occasion, supplies may be considered to occur without a mutual understanding (e.g. a court order imposing obligations to one or more parties)

B. Guidelines for the application of Neutrality Principle (1/2)

I. Key principles of Neutrality

Guideline 1: The burden of value added taxes themselves should not lie on taxable businesses except where explicitly provided for in legislation.

Guideline 2: Businesses in similar situations carrying out similar transactions should be subject to similar levels of taxation

Guideline 3: VAT rules should be framed in such a way that they are not the primary influence on business decisions

B. Guidelines for the application of Neutrality Principle (2/2)

II. Neutrality in international trade Guideline 4: Foreign businesses should not be disadvantaged

nor advantaged compared to domestic businesses (as regards the level of taxation)

Guideline 5: To ensure foreign businesses do not incur irrecoverable VAT, governments may choose from a number of approaches (such as the direct refund of local VAT incurred, the shifting of the responsibility to locally registered suppliers/customers, etc)

Guideline 6: Specific administrative requirements for foreign businesses should not create a disproportionate compliance burden

Indicative list with further issues to be covered by OECD guidelines regarding the application of VAT

Interaction of VAT/GST with Sales, Excise and other transactional taxes

Applying the main rule to legal entities with multiple locations B2C transactions Specific place of taxation rules Services characterization issues Time of supply and attribution rules Value of supply Compliance issues Avoidance of double taxation issues (including refund

mechanisms, dispute resolution and mutual co-operation)

Background (1/2) 1998: OECD Ottawa Conference on Consumption Taxation in the context of E-Commerce ...

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