Across the globe indirect VAT/GST rules are being amended to ensure that foreign digital suppliers become liable for the collection and remittance of these taxes.
Here's a snapshot of what is happening:
Plans to introduce a new e-business law on January 1, 2020. Following in the path of South-East Asia neighbours, Singapore and Malaysia.
In mid-February 2018, Singapore became the latest jurisdiction to flag such changes to their tax rules with change due to come into effect on January 1, 2020.
In early November 2018, became the second South-East Asian nation to reveal plans to introduce a consumption tax on the supply of digital services to Malaysian residents. Malaysia's 2019 budget confirmed the move with the new rules (pending official approval) to come into effect on January 1, 2020. More detail on Malaysia's moves here.
South America, in particular, has seen a series of moves with Colombia, Uruguay, and Chile all revealing plans to tax foreign suppliers of digital services. Similar plans in Brazil were put on hold after a legal challenge.
Global digital services tax developments
In this article we provide you with some insight into what digital services tax rules are in the pipeline across the globe.
First, some background: the pace of change, from a taxation perspective, has been rapid. In the first half of 2018 alone Turkey, Saudi Arabia, and the United Arab Emirates all imposed a destination-based VAT on cross-border B2C digital service supplies. On January 1, 2019, Bahrain and the Canadian provinces of Québec and Saskatchewan mirrored these introductions.
The Organisation for Economic Co-Operation and Development (OECD) has already approved the destination-based principle in Action 1 of its Base Erosion and Profit Shifting (BEPS) report. The OECD states that: “For consumption purposes internationally traded services and intangibles should be taxed according to the rules of the jurisdiction of consumption.” Numerous tax jurisdictions are taking their lead from the OECD recommended approaches to taxing the digital economy.
Here we provide a list of tax jurisdictions that are planning to extend their VAT/GST laws to the consumption of cross-border digital services:
A Reuters report in August 2019 quoted Ekniti Nitithanprapas, the director-general of Thailand's Revenue Department, that a VAT on electronic businesses would be introduced in 2020. There was no elaboration on the exact date of such an introduction.
According to a previous report - in The Bangkok Post back in April - a draft bill aimed at taxing "digital platform operators" is already being deliberated by the Thai Council of State and the Revenue Department.
If passed this bill would come into effect on January 1, 2020.
The Malaysian Ministry of Finance announced on Friday, November 2, 2018, that they are to officially become the second country in Southeast Asia to introduce a digital tax. The new rules for Business-to-Consumer (B2C) supplies are due to come into effect on January 1, 2020.
Malaysia recently passed a bill confirming such a move, more details here.
On Monday, February 19, during his 2018 Singapore speech Finance Minister Heng Swee Keat revealed that digital services imported by consumers based in Singapore will be subjected to GST from January 1, 2020.
From early reports of this GST extension, foreign-based suppliers of digital services would face GST registration to enable their collection and reporting of Singapore GST to the Inland Revenue Authority Of Singapore (IRAS).
“Today, services such as consultancy and marketing purchased from overseas suppliers are not subject to GST. Local consumers also do not pay GST when they download apps and music from overseas,” said Finance Minister Heng Swee Keat. “This change will ensure that imported and local services are accorded the same treatment.”
For more detail on Singapore's plans click here.
In June 2019 Vietnam adopted the Law on Tax Administration. Contained within this regulatory update are plans for foreign e-commerce companies to register for Vietnam VAT purposes. These plans are due to come into effect on July 1, 2020.
The place of consumption rule is already in place in Vietnam. However, VAT is currently withheld at source by the Vietnamese party to the contract. This applies unless the foreign contractor has registered for tax purposes in Vietnam.
Chile has also been reviewing its legislation relating to cross-border digital sales. In August 2018, Chile’s Finance Minister Felipe Larrain revealed that such foreign-supplied digital services would be taxed at a rate of 10%. The moves are part of a broader aim to modernize Chile's tax structure.
Rules governing the supply of cross-border digital services came into force in July 2018. The rules, however, differ from other implementations as income tax may also be due in addition to the 22% VAT.
We first learned of Uruguay’s plans to tax foreign-supplied digital services back in October 2015 when a report in El Observador website outlined how the National Association of Uruguayan Broadcasters (Andebu) had raised the issue of an unfair marketplace when competing with the likes of international streaming players such as Netflix and Spotify. It is estimated that this new VAT could raise USD$10 million per year from sales of foreign digital services to customers based in Uruguay.
An October 2017 Brazilian State Agreement (Convênio ICMS 106⁄2017) had revealed plans to tax digital services – e.g. games, streaming services, music and image downloads, etc — via the State tax mechanism (ICMS).
However, by March 2018, these plans were put on hold after a favourable ruling for the Brazilian Association of Information and Communication Technology Companies (Brasscom). This association had filed a petition against the imposition of ICMS on software downloads and streaming. They won a preliminary injunction to suspend the effects of the ICMS Decree that proposed to impose ICMS on the purchase of software via download or streaming.
In late October 2017 it was revealed that non-residents supplying digital services – such as streaming and music downloads – to Argentina-based consumers will be subject to a 21% tax from a provisional start date of 2019.
However, the rules in Argentina differ slightly from other global implementations as according to local news reports the Federal Public Revenue Administration (AFIP) in Argentina will start charging taxes through credit cards to digital service platforms. Affected platforms will include the likes of Netflix, Spotify, and Airbnb. More here on our dedicated Argentina blog.
The Canadian provinces of Québec and Saskatchewan already tax the cross-border supply of digital services by non-resident businesses, but there is no federal Canadian approach at the moment.
An internal government document revealed in January 2017 raises the possibility of a federal Canadian sales tax on foreign-supplied digital services. We alreadThe 2017 government document — as reported by CBC — stated that the lack of such a tax “not only represents a significant loss of potential tax revenue for government, but it can also place domestic digital suppliers at an unfair competitive disadvantage.”
An August 2017 report from respected Canadian think-tank, the C.D. Howe Institute, has recommended that Canada amend its Excise Tax Act to apply to businesses that supply digital goods and service for consumption within Canada. For more detail on this report click here.
10. GCC (Gulf Cooperation Council)
The six members of the Gulf Cooperation Council (GCC) plan to introduce a VAT system in January 2018.
The six member states of the GCC are Saudi Arabia, Kuwait, the United Arab Emirates (UAE), Qatar, Bahrain, and Oman. As of January 2019 three of the GCC member states (Saudi Arabia, UAE, and Bahrain) had implemented VAT systems.
It is expected that the remaining three member states of the GCC (Kuwait, Qatar, and Oman) will follow in their neighbours' taxation path during 2019 or early 2020. More here.
In June 2018 Bangladesh proposed a 5% VAT on all types of ‘virtual business’ in its 2018-19 budget.
The term ‘virtual business’ was later clarified to mean digital platforms such as Facebook, YouTube, and Google.
Here at Taxamo we have been following developments in Bangladesh very closely. You can learn more about what has happened, and what is planned, here.
Major tax reform is on the agenda in the Philippines with the taxation of foreign-supplied digital services firmly in the sights of the tax authority there.
Since 2016 Philippines Bureau of Internal Revenue (BIR) has been drawing up plans aimed at taxing the digital economy.
One of the points of focus for the Philippine tax authorities are companies that sell services via social media sites such as Facebook and Instagram. The services covered in any potential piece of legislation would attract value-added tax (VAT), the current VAT rate in the Philippines is 12%.
In a significant move, back in April 2016, the Israeli Tax Authority (ITA) proposed to change its VAT legislation so that foreign tech firms would have to register in Israel to account for VAT on digital services sold to Israeli consumers.
The key change from the ITA was that the definition of ‘permanent establishment’ was to include online businesses, where the economic activity of the foreign digital service supplier is via the internet.
The draft legislation stated that “a foreign resident who provides a digital service or operates an online store through which a digital service is provided will have to register as a business in Israel in a special register that will be maintained for the purpose, and will also be obliged to file a report with the Tax Authority attached to the tax payment that arises from it. The report will state the total price of transactions in the reporting period and the VAT due on them, and the Tax Authority director will be entitled to issue a tax demand to the foreign resident if the report submitted turns out to be incorrect.”
In September 2018 the ITA issued a ruling (6369/18) allowing a streamlined procedure for B2B e-commerce supplies by foreign businesses to Israeli businesses. There has been no movement, however, on B2C supplies by foreign businesses to Israeli-based customers.
On July 1, 2019, Angola was to have introduced a new VAT system to replace Angola’s Consumption Tax code. However, prior to the introduction it was delayed for introduction until October 2019.
Non-resident digital service suppliers that want to register for Angola VAT will need to appoint a local fiscal representative. The law in its current form also refers to a simplified registration system for non-resident digital service suppliers.
More here on our dedicated Angola blog.
Uzbekistan has revealed plans to extend its VAT system to the supply of digital services provided by foreign-based companies to domestic customers from January 1, 2020. The standard rate of VAT in Uzbekistan is 20%. More to come.