Digital tax trends: International plans to tax the digital economy

Tax trends indicate a move to destination-based taxes and non-resident digital suppliers being liable for VAT/GST. Here's a sample list of such plans.

Aug 4, 2020

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.

digital-tax-plans-world

Here's a snapshot of what is happening:

Thailand

Thailand looks set to become the latest South-East Asian nation to extend the scope of its VAT legislation to cover digital sales provided by non-resident businesses or platforms to customers based in Thailand. The Thailand VAT legislation was approved on June 9 and the next step in the process is a Thailand government vote and the announcement of a start date for the new legislation.

Latin America

Latin America, in particular, has seen a series of moves with Colombia, Uruguay, Mexico, and Chile all revealing plans to tax foreign suppliers of digital services. Similar plans in Brazil were put on hold after a legal challenge. Paraguay, meanwhile, has postponed the introduction of VAT rules on digital services supplied by non-residents until January 1, 2021. 

Central Asia

Uzbekistan extended its VAT system to digital services supplied by foreign providers from January 1, 2020. Kazakhstan plans to do so in 2021. More here.

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:

1. Costa Rica

From October 1, 2020, VAT at 13% must be applied to digital sales from foreign digital service providers and intermediaries — that are included on a government list — to consumers in Costa Rica. The plans were originally due to be introduced on August 1, 2020, but were delayed until October by a government directive issued on July 31. More here.

2. Thailand

The Thailand VAT legislation was approved in early June 2020. The next step in the process was for a Thailand government vote and the announcement of a start date for the new legislation. More here.

2. Ukraine

Ukraine has revealed draft plans of a proposal to tax non-resident digital businesses from the start of 2021. The plan contained in a bill before parliament has yet to be considered in parliament but details are available on its official website. More here.

3. Ecuador

Ecuador's new VAT plan to tax digital services supplied by non-residents will become effective in September 2020, with collection via financial intermediaries (as is common in South America). The plan is estimated to raise $100.3m per annum. More here.

4. Paraguay 

Paraguay's new VAT rules in relation to digital sales provided by foreign businesses to domestic customers have been postponed for six months until January 1, 2021. In common with other South American rules, the burden of the settlement and collection of the VAT due (Paraguay’s standard VAT rate is 10%) will be on the local bank, the issuer of the payment card used in the purchase. More here.

5. Brazil

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.

6. Canada 

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. It is increasingly likely that Canada will move to change how the supply of digital services by foreign companies is taxed from 2021. Any move may follow the path of Québec and Saskatchewan. More here.

7. GCC (Gulf Cooperation Council)

The six members of the Gulf Cooperation Council (GCC) committed to introduce VAT systems back 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 in early 2021. More here.

8. Bangladesh

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.

9. Philippines

A House Bill has been designed to tax the digital economy in the Philippines. The standard 12% VAT rate is to apply to affected digital services. More here.

10. Israel

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. 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.

11. Kazakhstan 

According to proposed changes, a foreign digital service supplier with customers in Kazakhstan will be required to register for VAT. These suppliers will also be obliged to regularly remit VAT on their sales in Kazakhstan based on the turnover of services rendered. The rule change is planned to come into effect on January 1, 2021. More here.

12. Moldova 

Moldova is the latest in a burgeoning number of tax jurisdictions that are revising rules to tax the cross-border sales by digital businesses. The new rules may come into effect in April 2020. More here.

13. Fiji 

Fiji has revealed plans to tax the sales of digital services, or remote services as they are referred to in the Fiji VAT Bill that is before Parliament. Such a move will trigger VAT registration obligations for affected digital service suppliers and electronic marketplaces. More here.

14. British Columbia

The Canadian province of British Columbia had revealed its plans to tax foreign-supplied digital services from July 2020 in its 2020 Budget. However, in March 2020, these plans were shelved due to COVID-19 - no new introduction date has been published. More here.

15. Mauritius

The Mauritius Government has revealed a plan to extend the scope of its VAT system to digital and electronic services provided by non-resident businesses to customers based in Mauritius. More here.

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