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:
- Singapore, in mid-February 2018, was the latest jurisdiction to flag such changes to their tax rules with change due on January 1, 2020.
- Malaysia, 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. The new rules come into effect on January 1, 2020.
- In March 2018 the Canadian province of Québec revealed its plan to introduce a digital sales tax on January 1, 2019.
- South America, in particular, has seen a series of moves in Q3 2018 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.
- In early October 2018 Bahrain became the third Gulf Cooperation Council (GCC) member states to implement a new 5% VAT system. The new VAT system goes live on January 1, 2019.
Here, we provide you with some insight into what digital 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.
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. Québec, Canada
In March 2018 the Québec government, in its annual budget, revealed plans to force non-resident digital service suppliers to register, collect, and remit Québec Sales Tax (QST) to Revenu Québec.
The introduction date of the proposed new rules is January 1, 2019.
More information here.
Bahrain will introduce a new VAT system on January 1, 2019.
Back in February 2018, Reuters quoted Bahrain’s Minister of Finance Sheikh Ahmed bin Mohammed al-Khalifa as telling a conference in the capital Manama that his Ministry will be “working with parliament on VAT and aim to have everything set up by the end of 2018.”
Bahrain’s parliament approved the VAT agreement for introduction in January 2019. More here.
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 come into effect on January 1, 2020.
The new tax will be applicable in the areas of software, music, videos and digital advertising, similar to Singapore. The intention of the tax is to level the playing field for local service providers in the area of digital technology to fairly compete with foreign firms. More 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.
VAT rules governing the cross-border supply of digital services from non-resident digital platforms are due to come into effect on July 1, 2018. The published draft law has confirmed the liability for foreign suppliers to register, collect, and remit VAT at 19% in Colombia for sales to individuals. For more detail on Colombia's plans click here.
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.
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.
A report in March 2018 stated that Thailand’s Ministry of Finance is “pushing a draft bill on an e-business tax, a levy on online purchases, advertisements and website rent in Thailand” earned by foreign-based digital service providers.
In April 2018 Thailand’s Revenue Department started the process of communicating with stakeholders who provided important feedback to a recent public hearing held in relation to the proposed legislative change. The proposed bill, if passed, will require foreign-based digital service suppliers, including platform operators, to register, collect, and remit VAT to Thailand’s Revenue Department. If passed, the rules are expected to be introduced in 2018.
The most recent draft bill (2018) is now before Thailand’s Council of State (department under the Prime Minister) for consideration.
An internal government document revealed in January 2017 raises the possibility of a Canadian sales tax on foreign-supplied digital services.The 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.
12. 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 mentioned in our introduction, on January 1, 2018, Saudi Arabia and the UAE both implemented a new VAT system. Bahrain as mentioned earlier is to do so on January 1, 2019. It is expected that remaining three member states of the GCC will follow during 2019. Reports in mid-2018 suggest that Qatar could possibly introduce the new 5% VAT system in early 2019. 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%.
The place of consumption rule is already in place in Vietnam. However, VAT is withheld at source by the Vietnamese party to the contract. This applies unless the foreign contractor has registered for tax purposes in Vietnam.
Vietnam is also assessing its options in relation to extending taxation of the digital economy. The Vietnamese Government has already stated that they back the OECD’s BEPS proposals and their next step is to choose their approach.
According to various reports the Vietnamese tax agency is liaising with other entities, such as banks, so as to obtain information about unreported transactions by non-resident digital companies. The target of this particular move are social media sites and messaging services.
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.