Digital platforms have transformed online commerce as they evolve into the go-to areas for online sales. The Organisation for Economic Co-operation and Development (OECD) is acutely aware of this evolution and focuses on the increasing importance of digital platforms in global commerce in a recently released report.
The report titled the ‘Role of digital platforms in the collection of VAT/GST on online sales’ is the OECD’s “practical guidance to tax authorities on the design and implementation of a variety of solutions for enlisting the platforms economy, including e-commerce marketplaces and other digital platforms, in the effective and efficient collection of VAT/GST on digital sales”.
The OECD, in drafting this report, also made clear that to fix on a definition of ‘digital platforms’ would be pointless as it would quickly be obsolete. Therefore, the report concentrates on key functions that may indicate that an economic operator is acting as a platform and may then trigger VAT/GST collection liabilities. We explore these examples in full later in this article. Crucially, the report has also left any definition open-ended so that taxing jurisdictions can develop their own specific guidance on the definition of digital platforms to best suit their own markets. This means that online sellers and tax advisors need to keep an eye on global legislative implementations to see if their business model is in scope.
This global market is dominated by a select group of large players facilitating transactions between individual sellers and end customers, often in circumstances where the seller and customer are in different countries. However, these digital platform models are also blurring the lines of commerce when it comes to controlling terms and conditions, payment processing, delivery, and customer support services. It is becoming increasingly difficult to determine who is responsible for what.
Simply put: the internet has changed how we think about the cornerstone of economics, the buying and selling of goods. Online commerce continues to mature and upend traditional business models. This phenomenal transformation creates problems that tax authorities and regulators are now attempting to resolve.
It is against this background that the OECD released this report that focuses particularly on the explosion in international online B2C trade. Take this estimate from the OECD report (page 13):
“Global B2C e-commerce sales of goods alone are now estimated to be worth in the region of USD 2 trillion annually with projections indicating they may reach USD 4.5 trillion by 2021, USD 1 trillion of which is estimated to be cross-border e-commerce.”
The report seeks to present a range of possible approaches in determining what functions may trigger when a digital platform may be liable for the collection of VAT/GST. In Annex 1 of the report (page 73), the OECD succinctly distil the examples to four areas including:
A crucial point here is that this is a non-exhaustive list of functions that may trigger compliance obligations for digital platforms. As explained in Section 2.2.2 of the OECD report (page 26) for digital platforms to be liable for VAT/GST they need to:
As this is a non-exhaustive list (remember platform designs are evolving rapidly) it is reasonable to suggest that, according to the report, “tax authorities may develop more specific guidance on the digital platforms that they consider to be in scope” of potential VAT/GST compliance regimes.
Here we discuss and explore each of the example functions as outlined in the OECD’s report.
An example listed in the report is that of controlling pricing. The price of a good or service for sale can be imposed by the digital platform. The digital platform can typically allow a seller to pick a pricing tier for the good or service that they have for sale on the digital platform. However, the terms and conditions (liability, etc) for the good or service sold is still provided by the individual seller, not the digital platform.
If the platform is to be liable for VAT/GST collection based on controlling the terms and conditions, it does not mean that they need to control all the aspects of the terms and conditions - influencing the pricing or other terms or conditions can be enough. It is crucial, in this example, to remember that the end customer may still be contracting with the individual seller meaning that they may not have terms and conditions with the digital platform directly.
The platform, of course, can have an impact on price and controlling terms and conditions without contracting directly with the end customer. This impact may only be reflected in their contract with the seller or with a mention in the seller's own terms and conditions.
The key element here is the reference to “controlling” terms and conditions. We are specifically interested here in the relationship between platform and seller, not the one between the platform and the end customer.
The report makes it clear that pure payment processors (PSPs) should be excluded from being considered a digital platform. However, the report makes it clear that should a party have any control or involvement in the payment this may indicate that they could be considered a platform. It is also clear that having actual custody of the funds is not required to be considered as being involved in payment processing.
The report states that “sending approval to suppliers and or instructing a third party to commence the delivery” may be a trigger for possible consideration as a digital platform. It is for this reason that the report identifies delivery as a key indicative function. This point is emphasised in the report where it indicates that instructing delivery can be considered as “delivery”. It is not so much about performing the action in itself but more related to having control or influence over the delivery.
The text around the customer support function acts to exclude websites with referral links as being considered platforms responsible for the collection of VAT/GST. It also makes it clear that should the business in question provide customer support, refunds and/or returns, or dispute resolution then they may be considered a digital platform.
Attempts by tax authorities across the globe to formalise the process of digital platforms collecting VAT/GST on online sales have already started. Here are some examples of countries that have changed their rules accordingly:
More information here in our recent blog posted right after the original publication date of the OECD report.
The key point is that the definition of a digital platform is left necessarily broad. The OECD has not attempted to come to a definition as business models are rapidly involving. They have instead looked at some basic functions that may identify a business as a digital platform. This means that online sellers and tax advisors need to monitor new tax rules from various taxing jurisdictions to understand if their current, or future evolved, business model means that they need to collect VAT/GST on behalf of sales done by sellers. Stay tuned for more on this topic.
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