The rapid growth in online sales around the world presents a major challenge for governments—how to ensure that taxes on the profitable sector are collected and sent to tax authorities.
Some countries, including the U.K., Germany, and India, are increasingly leaning on online marketplace platforms such as Amazon.com Inc. and eBay Inc. to take a role in collecting value-added tax (VAT) or goods and services tax (GST) from foreign sellers.
“There’s a significant amount of global sales activity occurring through these platforms,” said David Bradbury, head of the tax policy and statistics division at the Organization for Economic Cooperation and Development.
“If we don’t know all that much about the identity or circumstances of the sellers, we don’t necessarily have a lot of capacity to enforce the tax and make sure they’re collecting and remitting it”—which could mean lost revenue for tax authorities, Bradbury said. “So governments have been very concerned.”
E-commerce sales to consumers account for about $2 trillion per year, according to figures cited by the European Commission and the OECD.
When online marketplaces allow a buyer in one jurisdiction to purchase from a seller in another, the transaction should be subject to a sales or consumption tax, like VAT or GST, where the buyer is.
But sellers don’t always know what their tax obligations are in every jurisdiction they sell into, or they might just avoid them. That’s why many countries, as well as many U.S. states and the European Union, are considering or have already passed legislation that requires online marketplace platforms to enforce tax obligations.
The OECD published a report March 22 that recommends tax authorities lean on digital companies to crack down on avoidance of consumption taxes.
“Despite the efforts of the OECD to create a harmonized set of VAT/GST rules in the digital economy (and their endorsement by more than 100 tax authorities), the detailed rules implemented by countries demonstrate a patchwork of guidelines,” Sandy Nicolson, a principal at KPMG’s indirect tax practice, said in an email.
“While the broad purpose is to require nonresidents to collect VAT/GST on sales in the digital economy, the underlying requirements make it hard for businesses to comply,” Nicolson said.
For example, Nicolson wrote, countries have different rules for determining the location of a customer who is buying digital services, which could lead to double- or non-taxation.
More than 60 jurisdictions have already implemented rules for remote sales of digital services, and more are starting to think about how to tax such sales, particularly lower-value goods that may previously have been exempt from VAT or similar taxes, Nicolson said.
Starting in 2021, online marketplaces including Amazon and eBay will be required to collect VAT from foreign e-commerce markets selling goods into the European Union.
The online companies would have to collect VAT even if the transactions take place through warehouses based in the EU, according to implementing regulations adopted Dec. 11, 2018, by the European Commission.
Groups led by Ecommerce Europe, whose members include Amazon and eBay, had lobbied fiercely against requiring online marketplaces to collect VAT.
Germany’s Parliament passed a bill Nov. 23, 2018, making e-commerce platforms like eBay and Amazon liable for sellers’ unpaid VAT in Germany. All e-commerce platforms operating in Germany will be responsible for tracking foreign and domestic sellers’ VAT compliance starting Oct. 1, 2019.
When German tax authorities notify the platform of nonpayment, operators must recuperate the losses directly or they will be liable for the payments themselves, according to the bill.
The U.K. implemented measures in 2016 to tackle online VAT erosion. New rule changes that took effect April 1 impose additional measures on some companies.
Online marketplaces such as eBay and Amazon would also have the burden of ensuring their overseas clients are VAT-registered in the U.K. Companies that don’t comply could face a 10,000 pound ($13,074) penalty and a criminal conviction.
If the government wants “to significantly reduce the tax gap further, you may have to put more burdens on other parties to collect the tax for you,” Her Majesty’s Revenue and Customs Chief Executive and Permanent Secretary Jon Thompson said in September before Parliament’s Public Accounts Committee.
Australia and New Zealand
Online platforms in Australia have been responsible for GST owed on sales made on their platforms since 2017. As of July 1, 2018, the provisions also apply to sales of “low value goods”—those valued at AU$1,000 ($712) or less—made by offshore sellers into the country. Such imports were previously exempt from the GST.
New Zealand will adopt similar measures—requiring online platforms to collect GST on imported goods valued below NZ$1,000 ($676) starting Oct. 1, 2019.
The government is trying to make this measure a little easier for companies. For example, it is simplifying currency conversion rules for companies that have to collect tax from many foreign sellers and run into disagreements with tax authorities about the conversions.
The Indian tax department in October introduced a controversial “tax collected at source,” which requires e-commerce sites like Amazon to collect GST and deposit it with the government.
The measure requires companies to register in each of the 29 states where their vendors operate. Companies said the additional registrations and tax forms were burdensome.
“It’s difficult for the authorities to go after every vendor. It’s easier for them that the e-commerce player takes on that responsibility,” said Saloni Roy, a senior director at Deloitte India. But that adds compliance costs for the e-commerce companies, such as hiring more staff, she said.
A draft e-commerce policy released by India in February went further, targeting platforms that allow vendors to ship goods into the country through the postal service, mislabeling their packages as gifts to avoid tax. If e-commerce companies didn’t comply, they would risk having their downloads within the country blocked.
The government is expected to finalize the policy after national elections in May. Practitioners said the measures, if they take effect, will be the toughest yet in the country’s efforts to boost tax collection online.
A groundbreaking June 2018 U.S. Supreme Court decision upended the old rules by which states taxed remote sellers.
The ruling in South Dakota v. Wayfair tossed out the court’s 1992 physical presence standard affirmed in Quill Corp. v. North Dakota, a decision that limited the ability of states to tax remote sales. The majority in the 5-4 ruling suggested strongly that South Dakota’s law requiring remote sellers to collect sales tax if they met economic thresholds of at least $100,000 in sales or 200 or more transactions during a given year would pass constitutional muster.
Since the Wayfair ruling, more than 30 states have passed remote sales tax enforcement laws, and dozens are already collecting sales tax from remote vendors. California began collecting the tax April 1, and Texas will begin in October.
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