Implications of OECD VAT Guidance for Businesses
On Oct 24, the Organisation for Economic Co-operation and Development (OECD), released further guidance on how countries can implement effective VAT collection systems for cross-border trade, particularly concerning digital/electronic supplies. Business should take particular note of this development as history proves that OECD guidance, particularly in this space, leads to significant country-specific legal changes that will have to be addressed to continue to be compliant.
Regulations No Longer Confined by Borders
Governments around the world are struggling to keep up with new business models and expansion of global trade in our digital economy. As the technology landscape changes and e-commerce grows, governments are experiencing an ever-widening gap between collected and available tax revenue, otherwise known as the “tax gap.” The OECD has been actively developing analysis and suggested policies for countries to implement to ensure equal and fair tax treatment as global trade and in particular digital services and supplies has grown significantly and continues to expand at a rapid rate. Their intent is to provide governments best practices in how to design tax regimes that effectively and fairly tax commerce properly sourced to their jurisdiction.
To that end, Mechanisms for the Effective Collection of VAT/GST Where the Supplier Is Not Located in the Jurisdiction of Taxation details recommended approaches to help governments implement effective and efficient collection mechanisms for cross-border trade. The guidance represents an expanded discussion of the recommended approaches included in both the BEPS Action 1 report and the International VAT/GST Guidelines, previously released by the OECD.
The guidelines are broken out into three chapters:
- Chapter 1: Options for collecting VAT from suppliers outside the jurisdiction, policies and design issues
- Chapter 2: Policies and design issues for registration-based collection systems
- Chapter 3: Covers designs and practical applications for creating and operating simplified registration and collection systems
Proactively Addressing VAT Collection for Cross-Border Trade
While the guidelines are written with tax authorities in mind, the business community can and should review the guidelines as a way to understand how governments are changing systems and policies to keep up with these new business models. The publishing of BEPS Action #1 leads to a swath of countries enacting concrete changes to their tax rules (South Africa, South Korea, Russia, New Zealand, Australia) just to name a few. In a world where regulations are becoming increasingly borderless and fundamental compliance rules can change with relatively short notice, organizations can no longer afford to take a reactive approach. The need for processes and systems that are adaptable and global in nature is critical. Deploying an intelligent compliance solution represents the best path to success.
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About the Author
Matt Walsh is the Principal of Indirect Tax. Matt and his department ensure that all Sovos tax and reporting solutions are compliant with global indirect tax laws. He also provides strategic direction, guidance and recommendations for product enhancements and development. Matt is also focused on fostering and managing government and industry relationships.Matt has over 17 years of experience in compliance, including starting as a tax counsel in the tax department and then advancing from Manager to Director of Tax Research and from there to Senior Director of Tax to his present position. He also was formerly a Team Manager at John Hancock Financial Services. Matt is currently a member of the Technical Advisory Group of the OECD (Working Party #9), which drafts model legislation and implementation guidelines for the taxation of cross-border services.Matt has a BS in Business Administration from the MA College of Liberal Arts as well as a JD from the New England School of Law.More Content by Matt Walsh