Across the globe governments and tax authorities are scrambling to cope with the impact of the Covid-19 pandemic.
The reality for governments is that their revenue from taxation has dramatically collapsed. This means that they need to look for other sources of revenue. On the other hand, one section of the economy that has seen a significant boost is digitally-accessible services as large sections of populations work from home and families turn to online sources for entertainment. Video conferencing, streaming, music downloads and gaming have all experienced a rapid uptick in usage since the start of the Covid-19 pandemic. It was recently revealed that internet traffic during the pandemic has increased by up to 70% in some countries when compared to figures before the crisis.
As the popularity of such digital services increases, so too does the chance that they will become a target for tax authorities in need of additional revenue in this time of crisis.
Governments, of course, have taken note and we have seen a host of legislative measures aimed at taxing such digital services. In many situations, it has been an acceleration of plans that were in the pipeline but have been fast-tracked due to the consequences of Covid-19 and the erosion of government revenues.
High-profile examples include recent legislative changes in Indonesia, the Philippines, Saudi Arabia, and the UK.
In Indonesia, its Finance Minister Sri Mulyani Indrawati has said that imposing VAT on internet goods was to make sure the government captures the shift in people’s consumption patterns as they stay at home during a lockdown to curb the spread of the Covid-19. Consumers have been buying fewer physical goods, but demand for digital items has risen, she noted.
In the Philippines a bill aimed at taxing foreign-supplied digital services (e.g. streaming apps, social media ads and sales via online platforms) has been introduced to “soothe the pain inflicted by COVID-19 on businesses”.
In Saudi Arabia, there was a sudden communication that the Kingdom’s VAT rate was to increase from 5% to 15% on July 1, 2020. The move was made to “shore up state finances” due to a two-fold impact of rock-bottom oil prices and Covid-19.
In the U.K., there was an even more dramatic legislative change when it was decided to completely scrap VAT on electronic publications in the space of 24 hours. The news was announced on April 30 with the measures coming into effect the next day, May 1. This move was originally planned for December 1 in the U.K. but it was fast-tracked due to lifestyle changes brought about by the Covid-19 pandemic.
Oliver Dowden, the U.K. Culture Secretary, was quoted as saying: “This tax relief on subscriptions to digital publications will boost our world-class publishers, save consumers money and reflects the surge in popularity of e-reading as we stay at home to protect the NHS [UK health service]. I hope to see it benefitting the news industry through increased sales of e-newspapers as they continue to provide a vital public service giving people accurate and trusted information about coronavirus.”
Impact on digital businesses
For governments, these legislative changes are easy wins. They increase their revenue intake but they also level the playing field between domestic and foreign suppliers of digital services. Prior to these legislative changes, the supplies of foreign suppliers were not subject to tax but generally supplies from domestic suppliers were. This attempt to add fairness to the proposed tax changes helps governments in their attempts to pass such bills and make them law.
The fallout from the Covid-19 pandemic will no doubt lead to similar legislative changes in the near future. Future changes may come across the radar of affected businesses with little or no notice, making the required compliance more difficult to achieve.
The tax measures presented here are the tip of the iceberg. However, the characteristics of these changes are indicators of the turbulent Covid-19 times that we are in.
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