Tax authorities across the globe have adopted a series of strategies to ‘encourage’ compliance with new rules taxing online sales.
As online activity continues to grow, the focus of tax authorities is trained on the activities of an increasing number of digital businesses that come within the scope of these rules.
In this article we analyse some of the strategies employed. We know, of course, that such methods will evolve as tax authorities become more dependent on the growing revenue sourced from the implementation of such rules.
1. Use of publicly-available registration lists
Publicly available lists are available from over a dozen tax jurisdictions. These lists vary in size from over 2,700 in Russia to just 22 in Uzbekistan, where new rules were introduced on January 1, 2020 (note: these numbers are correct at time of publication).
The first tax jurisdiction to release such a list was Japan when their extension of consumption tax to foreign-provided digital services became effective on October 1, 2015.
Here are some of the tax jurisdictions that maintain updated lists of registered digital businesses (registration details correct as of February 2021):
- Belarus - 68 registered digital businesses
- Indonesia - 53 registered digital businesses
- Japan - 107 registered digital businesses
- Mexico - 48 registered digital businesses
- Norway - 1,000+ registered digital businesses
- Québec, Canada - 824 registered digital businesses
- Russia - 2,700 registered digital businesses
- Taiwan - 152 registered digital businesses
- Uzbekistan - 22 registered digital businesses
In Central and South America, tax jurisdictions have taken a different approach. In Argentina, Costa Rica and Ecuador the tax authorities have released a list of digital businesses that they expect financial institutions to withhold tax from. The lists run to hundreds of business names.
Do other tax authorities use these lists?
Yes, they do. We know that the Belarusian and, more recently, the Moldovan tax authorities have contacted potential tax-payers based on the fact that the businesses’ names were included in the list of foreign online service providers registered as VAT payers in Russia.
Separately, the Singaporean tax authority also reached out to a list of potentially affected digital businesses via email to inform them of their potential Singapore GST liabilities. They did so in June 2019, six months before the rules came into effect in Singapore.
When Thailand’s new VAT rules on cross-border digital supplies go live on September 1, the Thailand Revenue Department's website will also display a list of VAT registrants. A Thailand Revenue Department official told The Bangkok Post that this list will enable users or foreign business operators to examine the list. “This feature,” the article added, “is considered an international standard or social sanction for operators that refuse to register for VAT liability."
2. Tracking online transactions
Tax authorities across the globe are increasingly turning to digital tools to track what is being sold to consumers in their jurisdiction. For example, the Australian Tax Office (ATO) has in the past used a government agency called AUSTRAC.
AUSTRAC is the Australian Government agency primarily responsible for detecting, deterring and disrupting criminal abuse of the financial system. Using AUSTRAC the ATO could determine what is being sold and if the sellers need to comply with Australian tax obligations. If necessary creditors of businesses that have tax obligations in Australia (e.g. credit card companies, PSPs, banks, etc) can also be contacted if the taxes due are not forthcoming.
The ATO’s use of AUSTRAC is highlighted in the agency’s 2019-2020 report. In the report it stated that the ATO used AUSTRAC for 586 cases and that these cases “contributed to the ATO’s raised revenue of $62.9 million for the financial year, and ten year total raised revenue of $2.6 billion.”
The report added that using AUSTRAC “enables the ATO to identify undeclared foreign source income and serious non-compliance, which in turn drives revenue savings.”
3. Internet information
In certain tax jurisdictions where the internet is state-owned the authorities have the means to identify users of national tax authority websites, among others. Traffic to such websites, especially during the announcement and implementation phase of new rules on the taxation of online sales, can inform tax authorities of digital businesses that may be in scope. Additional information on potential digital businesses that are within scope of implemented rules can also be picked up from email addresses added to tax authority subscription lists.
The use of the internet as a means for accessing data on digital businesses that may fall within the scope of new rules extends to the popularity of certain websites within a jurisdiction. Tax authorities can use a range of different online tools to ascertain how many customers a digital business has in their jurisdiction.
Tools that can be used here include popular web scraping sites. The data that tax authorities obtain from such web scraping can then be used to augment a broader profile of potential digital businesses that they may then contact. This background information is key to informing the tax authorities of the type of digital businesses that are popular in their jurisdiction and therefore more likely to have VAT/GST obligations.
4. Use of domestic banking information
Some tax authorities can also obtain extremely detailed transactional information including the full amount paid by local citizens to foreign digital service businesses.
As a result of the access to such information, the foreign digital businesses that are party to such transactions may be contacted. If so they will first be asked why they are not registered in the country. Secondly, they will be asked why the VAT/GST on transactions does not match what the tax authority believes should have been applied. This information is also used for audit purposes.
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