As expected, late last week the Organisation for Economic Cooperation and Development (OECD) released discussion drafts of two additional sections of its VAT/GST Guidelines, the initial version of which was published earlier this year. The purpose of the document is to lay out guiding principles for any country looking to introduce a VAT or GST system and, for those that already have one, to help provide a pathway to best practices, including the avoidance of double taxation and non-taxation.
The document introduces two new draft elements, which relate to:
- The place of supply rules for business-to-consumer (B2C) supplies of services and intangibles; and
- Provisions to support the application of the guidelines in practice.
Before we dive in, it’s important to define some terms, including the difference between GST and VAT.
GST, which standards for goods and services tax, more commonly known as sales tax. In the United States, this is the tax tacked onto the price of certain goods and services at the point of purchase and paid by the consumer.
VAT, on the other hand, is collected by all sellers in each stage of the process. Tax jurisdictions collect revenue throughout the entire supply chain, not just at the point of sale to the final consumer the way GST is handled. That means suppliers, manufacturers, distributors and retailers alike collect VAT on taxable sales.
The new guidelines outline a set of best practices for determining the place of taxation for B2C supplies of services and intangibles, in accordance with the destination/consumption principle. It also presents a recommended approach for collecting the VAT/GST on cross-border supplies/suppliers and recommends that non-resident suppliers be required to register and remit the VAT/GST in the proper jurisdiction — and suggests a simplified registration process to facilitate compliance, especially for non-resident suppliers. Those of you who are familiar with the European Union (EU) VAT changes scheduled for 1st January, 2015 will see obvious similarities between these guidelines and those changes.
What strikes me about this particular guidance is that some significant countries are not currently aligned with these guidelines. For example, Japan and South Africa may be challenged by how they interpret and address these guiding principles. That said, it is up to each individual country to decide what practices they prefer and whether they will be effective for them or not.
As I mentioned, the EU has set the pace in some aspects of VAT/GST compliance, announcing a number of changes that come into effect on 1st January 2015, and that I discussed during a recent webcast. Of particular importance to U.S. multinationals is the proposal in relation to new place of supply rules, which primarily apply to businesses that make B2C supplies of telecommunications, broadcasting and electronic services to EU consumers.
While the number of countries adopting and developing VAT and GST systems continues to grow around the world, the complexity of those systems seems to deepen. By providing common guidelines that could be applied anywhere, the OECD is playing a part in driving toward some level of harmonization that could be valuable for multinational companies in the future. Remember, the drafts that have just been released are for public consultation, so take a look at the proposals and make your voice heard in this important initiative.
Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information.