2. Value-added taxes - Main design features and trends
Although VAT systems are generally built on the basis of a common set of core principles, such as the principles of neutrality and of destination-based taxation (see Chapter 1), there is considerable diversity in the actual design and operation of these VAT systems in OECD countries. This is notably illustrated by the wide variety of reduced rates, exemptions and other preferential treatments and special regimes that are widely used in OECD countries, for practical or historical reasons, to support certain economic sector or to achieve equity or social objectives.
This chapter presents an overview of the VAT rate structures in OECD countries and their evolution between 1975 and 2022, including the scope of reduced rates and the temporary measures taken by government to support consumers and businesses facing the COVID-19 pandemic (Section 2.2) and looks in some detail at the VAT exemptions that exist in these countries (Section 2.3). This is followed by an overview and analysis of the wide variety of special regimes used in OECD countries on the following aspects: specific restrictions to the right to deduct VAT on specific inputs (Section 2.4), registration and collection thresholds (Section 2.5), and the application of margin schemes (Section 2.6). This chapter also presents the challenges of applying VAT to international trade, the solutions developed by the OECD and how member countries are implementing them (Section 2.7). It finally provides VAT Revenue Ratio data, as an indicator of the revenue effect of VAT exemptions, reduced rates and non-compliance (Section 2.8) and the measures taken by governments to enhance the enforcement of VAT and combat VAT fraud and avoidance (Section 2.9).
2.2.1. Standard VAT rates remained stable in recent years
The evolution of VAT rates in the OECD can be divided into four main periods. The first period between 1975 and 2000 has seen a progressive increase in the average standard VAT rates from 15.6% in 1975 to 18.1% in 2000.
During a second period, between 2000 and 2008, the standard rate of VAT remained stable in most countries, with 26 out of 37 countries maintaining a rate between 15% and 22%. As of 1 January 2008, only four countries had a standard rate above 22% (Denmark, Iceland, Norway and Sweden –see Annex Table 2.A.1).
The third period, between 2009 and 2016, was marked by a considerable increase in the standard VAT rate in many countries, often in response to financial consolidation pressures caused by the financial and economic crisis. VAT standard rate increases played a key role in many countries' consolidation strategies, since raising additional revenue from VAT rather than from other taxes (such as income taxes) is often considered more effective, generating immediate additional revenue, and less detrimental to economic growth and competitiveness than income taxes (Jens Matthias Arnold, 2011[1]). Between January 2009 and December 2016, 25 OECD countries raised their standard VAT rate at least once. These changes occurred principally in European Union countries (Czech Republic, Estonia, Finland, France, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Netherlands, Poland, Portugal, Slovak Republic, Slovenia and Spain) but also in a number of non-EU countries (Colombia, Iceland, Israel, Japan, Mexico, New Zealand, Switzerland and United Kingdom). Two OECD countries lowered their standard VAT rate temporarily and then raised it again during this period (Ireland and the United Kingdom). This evolution resulted in a hike of the unweighted OECD average standard VAT rate from 17.8% in January 2008 to an all-time record level of 19.3% on 1 January 2017. Ten OECD countries operated a standard VAT rate above 22% on 1 January 2017 against only four in 2008. All these countries belong to the European Union, except Iceland and Norway.
The increases in standard VAT rates did not continue as OECD countries entered a new period of stable standard VAT rates, with only Japan having increased its standard VAT rate since January 2017 (from 8% to 10% in October 2019).
Only four OECD countries have reduced their standard VAT rate since January 2008, i.e. Iceland (which increased its standard VAT rate from 24.5% to 25.5% in 2010 and reduced it to 24% in 2015), Israel (which progressively increased its standard VAT rate from 15.5% in 2008 to 18% in 2013 and reduced it to 17% in 2015), Latvia (which increased its standard VAT rate from 18% to 21% in 2009 and to 22% in January 2012 and reduced it back to 21 in July 2012) and Switzerland (which increased its standard VAT rate from 7.6% to 8% in 2011 and reduced it back to 7.7% in 2018). Germany and Ireland temporarily reduced their standard VAT rate, respectively from 19% to 16% (from June to December 2020) and from 23% to 21% (from September 2020 to March 2021) in the context of the COVID-19 pandemic but have now returned to their original rate.
As a result, the unweighted OECD average standard VAT rate has remained relatively stable at 19.2% in 2022 compared to 19.3% in 2017 (see Figure 2.1).
Source: Author’s calculations.
Major differences in standard VAT rates continue to be observed among OECD countries, with rates ranging from 5% in Canada (noting, however, that most Canadian provinces levy specific sales taxes or Harmonised Sales Taxes alongside the Federal 5% GST); 7.7% in Switzerland and 10% in Australia, Japan and Korea; to 25% in Denmark, Norway and Sweden and 27% in Hungary (see Figure 2.2). On 1 January 2022, 23 OECD countries operated a standard VAT rate of 20% or more, with 10 of these countries having a standard VAT rate of 23% or more. All these countries are EU Member States, except for Iceland and Norway (with respectively a 24% and a 25% VAT standard rate).
The average standard VAT rate of the 22 OECD countries that are members of the EU is at 21.8%, which is significantly above the OECD average (19.2%). EU Member States are bound by common rules for establishing their national VAT rates (VAT Directive 2006/112/EC), which notably set the minimum level of the standard VAT rate at 15%.
2.2.2. OECD countries continue to apply a wide variety of reduced rates mainly as a means to promote equity and/or to stimulate certain sectors
Most OECD countries apply reduced VAT rates to a wide range of goods and services (see Annex Table 2.A.2). With the exception of Chile, all OECD countries that operate a VAT apply one or more reduced rates to pursue various policy objectives. A major reason for the application of reduced rates is the promotion of equity. Countries in the OECD generally consider it desirable to alleviate the VAT burden on necessity goods and services such as food and water supply, which typically form a larger share of expenditure of lower income households, by taxing them at a preferential VAT rate. Most countries also apply reduced VAT rates or exemptions to health and medical supplies, education and housing. In addition, reduced VAT rates have also been used to stimulate the consumption of “merit goods” (such as cultural products), or to promote locally supplied labour-intensive activity (e.g. tourism), or to address environmental externalities.
However, empirical evidence suggests that exemptions and reduced VAT rates are not the most effective way of achieving those policy objectives (OECD/KIPF, 2014[2]) and they can even be regressive in some instances. Other measures, such as providing targeted support through the income tax and/or the social transfer and benefit system, tend to be more effective in addressing equity concerns and to pursue policy objectives other than raising tax revenues (Thomas, 2020[3]). Reduced VAT rates that are targeted at supporting lower-income households (i.e. to address distributional goals) typically do have the desired progressive effect. Notably reduced rates for basic food generally provide greater support to the poor than to the rich as a proportion of household income and as a proportion of expenditure. However, despite their progressive effect, research led notably by the OECD has shown that these reduced VAT rates remain an inefficient distributive tool. This is because better-off households tend to benefit more in absolute terms from VAT reduced rates than low-income households. As richer households tend to consume more, and more expensive products than poorer households, their consumption of the tax-favoured goods and services is generally greater than that of poorer households. Research has also demonstrated that preferential VAT rates introduced to stimulate employment (e.g. in the tourism or hospitality sectors), or to support cultural activities (e.g. theatre) or to pursue other non-distributional goals, clearly benefit richer households more than lower-income categories of the population, and often considerably so.
Preferential VAT regimes such as reduced rates and exemptions (see Section 2.3) also tend to considerably add to the complexity of the VAT system, increasing the compliance burden for businesses and negatively impacting compliance levels (C. Evans; R. Highfield; B. Tran-Nam; M. Walpole, 2020[4]). A more effective policy to achieve distributional objectives, in principle, is to reduce the scope for reduced VAT rates where possible and use measures that are directly targeted at increasing the real incomes of poorer households and public services for these households. It is recognised, however, that although this analysis is widely shared, it is often difficult if not impossible to implement it in practice. The political economy obstacles to broadening the VAT base (in particular their perceived distributional impact) can indeed be formidable, and often insurmountable, particularly where the social transfer and benefit system may not be sufficiently effective to ensure that poorer households are properly compensated for the impact of a VAT increase on the cost of their consumption basket.
Member States of the European Union are bound by common rules regarding the operation of reduced VAT rates (VAT Directive 2006/112/EC). This common framework allows Member States to apply one or two reduced rates of not less than 5% and a third reduced rate lower than 5 % (incl. 0%) to a limited number of goods and services listed in the VAT Directive. In addition, the Directive provides that the European Commission can grant Member States the authorisation to apply a zero rate (“exemption with deductibility of the VAT paid at the preceding stage “) to the import and supplies of goods for the benefit of disaster victims. The European Commission also allowed Member States to apply a temporary zero rate to the import and supply of certain products needed to combat the COVID-19 (see Section 2.2.3 hereafter).
Since 2020, a number of countries made changes to the level and/or scope of their reduced VAT rates. Some are permanent (see below) while others are temporary in the context of the COVID-19 pandemic (see Section 2.2.3 hereafter).
Permanent changes include the application of a (further) reduced VAT rate to female sanitary products in Austria, Ireland, Italy, Mexico, Slovenia and the United Kingdom. This has followed similar measures taken by several other OECD countries in recent years, i.e. Australia, Belgium, Canada, Colombia, Germany and Iceland. Austria, Czech Republic, Estonia, Greece, Lithuania, Netherlands, Spain and the United Kingdom have reduced the VAT rate applicable to electronic publications, following the adoption in 2018 of an amendment to the EU VAT Directive allowing the application of VAT reduced rates to electronic publications, which had already triggered rate reductions in Belgium, Finland, France, Germany, Ireland, Luxembourg, Norway, Poland, Portugal and Sweden. In Latvia, the VAT rate on books, newspapers and periodicals (including in electronic format) was further reduced from 12% to 5%. Reduced rates now apply to e-books and e-publications in 20 of the 37 OECD countries that have a VAT – these are all EU Member States, except Iceland, Norway and the United Kingdom. Portugal permanently reduced its VAT rate on certain supplies of electricity up to a certain consumption amount to 13%. Austria (in 2021) and Sweden (in 2022) added repair services to the items that are taxed at the reduced rate of respectively 10% and 6%.
In the European Union, as of 1 July 2022, a zero rate will apply to supplies made for the benefit of the armed forces of the EU Member States when they are assigned "to a defence effort carried out with a view to implementing an activity of the Union within the framework of the common security and defence policy” similar to what is already applicable for NATO armed forces.
2.2.3. Temporary VAT rate reductions have been used in response to the COVID-19 crisis and to rising energy costs.
Most OECD countries have introduced temporary VAT rate reductions in response to the COVID-19 crisis
In 2020 and 2021, many OECD countries included temporary VAT rate reductions, including zero rates, in their tax response packages to the COVID-19 crisis (see (OECD, 2020[5]) and the country notes to Annex Table 2.A.2). Most of these measures have been aimed at supporting the healthcare sector, in particular through the application of zero rates or reduced rates to supplies and imports of certain medical equipment and sanitary products and to healthcare services (Austria, Belgium, Canada, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Netherlands, Poland, Portugal, Slovak Republic, Spain and United Kingdom) where these were not yet VAT exempt or subject to reduced rates under normal rules.
Several countries also introduced temporary rate reductions to stimulate consumption and/or to support specific economic sectors that have been hardest hit by the COVID-19 crisis. These include restaurants (Austria, Belgium, Colombia, Germany, Greece, Lithuania); accommodation or other tourism activities (Austria, Colombia, Costa Rica, Czech Republic and United Kingdom); cinema, culture or sports (Austria, Greece, Lithuania, Netherlands and United Kingdom); passenger transport (Colombia, Greece and Türkiye); or leases of commercial property (Colombia). Colombia applies a VAT rate of 0% to supplies of certain goods to final consumers on specific days in the year (“VAT holidays”). In most instances, the duration of these measures was initially limited in time, typically to three to six months, but many of these were subsequently extended in response to the (often) longer-than-expected duration of the pandemic.
While many of these measures have been phased out, a number of these temporary VAT rate reductions were extended and remained in place after 1 January 2022, such as the application of reduced or zero rates to imports and supplies of certain goods to combat COVID-19 pandemic (Austria, Belgium, Canada, Denmark, Estonia, Finland, France, Germany, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Netherlands, Portugal, Slovak Republic, Slovenia, Spain and Sweden); passenger transport (Colombia, Greece); tourism-related services (Colombia, Costa Rica, Ireland, and United Kingdom); cinema (Greece); and restaurants (Greece).
A few OECD countries introduced more general temporary VAT rate reductions in response to the outbreak of the pandemic. Germany reduced its standard VAT rate from 19% to 16% and its reduced VAT rate from 7% to 5% from 1 July to 31 December 2020. Ireland reduced its standard VAT rate from 23% to 21%, from 1 September 2020 until 28 February 2021. Norway decreased its 12% reduced VAT rate to 6% from 1 April until 1 October 2021.
Some countries have recently introduced or announced temporary reduced VAT rates to cushion the impact of the sharp rise in energy prices
Energy prices have been soaring since early 2021 due to a combination of supply and demand factors. These include long-term trends such as underinvestment in natural gas and clean energy supply, and short-term developments like reductions in natural gas spot delivery by Russia and a strong recovery in demand in the aftermath of the COVID-19 crisis (IEA, 2021[6]). It is very difficult for consumers and businesses to drastically reduce their energy consumption in the short term, which raises concerns over energy affordability and the cost of living. Price shocks have had significant adverse effects on households and businesses, which has prompted governments to respond with short-term measures to support income and limit price increases (Boone and Elgouacem, 2021[7]). A wide range of measures have been taken by governments to cushion the impact of raising energy prices, including subsidies, transfers, price support measures and reductions in personal income taxes, corporate income taxes and consumption taxes. (OECD, 2022[8])
Price support measures in particular can take the form of price controls, rebates at the pump, reductions in excise duties (see Chapter 3), environmentally related taxes and VAT rates (see below).
In this context, several OECD countries reported the introduction of VAT rate reductions, most often announced as temporary measures (see country notes to Annex Table 2.A.2). For instance, in 2021, Spain reduced its VAT rate on energy bills from 21% to 10% and Italy cut its VAT rate on the use of natural gas supplies for “civil and industrial uses” and for transport uses from 21% to 5%. Several other European countries followed suit in 2022, including Belgium where the VAT rate was reduced from 21% to 6% on the supply of electricity for residential consumption, gas and district heating; Ireland with a reduction of the VAT rate on energy products from 13.5% to 9%; Netherlands with a reduction of the VAT rate from 21% to 9% on natural gas, electricity and district heating and Poland that reduced its VAT rate on the provision of electricity from 23% to 5% and on district heating from 23% to 5%. In September 2022, the government of Luxembourg announced a temporary reduction of its standard VAT rate from 17% to 16% and of its reduced rates from 14% to 13% and from 8% to 7%.
Although price support measures have been the most common form of measures implemented by countries because they are the most visible, quickest and easiest to implement, they have a number of disadvantages in the medium to long term. They have indeed a strong negative impact on revenue, tend to be untargeted and benefits can accrue disproportionately to large energy consumers who often have higher incomes, limit the incentive for energy savings or switching away from fossil fuels and discourage new infrastructure investments.
2.3.1. OECD countries make extensive use of VAT exemptions
VAT regimes in the OECD make extensive use of exemptions, in addition to reduced rates (see Annex Table 2.A.3). In this context, exemption means that the supplier does not charge the VAT on its outputs and, as a consequence, has no right to recover the VAT on its related inputs. In some jurisdictions, exemption is referred to as “input taxation” to indicate that the supply is not free of VAT but that there is a “hidden VAT” in the price of the exempt supply - i.e. the VAT burden incurred on the inputs is embedded in the price of the exempt outputs. Exemption is thus not the same thing as absence of taxation.
Although it is a significant departure from the basic concept of VAT, all OECD countries that operate a VAT apply a number of exemptions. A wide variety of motivations exist for the application of VAT exemptions. These include the difficulty to determine the tax base (e.g. financial and insurance services) or the desire to exclude activities from the VAT base that are considered as public services or as serving a purpose of general and/or social interest (education, health, postal services, charities). A number of exemptions have their roots in tradition, such as the letting of immovable property and the supply of land and buildings. Certain sectors that are exempt from VAT may also be subject to other specific taxes (e.g. property, insurance, financial services).
Exemptions beyond these core items are also numerous and cover a wide diversity of sectors such as culture, legal aid, passenger transport, public cemeteries, waste and recyclable material, water supply, precious metals and agriculture (see Annex Table 2.A.3). To this regard, EU Member States are subject to common rules providing for the exemption of supplies considered as in the public interest such as postal services, healthcare, social services, education, public broadcasting and charities but also for a number of specific supplies such as financial and insurance services, transactions involving immovable property and gambling. However, EU Member States may choose to allow business to opt to tax certain transactions and to set specific conditions for some exemptions.
A number of services that are generally exempt in OECD countries are taxed in some of these countries. For example, postal services are taxed in Australia, Canada, Japan, New Zealand and Norway; betting or gambling is taxed in Australia, Canada, Korea, New Zealand, Türkiye and the United Kingdom; and insurance services are taxed in Mexico, New Zealand, Türkiye and in some cases in Australia. On the other hand, the transportation of passengers, which is taxed in most countries, is exempt (to some extent) in Chile, Denmark, Ireland and Korea. In Chile, services that are not specifically listed as subject to VAT by law, are treated as “out of scope”, i.e. they are exempt from VAT. These include legal, accounting, engineering, architecture and other professional services.
2.3.2. Exemptions have a number of undesirable effects
The standard advice in VAT design is to have a short list of exemptions, limited to basic health, education and perhaps financial services. By not allowing the deduction of input tax, VAT exemptions create an important exception to the neutrality of VAT (see Chapter 1). The following paragraphs provide an overview of the main, often adverse consequences of exemptions.
VAT exemptions introduce a cascading effect when applied in a B2B context. A business making an exempt supply can be expected to pass on the uncreditable input tax it has incurred by including it in the price of this supply. This “hidden tax” will subsequently not be deductible/recoverable for the recipient business in the VAT system. If the outputs of this recipient business are not also exempt, this hidden VAT will presumably be part of the price for the supplies on which it will charge output VAT. The result is a hidden tax at a variable rate depending on the number of production stages that are subject to the tax. This distorts businesses’ production decisions and choices of organisational form. The size of this cascading effect depends on where the exemption is applied in the supply chain. If the exemption is applied only at the stage of the final consumption, there is no cascading effect and the consequence is simply a loss of tax revenue since the value added at the final stage escapes tax. If the exemption occurs at some intermediate stage, the consequence of the cascading effect may be an increase of net revenues in a non-transparent manner.
Exemptions create incentives for reducing tax liability by vertical integration (“self-supply”) and disincentives for outsourcing as firms have an incentive to produce their inputs internally rather than to purchase externally and incur irrecoverable VAT. This may lead to economic inefficiencies and can initiate a dynamic whereby exemptions feed on each other resulting in “exemption creep”: once a sector receives an exemption, it has an incentive to lobby for exemptions for those from whom it buys its inputs in order to avoid paying hidden VAT on its inputs.
Exemptions generally lead to the under-taxation of supplies to consumers, as the tax burden in theory equals the tax on inputs used by exempt businesses in the supply chain but not on its value-added, and an over-taxation of businesses who are unable to deduct the “hidden” tax embedded in their inputs.
In the international context, exemptions compromise the destination principle for taxation of internationally traded goods and services (see Chapter 1) and may create competitive distortions. When an exporter uses exempt inputs, he will generally not be able to remove the irrecoverable VAT resulting from the exemption applied at an earlier stage in the production chain. The export thus becomes effectively “input taxed”. On the other hand, businesses that use inputs that are VAT exempt under national law, have an incentive to import these inputs from countries where these are zero rated for export instead of purchasing them from exempt domestic providers.
It has been suggested that managing exemptions also increases administrative costs and compliance burden. As is the case for differentiated rate structures, it may often be difficult for businesses and tax administrations to distinguish between exempt and taxable supplies, in particular in complex areas such as financial services. Businesses that make both taxable and exempt supplies are often faced with complex allocation rules to determine the share which is attributable to taxed outputs and for which it is thus entitled to an input tax credit. However, there is little quantitative evidence of the impact of exemptions on the cost of administration and on compliance burden (Bird and Gendron, 2007[9]).
The VAT exemption of financial services, in particular, is subject to frequent debate across jurisdictions, such as most recently in the EU. In a recent paper (GFV N°087 of March 2019), the European Commission recalled that the European Union’s VAT exemption rules for financial and insurance services have not kept pace with developments in these sectors, which makes these rules increasingly complex and difficult to apply in practice. This has led to rising litigation rates, legal uncertainty, and high administrative and regulatory costs. These rules are also interpreted and applied inconsistently across Member States, leading to competitive distortion within the EU. The European Commission therefore launched a public consultation in February 2021, the outcome of which was published in September 2021 (European Commission, 2021[10]). The findings of this consultation show that, although a vast majority of respondents consider that the VAT exemption is still needed, there is a need for clarification and further harmonisation across the EU.
The emergence of “fintech” and of new products and services such as virtual currencies and other crypto-assets raises new questions for VAT regimes, notably in light of their existing rules for the VAT treatment of financial services (OECD/G20, 2020[11]).
Although the burden of the tax should not fall on businesses, the right to deduct the VAT on business inputs is in principle limited to inputs that are used for producing taxable outputs. The right to input VAT deduction is in principle denied in cases where inputs are used to make onward supplies that are not taxable, i.e. exempt without credit (e.g. health care or financial services for example – see Section 2.3 above) or outside the scope of VAT (e.g. supplies for no consideration). Input-VAT deduction is normally also denied when purchases are not (wholly) used for the furtherance of taxable business activity, for example, when they are used for the private needs of the business owner or its employees (i.e. for final consumption).
In addition to the rules described above, most OECD countries have legislation in place that provides for restrictions to input VAT deduction on a number of goods and services that is linked to their nature rather than to their use by businesses (see Annex Table 2.A.4).
The rationale behind these limitations is generally threefold. First, they aim to avoid the administrative burden of having to police the actual use of goods and services that may easily be used for dual business/private purposes due to their very nature. Second, it is a way of reducing risks of fraud. Third, such commodities often contain an element of “consumption” (e.g. restaurant meals).
All OECD countries operating a VAT, except Colombia, Israel, Japan, Mexico and Switzerland, report restrictions to the right to VAT deduction on a number of specific inputs - mainly entertainment and vehicles. Colombia denies the deduction of VAT levied on the acquisition of fixed assets that are not considered as “productive fixed assets”. In Mexico, although there are no specific restrictions, the law provides that input VAT deduction is allowed only on inputs that are “strictly indispensable” for the principal business activity. The expenses on which this input VAT is incurred must be deductible under the Income Tax Law, which provides a list of “authorised deductions” for each type of regime.
Restrictions to the deduction of input VAT on entertainment costs are the most widespread, although the items included in that category may vary widely. These restrictions may include VAT incurred on restaurant meals; on (alcoholic) beverages; reception costs; hotel accommodation; attendance at sporting or cultural events; and on gifts and transport services. Seven OECD countries (Chile, Colombia, France, Israel, Japan, Switzerland and Türkiye) have not reported such specific limitation to the right to input VAT deduction.
The deduction of input VAT on the purchase and/or the use of vehicles is subject to limitations in 24 out of the 37 OECD countries operating a VAT. Colombia, Czech Republic, Germany, Israel, Japan Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Slovak Republic, Spain and Switzerland do not report any such specific restrictions.
The restriction to input-VAT deduction can be limited to a share of the VAT incurred. This can for instance be the case for the VAT incurred on the use of cars by the employees of a business, which can be limited to a fixed percentage. Some countries restrict the deduction of input VAT on cars to 50%, even if the car is fully used for business purposes.
VAT is often considered as particularly burdensome for small and medium size businesses (SMEs) to comply with (European Commission, 2013[12]) (Evans et al., 2018[13]). Many countries have therefore introduced simplification regimes for SMEs to ease the VAT compliance burden. These regimes can be grouped into three main categories: those that provide for an exemption from the VAT regime (exemption thresholds); those that facilitate the calculation of VAT liability; and those that simplify accounting, filing and/or payment obligations (OECD, 2015[14]).
In most OECD countries (except Chile, Colombia, Costa Rica, Mexico and Spain) businesses whose annual turnover is below a certain threshold are not required to charge and collect the tax on their outputs and their input VAT is not deductible. In Colombia and Türkiye, this only applies to individuals and not to companies or incorporated businesses (see Annex Table 2.A.5).
The consequences of such exemptions are equivalent to treating small businesses as non-taxable businesses. There are two kinds of exemption thresholds: registration thresholds that relieve suppliers from both the requirement to register for VAT and to collect the tax; and collection thresholds under which taxpayers, are required to register for VAT but are relieved from collecting the tax until they exceed the threshold. Different types of activities (e.g. supply of services vs. supply of goods) or sectors (e.g. the non-profit sector) may be subject to different thresholds or even be excluded from their application (e.g. the construction sector). In most cases registration thresholds do not apply to foreign businesses and in some cases collection thresholds apply only to individuals or to businesses that are not subject to commercial accounting requirements.
The calculation of thresholds is generally based on annual turnover. In Japan, businesses (companies and individuals) are not required to register and account for VAT during the first two years of establishment if they remain below a capital-based threshold, whereas a threshold based on an annual taxable turnover applies after the first two years (with some exceptions, based on levels of turnover). Although thresholds are generally based on annual turnover, their application may be subject to additional rules and conditions.
The level of VAT thresholds is generally the result of a trade-off between, on the one hand, minimising compliance and administration costs for small businesses and tax administrations, and on the other hand, the need to protect revenue and avoid competitive distortions. The levels of these thresholds vary significantly across OECD countries (see Figure 2.3). Four groups can be broadly distinguished.
Ten countries have a relatively high general threshold above USD 80 000 of turnover per year: France, Ireland, Italy, Japan, Lithuania, Poland, Slovak Republic, Slovenia, Switzerland and the United Kingdom.
Nine countries have a threshold between USD 40 000 and 80 000: Australia, Austria, Czech Republic, Estonia, Hungary, Korea, Latvia, Luxembourg and New Zealand.
Twelve countries have a relatively low threshold, below USD 40 000: Belgium, Canada, Denmark, Finland, Germany, Greece, Iceland, Israel, Netherlands Norway, Portugal and Sweden. Among these countries, three have a particularly low threshold below USD 10 000 (Denmark, Norway and Sweden).
Six OECD countries do not operate any general VAT exemption threshold: Chile, Colombia, Costa Rica, Mexico, Spain and Türkiye.
Since 2020, only Finland, Israel, Korea and Luxembourg have raised their threshold while none have reduced it. Compared to 2012, 17 OECD countries have raised their threshold (Austria, Belgium, Estonia, Finland, France, Germany, Hungary, Iceland, Israel, Italy, Korea, Luxembourg, Netherlands, Poland, Portugal, Slovenia and the United Kingdom). Only one country has decreased its threshold during this period (Latvia from EUR 50 000 to EUR 40 000).
There are no definitive arguments on the need for, or the level of, VAT thresholds. The main reasons for excluding small businesses (a notion that may vary considerably across countries) are that the costs of administration are disproportionate to the VAT revenues raised and, similarly, that the VAT compliance costs can be disproportionate for many small businesses compared to their turnover.
Determining the level of a VAT threshold is challenging. A relatively high threshold may give an advantage to small businesses, distorting competition with larger companies. A relatively low threshold may act as a disincentive for businesses to grow or as an incentive to avoid VAT by splitting activities artificially. It can also frustrate policy efforts to formalise the economy. The latter may be at least partly addressed by applying a simplified regime to businesses below the VAT threshold and thus bringing them into the “formal” economy. The level of the threshold is often the result of a trade-off between minimising compliance and administration costs, and the need to protect revenue and avoid competitive distortion.
All OECD countries that have a registration or collection threshold give the option to businesses below the threshold to register and account voluntarily for VAT, except Israel and Korea. Voluntary registration is often intended to provide an option for small businesses to avoid the disadvantages of non-registration. This however increases the risk of VAT fraud by “fly-by-night” traders who register and claim VAT refunds before disappearing again. A majority of OECD countries therefore impose a minimum period of time during which taxpayers that have registered voluntarily must remain registered. This period varies from one year (Australia, Canada, Czech Republic, Greece, Hungary, Slovak Republic and Switzerland) to two years (Denmark, France, Japan and Norway) or in some cases, three years (Netherlands and Sweden) or five years (Austria, Germany, Portugal and Slovenia). Fourteen countries do not apply any minimum registration period (Belgium, Estonia, Finland, Iceland, Ireland, Israel, Italy, Korea, Latvia, Lithuania, Luxembourg, New Zealand, Poland and the United Kingdom).
One challenge of VAT thresholds is to minimise incentives for small businesses to underreport turnover so as to remain below the exemption threshold, and/or to incentivise small businesses to grow their business. Research (Li Liu, 2019[15]) shows that firms tend to bunch below the registration threshold by restricting their reported turnover to avoid having to register for the VAT when they have a high share of sales to private consumers (B2C); but tend to register voluntarily, even when their turnover is below the threshold, in cases where they have a low share of such B2C sales, a relatively high share of external costs and more competition in the industry.
The adoption of a flexible threshold is one option to reduce a bunching effect. Under such a regime, small businesses that exceed the regular VAT threshold are not obliged to register immediately but are allowed to continue to benefit temporarily from the exemption as long as they do not exceed the threshold by a significant percentage. For example, in France, businesses that exceed the regular thresholds of EUR 85 800 (for goods) and EUR 34 400 (for most services) may continue to benefit from the exemption if their turnover does not exceed EUR 94 300 and EUR 36 500 respectively for more than a year.
A range of other measures have been adopted to reduce compliance costs for SMEs while avoiding the disadvantages of an exemption. Many OECD countries apply simplified presumptive schemes to facilitate the calculation of the VAT liability. These may, for instance, allow small businesses to apply a single flat rate to their turnover for determining the amount of VAT to be remitted to tax authorities instead of requiring a detailed VAT calculation of input and output VAT. Other simplification regimes allow a simplified input VAT credit calculation. A more detailed overview of these regime is available in an OECD report on SME taxation (OECD, 2015[14]).
The application of these exemption thresholds remains typically limited to domestic businesses. These thresholds notably do not apply under most of the “vendor collection regimes” implemented by OECD countries for the collection of VAT on remote supplies of services and intangibles by non-resident suppliers (see Section 2.8 below). Only six of these countries apply a turnover threshold below which non-resident suppliers are relieved from obligations under this regime, i.e. Australia, Canada, Iceland, Japan, New Zealand, Norway and Switzerland. These countries apply the same registration threshold for these non-resident suppliers as for domestic suppliers. The Member States of the European Union are bound by a common legal framework legislation (the EU VAT Directive) that does not allow such a registration threshold for non-EU suppliers.
Most countries allow or utilise specific methods for determining the VAT liability to simplify VAT administration and compliance in specific situations. Margin schemes are a typical method to simplify VAT calculation, which are often used when the determination of deductible input tax is considered too difficult or impossible under the normal rules, such as for the resale of second-hand goods bought from private individuals and for the activities of travel agencies. Under a margin scheme, the VAT due is determined by reference to the difference between the price paid by the taxpayer and the price of resale rather than on the basis of the full selling price. The reseller is not allowed to deduct the input VAT embedded in its purchase price of the items that are resold under the margin scheme.
Annex Table 2.A.6 shows that all the OECD countries have implemented more or less extensive margin schemes, except Canada, Iceland, Japan Korea and New Zealand. The most common areas where margin schemes are used are trade in second hand goods (in all the EU member States, Australia, Costa Rica, Norway and the United Kingdom; in Israel for used furniture and cars and in Colombia, Mexico and Türkiye for used cars); travel agencies (all the EU Member States and Türkiye); and sales of works of art, collector's items and antiques (in all the EU Member States, Norway, Switzerland and Türkiye). Margin schemes can also apply in real estate and sales of building land (Australia, Chile, France, Türkiye); sales by auction (Greece and Ireland); and fuel retail sales (Colombia, and Portugal). Specific margin schemes also apply to gambling in Australia and sales of coins, stamps and foreign currency in Israel.
In the Member States of the European Union, margin schemes for travel agencies, second-hand goods, works of art, collector's items and antiques are based on the EU VAT Directive.
Beyond temporary VAT rate reductions described in Section 2.2.3 above many OECD countries have introduced policy and administrative measures to alleviate the VAT burden on businesses, as part of their packages to support businesses during the COVID-19 crisis (OECD, 2020[5]). These measures mainly included the deferral of the obligation to file returns and pay the VAT due, to support business cash-flow and alleviate compliance burden. Most countries complemented VAT payment deferrals with a suspension, or reduction, of penalties and/or interest charges that are normally applied for late tax filing and payments. Other measures were taken such as the acceleration and/or enhancement of the processing of excess input VAT refund claims, the temporary relaxation of the conditions for claiming relief from VAT on bad debts and increased use of digital communication channels to simplify compliance processes and facilitate the interaction with taxpayers (CIAT/IOTA/OECD, 2021[16]). Several countries temporarily suspended audits and other enforcement and/or recovery actions to limit the additional stress and diversion of resources and time that these actions may cause during the COVID-19 crisis.1 Cases involving potential fraud or businesses with a high-risk profile have typically been excluded from these measures.
Countries’ experience and feedback from the business community through Business@OECD suggest that the VAT measures to support cash flow and to reduce VAT compliance burden have been particularly important in helping to mitigate the impact of the crisis for businesses. VAT payment deferrals, fast and flexible refunds of excess VAT and enhanced relief of VAT on bad debts have been highlighted as particularly important measures to support business cash flow. Measures to temporarily simplify VAT procedures and formalities notably by moving away from paper-based to electronic and online processes have been highlighted as critical in alleviating compliance burdens and in allowing business to continue given the mitigation and containment restrictions in place in many countries. On the other hand, tax authorities have highlighted that measures such as deferral of VAT payments and suspension of audits required careful management to minimise risks of fraud.
The COVID-19 pandemic challenged the operating models of tax administrations, and it triggered an acceleration of their digital transformation, including in the way they interact with taxpayers, with for example a drop of 55% in in-person visits, and a 30% increase in digital contacts (OECD, 2022[17]) and in the way they collect and manage data from the taxpayers and other sources (see Section 2.9. below).
The international tax challenges of the digital economy dominate the contemporary global dialogue over tax policy and its implementation. The growth of the digital economy, which increasingly informs the broader economy, raises fundamental challenges, including for VAT design and administration. At the core of many of these challenges is the ability of businesses to conduct economic activity within a jurisdiction without conducting a physical activity or having a physical presence in that jurisdiction (see Chapter 1). This applies to digitally supplied services and intangibles as well as to the continuously growing volume of low-value goods purchased online by private consumers from non-resident suppliers.
Countries worldwide recognised that the absence of a robust response to these challenges could lead to increasingly significant VAT revenue losses and growing unfair competitive pressure on brick-and-mortar retailers that were increasingly incapable of competing against the continuously rising volumes of online sales, where VAT was not being levied. This issue became even more important as the COVID-19 pandemic accelerated a further shift from brick-and-mortar businesses to online sales.
The global policy dialogue organised by the OECD in response to these challenges resulted in a set of internationally agreed standards, rules and mechanisms to address the VAT challenges of digital trade. They allow governments to secure important VAT revenues on e-commerce and to ensure a level playing field between e-commerce and traditional businesses, without stifling innovation and economic growth. These solutions were developed in an inclusive manner, notably through the Global Forum on VAT, and reflect consensus among more than 100 jurisdictions worldwide. They were delivered as part of the OECD/G20 Base Erosion and Profit Shifting (BEPS) package in 2015 and have been further complimented with guidance to support their effective and consistent implementation since then. The following subsections briefly discuss the main challenges of digital trade and provide a concise overview of the internationally agreed standards and guidance for addressing them. These include principles for identifying the jurisdiction that has the right to levy VAT on cross-border supplies of services and intangibles in accordance with the “destination” principle and mechanisms for the effective collection of the VAT due on these supplies, in particular from non-resident (online) suppliers of goods, services and intangibles.
The OECD policy framework for addressing the VAT challenges of digital trade has four main pillars:
1. Creating the legal basis for jurisdictions to assert the right to impose VAT on international digital trade. This includes internationally agreed standards for determining the “place of taxation” of online sales of services and digital products by reference to the location of the customer.
2. Ensuring the efficient collection of VAT on online sales of goods, services, and digital products from foreign vendors through simplified VAT registration and collection.
3. Boosting the efficiency of VAT collection by requiring digital platform operators, which dominate global digital trade, to collect and remit the VAT on sales carried out through their platform(s).
4. Enhancing VAT compliance by foreign online vendors through a modern risk-based compliance strategy and robust administrative co-operation
2.8.1. The OECD standards present internationally agreed principles for the consistent application of the destination principle to cross-border trade in services and intangibles
Introduction
The VAT legislation in many countries tends to define a “service” negatively as “anything that is not otherwise defined”, or to define a “supply of services” as anything other than a “supply of goods”. While this generally also includes a reference to intangibles, some jurisdictions regard intangibles as a separate category. For the purposes of this section, references to “services” include “intangibles” unless otherwise stated.
While the determination of the jurisdiction having the taxing rights over supplies of goods is relatively straightforward since they are in principle subject to VAT in the jurisdiction where they are physically located at the time of the supply or where they are imported, it is much less so for services. Given their intangible nature, it is more challenging for VAT systems to determine their place of consumption and thus to determine the jurisdiction that has the right to collect the VAT on the supply of services in a cross-border trade context. A variety of models for determining the place of taxation of internationally traded services can be observed in VAT systems around the world. Many systems for determining the place of taxation of services operate on the basis of a categorisation approach, in which supplies are divided into categories of services with a place of taxation specified for each category. Other models favour an iterative approach, in which the principle underlying the place of taxation rule is described in more general terms and where a series of rules are applied consecutively to determine the appropriate place of taxation. A combination of both approaches may also be applied. The key common feature among these various VAT models for determining the place of taxation of internationally traded services is that they generally aim to implement the destination principle, under which the place of taxation rules are intended to impose tax at the place of consumption.
The translation of these principles in legislation traditionally relied on concrete criteria such as, explicitly or implicitly, the place where the services were performed or the place where the supplier was located to determine the place of taxation. Before the advent of the global digital economy, these criteria were often appropriate for ensuring taxation at the place of consumption as B2C services were indeed generally consumed where they were performed. Now that suppliers can deliver most services remotely form one location to consumers anywhere in the world, these criteria are ineffective for determining the place of their consumption and hence for the effective allocation of jurisdictions’ rights to levy VAT on such services.
The use of these historical place of taxation rules for such remotely deliverable services led to increasingly significant uncertainties, competitive distortions, double taxation, unintended non-taxation and revenue losses.
The OECD International VAT/GST Guidelines present internationally agreed principles for determining the place of taxation of cross-border supplies of services and intangibles
Tax authorities worldwide recognised the need for an internationally agreed framework for the application of VAT to cross-border trade to minimise the growing risks of under-taxation and loss of revenue for governments, and of trade distortion due to double taxation. The need for the implementation of such a consistent global framework became particularly obvious in the context of the strong growth of international trade in online services and digital products as a consequence of the expansion of the digital economy (see Chapter 1). In response to the strong international call for a global standard on VAT design and operation, the OECD’s Committee on Fiscal Affairs (CFA) developed the International VAT/GST Guidelines (hereafter “the OECD Guidelines”), which were adopted as a Recommendation by the Council of the OECD in September 2016.
This Recommendation is the first OECD legal instrument in the area of VAT (OECD, 2016[18]). It incorporates the International VAT/GST Guidelines (OECD, 2017[19]), which present a set of internationally agreed standards and recommended approaches for the consistent application of VAT to international trade, with a particular focus on trade in services and intangibles.
The OECD Guidelines include chapters on the principle of VAT neutrality and its implementation in practice, and on the implementation of the destination principle for allocating the taxing rights on cross-border supplies of services and intangibles. For B2B supplies, the Guidelines establish that the right to levy VAT on cross border supplies of services and intangibles is to be allocated to the jurisdiction where the business customer has located its permanent business presence. For B2C supplies, the Guidelines recommend that the taxing rights over “on-the-spot supplies” be allocated to the jurisdiction in which the supply is physically performed; and that the taxing rights over all other supplies and services in principle be allocated to the jurisdiction in which the customer has its usual residence. These include remote supplies of services and digital products over the Internet (e.g. apps, streaming of music and movies, online gaming) by foreign suppliers. The Guidelines do recognise that a rule for determining the place of taxation by reference to the customer’s location or by reference to the place of physical performance may not identify an appropriate place of taxation in all circumstances and that more targeted rules might be more likely to identify an appropriate place of taxation in these circumstances. The Guidelines therefore provide a framework for evaluating the desirability of a specific place-of-taxation rule in those circumstances. In particular, the Guidelines recommend that the place of taxation for services and intangibles connected with immovable property be determined by reference to the jurisdiction where the property is located.
The OECD Guidelines do not aim at providing detailed prescriptions for national legislation. Jurisdictions are sovereign with respect to the design and application of their laws. Rather, the Guidelines seek to provide guidance to jurisdictions in developing national legislation with a view to facilitating a coherent application of national VAT systems to international trade, taking into account their specific economic, legal, institutional, cultural and social circumstances and practices.
These Guidelines are further complemented with guidance and technical standards to support their coherent implementation and application. These include a report on “Mechanisms for the Effective Collection of VAT/GST where the Supplier is not Located in the Jurisdiction of Taxation” (OECD, 2017[20]), a report on “The role of digital platforms in the collection of VAT/GST on online sales” (OECD, 2019[21]) and a set of toolkits aimed at supporting their actual implementation in different regions of the world i.e. Digital VAT Toolkits for Asia-Pacific (OECD/WBG/ADB, 2022[22])and for Latin America and the Caribbean (OECD/WBG/CIAT/IDB, 2021[23]) providing comprehensive and detailed guidance for the policy design, implementation, operation and enforcement of a comprehensive VAT strategy targeted at digital trade. A Digital VAT Toolkit for Africa will be released in early 2023.
Digital platforms can play a key role in enhancing the efficiency and the effectiveness of VAT collection on online supplies to final consumers
The growth of the digital economy has fundamentally changed the nature of sales and distribution in B2C trade. Consumers increasingly buy online from a website operated by a digital platform that facilitates the online sales of large numbers of individual suppliers. Digital platforms allow businesses of all sizes to efficiently access millions of consumers in what is now a global online marketplace. Digital platforms now facilitate a significant share of digital trade transactions globally. The increasingly dominant role of digital platforms in digital trade offers significant opportunities to enhance the efficiency and the effectiveness of VAT collection on the online supplies made by the large numbers of individual suppliers that these digital platforms facilitate. Digital platforms generally are better positioned than other third-party service providers to assist with the VAT collection process on the supplies that they facilitate because of their close connection with the supplier and the supply as well as their access to the VAT-relevant information. Moreover, imposing VAT compliance obligations on the platform in principle relieves the underlying non-resident suppliers from incurring the economic and administrative burdens of having to comply with the associated VAT obligations in the taxing jurisdiction. Finally, digital platforms are generally able to exercise a degree of economic control over non-resident suppliers, which can be used to assert their compliance with VAT obligations, whereas tax authorities may have limited authority or capacity to enforce VAT obligations on the large number of non-resident businesses selling online to customers within their jurisdiction via the digital platforms. Digital platforms can play various roles to assist jurisdictions with the efficient and effective collection of VAT on online supplies. These roles include information reporting or sharing obligations, education of the underlying suppliers, authorising platforms to operate as a voluntary intermediary for VAT collection on behalf of underlying suppliers and a requirement for the platforms to account for the VAT on the supplies they facilitate under a “full VAT liability regime” where they are designated by law as the supplier for VAT liability and compliance purposes. Under that regime, the digital platform is solely and fully liable for assessing, collecting, and remitting the VAT due on the online sales in the jurisdiction of taxation. Almost all OECD countries (see below) consider that such a full VAT liability regime for digital platforms is the most effective and comprehensive means of ensuring compliance with VAT obligations on the online sales that non-resident suppliers make through these platforms.
The OECD Guidelines and standards have had a considerable impact on VAT policy reforms in OECD countries and beyond
These OECD Guidelines and associated guidance have already had a considerable impact on VAT policy reforms in OECD countries and beyond, aimed at effectively collecting the VAT over cross-border trade in services and intangibles. At least 76 jurisdictions in the world have already enacted reforms to achieve more effective taxation of international digital trade and a further 34 are identified as being either in the process of enactment or actively considering commencement of reforms. Very positive results have been reported both in terms of compliance and revenue collected from these measures.
Within the OECD, all member countries that have a VAT system have implemented rules that reflect the neutrality and destination principles provided in the Guidelines for the determination of the place of taxation for internationally traded services and intangibles. All of them, except Israel, have also implemented mechanisms for the online registration of foreign suppliers (or digital platforms facilitating the supply) that are liable to account for the VAT on those supplies.
Each jurisdiction has implemented these rules in accordance with its own legislative framework. The following paragraphs provide an overview of some of the models for determining the place of taxation and collecting the VAT on internationally traded services that are operated in OECD countries.
In the European Union, the determination of the "place of supply" for services (i.e. the place of taxation) depends on the status of the customer receiving the service and the nature of the service supplied. B2B supplies are in principle taxed at the place where the customer has established its business (or at the place of the fixed establishment of the customer to which it is provided), implementing the destination principle for both supplies within the EU and supplies involving customers or suppliers in third countries. On the other hand, supplies of services to final consumers (B2C supplies) are still taxed at the supplier’s place of establishment as a general rule. This rule does not reflect a will to apply the “origin principle” to B2C supplies but rather the historical reality that most services were consumed where they were provided and it was technically difficult to provide services at a distance to final consumers. There are, however, many exceptions aiming at aligning the place of taxation with the place where consumption is likely to take place. These exceptions include notably the services connected with immovable property, which taxed where the property is located; services relating to cultural, artistic, sporting, scientific, educational, entertainment etc., which are taxed at the place where they are physically carried out; and B2C telecommunication, broadcasting and electronically supplied services, which are taxed where the customer resides (since 2003 for services provided by non-EU suppliers and since 2015 also for EU suppliers). To facilitate compliance by non-EU suppliers, an online digital portal (“One Stop Shop” - OSS) allows suppliers to register at a distance in only one Member State and account in this Member State for the VAT due in all the Member States of the EU where the VAT is due and where the supplier is not established. This regime is operated by the 22 OECD member countries that belong to the EU (Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Netherlands, Poland, Portugal, Slovak Republic, Slovenia, Spain and Sweden).
Although this model for determining the place of supply applies in the Member States of the European Union and in a number of other OECD countries such as Norway and Switzerland, it is not the international norm. A number of countries (e.g. Australia, Canada, New Zealand, Singapore, and South Africa) have adopted different models. While the EU model is based on an approach by category of supplies, where a “place of supply” (which is also the place of taxation) is determined for each category according to its nature and the status (business or consumer) of the customer, other models systematically apply a series of proxies for place of consumption or use, to all kinds of services. Such systems work in steps: first a connection with the country is established (e.g. the supplier or the customer are established there; the service is performed or can be acquired there). Then, a number of proxies are applied to determine the actual place of taxation, e.g. a connection with a tangible property; the customer location and/or residence; the location of the person to whom the services are delivered or who uses the service.
For example, in New Zealand (which adopted the GST in 1986) the place of taxation for supplies made by non-residents is generally presumed to be outside New Zealand, except when the service is performed in New Zealand or supplied to a customer who is resident in New Zealand and the recipient is either a final consumer or a registered business who has agreed to have the transaction treated as being made in New Zealand. In contrast, the place of taxation for supplies by residents is presumed to be New Zealand, unless the supply is a zero-rated export of services. These services include international transport and related services; services physically performed outside New Zealand; services supplied to a non-resident who is outside New Zealand at the time the services are performed; services directly in connection with land or goods located outside New Zealand and supplies in relation to intellectual property rights for use outside New Zealand. From 1 October 2016, New Zealand applies GST to supplies of services and intangibles made by non-resident suppliers to final consumers who are usually resident in New Zealand. A simplified digital registration and compliance regime is available to foreign suppliers liable to collect and remit the GST on these supplies.
In Australia (which adopted GST in 2000), supplies are taxable (unless GST-free) in Australia and the GST is collected through the supplier when the supplies are “connected with Australia”. Supplies made through an Australian based business or performed in Australia for a final consumer are connected with Australia. To prevent GST applying to services not consumed or used in Australia, the Australian GST law includes broad, proxy-based zero-ratings (“GST-free”) similar to those used in New Zealand. The Australian GST rules were amended as from 1 July 2017, to make supplies of services and intangibles made by non-residents to final consumers who are residents of Australia generally taxable unless the GST-free provisions apply. A simplified digital registration and compliance regime is available to foreign suppliers liable to collect and remit the GST on these supplies.
In July 2021, Canada has implemented a VAT reform that gives effect to key elements of the OECD Guidelines. From that date onwards, non-resident vendors (or non-resident distribution platform operator vendors) who sell taxable digital products or services, such as online music streaming or traditional services, to Canadian consumers and Canadian entities who are not registered under the normal GST/HST regime must register and account for GST/HST in Canada. Suppliers of short-term accommodation in Canada or accommodation platform operators that facilitate such supplies must also charge and collect the GST/HST on these supplies. A simplified GST/HST registration, reporting and remittance system is available to non-resident vendors (incl. distribution platform operator vendors) to account for the tax due on these supplies.
Annex Table 2.A.8 presents a broad overview of the approaches adopted by OECD countries for collecting VAT on cross-border supplies of services and intangibles from foreign suppliers (i.e. on remote “inbound supplies”).
This overview shows that, according to their common legislative root, the 22 OECD member countries that belong to the European Union determine the place of taxation for cross-border supplies of services and intangibles in principle by reference to the customer’s location (i.e. where the customer has established his business) for B2B supplies and to the customer’s usual residence for B2C supplies, in line with the OECD Guidelines. In these countries, the VAT on inbound supplies is collected through a reverse charge (self-assessment) mechanism for B2B supplies and through a simplified vendor registration and compliance regime (“One Stop Shop”) for B2C supplies.
Twelve other OECD countries use (some variation of) the customer’s location (usual residence, place of VAT registration, head office, etc.) as the main proxy for determining the place of taxation for cross-border supplies of services and intangibles in a B2B and B2C context (Australia, Canada, Colombia, Iceland, Israel, Japan, Korea, New Zealand, Norway, Switzerland, Türkiye and the United Kingdom).
Almost all OECD countries make a distinction between B2B and B2C supplies for determining the place of taxation as well as for determining the mechanism to collect the VAT on supplies by non-resident suppliers. The tax status of customers in this context is generally determined on the basis of the presence of a VAT registration number or on the basis of the customer’s business tax identification number. Two countries (Japan and Korea) distinguish between B2B and B2C supplies on the basis of the nature of the services or intangibles provided. In these countries, supplies of services or intangibles that are considered to be generally used by final consumers such as provision of e-books, digital newspapers, music, videos, games, etc. are deemed to be B2C supplies while others are considered B2B supplies. Only Mexico does not systematically distinguish between B2B and B2C supplies since the supplier must, in principle register and account for VAT in Mexico with respect to both B2B and B2C supplies. However, the business customer is liable to account for the VAT on inbound digital supplies where the foreign supplier has not registered for VAT in the country.
Most OECD countries apply a reverse charge mechanism to collect VAT on inbound B2B supplies of services and intangibles. In Australia, Iceland and New Zealand this mechanism only applies when the customer has a limited right to deduct the input tax, and no tax is due when the customer has a full right to deduction. In Korea, inbound B2B supplies are considered out of scope and no VAT is due on such supplies. In Switzerland, the application of the reverse charge mechanism is limited to situations where the place of taxation is determined according to the customer's residence proxy. When the supply is taxed in Switzerland according to other proxies (e.g. the location of the immovable property to which the supply is connected), the reverse charge mechanism does not apply and the supplier must register in Switzerland according to the standard procedure and account for VAT. In addition, foreign suppliers that are registered in Switzerland to account for VAT on their B2C supplies, must also account for their B2B supplies under that local registration and the reverse charge does not apply.
For remote B2C supplies of services and intangibles by non-resident suppliers, all OECD countries that have implemented place of taxation rules to levy VAT on these supplies as outlined above, require the non-resident supplier to register and account for the VAT, except Israel where the customer is liable to account for the tax on inbound supplies of services and intangibles. A simplified registration and collection regime (without right to deduct input taxes in the taxing jurisdiction - “pay-only registration”) applies in these countries (generally with an option for standard registration), except in Japan and Switzerland where only the standard registration applies (with the right to deduct the input tax incurred in the country) and where the foreign supplier must appoint a local tax agent. Six of the 36 OECD countries requiring foreign suppliers to register to account for VAT on their remote B2C supplies into the country do not impose such a requirement when the annual turnover of these suppliers in the country remains below a threshold that is set at the same level as the registration threshold for domestic taxpayers. These countries are Australia, Canada, Iceland, Japan, New Zealand and Norway.
Chile, Colombia and Costa Rica have implemented a withholding regime whereby financial intermediaries are required to withhold the VAT on payments made for taxable B2C supplies of services and intangibles made by non-resident suppliers that do not comply with their obligations under these countries’ vendor collection regime, as a backstop solution and disincentive to non-compliance.
All countries that operate a simplified registration and compliance regime for the collection of VAT on inbound B2C supplies of services and intangibles by non-resident suppliers have also implemented a full liability regime for digital platforms facilitating these supplies, except Chile, where such digital platforms have only an information provision requirement, and Japan and Switzerland, which require non-resident suppliers to account for inbound B2C supplies of services and intangibles under the standard registration procedure.
The neutrality principles set forth in the OECD Guidelines provide that foreign businesses should in principle not incur irrecoverable VAT in a jurisdiction where they are not established or registered for VAT purposes. However, it is recognised that taxing jurisdictions may limit the scope of a simplified compliance regime to the collection of VAT on B2C supplies by non-resident suppliers without making the recovery of input tax available under this regime. Input tax recovery can remain available for non-resident suppliers under the standard VAT refund or registration and collection procedure. Such an approach may ensure a proper balance between simplification and the needs of tax authorities to safeguard revenue and reduce refund fraud risks. Most non-resident suppliers that register under a simplified compliance regime make online supplies to customers in the jurisdiction where they register without having any physical presence there. They are thus unlikely to incur substantial amounts of input VAT in that jurisdiction. However, it is also recognised that circumstances may arise where a refund of VAT for registrants under the simplified “pay only” regime could be warranted such as, for example overpayments of VAT by suppliers and refunds made by suppliers to their customers after a product recall (OECD/WBG/ADB, 2022[22]).
One of the main ways in which jurisdictions can allow non-resident non-registered (under the standard registration regime) taxpayers to be relieved from the VAT incurred in the jurisdiction is to allow non-resident taxpayers to apply for a VAT refund. Annex Table 2.A.10 shows that most OECD countries with a VAT system allow non-resident businesses to recover the input VAT through a direct refund mechanism. This refund can only be done by way of a GST registration in Australia and New Zealand. In Canada, the supplier to a non-resident business is relieved from the payment of the local GST/HST under certain conditions. Türkiye is the only OECD country that allows VAT refunds to non-resident businesses registered under the simplified registration and compliance regime. By contrast, Chile, Colombia, Costa Rica and Mexico currently do not provide any form of VAT refund or relief to non-resident businesses. In the 22 OECD countries that belong to the European Union, the common legislative root provides that taxpayers that are not established there should be refunded of the input VAT incurred in an EU Member State, under a procedure determined by that Member State and subject to any restrictions that this Member State wishes to apply (e.g. requiring reciprocity or excluding refunds of input VAT incurred on certain types of supplies). The use of the European Union’s simplified registration and collection regime for VAT (often referred to as “One-Stop-Shop”) does not impede this right.
Fourteen OECD countries (Germany, Greece, Hungary, Italy, Korea, Latvia, Lithuania, Poland, Portugal, Slovak Republic, Slovenia, Spain, Switzerland and Türkiye) require that the granting of refunds to non-resident businesses be conditional upon similar relief being granted by the jurisdiction of the foreign business claimant. These requirements for reciprocity generally take two forms: a formal bilateral agreement between jurisdictions or a unilateral decision to recognise jurisdictions considered as having (or not having) appropriate features in their legislation.
2.8.2. Addressing the challenge of VAT collection on imports of “low-value” goods
The term “goods” generally means “tangible property” for VAT purposes. The VAT treatment of supplies of goods normally depends on the location of the goods at the time of the transaction and/or their location as a result of the transaction. When a transaction involves goods being moved from one jurisdiction to another, the exported goods are generally “free of VAT” in the origin’s jurisdiction (and are freed of any input VAT via successive businesses’ deductions of input tax), whilst imports are subject to the same VAT as equivalent domestic goods in the importing jurisdiction. The VAT on imports is generally collected at the same time as customs duties, although in some countries collection is postponed until declared on the importer’s next VAT return. For B2B supplies, the business importing the goods will generally be liable to account for the VAT due on importation. The deduction of the VAT incurred at importation by the importer, in the same way as input tax deduction on a domestic supply, ensures neutrality and limits distortions in relation to international trade. For B2C supplies, in the absence of a business liable to collect the VAT on importation (e.g. the vendor or the carrier), the person liable to pay the VAT is traditionally the recipient of the goods mentioned on the customs declaration.
Until recently, most VAT systems applied a “de minimis” exemption for the importation of relatively low value goods. These exemptions were generally motivated by the consideration that the administrative costs of bringing these low value items into the customs and tax system were likely to outweigh the revenue gained. Until 2018, the vast majority of OECD counties applied such a VAT relief arrangement, with value thresholds under which the VAT was not collected varying from USD 11 in Denmark to USD 200 in Colombia. For European Union countries, legislation in place until 1 July 2021 provided that Member States must exempt from VAT the import of goods whose value does not exceed EUR 10, and are permitted to grant an exemption for imported goods with a value of more than EUR 10 but not exceeding EUR 22. All EU Member States that are members of the OECD had opted for the higher threshold of EUR 22, except Denmark that applied the lower threshold of EUR 10 and France and Poland where there was no threshold for goods imported on mail order. This exemption in the EU did not apply to tobacco or tobacco products and alcoholic products (OECD, 2018[24]).
These VAT exemptions for imports of low value goods become increasingly difficult to bear in the context of the growing digital economy (OECD, 2015[25]). At the time when most low value import relief provisions were introduced, internet shopping did not exist and the level of imports benefitting from the relief was relatively low. In recent years, however, most countries have seen a significant and rapid growth in the volume of low value imports of physical goods from online sales on which VAT was not collected. This resulted in unfair competitive pressures on domestic retailers who are required to charge VAT on their sales to domestic consumers and in decreased VAT revenues for governments. It also created an incentive for domestic suppliers to relocate to an offshore jurisdiction in order to sell their low value goods free of VAT. The 2015 BEPS Action 1 report (OECD, 2015[25]) recognised that the difficulty lies in finding the balance between the need for appropriate revenue protection and avoidance of distortions of competition and the need to keep the cost of collection proportionate to the amounts of VAT to be collected.
The report observed that tax authorities could be in a position to remove or lower their VAT exemption threshold for imports of low value goods, if they were able to improve the efficiency of processing such low value imports and of collecting the VAT on such imports. The report outlines and assesses the main available approaches to address this challenge, noting that a vendor collection model offered the most promising solution. Under this model, the (online) vendor of the low value goods or the digital platform through which these goods are sold is required to register in the jurisdiction of importation and to remit the VAT on these sales in that jurisdiction via the same simplified registration and collection mechanism that is recommended for the taxation of remote supplies of services and intangibles to final consumers (see below). Such a model limits or removes the need for customs authorities to intervene in the collection of VAT collection on the importation of these low value goods, since this VAT is collected directly from the vendor or digital platform at the time of sale. This collection method can apply to goods that are only subject to VAT on importation, which are in practice goods that have a value below the customs “de minimis” threshold (generally significantly higher than the VAT de minimis thresholds). Goods subject to specific duties such as excise would in principle be excluded from the vendor collection approach.
The OECD subsequently complemented the conclusions and recommendation for addressing the VAT challenges of the digital economy included in the 2015 BEPS Action 1 report with further detailed guidance to support their consistent and effective implementation. A first report on “Mechanisms for the effective collection of VAT/GST” (OECD, 2017[20]) includes detailed guidance on the design and implementation of the vendor collection model and on the simplified registration and compliance mechanism. A second report on “The role of digital platforms in the collection of VAT/GST on online sales” (OECD, 2019[21]) provides guidance on the available models for enlisting online marketplaces and other digital platforms in the collection of VAT on e-commerce, focusing in particular on the implementation of the vendor collection mechanism for the effective collection of VAT on imports of low value goods. These reports were further complemented with more detailed guidance aimed at supporting countries for the successful implementation of a comprehensive VAT strategy directed at e-commerce i.e. the VAT Digital Toolkit for Latin America and the Caribbean (OECD/WBG/CIAT/IDB, 2021[23]) and for Asia Pacific (OECD/WBG/ADB, 2022[22]).
Australia was the first country to implement a vendor collection model for the collection of GST on imports of low value goods as of 1 July 2018, in accordance with the OECD guidance. The GST relief for imports of goods with value of AUD 1 000 or less remains in place and no GST on these imports is collected through border processes. A requirement was implemented for foreign vendors and digital platforms that supply more than AUD 75 000 of taxable goods to consumers in Australia per year, to register for GST in Australia and charge the tax on their sales to final consumers in Australia. The GST on the importation of these goods is collected from these foreign vendors through a simplified “pay only” registration regime, in line with OECD guidance. The threshold of AUD 75 000 is the same as the local registration threshold, below which Australian businesses are relieved from the collection of the GST. It aims to relieve small foreign vendors for whom the compliance cost of registering and remitting the GST on their goods sales to consumers in Australia, from the requirement to do so.
New Zealand implemented a similar regime from 1 December 2019, where imports of low-value goods from foreign supplies to final consumers in New Zealand are taxed if the foreign supplier sells goods for more than NZD 60 000 per annum in the country, the same registration threshold as for domestic businesses. The GST relief for imports of goods with value of NZD 1000 or less supplied by foreign vendors to New Zealand final consumers was also repealed from that date. As for remote services, a simplified “pay only” registration is available to foreign suppliers, with the option to do a full registration to claim input credits for business-related purchases sourced from New Zealand. This system is very similar to the Australian system. One important difference is that New Zealand implemented a simplification measure allowing suppliers whose shipments to consumers in New Zealand comprise at least 75 percent of goods below the NZD 1000 threshold, are allowed to make an election to apply the simplified “pay only” regime to the entire shipment, including the goods with a value above NZD 1000.
Under both Australian and New Zealand regimes, goods purchased from abroad via an online marketplace are considered to have been supplied by this online marketplace, which are required to collect and remit the GST on supplies made through them. This requirement also includes so-called “re-deliverers”. This applies when a foreign vendor or a digital platform is requested to deliver the goods outside Australia or New Zealand without knowing that the goods are destined for one of these countries, and the consumer contracts to have those goods re-delivered to Australia or New Zealand. Then the re-deliverer is responsible for the collection of GST on the sale of these goods to the final consumers.
Norway was the next country to implement a vendor collection regime for the collection of VAT on the importation of low value goods in accordance with OECD guidance, as of 1 April 2020. Under that regime, foreign vendors and digital marketplaces that sell goods with value below NOK 3 000 to final consumers in Norway must register and account for VAT under a simplified “pay only” registration regime (VOEC) if they sell goods for more than NOK 50 000 per annum in the country, the same registration threshold as for domestic businesses. The VOEC is not available for goods with value at or above NOK 3 000, foodstuffs, restricted goods, and goods subject to excise duties, which are subject to border collection of VAT, excise duties and customs duties.
Switzerland implemented a regime since 1 January 2019 requiring foreign vendors to register for VAT in the country and to remit to the tax authorities the tax on imports of goods if the vendor's turnover of imports of low value goods exceeds CHF 100 000 per annum (i.e. the same as the domestic registration threshold). In Switzerland, low value goods are defined by the VAT amount due, i.e. when this amount exceeds CHF 5, which means that the value of the goods subject to that regime is of CHF 200 for those subject to the reduced rate of 2.5% and CHF 65 for those subject to the standard rate of 7.7%. Unlike the Australian and New Zealand rules, there is no simplified “pay only” registration available and the vendor must register under the standard registration procedure.
The Member States of the European Union adopted a vendor VAT collection regime as part of the so-called “VAT e-commerce package” (European Commission, 2017[26]). One of the key measures included in this package that entered into force in July 2021 is the removal of the VAT exemption for imports of low-value goods (i.e. goods worth not more than EUR 22) and its replacement with a new regime where vendors have the option to charge and collect the VAT on distance sales of imported low value goods to EU consumers at the time of sale and to declare and pay this VAT through the EU’s online digital portal (Import One Stop Shop; IOSS). These goods will then be exempt from VAT at importation, allowing a fast release at customs. In case where these vendors do not opt for this simplified registration and collection regime, import VAT will be collected from customers by the customs declarant (e.g. postal operator, courier firm, customs agents) which will remit it to the customs authorities via a monthly payment rather than on a transactional basis. These new rules apply to supplies of imported low value goods with a value of EUR 150 or less. Imports of goods above the EUR 150 (customs) threshold will still require a full customs declaration. Where such distance sales are facilitated by electronic marketplaces, these will be considered as the suppliers of the goods for VAT purposes and be liable for collecting and declaring the VAT on these sales. Following the “Brexit”, the United Kingdom has adopted its own regime, applicable from 1 January 2021, where, for goods with a value below GBP 135, the point at which VAT is collected was moved from the point of importation to the point of sale. Foreign vendors or digital platforms where they are involved in facilitating the sale, will be responsible for registering collecting and accounting for the VAT through an online process.
The common features of all these regimes is that the imports of low value goods destined to final consumers are not relieved from VAT any more, in principle placing foreign and domestic vendors of such goods on an equal footing. The VAT is not collected upon importation by customs authorities any more but by the tax administration at the point of sale, i.e. when the good is sold by the foreign vendor or digital platform to the final consumer. Imports of goods that are not considered as “low value” goods i.e. whose value is above the value set by legislation or possibly subject to other taxes such as excise duties are taxed upon importation according to the standard customs procedures.
9 OECD countries still exempt the importation of low-value goods from VAT with widely varying exemption thresholds, i.e. Canada (USD 16), Chile (USD 30), Colombia (USD 200), Costa Rica (USD 500), Iceland (USD 13), Israel (USD 75), Japan (100), Korea (150), and Mexico (USD 50) (see Annex Table 2.A.9).
VAT performance can be measured through different methods, depending on the dimension of the performance to be measured. It has traditionally been estimated by the “efficiency ratio”, defined as the ratio of VAT revenues to GDP divided by the standard rate (expressed as a percentage). Although the efficiency ratio has been widely used as a diagnostic tool in evaluating VATs, it does not distinguish a product-type VAT from a consumption-type VAT. This limitation can be addressed by taking final consumption as a reference for the potential tax base rather than production (Ebrill, Keen and Perry, 2001[27]). If measured by the ratio of revenue from the tax to the product of the standard VAT rate and aggregate consumption, a benchmark VAT levied at a uniform rate on all consumption would have “C-Efficiency” of 100% provided that all the tax due is collected by the tax administration.
The estimates of the VAT Revenue Ratio (VRR) for OECD countries presented in this section build on the “C-Efficiency ratio” principles. The VRR provides an indicator that combines the effect of loss of revenues as a consequence of exemptions and reduced rates, fraud, evasion and tax planning. Although the VRR has to be interpreted with care and erosion of the tax base may be caused by a variety of factors, it may support policymakers in assessing the revenue raising performance of their VAT system and in identifying opportunities to increase revenue by improving the performance of their VAT regime.
2.9.1. What does the VRR measure?
The aim of the VRR is to provide a measure of the extent to which a VAT regime collects the VAT on the natural base of the tax, i.e. on final consumption expenditure. To achieve this, the VRR estimates the difference, if any, between the VAT revenue actually collected under a country’s VAT regime and what would theoretically be raised if VAT was uniformly applied at the standard rate to the entire potential tax base and all revenue was collected:
Where: VR = actual VAT revenues; B = potential tax base and r = standard VAT rate
The ‘standard’ rate refers to the default VAT rate applicable to the tax base, unless otherwise advised by legislation. Legislation can (and many countries do) provide that lower (or higher) rates are applicable to a defined list of products. Reduced VAT rates are still widely used in OECD countries, mainly to pursue equity or social objectives (basic essentials, health, education, etc.). No OECD countries apply higher VAT rates (see Annex Table 2.A.1).
In the VRR calculation formula as presented above, the basis for the potential tax base (B) is the Final Consumption Expenditure under Item P3 in the national accounts (System of National Accounts; SNA). However, as the amount under P3 SNA expresses consumption expenditures at market prices including VAT, this VAT element must be deducted from that amount for the VRR calculation. The theoretical basis for taxation should not include the tax itself. As a result, the VRR estimates presented in Annex Table 2.A.1 have been calculated as follows:
Where: VR = actual VAT revenues; FCE = Final Consumption Expenditure (Item P3 in National Accounts); and r = standard VAT rate.
2.9.2. The challenge of assessing the tax base
The main methodological difficulty in estimating the VRR lies in establishing the potential tax base in a manner that is comparable across OECD countries, as there does not exist a standard assessment of the potential VAT base for all these countries. The potential VAT base in principle includes all supplies of goods, services and intangibles made for consideration (or deemed to be made for consideration) by businesses or by any other entity acting as a business (e.g. individuals, government entities providing supplies for direct consideration, etc.) to final consumers. In principle, the tax base ultimately corresponds to the amount of final expenditure made by households to obtain goods, services and intangibles. In practice, however, many VAT systems impose VAT burden not only on final household consumption, but also on various entities that are involved in non-business activities or in VAT exempt activities (Chapter 1 and this chapter). In such situations, VAT can be viewed as treating such entities as if they were end consumers, or as “input taxing” the supplies made by such entities on the presumption that the burden of the VAT imposed will be passed on in the prices of the outputs of those non-business activities. The tax ultimately collected by the government in these situations is the tax on these inputs.
In the absence of a standard assessment of the potential VAT base for all OECD countries, the closest statistical data that can serve a basis for estimating that VAT base is the final consumption expenditure as measured in national accounts. Final consumption expenditure in national accounts in OECD countries is measured according to the 2008 System of National Accounts (SNA 2008) except for Türkiye, Chile and Japan that continue to use SNA 1993, under Item P3 Final Consumption Expenditure (see also 2.9.2 above).
2.9.3. The average VRR for OECD countries has remained stable
Across the OECD, the unweighted average VRR has remained relatively stable at 0.56 in 2020, up 0.01 from 0.55 in 2019 and at the same level as in 2018 as is shown in Annex Table 2.A.7. This stability of the unweighted average VRR in the first year of the COVID-19 pandemic contrasts with the significant decline of that average during the Global Financial Crisis (GFC) from 0.59 in 2007 to 0.53 in 2009. This average has remained stable around 0.55 since 2010. The unweighted average VRR of 0.56 in 2020 suggests that, on average, an estimated 44% of the theoretical potential VAT revenue is not collected.
The VRR estimates vary considerably across OECD countries. In 2020 the estimates ranged from 0.35 in Colombia, 0.37 in Mexico and 0.38 and Italy, to 0.77 in Luxembourg and 1.01 in New Zealand. An additional four OECD countries have an estimated VRR above 0.65, i.e. Estonia (0.72), Japan (0.71), Korea (0.70) and Switzerland (0.68). All the other countries (31 out of 37) have a VRR below 0.65 and 13 of these countries have a ratio below 0.50 (Belgium, Colombia, Costa Rica, Canada, France, Greece, Iceland, Ireland, Italy, Mexico, Portugal, Spain, Türkiye, United Kingdom). This suggests that a considerable part of the theoretical potential VAT revenue remains uncollected in many OECD countries.
Compared to 2018, the VRR declined in 18 countries in 2020. The biggest decline was seen in Iceland, of where the estimated VRR decreased by 0.8 points from 0.54 to 0.46. Other relatively big drops were observed in Greece and Slovenia, which both saw their estimated VRR decline by 0.6 points from 0.44 to 0.38 and from 0.60 to 0.54 respectively.
The impact of the decreases of the estimated VRR in these 18 countries on the OECD average was offset by the increase in 13 countries between 2018 and 2020, in particular in New Zealand (from 0.95 to 1.02), Netherlands (0.53 to 0.58) and Australia (from 0.47 to 0.51). The VRR estimates remained unchanged in 4 countries in 2020 compared to 2018: Germany (0.57), Hungary (0.59), Poland (0.51) and Switzerland (0.68).
The VRR levels notably reflect the fact that preferential treatments, such as reduced rates and exemptions, continue to be widely used in OECD countries (see Annex Table 2.A.2 and Annex Table 2.A.3). No direct correlation is observed between the level of the standard VAT rate and the VRR. Countries with very different VAT rates may have comparable VRRs. Australia and Poland, for example, have very different standard VAT rates (10% and 23% respectively) and the same VRR estimate (0.51). Although two thirds of countries (24 out of 37) have a VRR between 0.45 and 0.65, they have standard VAT rates that vary widely from 5% (Canada) to 25% (Denmark, Norway, and Sweden) and 27% (Hungary). These last four countries combine relatively high standard VAT rates (25% and 27%) with a VRR above the OECD average, at respectively 0.64, 0.60, 0.60 and 0.59; while Mexico and Türkiye combine lower standard VAT rates (respectively 16% and 18%) with a VRR estimate considerably below the OECD average (respectively 0.37 and 0.34).
Source: Author's work.
The respective weight of the different factors that affect the VRR may vary widely across countries depending on the circumstances. The two countries with the highest VRR, New Zealand and Luxembourg, have an estimated VRR of 1.02 and 0.77, which is far above the unweighted OECD average of 0.56 and significantly above any other OECD country. The behind these high ratios are very different.
The VRR for Luxembourg continued to increase constantly between 2000 (0.66) and 2014 (1.15). This increase was correlated with deep changes in the EU market, in particular the liberalisation of financial services and the boom of e-commerce. It is reasonable to assume that these market factors and the specific VAT treatment of these markets have had a strong upward effect on Luxembourg’s VRR. It may be assumed that Luxembourg’s position as an international financial centre has resulted in additional VAT revenue for the country. The supply of financial services is generally exempt from VAT in Luxembourg without the right to deduct the input tax, in accordance with EU VAT rules, including when supplied to customers in other EU Member States. This means that the non-deductible VAT incurred by financial service providers in Luxembourg increases Luxembourg’s VAT revenues while a large share of the corresponding final consumption occurs in other EU Member States, as a result of the increased cross-border trade in financial services. Luxembourg had also become an international centre for e-commerce, notably as a consequence of the VAT treatment of this activity under EU VAT legislation until 1st January 2015. According to this legislation, e-commerce supplies to final consumers in other EU Member States were taxed in the Member State where the supplier was established. The low standard VAT rate in Luxembourg, the lowest in the EU (at 15 % until 2014), acted as an incentive to e-commerce suppliers to establish in Luxembourg; and this generated additional and continuously increasing revenue for the country as digital trade continued to grow. This changed as of 1 January 2015. Since that date, intra-EU e-commerce sales to final consumers are no longer subject to VAT in the Member State where the supplier is established (which was often Luxemburg). These sales are now subject to VAT in the Member State of these consumers’ residence and at the rate applicable in that Member State. The loss of VAT revenues for Luxemburg from this change of the intra-EU place of taxation rules for e-commerce is reflected in the VRR estimates for Luxembourg, showing a decline of 0.41 points from 1.15 in 2014 to 0.74 in 2015.
The factors underlying the constant very high VRR since the implementation of the VAT (GST) in New Zealand are very different from those in Luxembourg. First, unlike Luxembourg, New Zealand operates a very broad GST tax base with limited exemptions (see Annex Table 2.A.3) at a single 17% rate with very limited application of a zero rate (see Annex Table 2.A.2). Second, New Zealand treats public services as GST taxable (see Chapter 1). Although this does not generate actual additional revenue (the GST charged by public bodies to the government is compensated through budgetary transfers and the GST collected on local government activities is included in local taxes), this increases the recorded GST revenues, which has an upward effect on the VRR. On the other hand, the potential GST base determined on the basis of national accounts data (see section above) does not include the value added by the government. The combination of these factors may explain why the VRR for New Zealand is so high and even sometimes above 1.
At the opposite end, Mexico and Colombia have the lowest VRR in 2020 (0.37 and 0.35 respectively) amongst OECD countries. This is likely to be due to a combination of factors such as the scope of VAT exemptions, the application of a domestic zero rate and relatively low compliance levels.
2.9.4. A number of factors influence the VRR
In theory, the closer a country’s VAT system is to a “pure” VAT as a broad-based tax on all final household consumption, the closer its VRR is to 1. A VRR close to 1 can be taken as an indicator of a VAT bearing uniformly on a broad base with effective tax collection. A lower value reflects such factors as the effects of reduced rates, exemptions or a failure to collect all tax due. A VRR above 1 is possible in theory, for instance under a broad-based VAT regime with a single standard rate that exempts certain activities without a right to input-VAT deduction (e.g. financial services), where the impact of the non-deductible input tax generates VAT revenue that exceeds the revenue foregone from exempting these activities (e.g. due to cascading or to “input-taxation” of exports). In practice, the VRR rarely equals 1 and a number of complex factors, alone or in combination, may influence the results positively or negatively. These include:
The application of lower VAT rates to a number of goods and services and the level of such lower rates that reduce the tax revenue and have a negative impact on the VRR.
The level of the registration and/or collection threshold under which small businesses are not required to account for VAT. These thresholds reduce the amount of VAT collected, although it could be argued that the adverse revenue consequences of such thresholds may remain limited since the businesses under the thresholds will generally not be able to deduct any input VAT and their overall value added be relatively modest.
The presence and scope of exemptions. Depending on the features of the exemptions and market structures, exemptions may influence the VRR upwards or downwards. Exemptions may reduce the tax revenue when the exemption applies to goods or services directly supplied to final consumers without requiring much investment or expenditure other than the supplier’s own labour. They may increase revenue when the exemption occurs early in a supply chain and the revenue arising from the non-recoverable input VAT and its cascading through the value chain exceeds the potential tax arising from taxation at standard rates with the deduction of input tax. The application of a VAT exemption for financial services in particular may have a considerable impact on the VRR, given the economic importance of this sector in many countries.
The VAT treatment of public sector activities. Final consumption by government is the second largest category of final use in national accounts after household consumption. Government activities are exempt or outside the scope of VAT in most countries, New Zealand being the notable exception treating all government activities as taxable. As a consequence, public bodies can generally not deduct the input VAT paid on their taxable expenditure, again with the exception of New Zealand that provides a full right to deduct input tax for government activities. A number of countries have created mechanisms for balancing the adverse effects of the exemption of public sector activities, such as targeted VAT refunds, full or partial right to deduct input VAT, budgetary compensations or extended taxation of government activities. The different options chosen by governments may have varied impacts on the VRR. Compensations outside of the VAT system (e.g. a simple budgetary compensation) have no direct effect on the VRR. The government activities remain input taxed, generating the corresponding VAT revenue, before and after the compensation measures. A measure that provides the right to input-VAT deduction to government bodies will normally reduce VAT revenue if the outputs remain exempt, and hence influence the VRR downwards. Applying VAT to government activities like New Zealand does, on the other hand, will increase the amount of VAT collected and influence the VRR upwards, as it results in the taxation of the total government output rather than just the inputs.
The implementation of an effective regime for the collection of VAT on online supplies of goods, services and digital products by foreign vendors and electronic marketplaces. Many VAT regimes have struggled to ensure the proper collection of VAT on online trade, in particular when faced with the challenge of collecting these taxes from non-resident vendors, which has caused increasingly important revenue losses as the value and volume of digital trade has continued to increase (see Chapter 1).
The capacity of the tax administration to manage the VAT system efficiently and the degree of compliance by taxpayers influences the VRR, as losses of VAT revenue from non-compliance and fraud obviously have a negative impact on a country’s VRR. Also the level of taxpayer insolvencies and bankruptcies can influence the VRR.
The failure of a tax administration to operate an appropriate VAT refund process (with timely refunds of excess input-VAT credits to domestic businesses and/or refunds to non-resident businesses), may influence the VRR upwards for the “wrong” reasons, as it is contrary to the fundamental principle of VAT-neutrality.
Similarly, the failure of a VAT regime to ensure that the exportation of goods and/or services is treated as “free of VAT” (i.e. zero-rated), notably because it levies VAT on exports or exempts exports without a right for the exporter to recover the associated input-VAT, may influence the VRR upwards “for the wrong reasons”.
Finally, also the possible differences in the measurement of final consumption expenditure in national accounts across countries and thus in countries’ potential VAT base should be taken into account when interpreting the VRR.
For further technical discussion on the factors influencing the calculation of the VRR see (OECD, 2016[28]).
2.9.5. Policy and compliance factors influencing the VRR
The level of the VRR rarely depends on one factor in isolation but rather on the interaction between them. For example, a high standard rate may create an incentive for evasion while multiple lower rates may lead to revenue loss due to misclassifications. Exemption of certain sectors of activity may create distortions and incentives for avoidance, which require additional administrative capacities that cannot be used for the efficient VAT collection. Inefficient tax administration, burdensome administrative requirements and complex VAT mechanisms may reduce taxpayer compliance levels.
These potentially influencing factors can be divided in two main categories:
Those directly resulting from policy decisions mainly affecting the tax base or the coverage of the standard rate (i.e. reduced VAT rates and exemptions – “policy gap”), and
Those related to the efficiency of the tax collection and compliance levels (“compliance gap”).
The VRR is a combination of the result of policy decisions and the “compliance gap”. Analysis to further break down the composition of the VRR can be carried out. One method to decompose the VRR into its policy and compliance components is to first use tax expenditure data from VAT preferential regimes (i.e. the revenue cost of a system’s departure from the application of the standard VAT rate to the entire theoretical tax base) to estimate the “policy gap”. The remaining difference between 1 and a given country’s VRR, after deducting the estimated “policy gap”, then provides an estimate of the “compliance gap”. However, given the number of other factors that may influence the VRR, such figures should be used with caution.
Another method is to estimate the “compliance gap” (or “VAT gap”), i.e. the difference between the VAT collected and the tax that should be collected if all consumers and businesses fully complied with a given jurisdiction’s VAT rules. This method is employed for the annual VAT Gap estimates in the European Union where the VAT Gap is defined as the difference between the amount of VAT actually collected and the theoretical tax liability according to tax law (VAT Total Tax Liability; VTTL). (Institute for Advanced Studies, 2015[29]). (CASE – Center for Social and Economic Research, 2020[30]). This VAT Gap is estimated using a “top-down” approach that applies a jurisdiction’s respective VAT rates to the relevant components of consumption (including final consumption of households; final consumption of government and non-profit institutions; intermediate consumption for partially exempt businesses; expenditure on housing; country-specific adjustments, etc.). Australia uses a similar method (Australian Taxation Office, 2020[31]). The International Monetary Fund RA-GAP framework (Hutton, 2017[32]) uses national accounts data to calculate the potential VAT base per economic sector. It calculates the potential VAT revenues for a given VAT system by applying its current tax schedule (exemptions, zero-rates, reduced rates) to that VAT base. Potential VAT revenues under the reference policy are calculated by applying the current standard VAT rate to the base. The VAT gap is calculated by comparing actual VAT revenue with potential revenues under the current policy and under the reference policy.
There is no common OECD definition of concepts such as VAT “non-compliance” or “fraud”. For the purpose of this publication, a distinction is made between “unintentional non-compliance” resulting from a taxpayer’s unawareness of its compliance obligations or its incapacity to comply, e.g. due to unclear or inconsistent rules; “intentional non-compliance”, i.e. the deliberate failure by taxpayers to meet their VAT obligations with a view to reduce or to avoid VAT liability; and “fraud” involving illegal arrangements with as main objective to steal public money, such as fake invoicing, carousel fraud, etc. These categories are not air-tight and criminal VAT fraud mechanisms can be dissimulated behind or be connected with genuine trade activities.
2.10.1. VAT revenue losses from fraud and non-compliance remain significant
Reducing the revenue losses from VAT fraud and non-compliance remains a key challenge and a priority for countries around the world. Many tax administrations carry out research to estimate their country’s VAT compliance gap, i.e. the revenue loss from VAT fraud, non-compliance and bankruptcies. The VAT Gap in the European Union (EU) was estimated at EUR 134 billion in nominal terms and at 10.3 percent expressed as a share of the VAT Total Tax Liability (VTTL) in 2019, down by approximately 0.8 percentage points from the 2018 estimates (Poniatowski, 2021[33]). The smallest VAT Gaps in the EU were observed in Croatia (1 percent) and Sweden (1.4 percent); the largest in Romania (34.9 percent), Greece (25.8 percent), and Malta (23.5 percent). Advanced estimates for 2020 forecast a reversal of the downward trend, with a potential loss of EUR 164 billion in 2020 due to the impact of the COVID-19 crisis on the economy. The United Kingdom estimated its VAT Gap at GBP 8.6 billion in 2020-21, i.e. 6.7% of the VTTL (HMRC, 2022[34]), declining from GBP 10.0 billion and 7.0% of the VTTL in 2018-19. A number of other OECD countries provide public estimates of their VAT gap. In Australia the GST gap is estimated for 2019–20 at AUD 53 billion, i.e. 7.8% of the VTTL (Australian Taxation Office, 2021[35]); in Canada, the GST/HST gap for 2018 is estimated at CAD 4.3 billion and 9% VTTL (Canada Revenue Agency, 2022[36]). In Latin America, the VAT gaps showed a wide diversity in 2017 (CEPAL, 2020[37]) but OECD countries in this region had a relatively low VAT gaps compared to other countries in the region, i.e. 21.4% in Chile, 23.6% in Colombia, 16.4% in Mexico and 31.1% in Costa Rica (compared to e.g. 45.3% in Panama and 43.8% in the Dominican Republic).
In addition to unintended and intended non-compliance, VAT systems are the target of organised criminal attacks. The most common type of organised VAT fraud is the “missing trader” or “carousel” fraud. It arises when a business makes a purchase without paying VAT (typically a transaction for which tax self-assessment applies), then collects VAT on an onward supply and disappears without remitting the VAT collected. Originally, the fraud involved primarily high-value goods that can easily be moved across borders, such as computer chips and cell phones - but it expanded to services that can be bought and sold like goods. Organised VAT fraud in CO2 emission trading, for instance, caused billions of Euros of VAT revenue losses in a range of countries. Energy markets are also vulnerable to organised VAT fraud. European energy regulators, energy trading firms and gas and electricity operators notably warned EU authorities about the serious impact of VAT carrousel fraud on the functioning of European gas and electricity markets (Europex – Association of European Energy Exchanges, 2018[38]). They reported signs of "a major penetration of the gas and electricity markets by VAT fraudsters”. Networks involved in such organised and criminal VAT fraud are often also active in money laundering, corruption and other crime types (EU SOCTA, 2021[39]).
As economic activity continues to evolve, so do the risks of VAT fraud and non-compliance that VAT administrations are facing. Research in the past for instance showed that certain accounting software products contained hidden tools (zappers) for the manipulation of VAT receipts (OECD, 2013[40]). The digitalisation of the economy creates increasingly important risks of VAT fraud and non-compliance and new challenges for tax administrations to address them, notably in light of the exponential growth of cross-border e-commerce and the growing capacity of online operators to carry out activities in a given jurisdiction without needing any physical presence there (OECD, 2015[41]). Activities supported by new technologies, such as those involving crypto-currencies and Non Fungible Tokens (NFT), may also create new risks of VAT fraud and non-compliance and challenges for tax administrations’ traditional VAT compliance risk management.
2.10.2. Reducing VAT non-compliance and fraud remains a priority for tax authorities
Countries are increasingly implementing measures to enhance VAT compliance and to reduce the vulnerability of VAT regimes to non-compliance and fraud, in particular in the context of the digitalisation of the economy. These measures include on the one hand the implementation of alternative collection mechanisms such as domestic reverse charge mechanisms and VAT split payment regimes; and, on the other hand, as the implementation of data collection regimes, including though electronic invoicing and data reporting requirements, to support VAT risk management through advanced data analysis. While these strategies can significantly enhance tax administrations’ VAT enforcement capacity, they increasingly require the effective international administrative cooperation in the area of VAT, given the globalisation and digitalisation of the economy (and of VAT fraud networks).
Almost all OECD countries apply domestic reverse charge measures to limit fraud risks in sectors that may be particularly vulnerable to VAT fraud
In a standard VAT regime, the tax is collected from suppliers through a staged process whereby the supplier collects the VAT from its customer and remits it to the authorities after having deducted any recoverable input VAT (see Chapter 1). Under a domestic reverse charge mechanism, the liability for remitting the VAT to the tax authorities is shifted from the supplier to its business customer (i.e. in B2B transactions). Shifting the VAT liability from the supplier to the customer for domestic transactions removes the possibility for dishonest suppliers to disappear with VAT that they collected from their customers without remitting it to the tax authorities, which is for example typical for so-called “missing trader” fraud. Nor can businesses claim the deduction or refund of VAT they have not paid (e.g. VAT on false invoices) or that has not been remitted to the tax authorities, which typically occurs in “carrousel fraud” schemes.
OECD countries that are using the domestic reverse charge mechanism have typically limited its application to economic sectors that are particularly vulnerable to organised fraud schemes such as trade in mobile phones; integrated circuit devices; game consoles; tablet PCs and laptops; cereals and industrial crops; raw and semi-finished metals; gas and green electricity certificates; and telecom services.
No OECD country operates a more generalised reverse charge regime for the collection of all VAT on domestic transactions between businesses. Although this would reduce the risks of specific fraud types, as described above, it would also create new complexity for businesses and tax administrations and growing risks of other types of fraud at the retail level (e.g. sales suppression, misuse of VAT identification numbers). One concern is that it would effectively transform the VAT into a retail sales tax, with the concentration of all revenue risks at the stage of the final sale or at a limited number of points, with the inherent weaknesses of such a system.
In the European Union, Member States can apply a domestic reverse charge mechanism to a determined list of supplies, on an optional and temporary basis. EU Member States have also been allowed since 2013 to apply a domestic reverse charge to any kind of supply in case of sudden and massive VAT fraud.
Annex Table 2.A.12 shows that the use of domestic reverse charge as a means of combatting VAT fraud is widely used in the 22 OECD countries that are Member States of the European Union, in particular for the supply of CO2 emission certificates (all except Estonia, Latvia, Lithuania and Poland); scrap materials and waste (all except Belgium, Luxembourg and Poland); and construction work (all except Estonia, Luxembourg and Poland). The domestic reverse charge is also applied by many EU countries for supplies of gold (14 EU countries); electronic devices such as laptops, chips, mobile phones etc. (11 EU countries) and the supply of gas and electricity to taxable dealers (10 EU countries). Also other OECD countries use a domestic reverse mechanism albeit to a much lesser extent, i.e. Canada (supplies of real property by non-residents and some supplies between provinces); Chile (supplies of rice, construction works, waste and certain plants and animals); Israel (metal debris); Mexico (waste, some supplies made by individuals); New Zealand (supplies of land incorrectly zero rated); Norway (supply of CO2 emission allowances and investment gold) and Türkiye (some supplies made by non-taxable persons). Chile also require certain (large) taxpayers to reverse charge the VAT on B2B supplies acquired from suppliers considered as not trustworthy by the tax administration. More than half of the OECD countries operating a VAT (23 out of 37) apply the reverse charge to supplies in the real estate sector.
No domestic reverse charge measures have been implemented in Colombia, Costa Rica, Iceland, Japan, Korea, and Switzerland. Poland replaced its domestic reverse charge arrangements with a mandatory split payment mechanism in November 2019 (see below).
The split payment mechanism applies to a more limited extent
Another means of reducing the vulnerability of VAT regimes to fraud and non-compliance is through the implementation of a so-called split payment (or withholding) mechanism. Under such a mechanism, the supplier charges the VAT on its domestic supplies to the customer according to normal rules, but the VAT paid by the customer (or part of it) is either directly remitted to the tax authorities (“withholding scheme”) or deposited on the supplier’s special VAT account (“split payment”) rather than to the supplier. The supplier can generally use the amounts deposited in its special VAT account under a split payment regime only to pay VAT either to the tax administration or to another supplier (and to this supplier’s VAT account only). Poland, which operates such a split payment regime (see previous section), has extended the possible use of amounts on special VAT accounts to pay certain other public levies.
A split-payment or withholding regime has a similar fraud-prevention effect as a domestic reverse-charge mechanism in that it removes the possibility for a supplier to collect the VAT without remitting it to the tax authorities. Among the drawbacks of these regimes are the added complexity (incl. the requirement for suppliers to determine for each transaction whether or not it is in the scope of the regime) and the cash-flow impact for businesses, which can be significant particularly under a withholding regime as businesses receive no/less output VAT against which they can offset deductible input-VAT (and this could result in a perennial excess-input VAT position). Some have observed that split-payment mechanisms may not prevent more complex missing trader frauds (Bartosz Gryziak, 2020[42]). Annex Table 2.A.12 shows that such a regime has been implemented in only five OECD countries and these are all targeted at specific sectors or types of supplies.
Colombia and Italy apply the split payment mechanism to supplies made to public authorities, government bodies and public owed companies. In Colombia the split payment also applies to supplies made to listed large businesses.
In Poland, a mandatory split payment mechanism applies to business-to-business (B2B) supplies of a defined list of goods and services that are considered to be sensitive to fraud (such as fuels, steel products, scrap metal, of CO2 emission allowances, mobile phones, tablets, construction services etc. which were previously subject to a domestic reverse charge), if the invoiced gross amount exceeds PLN 15 000. Korea applies a split payment regime to supplies of gold, copper and scrap gold and iron. Australia requires purchasers of new residential property to effectively withhold GST from payment to the supplier and to remit the full amount of the GST to the tax authority. This is reconciled against taxable amounts of GST required to be reported for these supplies by the supplier.
In the Czech Republic such a system is only optional for customers that wish to avoid possible joint and several liability for the supplier’s unpaid taxes. Türkiye operates a partial withholding regime whereby customers are required to withhold a percentage of the VAT charged to them by suppliers and remit it directly to the tax authorities for supplies in certain sectors, such as construction, scrap metal, glass, plastic and paper, advisory and audit services, some repair services etc.
Research (Deloitte, 2017[43]) has shown that, although a split payment regime could help combatting non-compliance and fraud in the EU, it may have a negative cash-flow impact on businesses and possibly increase their compliance costs, depending on business size and sector, which could lead to any additional revenue not outweighing its costs.
2.10.3. Digital reporting requirements are on the rise
Over the last decade, a range of incremental changes occurred across tax administrations which, taken together, are changing the nature of the tax compliance environment, allowing for more targeted and managed compliance (OECD, 2017[44]). A significant part of this change is driven by the increased availability of data. As digitalisation proceeds, even more tax related data from taxpayers and third parties is becoming available (for example, data from e-invoicing, automated transaction data reporting, online cash registers and financial account information), which is contributing to more targeted actions by tax administrations (OECD, 2022[17]).
OECD countries generally use technology to enhance the reporting of relevant data to tax authorities. After a generalisation of mandatory e-filing of VAT returns (OECD, 2015[45]), many OECD countries have introduced or consider introducing a requirement for taxpayers to provide transaction data to tax authorities (Transaction-Based Reporting – TBR), sometimes in real time. These measures typically require detailed information to be provided in an electronic format at individual taxable transaction level. This information can include invoicing information and accounting data or any other information that allows tax authorities to monitor supplies made and/or received by individual taxpayers and determine their tax liability.
TBR requirements in OECD countries, where they exist, are heterogeneous and can differ on several dimensions such as their scope, the data collected or the frequency of reporting. Annex Table 2.A.11 shows that most OECD countries have now implemented mandatory electronic transaction information reporting obligations (i.e. the transmission of detailed information in an electronic format on individual taxable transactions), except Belgium, Canada, Finland, Iceland, Japan and Switzerland. Amongst the countries that have implemented mandatory electronic transaction information reporting obligations, 20 impose a more or less detailed specific format for such reporting (Chile, Colombia, Costa Rica, Czech Republic, Estonia, France, Greece, Israel, Italy, Korea, Lithuania, Luxembourg, Mexico, Netherlands, Norway, Poland Portugal, Slovak Republic, Slovenia, Spain and Türkiye). Seven of them (France, Lithuania, Luxembourg, Netherlands, Norway, Poland and Slovenia) use (a variation of) the Standard Audit File for Tax (SAF-T) format developed by the OECD Forum on Tax Administration (OECD, 2005[46]). This involves the use of accounting software to create an electronic file (the SAF-T) containing tax-relevant accounting data. The SAF-T format enables the transfer of these data from the taxpayer to the tax authorities in a standardised electronic format.
More than half of the countries requiring electronic transaction reporting (18 out of 31) require the systematic transmission of such information to the tax administration (Austria, Chile, Colombia, Costa Rica, Czech Republic, Estonia, Greece, Hungary, Israel, Italy, Korea, Lithuania, Mexico, Poland, Portugal, Slovak Republic, Spain and Türkiye) and 10 out of these countries require this transmission to happen in (near) real time (Chile, Colombia, Costa Rica, Greece, Hungary, Italy, Korea, Mexico, Spain and Türkiye). Such electronic transaction reporting may involve the mere transmission of data to the tax administration - the “Transmission model” - or a validation system where each transaction data must be systematically cleared by tax authorities for the invoice emitted by the supplier related to this supply to be considered a valid accounting document - the “Clearance model”. Among the OECD countries requiring the systematic transmission of transaction data to the tax administration, 8 countries have reported the use of a form of Clearance model: Chile, Colombia, Costa Rica, Greece, Italy, Korea, Mexico and Türkiye. In all these countries, the clearance model is coupled with a real time reporting obligation
Countries are also increasingly concerned with the monitoring of transactions in cash in the business-to-consumer (B2C) environment and more than one third of OECD countries having a VAT (16 out of 37) have implemented requirements for suppliers to use electronic cash registers (Austria, Belgium, Costa Rica, Czech Republic, France, Greece, Hungary, Israel, Italy, Korea, Latvia, Norway, Poland, Slovak Republic, Slovenia, and Sweden). Five of these countries require the systematic transmission of such data to the tax administration (Greece, Israel, Korea, Slovak Republic and Slovenia) and this in (near) real time for Korea, Slovak Republic and Slovenia.
Another trend that is observed is the progressive digitalisation of invoices. For the purposes of this publication two kinds of dematerialised invoices are considered: “electronic invoice” that is a digital file allowing the automated exchange of invoice information between accounting systems of parties to a transaction; and “digitised invoice” that is a mere copy of an invoice (e.g. in pdf format) sent by electronic means (e.g. by email) between parties to a transaction. Annex Table 2.A.11 shows that, although electronic invoicing is now permitted in all OECD countries, it is still only mandatory in 10 of them. Among these countries, Austria, Portugal and France require it only for B2G (Business to Government) transactions, while Korea, Mexico, Norway and Türkiye require it for B2B and B2G supplies. On the other hand, electronic invoicing is mandatory for all invoices, including B2C, B2B and B2G supplies in Chile, Colombia, Costa Rica and Italy. France will however progressively introduce mandatory electronic invoicing for B2B supplies between 2024 (for large businesses) and 2026 (small businesses). The obligation to allow reception of invoices in electronic format will be mandatory on 1 July for all businesses, regardless of their size, as soon as their supplier is obliged to issue invoices in electronic format.
The implications of these different TBR regimes on businesses and tax administrations are different depending on the type of reporting. Under a Periodic Transaction Controls (PTCs) system transactional data reported to tax authorities at regular intervals can complement or be joined to the existing VAT return. Continuous Transaction Controls (CTCs) systems, in which transactional data is submitted electronically to tax authorities just before, during or shortly after the actual exchange of such data between the parties, are radically different and require more automation in an appropriate IT environment (Luchetta, 2022[47]). From a pure technical perspective, automatic transaction reporting systems are separate from the digitalisation of accounting documents or invoicing rules and don’t necessarily require the invoice as exchanged between the supplier and the customer to be in electronic format. However, tax authorities, in their efforts to gain more control over VAT revenue sources and prevent fraud may extend their mandates to cover more fiscal documents in the mandatory electronic transmission (Christiaan van der Valk, 2023[48])
Much is likely to depend on the design of these digital reporting requirements and on the performance of tax authorities’ online services and their technological capacity to minimise risks these new requirements adversely affect economic activity, including in a cross-border context. In addition, tax authorities will need to manage and analyse an unprecedented volume of data, to be stored in a secure environment. In order for countries to take full advantage of the opportunities that such data collection provides, citizens and businesses need to have confidence in the security and confidentiality of the information gathered. Facing the risks of inappropriate disclosure of information whether intentionally or by accident (e.g. hacking of tax administration databases), countries must ensure that both the legal framework and appropriate data protection systems are in place (OECD, 2012[49]).
2.10.4. Tax authorities are increasingly implementing or exploring strategies to manage VAT compliance risks in digital trade
The continuously expanding internet penetration and the continuously growing ease for consumers worldwide to shop online and to make use of online payment solutions, including through mobile devices, have been among the key drivers of an extraordinary increase in digital trade over the last decade. Its steadily increasing relevance for VAT revenues and its potential competitive impact on traditional “brick-and-mortar” businesses have triggered reform in jurisdictions worldwide to ensure that VAT is collected effectively on digital trade. In particular, a growing number of countries have implemented solutions for the collection of VAT from non-resident suppliers based on OECD standards and guidance or are in the process of doing so (see Section 2.8 above). These OECD standards and guidance mainly aim at achieving high levels of compliance by “making it easy to comply” for business involved in digital trade, including for small and medium enterprises.
Despite the efforts of tax authorities to facilitate VAT compliance in digital trade, non-compliant conduct will inevitably occur. This calls for the implementation of effective strategies to manage and counter risks of VAT fraud and non-compliance in digital trade. Early OECD analysis suggests that the patterns of VAT compliance risks associated with digital trade are not significantly different from those observed in traditional trade. Some of the specific features of digital trade can however exacerbate these compliance risks and create additional challenges for tax authorities to manage them. These may include limitations to tax administrations’ audit and risk detection and management capabilities and processes, challenges to access relevant information, and limitations to the capacity to enforce compliance against economic operators in digital trade that may often have no physical presence in the taxing jurisdiction.
Tax authorities are therefore exploring a range of strategies, tools and technologies to adjust their VAT compliance risk management approaches to the digital trade context. Data collection and management are at the heart of strategies to detect VAT non-compliance and fraud in digital trade and VAT risk management strategies. As part of its programme of work, the OECD Committee on Fiscal Affairs is undertaking work to enhance tax authorities’ capacity to tackle VAT fraud and non-compliance in digital trade, including through the analysis, experience sharing and development of guidance on enforcement strategies to support the effective collection of VAT on digital trade and the exchange of information and other forms of administrative cooperation in the area of VAT.
2.10.5. International administrative co-operation is critical for the effective management of international VAT risks
Greater need for administrative co-operation to tackle VAT fraud and non-compliance
Governments increasingly recognise that information exchange and administrative co-operation play a critical role in tax administrations’ strategies to ensure the effective collection of VAT and to tackle VAT fraud and non-compliance in international trade and in, not least in the context of the digitalisation of the economy (OECD, 2015[41]); (Court Auditors, 2015[50]). This need was notably highlighted in the 2015 OECD Report on Tax Challenges Arising from Digitalisation (OECD, 2015[25]) and the OECD is carrying out work in this context.
A number of instruments are available that provide the legal foundation for the international administrative co-operation, including the exchange of information, in the area of VAT. These include the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (OECD/Council of Europe, 2011[51]); the bilateral treaties implementing the current Articles 26 and 27 of the OECD and UN Model Tax Conventions; and Tax Information Exchange Agreements (TIEAs) based on the OECD Model. Regional agreements can also provide a legal base for such co-operation. These include EU Regulation No 904/2010 of 7 October 2010 on administrative cooperation and combating fraud in the field of value added tax; the Nordic Mutual Assistance Convention on Mutual Administrative Assistance in Tax Matters; the CIAT Model Agreement on the Exchange of Tax Information; and the African Tax Administration Forum Agreement on Mutual Assistance in Tax Matters.
The Multilateral Convention on Mutual Administrative Assistance in Tax Matters is the most comprehensive instrument available for administrative co-operation
Amongst these instruments, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the Convention) (OECD - COE, 2008[52]) has the widest coverage both in terms of membership (as of November 2022, 146 jurisdictions participate in the Convention) and in scope. The Convention was developed jointly by the Council of Europe and the OECD. It was opened for signature by the member states of both organisations in 1988. It was then aligned with the internationally agreed standard on transparency and exchange of information and opened to all countries in 2011.
It provides for all possible forms of administrative co-operation between the Parties (Article 1) in the assessment and collection of taxes, in particular with a view to combating tax avoidance and evasion. The Convention has a very wide scope and covers all forms of compulsory payments to general governments (i.e. the central government and its political subdivisions) with the sole exception of customs duties and all other import-export duties.
The Convention explicitly includes VAT among the taxes covered by its provisions (Article 2.1.b). It should be noted though that Article 30 of the MAAC allows the subscribing jurisdictions to reserve the right not to provide any form of assistance in relation to the taxes of other Parties in any of the categories listed in Article 2.1.b, which includes general consumption taxes such as VAT. Prior to sending an assistance request based on the Convention, jurisdictions are therefore advised to check the existence of reservations for the assistance related to VAT.
The main types of administrative co-operation tools under the Convention are:
Exchange of information on request (Art. 5). At the request of the applicant State, the requested State shall provide the applicant State with any information that is foreseeably relevant for the administration or enforcement of their domestic laws concerning the taxes covered by the Convention which concerns particular persons or transactions (Art. 5, § 1). If the information available in the tax files of the requested State is not sufficient to enable it to comply with the request for information, that State shall take all relevant measures to provide the applicant State with the information requested (Art. 5, § 2).
Automatic exchange of information (Art. 6). Two or more Parties shall automatically exchange information with respect to categories of cases and in accordance with procedures, which they shall determine by mutual agreement.
Spontaneous exchange of information (Art. 7). A Party shall, without prior request, forward to another Party information of which it has knowledge in the circumstances set forth in Art. 7, § 1.
Simultaneous tax examinations (Art. 8). A simultaneous tax examination is an arrangement between two or more Parties to examine simultaneously, each in its own territory, the tax affairs of a person or persons in which they have a common or related interest, with a view to exchanging any relevant information which they so obtain (Art. 8, para 2).
Tax examinations abroad (Art. 9). At the request of the competent authority of the applicant State, the competent authority of the requested State may allow representatives of the competent authority of the applicant State to be present at the appropriate part of a tax examination in the requested State. All decisions with respect to the conduct of the tax examination shall be made by the requested State.
Assistance in recovery (Chapter III, Section II, Art. 11-16). Under Article 11, § 1, at the request of the applicant State, the requested State shall take the necessary steps to recover tax claims of the first-mentioned State as if they were its own tax claims, except in relation to time-limits which are governed solely by the laws of the applicant State (Art. 14) and in relation to priority (Art. 15). This shall apply only to tax claims, which form the subject of an instrument permitting their enforcement in the applicant State.
Service of documents (Chapter III, Section III, Art. 17). At the request of the applicant State, the requested State shall serve upon the addressee documents, including those relating to judicial decisions, which emanate from the applicant State and which relate to a tax covered by the Convention.
However, Article 30 of the Convention also enables a State to put reservations about the type of assistance to be provided, so that it may limit its participation in the provision of mutual assistance, including in the VAT area.
Annex Table 2.A.13 shows that all OECD countries have signed the Convention and it has entered into force in all of these countries. Three OECD countries (Israel, Luxembourg and Switzerland) have expressed a general reservation on VAT and do not provide any kind of assistance in this area under the Convention. A limited number of other OECD countries have made reservations on specific components of administrative co-operation in the area of VAT, i.e. on the assistance in the recovery of VAT claims (Austria, Canada, Chile, Colombia Costa Rica, Germany and the United States) and on the provision of assistance in the service of documents (Chile, Colombia Costa Rica, and the United States).
The European Union has adopted a range of tools for the exchange of information and other types of administrative cooperation in the area of VAT
Within the European Union, the VAT Directive (2006/112/EC) and implementing Regulation (904/2010) provide the legal base for the administrative co-operation and exchange of information among Member States. It is supported by an operational network of tax officials, Eurofisc. Based on the information shared within the Eurofisc network, and after analysis of the available data, Eurofisc liaison officials can take appropriate action at national level, including requests for information, audits or deregistration of VAT numbers. The implementing Regulation was amended in 2018 to improve the exchange and analysis of information between the Member States’ tax administrations and with law enforcement bodies. The EU also signed a bilateral agreement on the VAT exchange of information with Norway in February 2018.
The VAT e-commerce package applicable from 1 July 2021, which removes the VAT exemption on imports of low value goods and obliges suppliers to pay the VAT on all goods imported into the EU, was accompanied by reinforced co-operation provisions between tax and customs authorities. Eurofisc has also strengthened its co-operation and exchange of information with the European Anti-Fraud Office (OLAF) and Europol.
On 18 February 2020, the European Council adopted a legislative package (EU Council Directive 2020/284 and Council Regulation 2020/283) that will require payment service providers to transmit information on cross-border payments originating from Member States and on the beneficiary (“the payee”) of these cross-border payments. Under this package, payment service providers offering payment services in the EU will have to monitor the payees of cross-border payments and transmit information on those who receive more than 25 cross-border payments per quarter to the administrations of the Member States This information will then be centralised in a European database, the Central Electronic System of Payment information (CESOP), where it will be stored, aggregated and cross-checked with other European databases. All information in CESOP will then be made available to anti-fraud experts of Member States via a network called Eurofisc. The objective of this new measure is to give tax authorities of the Member States the right instruments to detect possible e-commerce VAT fraud carried out by sellers established in another Member State or in a non-EU country. The measure respects the data protection rules. Only information related to payments that are likely to be connected to an economic activity is transmitted to the tax authorities. Information on consumers and on the reason underlying the payment is not part of the transmission. The transmission of data must start on 1 January 2024.
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[3] Thomas, A. (2020), “Reassessing the regressivity of the VAT”, OECD Taxation Working Papers, No. 49, OECD Publishing, Paris, https://doi.org/10.1787/b76ced82-en.
Austria*. A standard rate of 19% applies in Jungholtz and Mittleberg. Specific temporary reduced VAT rates apply in the context of the COVID-19 pandemic – See country note to Annex Table 2.A.2.
Belgium*. Specific temporary reduced VAT rates apply in the context of the COVID-19 and rising energy costs – See country note to Annex Table 2.A.2.
Canada. The following provinces have harmonised their provincial sales taxes with the federal Goods and Services Tax and therefore levy a GST/HST at the following rates: New Brunswick, Newfoundland and Labrador, Nova Scotia, Prince Edward Island: 15%; and Ontario: 13%. Québec applies GST at a rate of 5% and Québec Sales Tax at a rate of 9.975% (applied on the same tax base as the GST). With the exception of Canada’s territories (Yukon, Northwest Territories and Nunavut) and the province of Alberta, other Canadian provinces apply a provincial sales tax to certain goods and services in addition to the federal GST.
Colombia. Specific reduced VAT rates apply in the context of the COVID-19 pandemic – See country note to Table 2.2. The rate of 0% applies to hygiene products destined to final consumers in the department of Amazonas.
Costa Rica. Specific reduced VAT rates apply in the context of the COVID-19 pandemic – See country note to Table 2.2.
Czech Republic*. Specific temporary reduced VAT rates in the context of the COVID-19 pandemic – See country note to Annex Table 2.A.2.
Estonia*. Specific temporary reduced VAT rates in the context of the COVID-19 pandemic – See country note to Annex Table 2.A.2.
Finland*. Specific temporary reduced VAT rates in the context of the COVID-19 pandemic – See country note to Annex Table 2.A.2.
France*. Rates of 0.9%; 2.1%; 10.0%; 13.0% and 20.0% apply in Corsica; rates of 1.05%; 1.75%; 2.1% and 8.5% apply to overseas departments (DOM) excluding French Guyana and Mayotte. Specific temporary reduced VAT rates in the context of the COVID-19 pandemic – See country note to Annex Table 2.A.2.
Germany*. The standard VAT rate was reduced from 19% to 16% and the reduced VAT rate from 7% to 5% from 1 July to 31 December 2020. Specific temporary reduced VAT rates in the context of the COVID-19 pandemic – See country note to Annex Table 2.A.2.
Greece*. Specific regional rates of 4.0%; 9.0% and 17.0% apply in the islands of Leros, Lesbos, Kos, Samos and Chios and the decision to reduce the rates is automatically revoked 3 months from the closure of Reception and Identification Centres and Temporary Reception / Hosting Structures and Closed Controlled Structures for refugees. Specific temporary reduced VAT rates in the context of the COVID-19 pandemic – See country note to Annex Table 2.A.2.
Hungary*. Specific temporary reduced VAT rates in the context of the COVID-19 pandemic – See country note to Annex Table 2.A.2.
Ireland*. The standard VAT rate was reduced from 23% to 21%, with effect from 1 September 2020 until 28 February 2021. Specific temporary reduced VAT rates in the context of the COVID-19 pandemic – See country note to Annex Table 2.A.2.
Israel. The rate of 0% applies when an Eilat resident dealer buys goods from Eilat non-residents. Supplies made by an Eilat resident supplier (to be consumed in Eilat) are exempt from VAT.
Italy*. Specific temporary reduced VAT rates in the context of the COVID-19 pandemic – See country note to Annex Table 2.A.2.
Latvia*. Specific temporary reduced VAT rates in the context of the COVID-19 pandemic – See country note to Annex Table 2.A.2.
Lithuania*. Specific temporary reduced VAT rates in the context of the COVID-19 pandemic – See country note to Annex Table 2.A.2.
Luxembourg*. Specific temporary reduced VAT rates in the context of the COVID-19 pandemic – See country note to Annex Table 2.A.2.
Mexico. A reduced VAT rate of 8% applies in the northern border region (Ensenada, Playas de Rosarito, San Quintín, San Felipe, Tijuana, Tecate and Mexicali in the state of Baja California; San Luis Río Colorado, Puerto Peñasco, General Plutarco Elías Calles, Caborca, Altar, Sáric, Nogales, Santa Cruz, Cananea, Naco and Agua Prieta in the state of Sonora; Janos, Ascensión, Juárez, Praxedis G. Guerrero, Guadalupe, Coyame del Sotol, Ojinaga and Manuel Benavides in the state of Chihuahua; Ocampo, Acuña, Zaragoza, Jiménez, Piedras Negras, Nava, Guerrero and Hidalgo in the state of Coahuila de Zaragoza; Anáhuac in the state of Nuevo León; and Nuevo Laredo, Guerrero, Mier, Miguel Alemán, Camargo, Gustavo Díaz Ordaz, Reynosa, Río Bravo, Valle Hermoso and Matamoros in the state of Tamaulipas) from 1 January 2019 until 31 December 2024. Furthermore, it applies in the southern border region (Calakmul and Candelaria in the state of Campeche; Balancán and Tenosique in the state of Tabasco; Ocosingo, Palenque, Marqués de Comillas, Benemérito de las Américas, Amatenango de la Frontera, Frontera Comalapa, La Trinitaria, Maravilla Tenejapa, Las Margaritas, Suchiate, Frontera Hidalgo, Metapa, Tuxtla Chico, Unión Juárez, Cacahoatán, Tapachula, Motozintla and Mazapa de Madero in the state of Chiapas; and Othón P. Blanco in the state of Quintana Roo) from 1 January 2021 until 31 December 2024.
Netherlands*. Specific temporary reduced VAT rates in the context of the COVID-19 pandemic – See country note to Annex Table 2.A.2.
Poland*. Specific temporary reduced VAT rates in the context of the COVID-19 pandemic – See country note to Annex Table 2.A.2.
Portugal*. In the Islands of Azores, the standard VAT rate is 16% and the reduced rates are 4% and 9%. In the Islands of Madeira, the standard rate is 22% and reduced rates are 5% and 12%. Specific temporary reduced VAT rates in the context of the COVID-19 pandemic – See country note to Annex Table 2.A.2.
Slovak Republic*. Specific temporary reduced VAT rates in the context of the COVID-19 pandemic – See country note to Annex Table 2.A.2.
Slovenia*. Specific temporary reduced VAT rates in the context of the COVID-19 pandemic and to counter rising energy costs – See country note to Annex Table 2.A.2.
Spain*. Rates of 0.0%, 3.0%; 5.0%, 7.0%, 9.50%; 15.0% and 20.0% apply in the Canary Islands. Rates of 0.5%; 1.0%, 2.0%; 3.0; 4.0%; 5.0%; 6.0%; 8.0%; 9.0% and 10% apply in either Ceuta or Melilla. Specific temporary reduced VAT rates in the context of the COVID-19 pandemic – See country note to Annex Table 2.A.2.
Sweden. Specific temporary reduced VAT rates in the context of the COVID-19 pandemic – See country note to Annex Table 2.A.2.
Türkiye. Specific temporary reduced VAT rates in the context of the COVID-19 pandemic – See country note to Annex Table 2.A.2.
United Kingdom. Specific temporary reduced VAT rates in the context of the COVID-19 pandemic – See country note to Annex Table 2.A.2.
*Member States of the European Union apply a customs duties and VAT exemption for the importation of certain goods needed to combat the effects of the COVID-19 outbreak (Commission Decision (EU) 2021/2313). For more details, see country notes to Table 2.2.
Note: Temporary VAT rate reductions applicable in the context of the COVID-19 or energy crises are shown in italics in the country comments above. More details on temporary application of reduced VAT rates applicable in the context of the COVID-19 or energy crises are shown in country notes to Table 2.2.
Austria*. Temporary reduced rates related to the Covid-19 pandemic: a rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 30 January 2020 until 30 June 2022.
Belgium*. Temporary reduced rates related to the Covid-19 pandemic: a rate of 0% applies from 13 March 2020 until 30 June 2022 to imports of certain goods needed to combat the Covid-19 pandemic. A rate of 0% also applies to Covid-19 vaccines and in vitro diagnostic medical devices (and services closely linked to those) from 1 January 2021 to 31 December 2022. A rate of 6% applies to the supply, intra-Community acquisition and importation of masks and hydro alcoholic gels from 4 May 2020 until 30 June 2022. A rate of 6% applies to restaurant and catering services, excluding alcoholic beverages from 8 June 2020 until 31 December 2020. Temporary reduced rate(s) to counter rising energy costs: the VAT rate is reduced to from 21% to 6% on the supply of electricity for residential consumption from 1 March 2022 to 30 September 2022. The VAT rate is reduced from 21% to 6% on the supply of gas and district heating for residential consumption from 1 April 2022 to 30 September 2022. The VAT rate is reduced from 21% to 6% on the delivery with placement of solar panels, solar water heaters and heat pumps in recent homes (under strict conditions) from 1 April 2022 to 31 December 2023.
Canada. Temporary reduced rates related to the Covid-19 pandemic: a rate of 0% applies to supplies of certain face masks (medical and non-medical) and face shields design for human use that meet certain specifications made after 6 December 2020 and until their use is no longer broadly recommended by public health officials for the COVID-19 pandemic. Relief of customs duties and GST for goods imported on an emergency basis by or on behalf of certain entities, including health authorities, from 16 March 2020 to 7 May 2022.
Colombia. The Colombian VAT legislation distinguishes three categories of goods and services: (i) “taxable goods and services” (subject to VAT); (ii) “exempt goods and services” (zero-rated with the right in some cases to credit VAT paid on inputs); and (iii) “excluded goods and services” (not subject to VAT nor with the right to credit VAT paid on inputs). Temporary reduced rates related to the Covid-19 pandemic: “VAT holidays” (i.e. days where B2C supplies of goods in a specific list of products is subject to a VAT rate of 0%) took place on 19 June, 3 July, and 19 July 2020, 28 October, 19 November and 3 December 2021; and on 11 March, 17 June and 2 December 2022. The leases of commercial property were subject to a VAT rate of 0% from 1 June until 31 July 2020. The VAT rate for airline tickets and related services was reduced from 19% to 5% from 15 April 2020 until 31 December 2021. This measure was extended until 31 December 2022. The provision of hotel and tourism services were excluded from VAT from 4 June until 31 December 2020. Afterwards, these services subject to a VAT rate of 0%, from 1 January 2021 to 31 December 2022. Restaurants operating as franchises were excluded from VAT from 4 June 2020 until 31 December 2021.
Costa Rica. Engineering, architecture, topography, and civil works construction services are exempt from VAT are subject to the reduced rate of 4% from 1 September 2021 to 31 August 2022; to the reduced rate of 8% from 1 September 2022 to 31 August 2023 and to the standard rate of 13% from 1 September 2023 onwards. Temporary reduced rates related to the Covid-19 pandemic: tourism-related services were subject to a VAT rate of 0% from 1 August 2020 to 31 July 2021; to the rate of 4% until 30 June 2022 and to 8% until 30 June 2023. Standard rate of 13% will apply from 1 July 2023 onwards.
Czech Republic*. Temporary reduced rates related to the Covid-19 pandemic: a rate of 0% applies to imports of certain goods needed to combat the Covid-19 from 1 January until 30 June 2022 and to diagnostic medical devices for testing for the disease COVID-19 and vaccines against this disease until 31 December 2022.
Denmark*. Temporary reduced rates related to the Covid-19 pandemic: a rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 1 January until 30 June 2022.
Estonia*. From 1 August 2022, a rate of 5% instead of 9% applies to newspapers and periodicals (both physical and electronic). Temporary reduced rates related to the Covid-19 pandemic: a rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 1 January until 30 June 2022.
Finland*. Temporary reduced rates related to the Covid-19 pandemic: a rate of 0% applied to certain goods needed to combat the Covid-19 from 30 January 2020 until 30 June 2022. A temporary zero rate applies to Covid-19 self-test kits during 2022. Temporary zero rate applies to goods and associated services intended to be donated to Ukrainian refugees from 24 February until 31 December 2022.”
France*. Rates of 0.9%; 2.1%; 10.0%; 13.0% and 20.0% apply in Corsica; rates of 1.05%; 1.75%; 2.1% and 8.5% apply to overseas departments (DOM) excluding French Guyana and Mayotte. Temporary reduced rates related to the Covid-19 pandemic: rates of 0% or 5.5% apply to imports of certain goods needed to combat the Covid-19 from 1 January until 30 June 2022. A rate of 5.5 % also applies to supplies of certain goods needed to combat the Covid-19 from 1 march 2020 until 31 December 2022.
Germany*. Temporary reduced rates related to the Covid-19 pandemic: a rate of 0% applies to donations of certain medical material and equipment to hospitals from 1 March 2020 to 31 July 2020. A rate of 0% applies to imports of goods needed to combat the Covid-19 pandemic from 1 January until 30 June 2022. Restaurant and catering services (except beverages) were subject to the reduced rate of 5% from 1 July 2020 until 31 December 2020 and 7% from 1 January 2021 until 30 June 2021.
Greece*. Specific regional rates of 4.0%, 9.0% and 17.0% apply on the islands of Leros, Lesbos, Kos, Samos and Chios; the Decision to reduce the rates is automatically revoked within 3 months from the closure of Reception and Identification Centres and Temporary Reception/Hosting Structures and Closed Controlled Structures for refugees. Temporary reduced rates related to the Covid-19 pandemic: a rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 1 January 2020 until 31 December 2022. A rate of 0% also applies to the supply of COVID-19 vaccines and in vitro diagnostic medical devices and services closely linked to them. Sanitary products essential for the protection of public health during the COVID-19 pandemic (masks, gloves, etc.) are subject to the reduced rate of 6% from 20 March 2020 until 31 December 2022. Between 1 June 2020 and 31 December 2022, the reduced rate of 13% applies to admission to cinemas; transport of passengers and their accompanying luggage. In the same period, the reduced rate of 13% applies to services provided by restaurants, coffee shops and similar businesses, excluding nightclubs, and with the exception of the disposal of alcoholic beverages. In the same period, the reduced rate 13% applies to the supply of non-alcoholic beverages. The reduced rate of 13% also applies to sports tickets from 1 September 2020 until 30 June 2022. A reduced rate of 13% also applies to zoo tickets with effect from 5 February 2021 until 31 December 2022 and to services provided by gyms and dance schools (as soon as those are not exempt) from 1 October 2021 until 31 December 2022.
Hungary*. Temporary reduced rates related to the Covid-19 pandemic: a rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 1 January until 30 June 2022.
Ireland*. Temporary reduced rates related to the Covid-19 pandemic: a rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 1 January until 30 June 2022. From 12 December 2020 until 31 December 2022, a rate of 0% applies to the supply of authorised Covid-19 vaccines, services closely linked to those vaccines and to the supply of certain Covid-19 in vitro diagnostic medical devices and services closely linked to those devices. Temporary VAT rate reduction for Tourism and Hospitality sector from 13.5% to 9%, from 1 November 2020 to 28 February 2023. Temporary VAT rate reduction on energy products and supplies from 13.5% to 9%, from 1 May 2022 to 31 October 2022.
Israel. The rate of 0% applies when an Eilat resident dealer buys goods from Eilat non-residents. Supplies made by an Eilat resident supplier (to be consumed in Eilat) are exempt from VAT.
Italy*. Temporary reduced rates related to the Covid-19 pandemic: until 31 December 2022, a rate of 0% applies to the supply of COVID-19 vaccines and in vitro diagnostic medical devices and services closely linked to them. Temporary reduced rate(s) to counter rising energy costs: The VAT rate on the supply of natural gas for “civil and industrial uses” was reduced from 22% to 5% from 1 October 2021. In addition, the VAT rate on natural gas for transport use was reduced from 22% to 5% during the period from 3 May 2022 until 20 September 2022.
Latvia*. Temporary reduced rates related to the Covid-19 pandemic: a rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 1 January until 31 December 2022. A rate of 0% also applies to Covid-19 vaccines and in vitro diagnostic medical devices (and services closely linked to those) from 20 December 2020 to 31 December 2022.
Lithuania*. Temporary reduced rates related to the Covid-19 pandemic: a rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 1 January 2020 until 31 December 2021. From 1 January 2021 until 31 December 2022, a 0% VAT rate is applied to: supplies of vaccines against coronavirus infection; the supply of in vitro diagnostic medical devices for the diagnosis of coronavirus infection. A reduced rate of 9% applied to restaurants services, events and performance services provided by performers from 1 July 2021 to 31 December 2022.
Luxembourg*. Temporary reduced rates related to the Covid-19 pandemic: a rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 1 January until 30 June 2022.
Netherlands*. Temporary reduced rates related to the Covid-19 pandemic: a rate of (effectively) 0% applied to the hiring of healthcare workers by healthcare facilities or institutions qualifying for the VAT exemption of medical services. The measure applied from 16 March 2020 to 1 October 2021. The rate of (effectively) 0% also applied to donations of Covid-19 related medical material and equipment to healthcare facilities or institutions and to general practitioners from 16 March 2020 to 1 January 2021. A rate of 0% applied to imports of certain goods needed to combat the Covid-19 pandemic from 30 January 2020 to 30 June 2022. A rate of 0% applied to the purchase in the Netherlands of mouth masks (medical and non-medical) from 25 May 2020 to 1 October 2021; a rate of 0% also applied to the supply of anti Covid-19 vaccines approved by the authorities and on the actual testing therewith as well as on the supply of Covid-19 self-test kits from 21 December 2020 until 1 October 2021; a rate of 0% applied to the supply of test kits with a CE-number (as listed by the European Commission) and the actual testing therewith from 16 April 2021 until 1 October 2021. A reduced rate of 9% on online sporting lessons by gyms/sporting schools applied from 28 November 2021 to 15 January 2022; reduced rate of 9% on individual online sporting lessons applied from 18 December 2020 until 19 May 2021 (online group lessons: until 4 June 2021).Temporary reduced rate(s) to counter rising energy costs: the reduced rate of 9% (from 21%) applies to natural gas, electricity, and district heating from 1 July 2022 to 31 December 2022.
Poland*. Temporary reduced rates related to the Covid-19 pandemic. 0% VAT rate has been temporarily introduced for the supply of vaccines being pharmaceutical products and tests for SARS-CoV-2 and the COVID-19 being in vitro diagnostic medical devices, meeting the conditions specified in the regulation. The measure applies (under certain conditions) from 23 December 2020 until 31 December 2022. Temporary reduced rates rate(s) to counter rising energy costs and inflation. As of 1 February until 31 December 2022: 0% for natural gas (8% in January 2022); 5% for district heating (8% in January 2022) and electricity (5% as of 1 January 2022); 8% for some motor fuels. From 1 February to 31 December 2022 the VAT rate has been lowered to 0% for foodstuffs subject to 5% VAT rate and for soil improvers, plant bio stimulants, growing media in the meaning of The Act on fertilisers and fertilising (excluding mineral growing media), fertilisers, plant protection products normally intended for use in agriculture. Until 16 May 2022 the 0% rate was applied for the donation of laptops, tablets, central processing units, servers, monitors, desktop computer sets, printers, scanners, computer equipment for writing Braille, digital data transfer equipment (including concentrators and net switches, routers and modems), made by VAT payers to educational institutions or educational, charitable or humanitarian organisations which transferred them free of charge to educational institutions
Portugal*. In the Islands of Azores, the standard VAT rate is 16% and the reduced rates are 4% and 9%. In the Islands of Madeira the standard rate is 22% and reduced rates are 5% and 12%. Temporary reduced rates related to the Covid-19 pandemic: a rate of 0% applies to donations of certain medical material and equipment to hospitals from 1 March 2020. A rate of 0% applies to supplies, intra-community acquisition and imports of certain goods needed to combat the Covid-19 pandemic acquired by the State and other public entities, the national health service, private hospitals contracted by the State to fight COVID-19 and NGOs, from 30 January 2020 until 30 June 2022. A rate of 6% applies to imports, supplies and intra-community acquisitions of protective masks and disinfectant gel, from 8 May 2020 until 31 December 2022.
Slovak Republic*. Temporary reduced rates related to the Covid-19 pandemic: a temporary rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 30 January 2020 until 31 December 2021. A temporary rate of 0% applied from February to April 2021 to supplies (and intra-community acquisitions and imports) of personal protective equipment for respiratory protection (FFP2 and FFP3 respirators).
Slovenia*. Temporary reduced rates related to the Covid-19 pandemic: a rate of 0% applies to imports of certain goods needed to combat Covid 19 from 30 January 2020 until 30 June 2022. The same applies to supplies and Intra-Community acquisition of these goods from 13 March 2020 until 31 July 2020 and from 1 November 2020 until 30 June 2022. Temporary reduced rate to counter rising energy costs: the VAT rate is reduced from 22 % to 9.5 % on electricity, natural gas and district heating from 1 September 2022 until 31 May 2023.
Spain*. Rates of 0.0%, 3.0%, 5.0%; 7.0%, 9.50%; 15.0%, 20% apply in the Canary Islands. Rates of 0.5%, 1.0%, 2.0%, 3.0%; 4.0%, 5.0%; 6.0%, 8.0%, 9.0% and 10% apply in either Ceuta or Melilla. Temporary reduced rates related to the Covid-19 pandemic: a rate of 0% applies to the supply of medical equipment from national producers to public entities, NGOs and hospitals until 31 October 2020. A rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 1 January until 30 June 2022. Temporary reduced rate(s) to counter rising energy costs: the VAT rate was reduced from 21% to 10% on energy bills from 1 December 2021 until 30 June 2022.
Sweden*. From 1 July 2022 the reduced rate 6 % applies on repair of bikes, shoes, leather goods and household linen (instead of the reduced rate 12%). Temporary reduced rates related to the Covid-19 pandemic: a rate of 0% applies to imports of certain goods needed to combat the Covid-19 pandemic from 1 January 2020 until 30 June 2022.
Türkiye. Temporary reduced rates related to the Covid-19 pandemic: a rate of 1% applies to the supply of domestic air transport from 1 April to 30 June 2020. A rate of 8% applies to the supply of tradesman services such as small home appliance maintenance and repairing; house maintenance, paint and cleaning; car washing; barbering; hairdressing; locksmithing; tailoring; shoe repairing and painting; dry cleaning; carpet washing; etc. from 31/7/2020 to 30/9/2021. A rate of 8% applies to the supply of workplace rental, passenger transportation, wedding organization services, entrance fees (congress, conference, seminar, concert, fair and amusement park), etc. from 31/7/2020 to 30/9/2021. A rate of 1% applies to the supply of entrance fees (cinema, theatre, opera, operetta, ballet, museum), accommodation and catering services from 31/7/2020 to 30/9/2021. A rate of 1% applies to the supply of education and training services from 31/7/2020 to 30/9/2021. A rate of 1% applies to the supply of Covid-19 vaccines from 23/12/2020 to 31/12/2022. A temporary rate of 0% applies to supplies of substances to be used in the production of goods to be exported under the inward processing and temporary admission regime until 31 December 2025; to the delivery of goods and provision of services to international organizations operating in Türkiye within the framework of host state agreements or other agreements to which it is a party, to construction works for investments with a minimum fixed investment amount of 500 million Turkish Liras within the scope of investment incentive certificates, to delivery of goods and services related to construction works within the scope of the certificate to taxpayers holding investment incentive certificates for the manufacturing industry and tourism until 31 December 2025, to deliveries of new machinery and equipment to be used exclusively in the manufacturing industry to value-added taxpayers carrying industry registration certificate until 31 December 2022, to engineering services provided to taxpayers who manufacture electric motor vehicles in Türkiye as a result of their R&D activities in Türkiye to develop technologies that will eliminate greenhouse gas emissions until 31 December 2022.
United Kingdom: Temporary reduced rates related to the Covid-19 pandemic: a rate of 12.5% applies to the supply of hospitality, holiday accommodation and attractions from 1 October 2021 to 31 March 2022.
* European Union. According to the European Commission Decision (EU) 2021/2313 on 22 December 2021, the exemption from import duties and VAT on the imports of goods intended for distribution free of charge by the relevant bodies and organisations to the persons affected by or at risk from COVID-19 or involved in combating the COVID-19 outbreak was extended from 1 January 2022 to 30 June 2022 for 23 EU Member States, at their request. This Decision is further extended until end 2022 for 5 EU Member States. Are also exempt from VAT the imports of goods and purchases of goods and services made by the European Commission or a European institution, in execution of tasks they have been entrusted with in the objective of fighting the Covid pandemic-19.
On 5 April 2022, the EU Council adopted a change in the EU VAT Directive providing Member States more freedom regarding the use of reduced VAT rates, including the use of domestic zero rates for essential products such as food, pharmaceuticals and products for medical use. Most country-specific rates (i.e., derogations) will become available to all Member States. On the other hand, environmentally harmful goods such as fossil fuels and chemical fertilisers/pesticides will be excluded from the reduced rates as of 1 January 2030 and 1 January 2032, respectively. As of 1 July 2022, a zero rate will also apply to supplies made for the benefit of the armed forces of the Member States when they are assigned "to a defence effort carried out with a view to implementing an activity of the Union within the framework of the common security and defence policy” similar to what is already applicable for NATO armed forces.
Australia. For taxi drivers, including chauffeur driven limousines, hire cars and sharing economy ride-share services, there is no registration threshold. The applicable registration threshold to not-for-profit organisations is AUD 150 000.
Belgium. The registration threshold for Belgium does not apply to several sectors: real estate; hotels and restaurants; sale of used and waste materials. A number of specific supplies are also excluded from the application of the threshold: several supplies of new real estate, supplies of certain products subject to excise duties and undeclared and illicit activities.
Canada. The registration threshold does not apply to certain selected listed financial institutions; non-residents who enter Canada to make taxable supplies of admissions to a place of amusement, a seminar, an activity or an event; and persons who carry on a taxi or limousine business (which include a commercial ride-sharing business). These persons are required to register for and collect GST/HST. An alternative threshold applies to charities and public institutions. A charity or public institution is not required to register if either its revenue from worldwide taxable supplies is CAD 50 000 or less in a calendar quarter and over the last four consecutive calendar quarters, or its gross revenue in either of its two preceding fiscal years is CAD 250 000 or less.
Chile. All taxpayers are required to register and obtain a taxpayer’s identification number. However, small businesses, craftsmen and small service providers may be eligible for a special simplified regime according to which they account, for output VAT purposes, for a monthly fixed amount based on an average level of earnings. This special regime has to be calculated by taking into account the earnings from the last 12 months and there is a threshold of 20 Monthly Tax Units (CLP 1 083 420 - USD 1 274). This simplified tax regime does not apply to legal entities but to individuals only. This system must be adopted for at least for 12 months after which the taxpayer can return back to the ordinary regime.
Colombia. The VAT exemption threshold is mentioned in Tax Value Units (Unidad de Valor Tributario - TVU) in the tax code. The VAT exemption threshold is 3 500 TVU. The value of the TVU in Colombian Pesos (COP) is set every year by decree. The value for 1 TVU is COP 38 004 for fiscal year 2022. The VAT registration threshold for individuals is therefore 3 500 x 38 004 = 133 014 000 COP in 2022. The threshold for individuals that are contractors with the State, is of 4 000 TVU (i.e. 152 016 000 COP in 2022). There is no VAT registration threshold for incorporated businesses.
Costa Rica. Small businesses, craftsmen, small fisheries and farmers as well as small service providers can opt for a special simplified VAT and income tax regime, provided that the amount of their annual purchases does not exceed 350 base salaries (CRC 69 330 000 approximately USD 100 770) inclusive of VAT, employ a maximum of 5 employees, and their total assets do not exceed 150 base salaries (CRC 69 330 000 approximately USD 100 770). Businesses which perform as exclusive importer or distribution for the sale goods or services are not able to register under this regime as well as those that exploit franchise business.
Czech Republic. A taxable person that is not established in the Czech Republic should register immediately once it starts to provide any taxable supply within the territory of the country, except for supplies being subject to the reverse charge mechanism or to the one-stop shop (OSS).
Denmark. A higher threshold of DKK 170 000 (EUR 22 840) applies to the blind, and a threshold of DKK 300 000 (EUR 40 300) applies to the first sale of works of art by their creator or his successors in title. For the purposes of the latter exemption, the threshold of DKK 300 000 must not have been exceeded in the current or preceding year.
Finland. Where a business exceeded the registration threshold of EUR 15.000, it must register and is subject to VAT but a graduated tax relief is available until they reach a second threshold of EUR 30 000..
France. VAT relief applies to businesses whose annual turnover does not exceed EUR 85 800 or when their turnover does has not exceeded EUR 94 300 the preceding calendar year (when the turnover has not exceeded EUR 85 800 the penultimate year). For supplies of services (except hotel accommodation and food and drink in restaurants), the annual turnover must not exceed EUR 34 400 or EUR 36 500 the preceding calendar year (when the turnover has not exceeded EUR 34 400 the penultimate year). For lawyers (in the furtherance of their regulated business), writers and artists, the turnover must not exceed EUR 44 500 (the threshold is EUR 18 300 for their supplies outside the normal framework of their affairs). Experimentally, a specific threshold of EUR 100 000 has been implemented in Guadeloupe, Martinique and La Réunion until 31 December 2022.
Germany. Taxpayers are relieved from VAT obligations if their annual turnover does not exceed EUR 22 000 and their expected turnover for the current calendar year will not exceed EUR 50 000.
Greece. If the annual turnover from taxable supplies is less than EUR 10 000, a business can voluntarily enter the Special Scheme for small businesses under which no VAT is collected. New businesses may also enter the Special Scheme upon registration. Farmers under the flat-rate scheme are not eligible to enter the Special Scheme for small businesses. Small businesses that have entered the Special Scheme will be obliged to enter the “normal” scheme and collect VAT from the moment they perform a taxable supply on account of which they exceed the threshold (and for the full value of that supply). In case the administrative period is less than a year, then the value of the taxable supplies for the purpose of determining whether the business may enter the Special Scheme during the next year is calculated on a proportional basis.
Ireland. The general turnover threshold for the supply of goods is EUR 75 000. Persons supplying goods liable at the reduced or standard rates which they have manufactured or produced from zero-rated materials must however register if their turnover is EUR 37 500 or more. The general turnover threshold for the supply of services is EUR 37 500. For persons supplying both goods and services where 90% or more of the turnover is derived from supplies of goods (other than of the kind referred to in the previous sentence) are subject to the threshold for the supply of goods applies.
Israel. Self-employed persons with annual revenue below NIS 102 292 are considered "Exempt Dealers". Some professions are not allowed to be Exempt Dealers: agronomist, architect, practical engineer, technician, private investigator, rabbinical attorney, dental technician, organizational consultant, management consultant, scientific consultant, tax consultant, economist, engineer, surveyor, bookkeeper, translator, insurance agent, lawyer, accountant or appraiser, chemical or medical laboratory owner, artistes, various others in show business, doctor, psychologist, physiotherapist, veterinary surgeon, dentist, driving school owner, school or kindergarten owner, real estate agent or dealer, test preparation, testing and supervision, lecture, teaching, writing, shorthand, translation, writing, editing, car dealer or broker.
Italy. The micro-sized taxpayers’ scheme (“Regime forfetario”) applies to individual businesses if, in the previous year, they earned revenues or received remuneration, calculated per year, not exceeding EUR 65 000 and the gross expenses for employees do not exceed EUR 20 000. The regime does not apply to persons who are members of partnerships, professional associations or SRLs (limited liability companies) and are subject to the "regime di trasparenza" for income tax; persons who carry out sale of buildings or land or intra-EU supplies of new cars and trucks. Are also excluded, foreign businesses not established in Italy, except for those that are established in one of the EU Member States, or in a State party of the European Economic Area, and produce in Italy at least 75 percent of their total revenue.
Japan. Domestic and foreign businesses (both companies and individuals) whose taxable sales in Japan are less than 10 million yen, as well as new businesses of up to 2 years (except for the subsidiary of a certain large corporation) are exempt from Japanese Consumption Tax (JCT) return. Exempted businesses can opt to be liable for Consumption Tax, in which case they shall remain liable for at least two years.
Luxembourg. Taxpayers established in Luxembourg are entitled to opt for the special scheme; the exemption only applies to goods and services supplied in Luxembourg. Taxpayers can opt out of the special scheme but have then to apply the normal VAT rules for at least five years.
Netherlands. The special scheme for small businesses applies to all businesses, irrespective of their legal form and including corporate businesses (e.g. foundations, private and limited companies).
Norway. The higher threshold of NOK 3 000 000 applies for admission to sporting events. The higher threshold of NOK 140 000 applies to charitable institutions and organisations.
Poland. The registration threshold does not apply to taxpayers supplying (a) certain types of silver, gold, platinum, knives, cutlery, jewellery, non-hazardous metal waste, museum collections and coins; (b) goods subject to excise duty with a number of exceptions; (c) certain buildings, structures and their parts; (d) building land; (e) new means of transport. The threshold does also not apply to taxpayers supplying (a) legal services; (b) consulting and expert services with certain exceptions; (c) jeweller services and taxpayers not established in Poland. Supplies of certain goods bought remotely such as computers, electrical household appliances, cosmetics, toilet preparations and parts and accessories to cars and motorcycles are excluded from the exemption.
Portugal. The collection threshold does not apply to commercial legal entities.
Sweden. The threshold does not apply to taxable persons not established in Sweden, taxable persons voluntarily registered for VAT for rental of immovable property, trade with investment gold and artists. From 1 July 2022, the threshold is raised to 80 000 SEK.
Switzerland. The thresholds refer to the worldwide turnover. The higher threshold of CHF 150 000 applies to not-for-profit, sports and cultural associations and to public interest institutions.
Türkiye. Certain small individual taxpayers who are exempt from Personal Income Tax are also exempt from VAT.
Chile. Non-resident suppliers providing digital services to final consumers (B2C) in Chile (i.e. customers that are not registered for VAT purposes in Chile) are required to register under a simplified “pay only” registration and collection regime. Registration under the standard registration procedure is also available. Digital platforms are liable to collect the VAT on inbound supplies of these services made through them and remit the tax in Chile. The services covered include notably the supply of digital entertainment content, software and data storage. Such supplies are taxable in Chile provided that they are “consumed within the country”. Foreign suppliers are able to use proxies as evidence to identify the place of consumption. These proxies include: the location of the IP address of the device used by the customer (or another geolocation mechanism) at the time of contracting or paying the services; the country of issuance or registration of the card, bank account or other method of payment used; the invoicing address; and/or the country code of the mobile phone´s SIM card being used. Two items of non-contradictory evidence are required. There is no registration threshold and foreign suppliers are in principle requested to register from the first sale to Chilean consumers. B2B supplies continue to be subject to a reverse charge mechanism if the customer is registered for VAT in Chile.
Mexico. Non-resident suppliers providing digital services to consumers (B2C and B2B) in Mexico are required to register under a simplified “pay only” registration and collection regime. This registration does not grant the right to the registered businesses to deduct VAT incurred in Mexico. The registration does not generate a permanent establishment for income tax purposes in Mexico. Digital platforms are liable to collect the VAT on inbound supplies made through them and to remit it to the Mexican tax authorities. The digital services covered include notably downloads or access to images, movies, text, information, videos, audio, music, games, as well as other multimedia content, but does not apply to e-books or electronic versions of newspapers and magazines. The defined digital services also include online learning, tests or exercises and online clubs and dating sites. Such supplies are taxable in Mexico provided they “take place” in the country. Non-resident suppliers are able to use proxies as evidence to identify the place where these supplies take place. These proxies include: the location of the customer; the location of the IP address of the device used by the customer; the country of issuance or registration of the card, bank account or other method of payment used; or the country code of the mobile phone´s SIM card being used. There is no registration threshold and non-resident suppliers are in principle requested to register 30 days after the first sale to Mexican consumers. B2B supplies continue to be subject to a reverse charge mechanism if non-resident suppliers are not registered for VAT in Mexico. Non-resident suppliers are required to provide information to the tax administration monthly on the number of services provided, classified by type of services and their price, as well as number of recipients and they to keep the appropriate records. When requested by their business customers in Mexico, non-resident suppliers are required to issue proof of the payment made by these customer to the supplier with explicit and separate reference to the amount of VAT paid (to support these business customers’ claim to input-VAT deduction). In 2021 a measure was introduced that allows tax authorities to temporarily block access to the digital services of the non-resident suppliers that do not comply with some of their VAT obligations. The application of this measure provides prior right to hearing of the affected supplier.
United Kingdom. Foreign suppliers of B2C telecommunication, electronic and broadcasting (TBE) services are liable to account, collect and remit the VAT on those supplies in the UK where the customer is resident in the UK. In addition, where digital services are supplied via an online platform or marketplace, that platform or marketplace is deemed to have received and remade the supply in its own name. Other B2B supplies are subject to a reverse charge mechanism when the customer is a UK business.
European Union. Under the VAT Mini-One-Stop-Shop scheme (MOSS) non-EU suppliers (since 2003) and EU suppliers (since 2015) of cross-border B2C telecommunication, broadcasting and electronic (TBE) services were liable to account, collect and remit the VAT due on those supplies in the Member State where the consumer has its residence under a simplified VAT registration and collection regime. From 1 July 2021, this regime has been extended to all cross-border B2C supplies of services where the place of taxation is within the EU. Under this One Stop Shop scheme (OSS) EU and non-EU businesses that are not established in the Member State of taxation can opt to register and account for the VAT due on those supplies in only one Member State. Whereas EU business have to choose their Member State of establishment, the non-EU business can choose any Member State. This simplification measure avoids the need to register for VAT in all the Member States where the foreign supplier has B2C customers. Digital platforms (“marketplaces”) can be liable to collect, report and remit the VAT due on the B2C supplies they take part in. These platforms can have the possibility to register and account for VAT through the OSS.
Australia. From 1 July 2018, foreign suppliers shipping low-value goods (i.e. with a customs value of AUD 1 000 or less) to consumers in Australia are required to register, collect and remit the GST on those supplies if the volume of such supplies (and any other taxable supplies) exceeds the GST registration threshold of AUD 75 000 per annum. Digital platforms (Electronic Distribution Platforms) and “redeliverers” are liable to collect GST on such supplies made through them. Foreign suppliers/ Electronic Distribution Platforms/redeliverers can register for GST under the simplified “pay-only” registration procedure. B2B supplies follow the same principles as for services and intangibles. The GST is collected by the customs authorities at the border for goods where they are also subject to excise duties (i.e. alcohol and tobacco products) and for goods, including a consignment of goods, with a customs value exceeding AUD 1 000.
Canada. From July 1, 2020, the threshold is CAD 40 for goods that are imported by courier from Mexico or the United States. The threshold is CAD 20 for all other courier and postal importations.
Iceland. This exemption threshold applies only to the importation of goods via "express deliveries". An exemption threshold of ISK 1 500 applies to imports of goods by importers registered for VAT purposes in Iceland.
Israel. The threshold is given in USD in national legislation. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities.
Korea. The threshold is given in USD in national legislation. Postal parcels and express consignments are exempt if their value does not exceed USD 150 and the quantity is such that the customs authorities recognise the goods as for personal use.
Mexico. The threshold is given in USD in national legislation. The threshold of USD 50 applies to imports by the postal service or by courier services.
New Zealand. From 1 December 2019, foreign suppliers shipping low-value goods (i.e. with a value of NZD 1 000 or less) to consumers in New Zealand are required to register, collect and remit the GST on those supplies if the volume of such supplies (and any other taxable supplies) exceeds the GST registration threshold of NZD 60 000 per annum. Digital platforms (online marketplaces and platforms) are liable to collect the GST on such supplies made through them. Foreign suppliers/online marketplaces and platforms can register for GST under the simplified “pay-only” registration scheme. For goods whose value exceeds NZD 1 000 the GST is collected by the customs authorities at the border.
Norway. From 1 April 2020, foreign suppliers of low-value goods (i.e. goods with a value below NOK 3 000) that are imported and delivered to consumers in Norway are required to register, collect and remit the VAT on those supplies in Norway, if the volume of such supplies exceeds the VAT registration threshold of NOK 50 000 per annum (the same threshold as for locally established traders). Foreign suppliers whose volume of relevant supplies exceeds the threshold must register and account for VAT from the first supply. Digital platforms (Marketplaces) are liable for collecting the VAT on such supplies made through them. Foreign suppliers/online marketplaces can register under a simplified “pay only” registration scheme (VOEC). Imports of goods with a value at or above NOK 3 000, foodstuffs, restricted goods, and goods subject to excise duties are outside the scope of the VOEC. These goods will be subject to collection of VAT at the border, along with applicable other duties (such as excise and customs duties).
Switzerland. The importation of goods in Switzerland is exempt from VAT when the amount of the VAT due on such imports is CHF 5 or less per declaration. For ease of comparison, the equivalent threshold under the standard VAT rate is shown in the table above, i.e. CHF 65 x 7.7% VAT = CHF 5. For goods taxed under the reduced rate of 2.5 % (e.g. books) the CHF 5 threshold is reached only for supplies of CHF 200 or above. However, anyone shipping such goods to consumers in Switzerland for an annual value of CHF 100 000 is considered as making taxable supplies of goods in Switzerland and must register, collect and remit the VAT on those supplies.
United Kingdom. From 1 January 2021, the import VAT exemption for goods valued at GBP 15 or less was removed and these goods are now subject to VAT. How VAT is collected on imported goods depends on the value and nature of the consignment. Supplies of goods imported in low value consignments (valued at GBP 135 or less) are now subject to VAT at the point of sale instead of collection at the border.
A seller, or an online marketplace where it facilitates the supply, must be registered for VAT, charge VAT at the point of sale, and account for it through their VAT return.
Where a supply is to a VAT registered business, the seller or online marketplace should not charge VAT, and instead, the customer can account for the VAT through their VAT return.
Consignments valued above GBP 135, as well as consignments of any value containing excise goods or non-commercial goods (e.g. gifts), remain subject to import VAT collection at the border.
European Union. From 1 July 2021, the VAT exemption threshold for the importation of low-value goods was removed and these became subject to VAT. The VAT on supplies of low-value goods (i.e. goods with value below EUR 150) that are imported and delivered to consumers in the EU can be collected in two ways by the supplier or the digital platform (if the supply is facilitated through a digital platform – electronic interface).
The supplier/digital platform can register, collect and remit VAT under a simplified “pay only” registration scheme (The Import One-Stop Shop - IOSS) in the Member State of its choice (this simplification measure avoids the need to register for VAT in all the Member States where low-value goods are delivered to customers). However, only suppliers/digital platforms established within the EU may register directly under that scheme whereas non-EU established suppliers/digital platforms must register through an intermediary established in the EU. As an exception to this rule, suppliers/digital platforms established in a country with which the EU has concluded an agreement on mutual assistance and who are carrying out distance sales of goods from that third country can also register directly. Under this scheme, the supplier/digital platform will charge the VAT directly to the customer at the time of sale and remit it to the tax authorities. No VAT will be collected at the border. There is no registration threshold and suppliers/digital platforms using the IOSS must register and account for VAT from the first supply.
The supplier/digital platform can opt for the standard customs procedure and elect to have the customs declarant (usually the postal operator, courier firm, or a customs agent) collect the import VAT (with possibly clearance fees) from the final consumer at the time of the delivery.
Australia. Electronic transaction information may be required from the taxpayer only when a risk assessment of activities reveals a need for further information. This may be simply a copy of invoices (possibly in .pdf format), other substantiating documents, or an electronic spreadsheet of transactions. It is rare for the Australian Tax Administration to access the actual electronic records within the business system.
Austria. Electronic transaction information: from 2000, there is an obligation to provide transaction data on data carriers at the request of tax authorities (in the course of an audit). From 2009 data transmission under the SAF-T format is allowed. As from 1 January 2020, a special reporting obligation applies to platforms, in respect of goods and services of other suppliers facilitated by the platform. Electronic cash registers: the use of electronic cash registers is mandatory for taxpayers with a net annual turnover of EUR 15 000 or more, provided that the cash turnover exceeds EUR 7 500 per year. The applicable annual turnover is of EUR 30 000 for businesses in the following areas: outdoor sales; sales of alpine – mountain ski and refuge hunts; sales in specific kinds of wine taverns (“Buschenschank”); sales in canteens of non-profit organisations. General exemption from the cash register obligation applies to non-profit organisations, charitable and ecclesiastic bodies; self-service automates with single sales of less than EUR 20.
Belgium. Electronic cash registers: the obligation to issue cash receipts delivered by a cash registered system (CRS) is imposed on taxpayers supplying meals or catering services on a regular basis when their annual turnover, excluding VAT, related to the restaurant and catering services, exclusive of the supply of drinks, exceeds EUR 25 000. If the threshold is exceeded, CRS cash receipts must be issued for all their supplies relating to the provision of meals and drinks (supplied during the meal or not), including all sales of food and drinks.
Chile. Electronic invoicing for B2B and B2G is allowed since 2003 on a voluntary basis. It became mandatory since 2014 for large taxpayers, since 2016-2017 for medium taxpayers and since 2018 for small taxpayers. The electronic invoicing scheme requires taxpayers to provide B2B transaction information electronically to tax authorities. In 2017, this requirement was extended to the provision of other accounting data to an electronic record kept by the tax authority. Transaction data must be transmitted to tax authorities in near-real time. Invoicing data must be cleared by tax authorities to be considered as a valid supporting document (incl. for the right to deduct input VAT). Effective from 1 April 2021, an amendment to the VAT Act introduced the obligation to issue B2C invoices electronically. These invoices should be sent through any electronic method (e.g. email) provided that it is accessible to the consumer and the business. Exceptions to the electronic invoicing obligations may apply for taxpayers located in zones where no internet connection or energy supply exist, with prior authorization by the tax authority. Electronic cash registers are not allowed.
Colombia. The obligation to use electronic invoicing and to provide B2B transaction information electronically to tax authorities (DIAN) started in 2019. Transaction data must be transmitted in XML format to tax authorities in real time. Until mid-2019, the reporting model required taxpayers to submit invoices to DIAN within 24 hours for their issuance. Since then, the taxpayer must submit the e-invoice in XML format for prior validation by DIAN. Until this is granted, which is done live, the e-invoice is not considered as a valid accounting document (incl. for the right to deduct input VAT).
Costa Rica. The obligation to use electronic invoicing and to provide B2B transaction information electronically to tax authorities started in 2017. Transaction data must be transmitted in XML format to tax authorities in real time. Invoicing data must be cleared by tax authorities to be considered as a valid accounting document (incl. for the right to deduct input VAT). In this system, the tax administration performs basic validation checks and issues an acceptance confirmation within three hours to the taxpayer. This ensures the document has full tax status, and may be used as evidence for VAT deductions. In the case of a rejection, the supplier must issue a credit note to reissue a corrected invoice. This obligation is imposed on all taxpayers.
Czech Republic. Taxable persons registered for VAT are obliged to submit a “VAT Control Statement” from 1 January 2016 onwards. It contains data from records that taxable persons are already obliged to keep for VAT purposes (incl. invoices). The VAT Control Statement has to be submitted electronically.
Denmark. Legislation has been passed to require taxpayers to use electronic cash registers when they belong to a category considered at risk. The implementation date is still to be decided.
Estonia. Transaction data must be systematically transmitted to the tax authority at the time the VAT return is lodged for all transactions above EUR 1000 per business partner (below the threshold, transactions data can be reported as an aggregate amount). Reporting format: X-road by sending a VAT return directly from the business software; in online self-service environment using formats XML, CSV.
France. Electronic invoicing is not mandatory, except for B2G supplies. However, mandatory electronic invoicing and e-reporting system will be introduced in stages as follows: the obligation to issue invoices in electronic format and the obligation to transmit payment information and data through a platform accredited by the tax administration will enter into effect as of 1 July 2024 for large businesses; as of 1 January 2025 for medium-sized businesses and 1 January 2026 for all businesses. The obligation to accept invoices in electronic format will enter into effect as of 1 July 2024 for all businesses, regardless of their size, as soon as their supplier is obliged to issue invoices in electronic format. Electronic transaction information: taxpayers keeping electronic accounts must provide them in the form of digital files upon request by the tax administration for control purposes (these files should meet specific standards). Electronic cash registers: VAT registered taxpayers making sales to final consumers, which record payments using electronic cash registers must use certified software meeting several technical conditions (inalterability, security, preservation) for tax control purposes. However, the use of electronic cash registers is not mandatory.
Greece. Electronic invoicing is not mandatory. Transaction data: as of 1 October 2021, businesses established in Greece subject to the Greek Accounting Standards and making supplies to other businesses/consumers/government entities are required to submit their transaction data (sales and purchases) to an online platform called myDATA (my Digital Accounting & Tax Application). All entities subject to these provisions must digitally transmit to myDATA: (1) a summary of issued and received sales documents (invoices, retail receipts etc.); (2) the characterisation of the transactions covered by these sales documents classifying them to revenue and expenses categories; (3) data of the additional adjustment accounting entries (e.g. payroll, depreciation) that form their accounting/tax base for the export of the accounting/tax result of each fiscal year. Such data can be transmitted through: an interoperable accounting/commercial software; a special Data Entry Form developed by IAPR; connected Electronic Tax Register Machines (ETRMs) for retail sale transactions (Online Cash Registers, OCR); or Electronic Invoicing through Licensed Providers or through an application named “timologio” developed by IAPR for issuance and transmission of accounting documents (invoices, retail receipts). These submissions are different from VAT returns but allow tax authorities to cross-reference the VAT return and myDATA information. If the information does not match up, businesses have two months to correct or justify any discrepancies. If they fail to do so, they can be subject to an audit. Electronic cash registers (“tax machines”) are mandatory for retail sales, except for business categories listed by the tax administration regulation (e.g. solicitors, accountants, farmers, etc.).
Hungary. Invoicing information: invoices emitted by an invoicing programme must be transmitted to the tax authorities at the same time the invoice is emitted by the taxpayer (real time reporting). Information on ‘paper invoices’ must be provided to the tax authorities within one day (if the value of VAT figuring in the invoice exceeds HUF 500 000) or within 4 days (in other cases). The customer who wishes to deduct VAT has certain reporting obligations too. Further reporting obligations apply for the modification or cancellation of invoices as well. These reporting rules concerning emitted invoices apply to invoices which fall under the Hungarian invoicing rules according to EU-rules, B2B/B2C supplies and exempt Intra-Community supplies of goods included.
Israel. Transaction data transmission: taxpayers (“licenced dealers”) whose turnover exceeds ILS 2 500 000 or that are obliged to implement the double-entry bookkeeping system; or those whose turnover exceed ILS 1 500 000 and are required by law to prepare balance sheets and to appoint an auditor; must transmit invoicing information every month (i.e. by the 23rd of the following month) to the tax administration under a prescribed format (PCN874). Certified electronic cash registers: the obligation to use certified electronic cash registers is imposed on/available to certain taxpayers depending on their activity and turnover. For example, all retailers must use certified electronic cash registers (no threshold applies but under ILS 350 000 annual turnover, the retailer can choose to use sales book instead). Wholesalers with turnover up to ILS 10 100 000 can use certified electronic cash registers as an option for cash transaction up to ILS 710 instead of invoices. Transportation service providers can use certified electronic cash registers (no threshold). For other services, electronic cash registers can be used (no threshold); if a transaction is recorded with a receipt, the receipt replaces the electronic cash registers.
Italy. Transaction data transmission: all VAT-registered businesses established in Italy are obliged to accept and issue invoices in electronic format through the Italian Revenue Agency’s e-invoicing platform, Sistema di Interscambio (SdI) for the operations that take place in the Italian territory. The invoice file can also be submitted by the customer or a third party on behalf of the supplier. The invoice must be issued at the latest 12 days after the execution of the supply. From 1 July 2022, businesses subject to the exemption under the small enterprises regime with more than EUR 25 000 in annual turnover are obliged to accept and issue invoices in electronic format. From 1 January 2024, this obligation will be extended to all the remaining businesses subject to the exemption under the small enterprises regime, regardless of their turnover. Businesses established in Italy providing or purchasing supplies to/from businesses established abroad must provide the Revenue Agency with transaction data on such transactions by the end of the month following the reference quarter. Starting from 1 July 2022, these businesses must transmit data to the Revenue Agency at the same time the invoice is emitted (real time invoice reporting) for active transactions or by the fifteenth day of the month following that of receipt of the document proving the transaction or execution of the transaction for passive transactions. For B2C supplies (i.e. businesses engaged in the retail trade and similar activities), the issuance of the invoice is not mandatory. However, if the customer requests an invoice no later than at the time of the supply, it should be issued in electronic format. Electronic cash registers: from 1 January 2020, all retailers are subject to the obligation to transmit daily their sales records electronically to the Revenue Agency through electronic cash registers or through a web application offered free of charge by the Revenue Agency. Retailers must also issue a receipt to the customer but this document has only commercial value: the fiscal certification of the supply is given by the storage of data in the cash register and the daily transmission of data to the Revenue Agency.
Korea. Transaction data transmission: all business operators and individual businesses whose total value of supplies of goods and services for the immediately preceding taxable year is at least KRW 300 million are required to issue electronic invoices under a prescribed format for all B2B supplies. The tax administration must have a direct automated access to invoicing information (only) 1 day after the invoice is emitted through the Electronic Tax Invoicing System. The invoicing information must be available to the tax administration for clearance before it can be considered as a valid accounting document, including as supporting evidence for the deduction of input VAT. Electronic cash receipts: individual businesses that supply goods or services mainly to final consumers must issue electronic cash receipts and transaction data must be transmitted daily to the tax authority.
Latvia. Transaction data transmission: if a taxpayer maintains accounting registers in electronic form, it must, at the request of the tax administration, provide access to any information related to its economic activities, stored in electronic form. The accounting computer programme shall ensure the recording of accounting data in such formats: MS Excel, dBase/FoxPro, Text Report files, Flat files, Excel, Access, PDF, Adobe PDF, XML or ODBC data sources. Electronic cash receipts: in street trading venues, taxpayers are required to use a cash register stipulated by law if the combined value of its supplies of goods and services does reach EUR 150 000 within the period of previous 12 months. For passenger transport activities, taxpayers are required to use cash register systems stipulated by law if the combined value of transactions performed in a particular structural unit or passenger transport vehicle exceeds EUR 1 500 000 during the period of previous 12 months. The use a cash register stipulated by law is mandatory for taxpayers registered with the Value Added Tax Payers Register of the State Revenue Service, petrol stations and taxi firms.
Luxembourg. The transaction information transmission obligation was implemented for the fiscal year 2011. The requirement to make transaction information available to the tax administration under the SAF-T format is not imposed on taxpayers who are not liable to the plan comptable normalisé (standardised chart account); or who benefit from the simplified regime; or whose turnover is below EUR 112 000; or having no reasonable volume of booking transactions (under +/- 500).
Mexico. Electronic invoicing is mandatory since 1 January 2014. The transmission of transaction data to the tax authority is mandatory since 1 January 2015. Invoicing information must be transmitted to the tax authorities at the time the invoice is emitted (real time transmission) through a government-approved e-invoicing company (PAC) to validate and stamp invoices as they are issued. Invoices must be validated through the system to be considered as a valid accounting document (incl. for the right to deduct input VAT). The PAC also provides secure storage and retrievable for invoices. This obligation applies to all taxpayers and covers the domestic supplies of goods and services for both B2B and B2C transactions. Periodic transmission of transaction information is also imposed to all taxpayers. Federative entities, municipalities, trade unions and entities of the parastatal public administration; certain small taxpayers and non-profit legal persons are relieved from that obligation.
Norway. Transaction data transmission: the Norwegian Bookkeeping Regulation includes a requirement to disclose accounting data in the SAF-T format for all businesses with annual turnover of NOK 5 million or more. This requirement also applies to businesses with an annual turnover of less than NOK 5 million if they have bookkeeping information available electronically. The companies subject to bookkeeping obligations are only obliged to submit accounting information in SAF-T format on request by the tax authorities. Electronic Cash registers: from 1 January 2017, cash register systems must meet the requirements laid down in the Norwegian Cash Register Systems Act and regulations. Suppliers must declare the systems to be in compliance with the new rules. Companies subject to a bookkeeping obligation must start using new cash register systems from 1 January 2019.
Poland. E-invoicing: since the 1 January 2022, e-invoices are allowed but not obligatory. Transaction data provision: taxable persons must provide transaction data to the tax authorities under the SAF-T format on a monthly basis for JPK_V7M and JPK_V7K; other JPKs (SAT-Ts) are submitted upon request and may cover periods other than one month. The obligation to report transactions was introduced in stages: on 1 July 2016 for large entrepreneurs, on 1 January 2017 for medium-sized and on 1 January 2018 for micro-entrepreneurs. Taxable persons carrying out only supplies exempt from VAT or those benefiting from the VAT exemption for the small enterprises whose annual turnover does not exceed PLN 200 000 (the registration threshold), are exempt from this obligation. The tax authority can also obtain electronic transaction information on request from taxpayers who keep accounting books using computer programs. This obligation also applies to stock movement, invoicing and bank statement programs. As of 1 October 2020 the SAF-T contains new fields to include VAT return data previously submitted in different separate files. Reporting format: Poland has applied its own solutions (JPK_V7M and JPK_V7K) as regards the SAF-T schema. Electronic cash registers: taxable persons whose annual turnover on B2C supplies, exclusive of VAT, does not in the current tax year exceed PLN 20 000 nor in the course of the preceding tax year are exempt from the obligation to use certified electronic cash registers (the exemption does not apply to certain categories of goods /services). Are also exempt, certain categories of supplies such as when an invoice is emitted and/or the payment is made by bank transfer. Online cash registers have been gradually introduced for industries recognised as particularly vulnerable to fraud and non-compliance: for fuel suppliers, car repair services as of 1 January 2020; restaurants and catering services, supplies of coal, short-term accommodation services as of 1 January 2021; hair and beauty salons, construction services, private medical practice, legal services, fitness clubs and gyms as of 1 July 2021. Cash registers in the form of software (the so called virtual cash registers) are a type of online cash registers not requiring hardware equipment or any external devices. They are available for taxpayers conducting activity in specified sectors (e.g. transportation).
Portugal. Transaction data transmission: taxpayers with a permanent establishment in Portugal providing supplies subject to VAT must systematically (at the latest 12 days after the end of each month) transmit invoicing data to the tax administration. This can be done in real time (via web-service) or on a monthly basis through a structured file based on the SAF-T format or by filing it directly in the Tax Authority Web portal. The tax administration can request a SAF-T file for audit purposes, which includes accounting and invoicing data. Taxpayers with a turnover above EUR 50 000 during the previous taxation period are required to use, exclusively, computer invoicing programs previously certified by the Tax and Customs Authority (AT). Common Simplified Report (IES): accounting and financial reporting information to different government bodies is provided through one single common declaration. Electronic cash registers: the use of certified ECR it’s not mandatory but given the obligation to issue an invoice for any transaction and the obligation for taxpayers to use certified invoicing programs, most taxpayers use certified invoicing software instead of electronic cash registers.
Slovak Republic. Transaction data provision: all taxable persons registered for VAT purposes in the Slovak Republic are obliged to submit a special VAT Control Statement, together with their VAT returns to the Financial Administration (FA). VAT listings are submitted separately and are not dependant on the VAT return. Some crosschecking between VAT listings and VAT returns are built into the analytical system. Electronic cash registers: the use of certified cash registers is mandatory for all suppliers that receive payments in cash or by other payment methods replacing cash at the point of sale and those providing sole services listed in the law. Data from these electronic cash registers must be transmitted to the tax authorities in real time.
Spain. Transaction data provision: taxpayers registered in the monthly VAT refund register, those whose annual turnover exceed EUR 6 million and company groups for VAT purposes are required to provide the tax administration with invoicing data in XML format within four calendar days after the invoice is issued or received (Immediate Supply of Information – SII). Any other taxpayer can, on a voluntary basis, also provide the tax administration with invoicing data in the same format and within the same period. Information on investment goods should also be provided within the submission deadline of the last settlement period of the year.
Sweden. Electronic cash registers: the use of certified electronic cash registers is mandatory for taxpayers above the annual turnover threshold of SEK 182 000. It is not imposed on certain taxpayers such as taxi drivers and sales from vending machines. Taxpayers can apply for an exemption of the obligation to use certified electronic cash registers.
Switzerland. Transaction data provision: the tax administration cannot require a registered VAT taxpayer to provide invoicing data in electronic format. The taxpayer is allowed to provide only the paper invoices. Electronic cash registers: where the taxpayer opts for an electronic cash register, data on individual transactions must be transmitted to the tax administration on request or during an audit.
Türkiye. From 1 January 2020, paper invoices are no longer legally valid. All invoices must be sent under electronic format via the e-archive invoice system. Every time an electronic invoice is issued, the recipient receives a notification by email. All businesses must file a daily statement with a summary list with all the e-archive invoice and send it to the tax administration.
United Kingdom. Under the Making Tax Digital initiative, VAT registered businesses with taxable turnover above the VAT registration threshold need to keep digital records and submit VAT Returns to HMRC using functional compatible software.
Note
← 1. OECD. Tax policy responses to COVID-19; table with measures taken by countries, http://www.oecd.org/tax/covid-19-tax-policy-and-other-measures.xlsm.