4. Compliance risk and enforcement measures to support VAT/GST policy and administration responses to the sharing/gig economy
This chapter provides a high-level overview of a number of compliance risk management and enforcement strategies that tax authorities may wish to consider as part of their overall VAT/GST strategy for the sharing/gig economy. It discusses the role of risk-based compliance management and of data collection and exchange; the importance of inter-agency cooperation and of the international cooperation between tax authorities; and the design of a sanctions policy that imposes real consequences of non-compliance for non-compliant actors.
Chapters 2 and 3 of this report present an overall approach for the design of a jurisdiction’s VAT/GST strategy for the sharing/gig economy and a range of policy options for tax authorities to consider in implementing such a strategy, taking into account their specific national circumstances and key policy motivations. This chapter complements that analysis with a high-level overview of a number of compliance risk management and enforcement strategies that tax authorities may wish to consider as part of their overall VAT/GST strategy for the sharing/gig economy.
These strategies will need to be embedded in jurisdictions’ overall compliance and enforcement strategies, notably to ensure an even VAT/GST playing field between the sharing/gig economy and competing sectors in the traditional and broader platform economy. Such a broad approach to VAT/GST compliance and enforcement will also be necessary to avoid sharing/gig economy providers and other actors adjusting their activities or mode of operation to avoid VAT/GST obligations (i.e. ensure a “no place to hide” approach).
This chapter first discusses the role of risk-based compliance management in VAT/GST strategies for the sharing/gig economy and the critical role of data collection and exchange in this context. It then discusses the importance of inter-agency cooperation and of the international cooperation between tax authorities. It concludes with a brief discussion on the design of a sanctions policy that imposes real consequences of non-compliance for non-compliant actors.
4.1.1. Risk-based compliance management
Management of VAT/GST compliance in the sharing/gig economy will almost inevitably need to rely on a risk-based management approach. The number of actors involved in the sharing/gig economy make a case-by-case handling practically impossible. Such a risk-based approach will need to rely on effective risk profiling of the various sharing/gig economy actors, based on risk indices notably indicating the possible revenue risk involved, the possible impact on the integrity of the tax system and the likelihood of the risk materialising. These risk indicators and the associated risk profiling may need to be adjusted according to the sector of the sharing/gig economy and in light of the jurisdiction’s VAT/GST policy strategy. It is reasonable to expect that tax authorities’ may wish to focus their efforts first on the sectors/types of supplies of the sharing/gig economy that require the most immediate VAT/GST policy attention given their impact on VAT/GST revenue and/or the impact of an uneven VAT/GST treatment on competitive neutrality.
The implementation of such a risk-based compliance management strategy will need to be based on the efficient collection of data on the relevant sharing/gig economy sector(s) and robust data analytics. In light of the heavy reliance of the sharing/gig economy on technology and on digital data to carry out their commercial activities, the use of technology by tax authorities to collect data from sharing/gig economy actors (including via information sharing roles for digital platforms) is likely to boost their risk-based compliance management capacity. The use of information technology to collect VAT/GST relevant data by tax authorities is notably discussed in section 3.2.5 of this report.
Financial information elements will necessarily play an important role in tax authorities’ risk-based VAT/GST compliance strategy for the sharing/gig economy. The financial flows reflect the actual transactions carried out and efficient risk analysis and tax auditing in a highly automated and digitalised industry such as the sharing/gig economy will highly depend on the automated cross-checking of information, including financial flows. It will thus be important for tax administrations to have access to financial information for the efficient management of VAT/GST compliance in the sharing/gig economy. Section 3.2.6 of this report discusses the possible introduction of reporting obligations on financial intermediaries in the sharing/gig economy, which could serve to support tax authorities’ risk-based compliance management approaches in addition to facilitating overall compliance and administration.
Information held by tax authorities for other tax purposes than VAT/GST as well by other national agencies (see section 4.1.2 below) could also be of potential use. In particular, the information collected and exchanged under the OECD Model Reporting Rules (discussed under section 3.3.4. of this report) is likely to present considerable opportunities for VAT/GST risk identification and management (OECD, 2020[1]). Targeted audit and monitoring activities, such as mystery shopping by the tax administration on specific platforms, can further enhance the effectiveness of tax authorities VAT/GST compliance strategies.
The OECD’s Forum on Tax Administration has produced a series of guidance material and reports1 for tax authorities to draw on in implementing risk analysis solutions which are based on practical experience in countries.
These approaches may enable national administration to adopt a targeted and proactive rather than a reactive response to compliance risks in combination with an overall strategy that facilitates VAT/GST compliance for legitimate sharing/gig economy operators.
4.1.2. Co-operation and information exchange amongst domestic agencies
To increase the efficiency of their systems in analysing considerable amounts of data from different sources, tax authorities could consider implementing measures to facilitate co-operation and information exchange amongst domestic public agencies. These could notably include social security authorities, property registers, road traffic authorities, financial intelligence units etc. These data can be of considerable use for a tax authority to identify unregistered digital economy business activity. For example, data held by a financial intelligence unit to counter anti-money laundering and counter-terrorism financing has already been useful in certain jurisdictions for the detecting of non-compliance in the sharing/gig economy by allowing the tax administration to trace funds flowing to non-compliant sharing/gig economy actors (e.g. drivers and lessors of properties) from overseas banks to local banks from where they are distributed. In jurisdictions that apply a registration requirement for properties that are offered for vacation rental, these registration data can also be useful for tax authorities.
4.1.3. Imposing real consequences on non-compliant actors
To safeguard the level playing field with compliant operators, tax authorities may wish to complement their VAT/GST compliance strategy with a well-balanced sanctions policy that imposes real consequences of non-compliance for non-compliant actors (residents and non-residents). Such real consequences could involve, depending on the case, the publication of lists of non-compliant actors (a “naming and shaming” approach); deterring interaction by platforms and/or uses with non-compliant actors; imposing proportionate monetary penalties; using payment service providers and other financial intermediaries as a backstop to deal with no compliance, notably by blocking payments on accounts belonging to non-compliant sharing/gig economy actors.
As a last resort, jurisdictions may consider the possibility of implementing stricter sanctions such as blocking access to platforms or applications deployed by non-compliant actors. This may be considered as the ultimate resource of reaction when all other compliance tools have been exhausted. Tax authorities will need to ensure that such an intrusive measure is permissible from a broader legal and regulatory perspective, including in a jurisdiction’s trade and broader international context, and consult with Internet service providers on the technical and operation aspects. While experience shows that non-compliant actors may find ways to circumvent such a measure by using alternative internet domains, the public announcement of a sharing/gig economy website blocking by a jurisdiction’s authorities may serve as a deterrent for users.
Overall, tax authorities will need to ensure that a sanctions policy for VAT/GST non-compliance in the sharing/gig economy is properly balanced and proportionate, notably by allowing sufficient time for non-compliance to be addressed and by safeguarding the possibility to appeal against a sanction.
The enforcement of sanctions against non-resident actors is likely to require the appropriate international administrative cooperation. This is discussed in the next section below.
4.1.4. Leverage the international administrative cooperation
The importance of the exchange of information and other forms of international administrative co-operation for jurisdictions’ VAT/GST compliance strategies targeted at the sharing/gig economy has been highlighted throughout this report. The need for international cooperation between tax authorities can notably be expected as sharing/gig economy platforms may often have no physical presence in the jurisdiction of taxation and this may also be the case for the underlying providers in a number of sectors as this economy continues to evolve (e.g. in cooperative finance). This section outlines a number of possible tools that may serve as a basis for such international administrative cooperation.
The International VAT/GST Guidelines present the existing tools available to tax authorities for both multilateral and bilateral co-operation (OECD, 2017[2]). They point to the possibilities for multilateral co-operation through the Multilateral Convention on Mutual Assistance in Tax Matters2 which was developed jointly by the OECD and the Council of Europe in 1988 and amended by Protocol in 2010. This Convention and Protocol are in principle applicable also to VAT/GST and provide for a wide range of forms of administrative co-operation between the parties in the assessment and collection of taxes, in particular with a view to combatting tax evasion and avoidance. This is particularly relevant as notably platforms facilitating sharing/gig economy supplies can increasingly access markets in other jurisdictions without having a physical presence thereat. This can also be relevant for sharing/gig economy providers of services remotely from another jurisdiction.
The International VAT/GST Guidelines (OECD, 2017[2]) also highlight the possibilities of bilateral co-operation, in particular through the exchange of information provisions of Article 26 of the OECD Model Tax Convention (MTC) (OECD, 2017[3]). This may offer an appropriate basis for the exchange of information between tax authorities both in individual cases and in broader classes of cases in respect of VAT/GST. Bilateral tax treaties may thus provide a possible mechanism for enhanced co-operation and development of solutions to common problems. In this context, the International VAT/GST Guidelines also point to the possibilities offered by the OECD Model Agreement on Exchange of Information.3
The OECD Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy is the most recent tool that has become available to tax authorities to support the exchange of information specifically targeted at the sharing/gig economy (OECD, 2020[1]). Section 3.2.4 of this report discusses how the information exchanged under this instrument can contribute to jurisdictions VAT/GST compliance strategies in respect of the sharing/gig economy. Tax authorities are strongly encouraged to use these Model Reporting Rules as a basis for their information collection and exchange policies, notably to ensure international consistency and minimize risks of duplication in reporting requirements (OECD, 2020[1]). This will notably be important to facilitate compliance by sharing/gig economy platforms that are likely to face reporting obligations in multiple jurisdictions.
Overall, the exchange of information is likely to be a priority for the international administrative cooperation in respect VAT/GST compliance in the sharing/gig economy, notably to allow the parties involved in sharing/gig economy activity to be identified, to monitor volumes and values of transactions, to assess the VAT/GST liabilities involved and compliance with the obligations to report and remit the proper amounts of VAT/GST on these transactions. Assistance in recovery of taxes may be necessary in certain case as well a proper mechanism to resolve disputes, as appropriate.
References
[1] OECD (2020), Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy, OECD , Paris, https://www.oecd.org/tax/exchange-of-tax-information/model-rules-for-reporting-by-platform-operators-with-respect-to-sellers-in-the-sharing-and-gig-economy.htm (accessed on 25 February 2021).
[2] OECD (2017), International VAT/GST Guidelines, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264271401-en.
[3] OECD (2017), Model Tax Convention on Income and on Capital: Condensed Version 2017, OECD Publishing, Paris, https://dx.doi.org/10.1787/mtc_cond-2017-en.
Notes
← 1. Please see more on a series of guidance material and reports by the OECD’s Forum on Tax Administration available at http://www.oecd.org/tax/forum-on-tax-administration/publications-and-products/.
← 2. Please see further information on the Convention on the dedicated webpage: https://www.oecd.org/tax/exchange-of-tax-information/convention-on-mutual-administrative-assistance-in-tax-matters.
← 3. The OECD Model Agreement on Exchange of Information is available at http://www.oecd.org/ctp/exchange-of-tax-information/2082215.pdf.