Chapter 4. Supporting measures for efficient and effective collection of VAT/GST on online sales
This chapter examines supporting measures for the efficient and effective collection of VAT/GST on online sales beyond measures specifically targeted at digital platforms. This chapter examines the possibilities of joint and several liability as a means to encourage compliance and co-operation; and possible measures to support compliance in respect of supplies made via so-called “fulfilment houses”. It also recalls the need for measures to facilitate compliance for online suppliers that do not sell through a digital platform (“direct sellers”); and considers the importance of co-operation and information sharing between tax and customs authorities at domestic level, as well as of the international exchange of information and administrative co-operation at trans-national level, notably to support compliance through risk analysis.
4.1. Introduction
Chapters 2 and 3 focused on the potential roles and obligations for digital platforms in the VAT/GST collection process. This chapter considers a range of other measures that tax authorities can take to maximise VAT/GST compliance in respect of online sales. It acknowledges that VAT/GST enforcement and controls do not just relate to supplies via digital platforms, but also need to address enforcement more generally as part of an overall compliance strategy to secure the proper VAT/GST collection on online sales. Further, less than efficient collection creates an un-level playing field for business and platforms that are willing to comply with their obligations. The lack of a level playing field can harm traditional bricks and mortar businesses, domestic online businesses, compliant platforms and indeed suppliers outside the jurisdiction.
Tax authorities are therefore encouraged to give due consideration to the VAT/GST compliance role and obligations of the broad range of other actors in online trade, beyond digital platforms. Taking such a broader perspective is important for effective collection as there would be revenue risks for countries if underlying suppliers could identify opportunities to avoid VAT/GST obligations by selling directly to consumers (without using a digital platform that is subject to VAT/GST obligations), or through non-compliant platforms or by supplying via fulfilment houses.
This chapter examines the possibilities of joint and several liability as a means to encourage compliance and co-operation; possible measures to support compliance in respect of supplies made via so-called “fulfilment houses”. It also recalls the need for measures to facilitate compliance for suppliers that do not sell through a digital platform (“direct sellers”); and considers the importance of co-operation and information sharing between authorities at domestic level, as well as of the international exchange of information and administrative co-operation at trans-national level to support compliance through risk analysis.
4.2. Joint and several liability
4.2.1. Overview
Jurisdictions may wish to consider introducing joint and several liability (JSL) provisions in legislation as a means to help to support compliance for the collection of VAT/GST on online sales. These provisions may apply to digital platforms in cases where a platform has no liability for the VAT/GST on online sales that were carried out through its platform.
JSL is generally not considered to be a primary tool in securing the collection of VAT/GST on online sales, as either a platform or an underlying supplier will have statutory liability for the VAT/GST. However, such a provision can be useful as a tool to support tax authorities in cases of non-compliance and indeed can deter non-compliant behaviour.
This section which outlines how JSL can work in practice draws on the experience of countries who have introduced such provisions. Indeed, recent experience suggests that JSL can offer a strong incentive for digital platforms to ensure that the underlying suppliers using the platform are compliant insofar as their VAT/GST obligations. Furthermore, this section highlights the desirability of avoiding disproportionate burdens on digital platforms in the application of such a regime, including in respect of the due diligence a platform needs to apply and therefore endeavours to ensure fairness.
4.2.2. Practical application of joint and several liability provisions to digital platforms
JSL could be imposed on digital platforms in cases where the platform has no statutory VAT/GST liability for the supplies carried out by its underlying suppliers, i.e. where the underlying supplier is liable for the VAT/GST on the supplies made via this platform. If the underlying supplier is not compliant, the JSL provision provides the possibility to the tax authorities to declare the digital platform jointly and severally liable for this VAT/GST.
Based on experience in countries applying such provisions, there are two broad variations in applying JSL which can be designed to work in tandem:
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Under variation 1, the digital platform is held jointly and severally liable for the future undeclared VAT/GST of the underlying suppliers, once the tax authority had spotted cases of non-compliance, has reported these cases to the digital platform and the latter did not take appropriate action within a specified number of days. Such action by the digital platform typically consists of securing compliance from the underlying supplier or removing the supplier from its platform;
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Under variation 2, the digital platform may be held jointly and severally liable for the past undeclared VAT/GST of underlying suppliers when the digital platform should have had a reasonable expectation1 based on the underlying supplier’s activities on the platform that the supplier should be registered for VAT/GST but has not.
Neither variation puts primary liability on the digital platforms but both can assist a jurisdiction in its enforcement efforts.
4.2.3. Description of Variation 1 – Forward looking
Under this variation, the tax authority notifies a digital platform that underlying suppliers on this platform have been detected as being non-compliant. According to this pre-notice by the tax authority, the digital platform has a specific number of days to take appropriate action to secure the VAT/GST on the sales made by the non-compliant supplier. Such action typically requires the platform to ensure: (i) that the non-compliant supplier complies with its VAT/GST obligations in line with the notice from the tax authority; or (ii) that the non-compliant supplier is removed from the platform. If the digital platform fails to take the appropriate action within this period, the tax authorities can decide to consider the platform as jointly and severally liable for the VAT/GST on any future sales made by the non-compliant underlying supplier.
One complexity may result from non-compliant suppliers (individuals or legal entities) selling online under multiple seller identities. Where a tax authority is aware of such a scenario, it will need to notify the digital platform of all the identities that belong to the same supplier for the JSL provision to be truly effective. If a non-compliant supplier appears on multiple digital platforms, all platforms will need to be notified.
This variation typically does not require the tax authority to prove fraudulent behaviour by the underlying supplier or the digital’s platform ‘knowledge’ of this behaviour. But the pre-notice phase under this variation would typically allow a well-intentioned supplier to have time to comply and rectify issues.
4.2.4. Description of Variation 2 – Focus on past liability
This variation allows a tax authority to make a digital platform liable in respect of past sales of a non-compliant underlying supplier, if the platform should have had a reasonable expectation based on the underlying supplier’s activities on the platform that the supplier should be registered for VAT/GST but has not. In effect, this variation of joint and several liability model puts an onus on digital platforms to carry out due diligence (know-your-customer checks) on underlying suppliers by requesting VAT/GST registration numbers and carrying out checks to ensure these numbers are valid.
The digital platform can avoid being held jointly and severally liable if it takes mitigating steps such as blocking the supplier from its platform and/or notifying the relevant tax authority in cases where due diligence indicates that the underlying supplier is not VAT/GST registered in the taxing jurisdiction or is engaging in suspicious behaviour.
Under this variation, there is an onus on the digital platform to self-police the VAT/GST registration numbers of underlying suppliers to avoid the risk of joint and several liability for VAT/GST on past sales by non-compliant underlying suppliers. This requires, however, that the digital platform has the legal and practical means to check whether a supplier is displaying a valid VAT/GST number associated with its business name (e.g. that taxpayer confidentiality rules do not limit the digital platform’s capability of checking the validity of underlying suppliers’ VAT/GST registration numbers in the taxing jurisdiction; available electronic data or similar means to check VAT/GST registration numbers).
4.2.5. Implementation considerations for joint and several liability
The following considerations can be taken into account in respect of applying JSL:
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JSL regimes do not impose primary legal responsibility for collecting the VAT/GST on digital platforms but can assist a jurisdiction in its enforcement efforts and, in particular, provide a fast mechanism to enforce compliance on non-compliant suppliers and/or to block non-compliant suppliers (see Variation 1). In this context, it is useful to note that a “forward looking” JSL provision (Variation 1) can in principle be implemented without the requirement for the tax authority to prove that the digital platform knew that an underlying supplier was not compliant with their VAT/GST obligations. This is different from Variation 2, where such proof will typically be required to justify the platform’s joint and several liability for unpaid VAT/GST in respect of past sales;
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Under Variation 2, a platform can protect itself from potential JSL by applying due diligence on the underlying suppliers. Such checks may also apply in respect of intellectual property rights and legal provisions in the destination jurisdiction e.g. prescription drugs;
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JSL builds on the assumption that it is in the interest of platforms as well, to ensure a level playing field for all of their sellers and remove ‘bad actors’ from their sites, incl. from a reputational viewpoint. It should also be in the platforms’ interests to help their suppliers to be fully compliant with their VAT/GST liabilities so that they are able to continue to trade on their platforms;
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If a tax authority chooses to implement this measure, it is important to make sure to enforce it across the e-commerce market as a whole so as to avoid non-compliant sellers simply continuing supplies on other platforms;
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It is also important for a tax authority when applying JSL to avoid disproportionate requirements on platforms and include clear criteria to ensure legal certainty;
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The application of JSL may be particularly effective in cases of supplies of goods being warehoused in the taxing jurisdiction where tax authorities have access to information through local fulfilment houses and the ability to seize goods;
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For the operation of Variation 2, tax authorities will need to ensure that digital platforms have access to updated lists of VAT/GST identification numbers associated with taxpayers so as to be able to validate a specific VAT/GST number provided by an underlying supplier;
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It is recognised that JSL regimes require the tax authority to first detect non-compliance, contrary to for instance a full VAT/GST liability regime, which may require significant administrative effort and/or may be beyond its current capacity;
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There are risks that non-compliant online suppliers can circumvent the rules by simply re-registering with the platform using a different identity or legal entity. It can be argued, however, that commercial factors could mitigate this risk given that the underlying suppliers are removed from the platform, and therefore lose their feedback history and customer rating, which can be critical for the confidence of an end consumer purchasing from a supplier. This may be disruptive to their business and thus provide a strong incentive to comply;
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Application of JSL needs to be supported by clear communication with the platforms to ensure that there is full clarity on the application of such a provision, and the steps that a platform can take to ensure it does not become liable;
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The specific time compliance window provided under both variations should take into account the period required for a well-intentioned supplier to comply.
4.3. Monitoring supplies made via fulfilment houses
Fulfilment houses play an increasingly important role in facilitating online trade, prompting the need for further assessment of the scale of the fulfilment house industry, the associated VAT/GST compliance risks and of the need and/or opportunity for targeted measures.
Fulfilment houses are third-party warehouses responsible for handling goods on behalf of foreign suppliers. These are now commonly used by business for the distribution of their products (i.e. receiving, processing and delivery services), especially in the cross- border context. Fulfilment services provide businesses (start-ups and SMEs that may not have the infrastructure and logistic facilities but also big established enterprises) with many benefits, including lower shipping and operating costs, global delivery of goods, speed of delivery, improved customer service, and technology-intensive solutions (e.g. item tracking and information, carrier selection, integration with sales channels, etc.).
It has been reported, however, that fulfilment houses have been involved in facilitating the non-payment of VAT/GST on goods supplied by foreign suppliers. This type of abuse essentially consists of foreign suppliers selling goods that are physically held in a third-party fulfilment house to consumers in the same jurisdiction as where the goods are held, without charging the correct amount of VAT/GST on the sale (no VAT/GST or an incorrectly low amount of VAT/GST as a consequence of undervaluation or mischaracterisation). This is often preceded by a fraudulent importation of these goods by the foreign supplier into that jurisdiction. Given their role as third-party warehouses, which only deal with the logistical aspect of goods deliveries on behalf of foreign suppliers, these fulfilment houses generally have (or claim to have) no knowledge of the VAT/GST status of the goods nor do they have a liability, in principle, to collect the VAT/GST on the supplies of these goods to final consumers.
Such abuse can potentially be addressed by registering/licensing the operators of fulfilment houses, including a requirement for them to carry out due diligence on the businesses using their facilities and to keep records on goods shipped to and from the fulfilment house. Additionally, they could be required to supply notices to customers with respect to their VAT/GST obligations (and potentially other tax and duty obligations, such as customs and excises), and be subject to penalties even to the extent of having goods seized or to lose the right to trade as a fulfilment house if they fail to carry out proper due diligence checks or to report customers suspected of not having complied with these obligations. It is recognised that fulfilment houses can be used for cross-border supplies also, and therefore this is another area which can benefit from co-operation between jurisdictions.
Tax authorities could consider applying a joint and several liability regime to fulfilment house operators. However, the feasibility of this is likely to depend on the level of involvement of these fulfilment houses in the supply and the tax authorities would need to evaluate the proportionality of such a measure.
4.4. Do not lose sight of online sales that do not involve digital platforms
This report identifies the potential roles and obligations for digital platforms in the collection of VAT/GST for online sales and proposes potential measures that tax authorities can take to ensure collection on those sales. It is acknowledged, however, that while a large proportion of online sales are currently made via platforms, a significant amount of sales are made without the intervention of a digital platform, i.e. through direct sales. When designing and implementing measures to support VAT/GST compliance on online sales, tax authorities are encouraged to ensure that their VAT/GST compliance strategy for online sales takes due account of the importance of direct sales and of the challenges of ensuring compliance for such sales made by foreign suppliers in particular.
In this context, the Guidelines point out that the highest feasible levels of compliance by foreign suppliers are likely to be achieved if compliance obligations in the taxing jurisdiction are simple and limited to what is strictly necessary for the effective collection of the tax2 (OECD, 2017[1]). These Guidelines encourage tax authorities to facilitate compliance for foreign suppliers, particularly in cross-border sales to final consumers, by implementing a simplified registration and compliance regime (OECD, 2017[1]). The experience of the jurisdictions that have implemented such a regime indeed confirms the high levels of compliance by foreign suppliers. In introducing simplified registration and compliance regimes, jurisdictions can draw on the extensive guidance in Chapter 3 of the Collection Mechanisms Report (OECD, 2017[2]). As outlined in the Collection Mechanisms Report, appropriate simplification is important to facilitate compliance by business faced with obligations in multiple jurisdictions, which is likely to be particularly relevant for direct sellers (OECD, 2017[2]). Further, the report acknowledges that complex obligations can create barriers which increase the risk of non-compliance or of certain suppliers declining to serve customers in jurisdictions that impose such barriers.
It is useful to also recall the possibility outlined in the Guidelines that “compliance for foreign suppliers could be further facilitated by allowing such suppliers to appoint a third-party service provider to act on their behalf in carrying out certain procedures, such as submitting returns”3 (OECD, 2017[1]). This could be especially helpful for small and medium enterprises and businesses that are faced with multi-jurisdictional obligations. Allowing a direct seller to use a third-party service provider may mitigate against possible risks of non-compliance.
4.5. Co-operation between tax and customs authorities at domestic level
This section recalls the importance of a close co-operation between tax and customs authorities for ensuring the efficient and effective collection of VAT/GST, customs and other duties in respect of imports from online sales.
Chapter 2 has already outlined the importance of a close co-operation between tax and customs authorities to ensure the workability of the full VAT/GST liability regime for digital platforms. However, it is recognised that a co-operation between tax and customs authorities is also needed to ensure compliance for online sales that are not carried out through a digital platform, or sales via fulfilment houses or indeed for sales that are not covered by a full VAT/GST liability regime for digital platforms or where a platform has an obligation but is not compliant.
Co-operation of tax and customs authorities is likely to be beneficial for the efficiency and the effectiveness of the collection of VAT/GST, customs and other duties on imports from online sales, and to minimise the impact of the collection of these taxes on online value chains. Such co-operation will also help to ensure that online sales of imported goods and wholly domestic sales are treated equally for VAT/GST and duties purposes, incl. where sales are made by traditional brick and mortar stores.
The great significance of co-operation between tax and customs authorities as also emphasised throughout the WCO Cross-Border E-Commerce Framework of Standards and its Guidelines on Customs-Tax Co-operation.4
Co-operation between tax and customs authorities may already be desirable at the design stage of measures for the collection of VAT/GST of imports from online sales. This is likely to enhance consistency in processes and facilitate the implementation of reforms (incl. the design and implementation of IT systems), and also to foster ongoing co-operation.
The co-operation between tax and customs authorities could further include the sharing of information, good practices and intelligence, which can be facilitated through enhanced inter-connectivity between the IT systems, and co-operation on targeted compliance and enforcement initiatives. This could include coordinated on audits, including system and account based audits.
The benefits of co-operation between tax and customs authorities at a domestic level can be even more enhanced through international co-operation and exchange of information.
4.6. International mutual co-operation and exchange of information
4.6.1. Overview
International co-operation and exchange of information is particularly relevant in light of the exponential growth of cross-border e-commerce and the potential VAT/GST revenues at stake. The Guidelines highlight the existing mechanisms available to countries through both multilateral and bilateral co-operation (OECD, 2017[1]). This is the subject of further work by the WP9, recognising the great importance of this work in light of the challenges for VAT/GST collection arising from the growth in e-commerce.
4.6.2. Existing mechanisms for mutual co-operation
The Guidelines point to the possibilities for multilateral co-operation through the Multilateral Convention on Mutual Assistance in Tax Matters which was developed jointly by the OECD and the Council of Europe in 1988 and amended by Protocol in 2010 (OECD, 2017[1]). This Convention and Protocol provides for all possible 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 whereby businesses and platforms can increasingly access markets in other jurisdictions without having a physical presence. While generally it covers all taxes including general consumption taxes such as VAT/GST, a country may choose to restrict its application to taxes on income/ profits, capital gains and wealth.
The Guidelines (OECD, 2017[1]) also highlight the possibilities of bilateral co-operation through the exchange of information provisions in Article 26 of the OECD Model Tax Convention (MTC) (OECD, 2017[3]). Paragraph 10.1 of the Commentary on Article 26 on the MTC provides the possibility to States to restrict the scope of the exchange of information to taxes covered by the MTC (which would not include VAT or GST). As indicated, this appears to offer a promising platform for parties to exchange information both in individual cases and in broader classes of cases arising under VAT/GST. A bilateral agreement thus provides a possible mechanism for enhanced co-operation and development of solutions to common problems. Another possibility that may exist is through the OECD Model Agreement on Exchange of Information (OECD, 2002[4]).
Given the critical role of customs authorities in cross-border supplies of goods, it is also relevant that the WCO has developed a number of instruments and tools supporting exchange of information (e.g. the Nairobi Convention, the Model Bilateral Agreement on Mutual Assistance and the Globally Networked Customs (GNC)). Based on these instruments, customs administrations have entered into bilateral or multilateral agreements/arrangements for the exchange of information.
4.7. Supporting compliance through risk analysis
The OECD’s Forum on Tax Administration has produced a series of guidance material and reports which tax authorities can draw on in implementing risk analysis solutions which are based on practical experience in countries. These reports include Advanced Analytics for Better Tax Administration (OECD, 2016[5]) and The Changing Tax Compliance Environment and the Role of Audit (OECD, 2017[6]).
Given the rapid growth in volumes of packages and the consequent difficulty in controlling these transactions individually, there can be benefits in utilising, or indeed adapting existing risk analysis systems, to assist in the control of online sales. The use of risk analysis could be applied to all actors in the supply chain i.e. suppliers, platforms, shippers, payment service providers, importers and fulfilment houses.
Further, it is relevant that the WCO has agreed standards on “Risk management for facilitation and control” and “Use of non-intrusive technologies and data analytics” as part of the WCO Cross-Border E-Commerce Framework of Standards which was delivered in June 2018 (see further Annex G). This may present a practical opportunity for tax and customs authorities to work effectively together to address revenue collection risks.
4.8. Remain vigilant against abuse
It is acknowledged that there is a need for tax authorities to remain vigilant against abuse and to take appropriate countermeasures to tackle it. Circumstances may materialise whereby certain actors in the supply chain will try to circumvent rules or create artificial structures in order to avoid liability. For example, a locally established supplier may decide to structure its business in order to shift liability to a foreign digital platform which, in turn, does not comply with its VAT/GST obligations in the taxing jurisdictions.
The Guidelines recognise that it is appropriate for tax authorities to take proportionate measures to protect against evasion and avoidance, revenue losses and distortion of competition (see Chapter 4, Section 4.5 above) (OECD, 2017[1]). The enforcement tools identified in this chapter provide tools to authorities to maximise compliance. As identified above, the global nature of online sales underline the need for greater administrative co-operation at an international level particularly in terms of notifying other tax authorities of schemes and structures which may be identified and the application of good practices in addressing abuse.
References
[1] OECD (2017), International VAT/GST Guidelines, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264271401-en.
[2] OECD (2017), Mechanisms for the Effective Collection of VAT/GST, OECD, Paris, http://www.oecd.org/ctp/consumption/mechanisms-for-the-effective-collection-of-vat-gst.htm.
[3] OECD (2017), Model Tax Convention on Income and on Capital: Condensed Version 2017, OECD Publishing, Paris, https://doi.org/10.1787/mtc_cond-2017-en.
[6] OECD (2017), The Changing Tax Compliance Environment and the Role of Audit, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264282186-en.
[5] OECD (2016), Advanced Analytics for Better Tax Administration: Putting Data to Work, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264256453-en.
[4] OECD (2002), Agreement on Exchange of Information on Tax Matters, http://www.oecd.org/ctp/exchange-of-tax-information/2082215.pdf.
Notes
← 1. This will depend on the legal regime in the taxing jurisdiction which may include specific measures addressing fraud in the supply chain as well as anti-abuse measures.
← 2. Guidelines, Chapter 3, C.3.2 and C.3.3.
← 3. Guidelines, paragraph 3.148.
← 4. See Standard 7 of the WCO Cross-Border E-Commerce Framework of Standards in Annex G of this report; WCO Guidelines on Customs-Tax Cooperation available at www.wcoomd.org/en/topics/facilitation/instrument-and-tools/tools/guidelines-on-customs-tax-cooperation.aspx.