19 01 2021

Digital VAT Regimes Vital To Buoy Countries' Tax Takes: Report

The OECD has released its annual Consumption Tax Trends report, which highlights that with VAT rates at an all-time high, governments should ensure they have effective VAT frameworks in place to tax e-commerce.

Consumption Tax Trends 2020 highlights that standard VAT rates remained stable between 2017 and 2020, at a record high of 19.3 percent on average. Only one country increased its standard VAT rate (Japan, from eight percent to 10 percent) in 2019, and no reductions were recorded until the COVID-19 outbreak in early 2020, when Germany and Ireland temporarily reduced their standard VAT rate as part of their economic stimulus packages (from 19 percent to 16 percent and from 23 percent to 21 percent, respectively).

Many countries have also introduced a range of VAT measures to support businesses and the healthcare sector during the crisis, as detailed in a special section of Consumption Tax Trends.

Consumption tax revenues in OECD countries in 2018 ranged from 3.8 percent of GDP in the US to 16.4 percent of GDP in Hungary. As a share of tax revenues, these taxes represented 15.4 percent of total taxes in the United States and 49.5 percent in Chile.

The report urges countries to adopt the reforms proposed by the OECD in its International VAT/GST Guidelines, covering the digital economy, with the report highlighting that "the surge in e-commerce following the COVID-19 outbreak has emphasized the importance of reform to ensure that VAT is properly applied to digital trade."

The latest Guidelines feature the various value-added tax recommendations from the OECD's base erosion and profit shifting Action Plan. They in particular look to establish a global approach on the taxation of electronic services provided by online retailers to consumers. The Guidelines recommend that foreign sellers register and remit tax on sales of e-books, apps, music, videos, and other digital goods in the jurisdiction where the final consumer is located. The Guidelines also include a recommended mechanism to ensure the effective collection of VAT by tax authorities from foreign sellers.

According to the report, almost all OECD countries with a VAT have now implemented the OECD standards for the collection of VAT on online sales of services and digital products from offshore e-commerce vendors, while the European Union and the UK are to remove their exemptions for imported low-value goods from July 2021.