Tax avoidance in E-Commerce leads to banks becoming collectors

June 19, 2020

Such platforms as Netflix and Amazon have billions of untaxed revenue flowing daily through their systems and tax authorities are looking into ways to seize them. To help them collect as much as they can, the authorities are planning to recruit banks, mobile payments providers, and credit card companies. As of July 1st, 2020, Vietnam is the latest country to join Argentina and Colombia in requiring financial institutions to remit value-added tax on foreign digital products from their client’s cross-border payments. Thailand, Nigeria, Mexico and some other countries are planning on proposing similar laws while the U.K. is looking into alternative approaches.

A few countries, including India, Malaysia, New Zealand, are considering laws that enforcing tax obligations is a responsibility of the marketplace and not the payment provider. The Organization for Economic Cooperation and Development also advises this approach to such matters. Many tax specialists don’t see this as a feasible long-term solution as ultimately it will cause difficulties with administrative tasks and prove to be highly costly when it comes to compliance. Even now, various sellers are struggling with VAT compliance regulations and require help from tax advisors.

Any goods and services sold on E-Commerce websites from a seller in one country to a buyer in another are subject to a consumption levy, which is either VAT or GST depending on the country the one purchasing the goods is located. The issue here is that not all individual vendors & sellers know that they have to include this tax and that they’re obliged to submit taxes in every country they sell into. Of course, some know about this but avoid their tax obligations.

Because of the scale of sales on various online marketplaces, it’s hard to say how deep this problem with untaxed revenue is. It would be an arduous task to push every single third-party reseller to register and remit due VAT/GST, or even to pass off this kind of responsibility to these online platforms. That is why tax authorities in certain countries are pushing for financial service providers to take up this task.

A complex system

Some tax specialists believe that the countries pushing for this type of law see this kind of change as an extension of the monitoring services the financial institutions are already doing. It might seem as simple as just adding a few more information lines next to the payment but adding a few more codes lines in the system isn’t as straightforward as that. Not every party in the payment cycle can tell where the purchased goods are coming from at the point of the sale or categorize transactions.

The financial institutions also don’t know everything about most of the proposals these new laws submit. For example, what will happen to them legally if they tax the wrong transactions, or what type of payments will be covered. That’s why in some cases, the only fallback for these institutions is if these digital service providers and sellers don’t register for tax.

While these changes might offer some short-term benefits, it’s hard to say how everything would play out in real life. There’s a lot of talk about what would be adjusted but not enough information is given how these would actually work in practice.

OECD is working on the issue

The Organization for Economic Cooperation and Development is cooperating with many member countries to help solve the issue of collecting VAT/GST all in the hopes of improving the taxation of the digital economy. In March 2019, they published a VAT/GST guidance document, in which they suggest governments to use E-Commerce websites to boost the efficiency of tax collection.

Of course, the best solution still needs each seller to register and remit VAT in the countries which they are selling into. This way, by relying on online marketplaces to collect and remit VAT, tax institutions could collect up to 90% of inbound E-Commerce sales.

According to the organization’s statistics, this tax revenue makes up about 1/5 of tax income in the member states. Non-OECD countries rely even more on VAT/GST: it makes up 29.3% of taxation revenue in Africa and about 27.9% in the Caribbean and Latin America. About 60 countries follow the guidelines set up by the OECD but there’s still a lot of work and monitoring to be done, especially when some differences are inevitable and eventually arise.

Piet Battiau, the Head of the Consumption Tax Unit, emphasizes that it’s important for countries to implement and coordinate these changes. If the measures are as similar as possible in each state, they will be held as a standard, making it easier for sellers to comply.

Tax collection done by financial institutions is possible and can be successful in a domestic context. Argentina already does this: whenever a purchase is made via card at the store, a part of that payment goes to the shop and the other is directly remitted to appropriate tax authorities. The issue arises in cross-border cases as very few countries have actually implemented this.

Possible solutions

Argentina provided a list of all foreign service providers the country’s financial institutions should watch out for when flagging transactions for a 21% VAT charge in 2018. It includes such well-known services as Skype, Netflix, Tinder, and even subscription-based media outlets as the New York Times.

The same year, while Columbia hasn’t formed a similar list, they still passed a law that requires banks and service providers to withhold tax on outbound payments for digital service platforms and remote sellers that haven’t registered in Columbia. Though until a list is provided, payment companies and payors can’t determine which sales to withhold.

Meanwhile, the U.K. is taking a different approach to this issue. In 2018, they announced that a group of government and industry representatives is going to examine a possible split-payment method for VAT. They’re planning on having the taxes extracted in real time: part of it goes straight away to the seller and the rest to Her Majesty’s Revenue and Customs. The spokesperson for HMRC explains that they are trying to come up with a potential model that could reduce fraud and change the way how VAT is collected.

Thailand, Nigeria, and Mexico are drafting proposals that would shift some of the responsibility of VAT collection to the financial institutions. More information about them is yet to be provided. Such measures could work for the short term, but it might prove to be too costly for financial institutions in the long run. And while some revenue will still be generated with these changes, will it actually be beneficial not only for the country but from a commercial standpoint? Right now, it’s hard to tell.