The OECD's International VAT/GST Guidlines 2017

The OECD's International VAT/GST Guidelines 2017 Its Validity Today?

HECTOR J. SPITERI

Hector is a certified public accountant and holds a practising certificate in auditing. He is a Fellow member of the Malta Institute of Accountant, a Fellow Member of the Malta Institute of Taxation and an honorary member of the Malta Institute of Management.

Hector commenced his career in 1979 working in industry, from where, later in the same year, he moved into auditing. He also worked as a financial controller for a foreign bank and in 2003 joined Busuttil & Micallef where today he holds the position of senior partner.

Hector also holds various directorships and is a keen activist in the corporate and financial industry. Currently, he is also the Vice-President of the Malta Institute of Management and the Managing Director of the Malta Academy for Taxation Studies.

In 2017 Hector was appointed Honorary Consul of the Republic of Poland to the Republic of Malta.

The main purpose of the Organisation for Economic Co-operation and Development (OECD) is to improve the global economy and endorse global trade in all commonly shared industries in international trade, by providing a shared society in which governments of different countries may work together to uncover solutions to common problems that may be a hindrance to possible engagements of international trade. It includes working with self-governing nations that share a devotion to convalescing the local economies and well-being of the general population. Thus resulting in continues adaptive improvements for the global economy.

The OECD’s main focus is to help governments around the world achieve the following:

Improve confidence in markets and the institutions that help them function.

Obtain healthy public finances to achieve future sustainable economic growth.

Achieve growth through innovation, environmentally friendly strategies, and the sustainability of developing economies.

Provide resources for people to develop the skills they need to be productive.

The OECD published its new International VAT/GST Guidelines in the year 2017. The Guidelines were published previously and made available in 2015 however the 2015 guidelines had undergone material amendments throughout the OECD’s post-discussions. Hence an amended version with varying views was published in 2017 guidelines.

As from kick-off of this briefing article, it must be noted that the Guidelines do not prescribe rules that jurisdictions must follow. The OECD states that jurisdictions remain sovereign with respect to the intent and applications of their own domestic laws. In this regards, the Guidelines purely identify objectives, and suggest the means that various jurisdictions should go about in achieving them.

They support and give strong arguments in relation to the destination principle for the imposition of VAT, (also known as ‘Goods and Services Tax’ (GST)) from which it follows that tax should be ultimately levied only on the final consumption brought about by the end user within the taxing jurisdiction.

In relation to internationally traded services and intangibles the guideline states that the destination principle should apply to such supplies. In other words, for cross-border supply of services and intangibles, VAT/GST should be charged in the consumer’s jurisdiction, rather than the supplier’s jurisdiction, the underlying principle that VAT alike to Income Tax should only be charged once is being reflected. Hence it is understood that such an approach used by the OECD with regards to VAT/GST is the possible basis for the EU COUNCIL DIRECTIVE 2006/112/ EC of 28 November 2006 on the common system of Value Added Tax. In light of the difficulties that may be faced in applying the destination principle to services and intangibles, the Guidelines provide place of taxation rules for determining the place of taxation for business-to-business (B2B) and business-to-consumer (B2C) cross-border supplies of services and intangibles.

For B2B supplies, the Guidelines recommend the implementation of a reverse charge mechanism, in such a case, the business customer is responsible for paying VAT/GST instead of the non-resident supplier. For B2C supplies, the Guidelines recommend that non-resident suppliers be required to register and account for VAT/ GST in the jurisdiction of taxation (based on the destination principle) under a simplified registration and compliance regime, even if it is not located in the jurisdiction of taxation.

It also provides recommendations for mutual co-operation among tax administrations, in order to facilitate a consistent interpretation of the recommendations in the Guidelines, particularly in respect of neutrality and place of taxation, so as to minimize double taxation or double non-taxation, and the potentially resulting disputes.

The use of among others, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and the various bilateral double taxation treaties and exchange of information treaties are highly recommended by the guidelines. In this way mutual co-operation, information exchange and mutual assistance may be brought about between the various tax administrations in the jurisdictions that trade is being undertaken in.

With the publication of the Guidelines and the increasing growth and challenges of the digital economy, many jurisdictions around the world have responded and/or are responding to this through the adoption of the recommendations provided under the Guidelines (specifically in relation to the destination principle and the cross-border supply of services and intangibles). This has resulted in additional costs and complexity to the offshore supplier who has to comply with the different rules and compliance requirements under the various jurisdictions it operates in.

Back in 2016, under their ‘Better Regulation’ agenda, the European Commission adopted a ‘VAT Action Plan’ so as to “reboot the current EU VAT system to make it simpler, more fraud-proof and business friendly”- In this regards on viewing of the effects of the EU VAT Action Plane on the EU VAT Directive, it is noted that similarities are apparent between the OECDs’ guidelines and the EU Vat Action Plane.

Since then, the global VAT scenery has continued to transform dramatically due to the dynamic world of trade. Navigating the transformation of the EU VAT regulations, alongside many other countries introducing or modifying their own indirect tax regimes, is a significant challenge for multinational businesses.

As this period of change continues, businesses must be prepared for how this impacts their own evolving models, operations and structures.

Reflecting on the narrative above, one cannot overlook the value added, in practical terms, by the OECD’s International VAT/ GST Guidelines. However the question that remains for one to ponder upon is that of its isolated relevance in the current global market trade of today.