Untangling the World Wide VAT Web on digital supplies

M.Walpole and M.Stiglingh

The First Industrial Revolution used water and steam power to mechanize production. The Second used electric power to create mass production. The Third used electronics and information technology to automate production. Now a Fourth Industrial Revolution is building on the Third, the digital revolution. It is characterized by a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres.1

1. Introduction

We are currently in the Fourth Industrial Revolution where we face disruptive

technologies that blur the lines between the physical, digital and biological spheres.2

This Fourth Industrial Revolution is evolving at an exponential pace, with up to 50

billion connected devices predicted by 2020.3 These connected devices will transact

in the digital economy on the World Wide Web. Governments, all currently in dire need

of tax revenues, will have to ensure that their respective legal frameworks protect their

share of taxation in respect of consumption taxes attributable to this digital economy.

One of these consumption taxes is Value-Added-Taxation (VAT).

Most VAT systems around the globe have traditionally been developed to deal with the cross-border trade of physical goods or tangible services. On the one hand, orders of tangible goods are progressively being substituted with intangible digital solutions. Instead of purchasing physical copies of music albums or entertainment DVDs, customers are now able to access these products electronically, either through digital downloads or streaming. Moreover, with the development of 3D printers, customers will progressively have the capacity to create an increasing array of goods on-the-spot and in real time, merely requiring from foreign suppliers the information needed to program the printers. On the other hand, services that once required the physical presence of personnel at a customer site may now be performed electronically from a remote location. A business will often have no physical presence in its customers’ jurisdiction – the sole tangible evidence of its real-world presence may be reduced to a server or a computer that stores files for one or more websites.4 These aspects of digital commerce fundamentally alter the way in which business is conducted and raise several interpretative issues concerning the administration of VAT.

The VAT implications of this increasing prevalence of digital supplies present a

complex conundrum. A supplier of music downloads may well have customers in over

200 countries. Some of these jurisdictions may not have a VAT system while others

may employ a variety of different local VAT rules. This supplier will have to comply

with over 200 sets of consumption tax rules based on numerous fluctuating currencies.

Furthermore, the legislation detailing these rules may in some cases only be available

1 Klaus Schwab. 2015. “The Fourth Industrial Revolution, what it means and how to respond”. SNAPSHOT. Online. Available at: https://www.foreignaffairs.com/articles/2015-12-12/fourth-industrial-revolution. Accessed on? 2 First name? Davos. 2016: “Where will the fourth industrial revolution impact us most?” London Business School. 3 Darrel Moore. 2016. “Fourth industrial revolution?”. bio-bean. Online. Available at: http://www.bio-bean.com/2016/03/02/fourth-industrial-revolution/ Accessed 8 September 2016. 4 And in the case of Cloud computing the business may simply use spare capacity on other servers it does not own.

in foreign languages. In reality it seems questionable whether any supplier would be

able to navigate through such a tangled web of information. Even if suppliers manage

to delineate this plethora of entanglement in an effective and accurate manner, it is

doubtful whether many would survive such a heavy compliance burden.

In light of this, countries around the globe have undertaken unprecedented co-operative efforts in an attempt to align this world-wide-VAT web in developing cross-border VAT5 guidelines. Internationally, regionally, nationally and sub-nationally, bodies and organisations have worked together in response to the complex tax implications arising from the burgeoning digital market.

To evaluate the progress of co-operative efforts on an international level, this paper critically analyses the VAT on inbound digital supplies in four countries that do not form part of the same region (namely, Australia, Canada, New Zealand and South Africa). The Organisation for Economic Co-operation and Development (OECD) already recognised the need for this kind of international co-operation and development before the turn of the century and in 1998 issued a set of conditions to govern the taxation of e-commerce (the Ottawa Taxation Framework).6 Building on this work, the OECD in 2015 released its International VAT/GST Guidelines (referred to hereafter as “the OECD Guidelines”).7

This paper will analyse the OECD Guidelines and will review the VAT laws applicable to the provision of so-called inbound digital supplies in Australia, Canada, New Zealand and South Africa. The authors will critically analyse the VAT on inbound digital supplies in those jurisdictions and determine to what extent they comply with or depart from the OECD Guidelines.

As this paper is concerned with the supply of inbound digital services, it will focus only on the national VAT legislation of each jurisdiction under analysis.8 The authors further acknowledge that certain telecommunication services could also be supplied digitally. However, the development of VAT rules governing the supply of telecommunication services superseded the exposition of VAT rules governing other cross-border digital supplies. Most countries also treat the supply of telecommunication services as distinct from that of other digital supplies. Traditional services could furthermore also be delivered through a digital medium. For example, a tax opinion that was prepared by a tax consultant might be delivered through email or may be available for download through a digital medium. The service supplied is still a tax consulting service and the fact that it was delivered through a digital medium did not alter the nature of the service. This paper will only investigate inbound digital supplies to the extent that it does not include telecommunication services and will include other traditional but intangible services only if they are not seen as a discrete form of supply in the relevant jurisdiction.

Three of the four countries under scrutiny in this paper are OECD member countries9 (Australia, Canada and New Zealand). Although South Africa is not an OECD member

5 For ease of reading, the term VAT is used to refer to any national tax that embodies the basic features of a value-added tax, by whatever name or acronym it is known (e.g. “Goods and Services Tax” (“GST”)). 6 OECD, Electronic Commerce: Taxation Framework Conditions, A report by the Committee on Fiscal Affairs, as presented to Ministers at the OECD Ministerial Conference “A Borderless World: Realising the Potential of Electronic Commerce”, 7-9 October 1998. 7 OECD, International VAT/GST Guidelines, November 2015. 8 The paper will not focus on the national division of VAT between different provinces or states of a specific jurisdiction. 9 OECD, List of OECD Member countries – Ratification of the Convention on the OECD. Available at http://www.oecd.org/about/membersandpartners/list-oecd-member-countries.htm. Accessed: 3 August 2016.

country, the Ottawa Taxation Framework and the OECD Framework were drawn up in co-operation with several non-member countries, including South Africa. Furthermore, the OECD adopted a resolution in 2007 to strengthen its co-operation with South Africa through a programme of enhanced engagement.10 All four of the countries investigated in this study therefore either contributed to or were consulted in the development of the Ottawa Taxation Framework and the subsequent development of the OECD Framework. The OECD Framework builds on the Ottawa Taxation Framework and sets forth guidelines to serve as reference points intended to assist policymakers in their efforts to evaluate and develop the legal and administrative frameworks governing the VAT on cross-border digital supplies in their jurisdictions. These frameworks are thus appropriate points of reference in evaluating the VAT on inbound digital supplies in the countries under investigation here.

Apart from outlining the general intended characteristic of a digital supply, the Ottawa Taxation Framework specifically identifies six broad taxation principles that are relevant in an e-commerce cross-border VAT environment. Five of these six principles have subsequently been incorporated in the OECD Framework. These are the principles of Neutrality; Efficiency; Certainty and Simplicity; Effectiveness; and Fairness11.

This paper will commence with an in-depth evaluation of the rules that govern the VAT implications of inbound digital supplies in each specific jurisdiction (section 2). This will provide the basis for an evaluation of the legislation of the selected jurisdictions against the five principles incorporated in the OECD Framework. In order to evaluate the progress of co-operative efforts on an international level, the paper will then proceed with evaluating the legislation of the different jurisdictions against the five principles (section 3). Finally, the conclusion of the paper is presented in section 4.

2. VAT rules governing inbound digital supplies

VAT is a tax which is based on the final consumption by households. The OECD Framework requires that inbound digital supplies are taxed according to the rules of the jurisdiction of consumption. This is achieved by applying the so-called “destination principle”.12 The VAT rules governing inbound digital supplies of the jurisdictions investigated should therefore be analysed to understand their application of the “destination principle”.

2.1 VAT rules governing inbound digital supplies: Canada

The federal VAT in Canada, the GST, was introduced in 1991 to replace the longstanding federal Manufacturers Sales Tax.13 It was originally levied at 7%, but was later reduced to 5%. However, depending on the relevant province, Canada applies

10 OECD, South Africa. Available at http://www.oecd.org/southafrica/. Accessed: 3 August 2016. 11 The principle of Flexibility, however, was omitted by the OECD Framework, possibly due to the fact that its dictate that tax systems remain adaptable and dynamic in accordance with commercial and technological developments could only be evaluated over the course of time. 12 OECD, International VAT/GST Guidelines, Guideline 3.1, November 2015, p.27. 13 Richard M. Bird and Michael Smart. 2014. “VAT in a Federal System: Lessons from Canada”. Public Budgeting & Finance. edition and volume numbers?

both retail sales tax (on a provincial level)14 and VAT (on a federal level). It also levies a Harmonized Sales Tax15. Essentially, this consists of the federal VAT, together with provincial retail sales tax, imposed and collected together as one tax. One province has no provincial sales tax – in this province, the only sales tax is the federal VAT of 5%.16 For the majority of the other provinces the total VAT rate (the provincial as well as the federal rate combined) is levied at 15%. It is interesting to note that Canada hosted the OECD’s Ministerial Conference on e-

commerce in Ottawa in 1998, resulting in the release of the Ottawa Framework. The

Ottawa Framework expressed the view that the taxation principles which guide

governments with regard to conventional commerce should also guide them when

dealing with electronic commerce.17 In light of this, Canada’s navigation of the world

wide VAT web implications of cross border digital supplies is fairly conservative and

follows the route of applying their existing VAT principles to digital supplies. Their

legislation does not specifically provide for any special treatment of cross border digital

supplies. However, their Technical Information Bulletin18 provides the taxpayer with

information regarding the interpretation of possible VAT consequences of cross border

digital supplies. This Technical Information Bulletin was issued fourteen years ago –

unsurprisingly, an ongoing consultative process is underway to investigate specific

changes that would ensure the registration of non-resident suppliers of digital

supplies.19

Digital supplies in Canada are classified either as the supply of intangible personal property or as the supply of a service. To determine to which category the supply belongs, the Canadian Revenue Agency considers the agreement between the parties to ascertain if the agreement is in substance for work or for the supply of property (including a right to use the property). An extract from a publication of the Canadian Revenue Authority lists the factors that generally indicate the nature of a supply: “Factors that generally indicate that a supply made by electronic means is intangible personal property are:

a right in a product or a right to use a product for personal or commercial purposes is provided, such as intellectual property or a right to use intellectual property (such as, a copyright), or rights of a temporary nature (such as, a right to view, access or use a product while online);

14 Three provinces (British Columbia (7%), Manitoba (8%) and Saskatchewan (5%)) apply a retail sales tax on the base excluding the federal VAT. Harmonized sales tax calculator GST/PST or HST 2016. Online. Available at: http://www.calculconversion.com/sales-tax-calculator-hst-gst.html. Accessed: 16 September 2016. 15 The HST is currently levied in five provinces (Newfoundland/Labrador (15%), Nova Scotia (15%), New Brunswick (15%) and Prince Edward Island (15%)). Quebec levies a QST, but it is almost completely harmonized with the federal VAT. Richard M. Bird and Michael Smart. 2014. “VAT in a Federal System: Lessons from Canada”. Public Budgeting & Finance, 2016. Harmonized sales tax calculator GST/PST or HST 2016. Online. Available at: http://www.calculconversion.com/sales-tax-calculator-hst-gst.html. Accessed: 16 September 2016. 16 The province of Alberta does not levy any provincial VAT or retail sales tax. The only tax is the federal VAT of 5%. 2014. Richard M. Bird and Michael Smart. 2014. “VAT in a Federal System: Lessons from Canada”. Public Budgeting & Finance. edition and volume numbers? 17 OECD, Electronic Commerce: Taxation Framework Conditions, A report by the Committee on Fiscal Affairs, as presented to Ministers at the OECD Ministerial Conference “A Borderless World: Realising the Potential of Electronic Commerce”, 7-9 October 1998. p.3. 18 Canada Customs and Revenue Agency. 2002. GST/HST and electronic Commerce. GST/HST Technical Information Bulletin, B-090. 19 EY. 2016. Digital developments of indirect tax. Online. Available from: http://www.ey.com/Publication/vwLUAssets/ey-digital-developments-map-indirect-tax-april-2016/$FILE/ey-digital-developments-map-indirect-tax-april-2016.pdf. Accessed: 4 September 2016.

a product is provided that has already been created or developed, or is already in existence;

a product is created or developed for a specific customer, but the supplier retains ownership of the product; and

a right to make a copy of a digitized product is provided.

Factors that generally indicate that a supply made by electronic means is a service are:

the supply does not include the provision of rights (such as, technical know-how), or if there is a provision of rights, the rights are incidental to the supply;

the supply involves specific work that is performed by a person for a specific customer; and

there is human involvement in making the supply.” 20 For example: The payment of a subscription fee to permit the downloading of digital products should be characterized as a supply of intangible personal property because the subscriber is acquiring the right to download the products. However, online consulting such as the provision of legal advice by a lawyer via Skype should be viewed as a supply of a service. Canada has specific place-of-supply rules enacted in its legislation.21 Since Canada

applies VAT on both provincial and federal levels, the place of supply rules distinguish

between general rules for determining the place of supply as being inside or outside

Canada22. Specific place-of-supply rules determine in which province a specific supply

is made.23

For a supply of intangible personal property, the place of use24 determines the place

of supply. The business agreement, while important,25 determines the place of use

and not the location of the customer. This not only refers to the actual place of use,

but also the place in which it may be used.

For inbound supplies of intangible personal property the foreign digital supplier

therefore either has the obligation to register for VAT in Canada or to apply the reverse

charge mechanism.

A non-resident person who makes taxable supplies through a permanent establishment in Canada or who conducts business in Canada, is required to register for VAT purposes,26 and to collect tax on his or her taxable (other than zero-rated) supplies made in Canada (unless the person is a small supplier). It is therefore important to understand who is regarded as a ‘resident’ for Canadian

VAT purposes. A person is classified as a Canadian resident when they have a

20 Canada Revenue Agency. 2016. GST/HST and e-commerce. Online. Available at: http://www.craarc.gc.ca/tx/bsnss/tpcs/cmm/gst-tps/menu-eng.html Accessed: 3 September 2016. p.1-2. 21 Sections 142-44 of the Excise Tax Act, Part IX Goods and Services Tax. 22 Section 142(1) and (2) of the Excise Tax Act, Part IX Goods and Services Tax. 23 Section 144(1) of the Excise Tax Act, Part IX Goods and Services Tax. 24 Section 142(1)(c)(i) and Section 142 (2)(c)(i) of the Excise Tax Act, Part IX Goods and Services Tax. 25Canada Revenue Agency. 2016. GST/HST and e-commerce. Online. Available at: http://www.craarc.gc.ca/tx/bsnss/tpcs/cmm/gst-tps/menu-eng.html Accessed: 3 September 2016. p.2. 26 Under subsection 240(1) of the Act.

permanent establishment in that country.27 The mere provision of digital services

through a website is not regarded as sufficient in qualifying for this categorisation.

However, if a person owns or leases a server in Canada, that person could be

regarded as having a permanent establishment. The general test that is applied to

determine whether a person has a permanent establishment in Canada requires that

all the following requirements be met: 28

The person should have access to “space” in Canada. That could include

“digital space” in the form of a server.

There should be a degree of continuity and permanence attached to the

“space”.

There should be “control” of the space.

The person should use the “space” to make supplies in the course or

furtherance of the business. The “space” should significantly contribute

to the making of the supply.

A non-resident without a permanent establishment or who does not conduct business in Canada may also voluntary choose to register as a VAT vendor29 if they are engaged in commercial activity in the country, or if they have entered into an agreement for the supply of intangible personal property to be used in Canada. A non-resident person who is required to register or who registers voluntarily and who does not have a permanent establishment in Canada is required to provide and maintain security.30 The recipient of an ‘imported taxable supply’ is obliged to self-assess and remit VAT to the Canadian Revenue Agency.31 The intention of the reverse charge mechanism is to levy VAT on the supply of intangible personal property to the extent that it is consumed or used in Canada for non-taxable purposes. To achieve this an ‘imported taxable supply’ definition is specifically included. This includes a taxable supply (other than a zero-rated supply) of intangible personal property32 supplied outside Canada to a person who is resident in Canada when it is not a supply of property “that is acquired-

for consumption, use or supply exclusively in the course of commercial activities of the person or

for activities that are undertaken exclusively outside Canada by the person and that are not part of a business or an adventure or concern in the nature of trade engaged in by the person in Canada,33 or

may only be consumed or used by an individual exclusively outside Canada or in respect of real property or tangible personal property situated outside

Canada”.

27 2005. GST/HST Policy Statement, P-208R, definition of “permanent establishment” in subsection 123(1) of the Excise Act. 28 2005. GST/HST Policy Statement, P-208R, definition of “permanent establishment” in subsection 123(1) of the Excise Act. 29 Under subsection 240(3). 30 Under subsection 240(6) of the Act 31 Part IV Tax on Imported Taxable Supplies of the Excise Tax Act. Section 218(1) of the ETA. 32 Section 217(c) of Part IV Tax on Imported Taxable Supplies of the Excise Tax Act. 33 Section 217 of the ETA.

The reverse charge tax is collected and reported through self-assessment by the

importer. Section 218, within Division IV of the Excise Tax Act, requires registrants to

self-assess the 5% federal VAT portion related to an ‘imported taxable supply’.34

2.2 VAT rules governing inbound digital supplies: South Africa

South Africa has had a VAT since 1991 and levies VAT at a rate of 14%. However,

legislation specifically governing inbound digital supplies only came into effect in 2014.

Digital services for this purpose are specifically defined35 within a finite list and are

grouped according to the following five headings: educational services, games and

games of chance, internet-based auction services, miscellaneous services (including

e-books, audio-visual content, still images and music), and subscription services.

This definition seems to include neither advertising services nor the supply of software

(although some stakeholders36 are of the opinion that the current definition might also

include online advertising). The legislator seems to have excluded these two types of

digital supplies intentionally as they are mainly used in the B2B context.37

South Africa has a worldwide VAT system and applies the destination principle to cross-border transactions. Worldwide VAT systems generally contain limited or no place-of-supply rules with increased reliance on certain definitions. This is also the case in South Africa. However, South African legislation does not contain a general rule which clarifies that the South African VAT system seeks to tax final domestic consumption.38

South Africa taxes inbound digital supplies according to a two-step approach. The first step is to determine whether the foreign supplier of the digital service has to register in South Africa. If the foreign supplier does not have to register for VAT in the country, South Africa applies a reverse charge mechanism in a B2C context as a second step.

The general definition of an “enterprise” in South Africa did not always accommodate

foreign digital service providers not conducting an enterprise or activity in South Africa

or partly in South Africa. A special inclusion in the definition of an enterprise ensures

that these suppliers are included in the South African VAT net. The first step is

therefore to determine whether the foreign provider of the digital services falls within

the special inclusion of the definition of carrying on an enterprise in South Africa. The

supply of digital services39 is specifically included in the definition of an enterprise if

the service is supplied from a place outside South Africa and if two of three other

requirements are met. These requirements stipulate that the recipient of the supplies

34 The requirement to self-assess the provincial portion of the VAT when importing directly from outside Canada is covered in

paragraph 218.1(1)(a) for intangible personal property and services. 35 Digital services in a South African context is defined in a Regulation and it is defined as “electronic service”. South Africa, 2014. Government Notice R. 221. Government Gazette No. 37489, 585(28 ) March 2014. 36 Davis Tax Committee (DTC). 2015. VAT First Interim Report for public comment. p.36. 37 South Africa. National Treasury. 2013. Press Release Final Electronic Services Regulation Published. Available: http://www.treasury.gov.za/comm_media/press/2014/2014032801%20%20Press%20Release%20%20Electronic%20Services%20Regulations.pdf Accessed? 38 Davis Tax Committee (DTC) VAT First Interim Report for public comment. 2015. p.9. 39 Digital services are specifically defined as “electronic service” and include a finite list as per Government Notice R. 221. Government Gazette No. 37489, 585(28). March 2014.

should be a South African resident;40 that the payment of the service is made from a

South African bank account; and that the recipient has a business address, residential

address or postal address in South Africa.41

Foreign suppliers of digital services are not required to register if the total value of the

taxable digital services supplied is below R50 000.42 This threshold does not seem to

be applied for a period of 12 months. It is submitted that if the value of the supplies

exceeds R50 000, irrespective of the time period, such a person would be liable for

registration in South Africa.43

If a foreign provider of digital services is not required to register in South Africa, the

second step for inbound digital supplies is to determine whether the reverse charge

mechanism is applicable. South African legislation provides for this mechanism for

the imposition of VAT on services defined as “imported services”.44

The reverse charge mechanism applies to all inbound digital services that are utilized

in South Africa for purposes other than for making taxable supplies. It is therefore not

limited to the definition that applies to inbound digital services (the finite list). This

reverse charge mechanism is therefore also applicable to the downloading of

software and advertising services in a B2C context.

This reverse charge mechanism requires the South African individual consumer of

certain digital content to report and pay VAT of 14% directly to the South African

Revenue Service. That is, the onus actually rests on the individual consumer in South

Africa to self-account for the VAT on the relevant services.45 However, consumers

very rarely comply with this requirement.46

In instances where the consumer is a business that is not entitled to a full VAT credit

(as would be the case with banks, universities or life-insurers) this will result in a net

collection for the South African Revenue Service. Here, the South African business

is required to self-account for VAT on the purchase of foreign digital services to the

extent that it would not be entitled to recover a VAT credit. This is then done through

its VAT return.

For the reverse charge mechanism there is a R100 per transaction exemption. This

mechanism is further not applicable to non-resident47 recipients, even if the imported

40 A “resident of the Republic” means a resident as defined in s1 of the Income Tax Act: Provided that any other person or any other company shall be deemed to be a resident of the Republic to the extent that such person or company carries on in the Republic any enterprise or other activity and has a fixed or permanent place in the Republic relating to such enterprise or other activity. 41 Paragraph (b)(vi) of the definition of an “enterprise” in s1 of the VAT Act, Act 89 of 1991. 42 If the suppliers of the digital services supply these services through an intermediary, there is a draft Binding General Ruling that proposes that the supplier in certain instances also would not be required to register as a vendor for VAT in South Africa. Draft Binding General Ruling (VAT). Electronic services supplied via intermediaries. 43 Section 23(1A) of the VAT Act, Act 89 of 1991. 44 Definition of “imported services” in s1 of the VAT Act, Act 89 of 1991. This means a supply of services that is made by a supplier who is resident or carries on business outside the Republic to a recipient who is a resident of the Republic to the extent that such services are utilized or consumed in the Republic otherwise than for the purpose of making taxable supplies. 45 This would require the consumer to complete a VAT215 form, and submit this, together with payment, at a local revenue office for each and every download. 46 2016. Bowman. South Africa’s VAT changes: the impact on e-commerce. Online. Available at: www.bowman.co.za/FileBrowser/ArticleDocuments/South-Africa-VAT-Changes.pdf Accessed: 29 September 2016. 47 A “resident of the Republic” means a resident as defined in s1 of the Income Tax Act: Provided that any other person or any other company shall be deemed to be a resident of the Republic to the extent that such person or company carries on in the Republic any enterprise or other activity and has a fixed or permanent place in the Republic relating to such enterprise or other activity.

digital services are used or consumed for non-taxable purposes in South Africa. The

reverse charge is also only payable by the recipient if the foreign supplier of the digital

service does not have the obligation to register and pay the VAT in South Africa.48

2.2 VAT rules governing inbound digital supplies: Australia

The Australian Goods and Services Tax was introduced in 1999 at a rate of 10%,

which has not changed. As a (late) twentieth-century tax it did not materially impact on

cross-border intangible supplies as its taxation of supplies involving neither “goods”

nor “real property” required a connection to Australia (recently statutorily entitled the

“indirect tax zone”). This connection is the Australian equivalent of the place-of-supply

rule under s9-25(5) as it read before the changes under discussion. The “connection”

was established through:

some conduct by the supplier within Australia (the statutory words are “the thing

is done”); or

the supplier making the relevant taxable supply (that is neither goods nor real

property) through an enterprise that they carry on in Australia; or

neither of the preceding conditions is met but the thing supplied is a right or

option to something that would be connected to Australia.49

The conventional interpretation of these provisions was therefore that although

intangible supplies were clearly covered by the generally broad definition of supplies

(in s9-1)) which includes “any form of supply whatsoever” and which definition also

specifically mentions “services”, what was lacking in relation to intangible supplies of

the type contemplated by the changes was a “connection with” Australia’s “indirect tax

zone”.

This has been addressed by (inter alia) amendment of the place-of-supply rules so as

to include within them a supply to “an Australian consumer”.50 The latter is a newly

defined term, sensibly explained by means of an extension to the s9-25 rules

connecting supplies to Australia. Thus under the recent amendments to s9-25:

“Meaning of Australian consumer

(7) An entity is an Australian consumer of a supply made to the entity if:

(a) the entity is an * Australian resident …; and

(b) the entity:

(i) is not * registered; or

(ii) if the entity is registered--the entity does not acquire the thing supplied solely

or partly for the purpose of an * enterprise that the entity * carries on.

48 It is submitted that the phrase “Except as otherwise provided in this Act” in s7(2) of the VAT Act, Act 89 of 1991, could be interpreted to mean that the reverse charge is only payable by the recipient if the foreign supplier of the digital services does not have the obligation to pay the VAT 49 This paraphrases s9-25(5) of the A New Tax System (Goods and Services Tax) Act 1999 (“the GST Act”) prior to amendment. 50 New s9-25(5)(d) the GST Act.

Note: Suppliers must take reasonable steps to ascertain whether recipients are Australian

consumers: see section 84-100.”

The definition thus not only addresses the problem with the GST Act that supplies of

intangibles by non-residents would usually fail the “connected with” test, but it also

narrows the impact of the remedy to this problem by ensuring that the necessary

connection is restricted to the private consumption of such supplies.

The breadth of the supply rules in Australia seems to be distinguishable from those in,

for example, South Africa, as they cover everything – leaving the legislation to carve

out discrete areas or items that will not be subject to the GST.

There is a further carving out by removal from the scope of the new rules supplies that

are not connected to the Australian indirect tax zone. This further removal

complements the Australian consumer limitation in s9-25(7). The items removed from

the broad application of the new rules are to be found in s9-26 which introduces a

further concept in the form of “an inbound intangible consumer supply”. In summary

these cover:

“Inbound intangible supplies” (being supplies of things other than goods or real

property) which are deemed not to be connected with the indirect tax zone when

the recipient is an “Australian-based business recipient” (another defined

term51);

Intangible supplies between non-residents where the recipient is a non-resident

which acquires the supply solely for the purpose of carrying on its business

enterprise outside Australia;

A supply between non-residents of leased goods; and

Continued lease of goods covered by the previous item.

The exclusion of these items from the pool of supplies potentially affected by the

changes to the law can be justified easily on policy grounds as they are revenue

neutral because taxing the supply will simply lead to a credit being claimed by the

recipient.

The set of exclusions reinforces the limitation of imposing GST on cross-border

supplied intangibles to those made to local domestic consumers.

What this set of exclusions leaves to be addressed is those supplies of inbound

intangibles that are made to Australian GST registered businesses as part of their

enterprise but that are not acquired solely for a GST creditable purpose. In such cases

the supplies in question, or the relevant portion of them, are subject to reverse

charging rules under which the recipient must pay GST on these supplies.52 The net

51 Section 9-26(2) A New Tax System (Goods and Services Tax) Act 1999 defines “an Australian based business recipient” of a supply as follows: (2) An entity is an Australian-based business recipient of a supply made to the entity if: (a) the entity is *registered; and (b) an *enterprise of the entity is *carried on in the indirect tax zone; and (c) the entity's acquisition of the thing supplied is not solely of a private or domestic nature. Note: If a supply is not connected with the indirect tax zone, the Australian-based business recipient may be subject to a reverse charge: see Subdivision 84-A.” 52 This is achieved by reason of the operation of the amended s84-5 read with s84-10 A New Tax System (Goods and Services Tax) Act 1999.

effect of these rules is to ensure that to the greatest extent possible non-resident

suppliers are excluded from unnecessary inclusion in the Australian GST system.

For those that are not excluded, there is a requirement to identify the recipient of the

supply.53 There is no requirement for such suppliers of an “inbound intangible

consumer supply” to issue a tax invoice.54 The expectation imposed is that the supplier

will collect GST on the supply, unless they take “reasonable steps” to identify the

recipient as other than an Australian (domestic) consumer of the supply and unless

having done so they have formed a reasonable belief that the recipient is not such a

consumer. The supplier may rely on their “usual business systems and processes”55

in order to form their reasonable belief as to whether the recipient is an Australian

consumer or not. Information as to the Australian GST registration of the recipient of

the supply may be used to form an opinion only if the Australian Business Number of

the recipient has been provided and the recipient has made a declaration to the effect

that they are registered for GST.56 This is relevant because the possession of an

Australian Business Number is not evidence of GST registration – this is an often-

encountered misunderstanding even in Australia.

2.3 VAT rules governing inbound digital supplies: New-Zealand

New Zealand is the earliest of the so-called “New World” VAT regimes. It introduced

a comprehensive Goods and Services Tax in 1986. The New Zealand GST is seen as

relatively simple and comprehensive. It was introduced at a rate of 10% but this has

risen to the current 15% which became effective in 2010. The GST applies to the

supply of most goods and services inside New Zealand and most goods imported into

New Zealand as well as to specified imported services. Legislation affecting imported

intangibles was introduced in 2015 and became law in 2016. It is applicable from

1 October 2016. The affected supplies are described as cross-border “remote”

services supplied by non-resident suppliers.

The provision giving effect to this is a new s8B inserted into the Goods and Services

Tax Act 1985 as read with the amended definition in s2 of “remote service”.57

According to the New Zealand Inland Revenue Report explaining the changes:

‘A “remote” service is defined as a service where, at the time of the performance

of the service, there is no necessary connection between the physical location

of the recipient and the place of physical performance. The definition includes

digital services, such as e-books, music, videos and software downloads, as

well as non-digital services, such as general insurance, consulting, accounting

and legal services.’58

53 Section 84-100 A New Tax System (Goods and Services Tax) Act 1999. 54 Section 84-50 A New Tax System (Goods and Services Tax) Act 1999. 55 Section 84-100(2) A New Tax System (Goods and Services Tax) Act 1999. 56 Section 84-100(3) A New Tax System (Goods and Services Tax) Act 1999. 57 The newly inserted definition means of remote service means a service that, at the time of the performance of the service, has no necessary connection between (a) the place where the service is physically performed; and (b) the location of the recipient of the services. 58 New Zealand Inland Revenue. May 2016. “A special report from Policy and Strategy, Inland Revenue - GST on cross-border supplies of remote services” p.1.

A remote service can thus be distinguished from a service such as a haircut.59 To

these authors the provision of intangibles such as music, books, videos and the like

are not self-evidently “services”. The resolution of this apparent strangeness lies in the

existing definition of “services” in s2 of the Goods and Services Tax Act 1985 which

“means anything that is not goods or money”. It remains to be seen how the provision

is interpreted.

New Zealand observes usual norms as regards the operation of the place of taxation rule. Exports of supplies are zero-rated.60

As regards imported intangibles, the place of taxation rule for “remote services” in New Zealand is given effect through taxation based on the “residence” of the recipient of the supply. This is used as a proxy for the place of consumption of the cross-border intangible supply. A diverse set of characteristics is used in order to establish the residence of the recipient of the supply. These are set out in s8B(2) and require the non-resident supplier to treat the recipient as New Zealand resident if they have non-contradictory information as to two of six items. The items that support the conclusion that the recipient is resident in New Zealand are: the recipient’s billing address; the internet protocol (IP) address of the device used by the recipient; or “…another geolocation method”;61 the bank details of the recipient “including the account the person uses for payment or the billing address held by the bank;62 the country code of the mobile device’s subscriber identity module card (SIM card) that was used by the recipient; the location of the recipient’s fixed land line used to supply the service to them; or “other commercially relevant information”.63 The legislation includes rules that assist in determining the place of supply where the evidence is ambiguous, such as when the supplier has two non-contradictory indications of residence in some other place – in which circumstances the more reliable evidence must be chosen. The Commissioner of Inland Revenue can, in certain circumstances, prescribe the use of another method to determine a recipient’s residence, or may agree with the supplier on the use of another method, if a supplier is unable to establish a recipient’s residence as suggested by the items on the list discussed.64

Where such supplies are made on any significant scale to consumers that are not businesses the new rules require the non-resident to register in New Zealand and to remit GST on the supplies if they, in aggregate, exceed NZ$60,000 in a 12-month period or are expected to do so. It should be noted that only B2C supplies are taxed and that B2B supplies are zero-rated. New Zealand thus operates in consistency with the OECD Guidelines in taxing supplies to final consumers and not taxing supplies to businesses. The zero-rating of supplies in this way “…may allow the supplier to claim back New Zealand GST costs incurred in making zero-rated supplies to GST-registered businesses.”65

59 This example is actually given in GST: Cross-border Services, Intangibles and Goods: A Government discussion Document, (August 2015) at para 2.6. Online. Available at: http://taxpolicy.ird.govt.nz/publications/2015-dd-gst-cross-border/overview). Accessed: 16 September 2016. 60 Detailed qualifications to this rule apply, but for present purposes the export of intangibles and services not connected with New Zealand seems to be covered by s11A(k) of the Goods and Services Tax Act 1985. 61 Section 8B(2)(b). 62 Section 8B(2)(c). 63 Section 8B(2)(f). 64 Section 8B(3)(b). 65 New Zealand Inland Revenue. May 2016. “A special report from Policy and Strategy, Inland Revenue - GST on cross-border supplies of remote services”. p.2.

The operation of the rules imposes some complexity and thus compliance costs, in light of the need for suppliers to identify the residence of recipients and to treat different recipients differently. The default position is, however, that the non-resident suppliers will regard recipients as final consumers unless provided with evidence of GST registration of the recipient.66 There is some prospect of relief from overly burdensome compliance activities as the Commissioner is able to agree or prescribe an alternative manner of determining whether or not the recipient is registered.67

How errors in the charging of GST are to be dealt with seems a little untidy and reliant on goodwill between the suppliers and recipient. The Inland Revenue explains the rules that apply when there are errors thus:

“When a GST-registered recipient is inadvertently charged GST, they will have to seek a refund from the non-resident supplier, and the non-resident supplier may make a GST adjustment in their GST return when it is apparent that a mistake has been made. Alternatively, if the payment for the supply (including GST) is NZ$1,000 or less, a non-resident supplier will have the option to provide a tax invoice to the purchaser to allow them to claim a deduction, rather than to refund the GST charged and make the necessary adjustment in their GST return.”68

2.4 VAT rules governing inbound digital supplies: Summary

The VAT rules governing inbound digital supplies vary among the sample jurisdictions (refer to Table 1 for a summary of such rules). These rules constitute a range of approaches: Canada, on the one end of the spectrum, relies on the general VAT rules governing traditional supplies, while New Zealand, on the other end, makes use of detailed, inclusive and targeted rules that not only require registration of foreign inbound digital suppliers, but also ensure that such foreign suppliers do not incur irrecoverable VAT.

The two popular methods ensuring the application of the destination principle to inbound digital supplies is either the traditional reverse charge mechanism or the more recent requirement that the foreign supplier should register for VAT in the jurisdiction of consumption.

All four sample countries provide for the reverse charge mechanism. For both Canada and South Africa this mechanism is required for inbound digital supplies to final consumers. These consumers include both private individuals and businesses. In South Africa the reverse charge mechanism is only required if the foreign digital service provider is not required to register. In both Australia and New Zealand the reverse charge mechanism is only required of GST-registered businesses in receipt of partially creditable supplies.

The requirement that the foreign inbound digital supplier has to register in the country of consumption was first required by South Africa in 2014. This requirement has only

66 This is covered in the new s8B(5) as follows: “Having established the New Zealand residence of a recipient of a supply of services under subsection (2), a supplier must treat the recipient as not being a registered person unless the recipient— (a) notifies the supplier that they are a registered person; or (b) provides their registration number or New Zealand business number.” 67 Section 8B(6). 68 New Zealand Inland Revenue. May 2016. “A special report from Policy and Strategy, Inland Revenue - GST on cross-border supplies of remote services”. p.3.

recently become applicable in New Zealand (on 1 October 2016) and will only apply to Australia in 2017. This registration requirement is usually accompanied with a specific definition that demarcates the application of this requirement. These definitions could be very broad, such as the one in Australia that includes everything other than goods or real property, or the definition applicable in New Zealand that is also very wide and that distinguishes between digital and non-digital supplies with examples only meant to clarify and not to limit. The definition in South Africa is more limited and constitutes a finite list, with different headings, that does not include all intangibles.

The requirement for the foreign inbound digital supplier to register is usually also only applicable to inbound digital supplies supplied to residents of the jurisdiction of consumption. South Africa and New Zealand require an objective test to determine the residency of the consumer. In South Africa, a “two of three item”-test ensures residency and in New Zealand a “two of six item”-test does the same. Australia’s test is more subjective and requires the foreign digital supplier to have reasonable belief that the consumer is an Australian resident.

The registration of foreign inbound digital suppliers will only result in a net inflow of VAT in a specific jurisdiction to the extent that the supplies are made to final consumers. In acknowledging this fact, both Australia and New Zealand require such registration only for supplies to final consumers. South Africa neither distinguishes between inbound digital supplies in a business context (B2B) nor between final consumers (B2C), requiring both to register.

A threshold for registration is allowed for all three countries requiring the registration of the foreign digital supplier. Again, Australia and New Zealand are comparable to the extent that both allow the same threshold to both local and foreign suppliers. In South Africa, the vast discrepancy between the threshold for local and foreign businesses (R50 000 vs R1 million) could be seen as a token.

Table 1: Summary of VAT rules governing inbound digital supplies

Inbound digital supply rules

Canada South Africa Australia New Zealand

Specific rules No Yes Yes Yes

Effective date N/A 2014 1 July 2017 1 October 2016

Specific definitions Yes Yes Yes Yes

Type of definition “intangible personal property”

“Electronic service” Finite list not including all intangibles.

“Australian consumer” and “Inbound intangible consumer supplies”

“Remote service” that distinguishes between digital and non-digital services.

Place of taxation proxy

Place it may be used (not actual use)

Residence Objective “two of three item”-test

Australian consumer Reasonable-belief test

Residence. Objective “two of six item”-test, or as prescribed.

Non-resident registration69

Not required for non-resident not carrying on business in Canada.

Yes

Yes But only in relation to B2C supplies to non-registered recipients. Also “electronic distribution service”

Yes Also provides for “electronic marketplace”

Threshold Yes - same

Yes – not the same R50 000 vs R1 million

Yes - same

Yes - same

Types of taxable inbound supplies

Only B2C De Minimis rule (90%)

B2B and B2C

Only B2C Only B2C B2B are zero-rated

Reverse charging Yes – B2C

Yes – B2C (unless non-resident is registered)

Yes – GST registered business

Yes – GST registered business

3. Evaluation of the VAT rules against the OECD Framework

As we now understand the VAT rules governing inbound digital supplies in our sample

jurisdictions, the next step is to evaluate these rules against the principles incorporated

by the OECD Framework. These are the principles of Neutrality; Efficiency; Certainty

and Simplicity; Effectiveness; and Fairness70.

3.1 Neutrality

Neutrality is the first broad taxation principle included in the OECD Framework and is

clarified by six supportive guidelines, as outlined below. In general, the principle of

Neutrality aims to ensure an equitable correlation of VAT between conventional and

digital forms of commerce, as well as amongst different forms of e-commerce. This

principle also requires that business decisions be motivated by economic rather than

VAT considerations.71 VAT considerations in this regard include the tax amount paid

to authorities, the associated compliance burdens, and the cash-flow impact of VAT.

There are noticeable differences in the countries reviewed as regards how well their rules address the neutrality criteria. OECD Guideline 1 expects neutrality in the way

69 Without permanent establishment and complying with carrying on of business requirement in the country. 70 The principle of Flexibility, however, was omitted by the OECD Framework, possibly due to the fact that its dictate that tax systems remain adaptable and dynamic in accordance with commercial and technological developments could only be evaluated over the course of time. 71 OECD, “Electronic Commerce: Taxation Framework conditions, A report by the Committee on Fiscal Affairs”, as presented to Ministers at the OECD Ministerial Conference: “A Borderless World: Realising the Potential of Electronic Commerce”, 7-9 October 1998. p4.

VAT rules are framed, such that they are not the primary influence on business decisions.

Although Australia and New Zealand meet this criterion in that their changes will remove competitive distinctions between domestic and foreign suppliers and attempt to minimise the impact of the changes on B2B arrangements, neither Canada nor South Africa fare quite as well. Both these countries’ legislation leads to non-neutral tax treatment between domestic and foreign suppliers of inbound digital supplies. For South Africa the non-neutral treatment extends to inbound digital supplies not included in the finite list of digital supplies as defined. Canada’s non-neutrality has a wider impact as they do not have a requirement that foreign suppliers of inbound digital supplies should register for VAT in the country. This treatment could influence business decisions. Turning to the expectations in OECD Guideline 2 that taxpayers in similar situations

should be subject to similar levels of taxation, Australia and New Zealand are

compliant. The GST differential that used to exist between consumers of Australian

supplied intangibles and those supplied from overseas will be removed by the new

rules as both types of supply will be taxed at a similar rate. In New Zealand the same

is true. Its extension of GST to “remote services” will treat supplies by domestic

suppliers and those by non-resident suppliers in the same manner. Similar businesses

are treated the same whether they are residents or not. The same GST registration

threshold applies to residents and non-residents, and similar supplies are taxed the

same. Neutrality is achieved too in the way that supplies via non-resident

intermediaries will also be taxed under the new GST rules, in the same way as supplies

by principals. This is effected in New Zealand under its rules applied to a newly defined

phenomenon: the “electronic marketplace”. In Australia, a similar result is achieved

through the equal application of the new rules to what it terms an “electronic

distribution platform”.72 In such cases the “electronic distribution platform”73 assumes

the liability for the supply.

Canada’s rules result in consumers of Canadian-supplied intangible personal property

being treated inequitably in comparison to those consuming the supplies of non-

residents. In South Africa, the new rules do not fully comply with Guideline 2. This is

because in South Africa’s reverse charging model, similar levels of taxation do not

apply to residents and non-residents who download software from the Internet to be

consumed in South Africa. The South African resident is required to apply the reverse

charge mechanism to the transaction, whereas the non-resident is not. It is accepted

that although levels of taxation are not similar, it would most probably be impractical

to require the reverse charge mechanism for the non-resident. Non-residents without

either an address in South Africa or a bank account in South Africa would also not pay

VAT on inbound digital services.

In certain situations, double taxation may become a further complication when the

definitions of “resident” are not aligned between all the jurisdictions. This would be the

case when a South African resident temporarily works in the UK and purchases a

software application (an “app”) from a registered foreign digital service provider using

72 Section 84-60 A New Tax System (Goods and Services Tax) Act 1999. 73 Defined in s84-70 A New Tax System (Goods and Services Tax) Act 1999.

her or his UK address and a South African credit card. The UK tax authorities would

claim UK VAT (20%) based on the IP address and local residency address, and the

South African Revenue Service would claim South African VAT (14%) based on the

residency status and credit card payment made via the South African bank account. If

the South African undertook the same transaction while in South Africa, only the South

African VAT (14%) would have applied.

The differences in the various definitions of digital supplies could also result in non-

taxation to the extent that there would not be full compliance with the reverse charge

legislation. A picture received by e-mail might qualify as a digital supply in South Africa,

where it would not necessarily qualify as such elsewhere (i.e. in countries not studied

here). A further difference is the non-inclusion of the downloading of software from the

current South African finite list. The idea behind the South African finite list is to include

services that are predominantly supplied to private customers (B2C) and exclude

services predominantly supplied to businesses (B2B).

As for Guideline 3, which expects that foreign businesses should neither be more nor less advantaged than their domestic peers in the jurisdiction where the VAT may be due or paid,74 differences exist between the jurisdictions. In the case of Canada it seems that domestic and foreign suppliers will be treated differently. A domestic supplier supplying digital intangibles will have a disproportionate compliance burden when compared to foreign suppliers without a permanent establishment and who do not carry on a business in Canada. There would be no compliance burden for the foreign suppliers as they are not required to register or levy VAT in Canada on their inbound digital supplies. The current rules also discriminate against Canadian companies that must charge VAT on the sale of digital supplies. The low compliance with the reverse charge VAT rules results in Canadian businesses being at a competitive disadvantage in comparison to foreign digital suppliers who can charge lower prices as they exclude VAT.75 South Africa’s rules only partly comply with Guideline 3. Although the technical

application of South African legislation requires an individual to pay VAT on the

purchase of software locally (VAT will be added to the price of the transaction) and the

purchase of software from a foreign business (the reverse charge mechanism is

applicable), the likely non-compliance with the reverse charge mechanism results in

the foreign business having a price advantage.

As the inbound foreign digital service provider has the option to choose to register on

the payment basis, the foreign business may derive a cash flow benefit. The payment

basis option is available to local businesses only to a limited extent.

The fact that the preferred tax period option for an inbound foreign digital service

provider is a monthly VAT period may result in a cash-flow disadvantage when

compared to South African businesses that have a two monthly VAT period unless

their taxable supplies are greater than R30 million per annum.

74 OECD, International VAT/GST Guidelines, Guideline 2.4, November 2015, p16. 75 This is because of the low compliance with the reverse charge mechanism that will result in no VAT being levied on the inbound digital supplies.

While the threshold of R50 000 for registration when supplying inbound digital

intangibles may seem low, especially when juxtaposed with the R1 million required for

the registration of local businesses, the South African Revenue Service specifically

chose this limit to ensure neutrality amongst local and international businesses

operating in South Africa. This apparent discrepancy seems to undermine the principle

of equity, but consideration should be given to the fact that the R1 million includes the

world wide taxable supplies of the vendor, whereas the R50 000 includes only digital

supplies of the foreign service provider consumed in South Africa. It is submitted that

the R50 000 is symbolic, as it would not result in many foreign digital service providers

being relieved of the obligation to register for VAT in South Africa.

As for New Zealand and Australia, both have removed the consumption tax differential

that used to exist between consumers of domestically supplied intangibles and those

supplied from overseas as both types of supply will be taxed at the same rate and

foreign and domestic suppliers will not be treated differently.

Guideline 4 expects that the burden of VAT should not be borne by a taxable business unless it is explicitly imposed. It seems that Canada does adhere to Guideline 4, as it does not require a taxable business to incur VAT. However, apart from allowing foreign businesses to voluntary register for VAT in Canada, there does not seem to be another mechanism to ensure that foreign businesses do not incur irrecoverable VAT as required by Guideline 5. The same consideration applies to Australia. The way in which the Australian rules narrow the incidence of the GST to domestic final consumption of the affected supplies (either through private consumption or non-creditable consumption within businesses) is a clear attempt to ensure that only final consumption is taxed. It is expected that this will be how the rules will operate. As for Guideline 5 – Australia falls short of New Zealand’s measures that allow affected entities to deduct foreign VAT in certain circumstances. Australia would allow Australian GST to be credited (provided the entity has not elected to be a limited registration entity) but has no provision that extends further than that. Australian legislators presumably assume that the supply by the foreign entity into Australia is an export and should thus be zero-rated (GST-free in Australian terminology) in the home jurisdiction of the supplier. New Zealand stands out on the criteria in Guidelines 4 and 5. Firstly, as in Australia, a reverse charge rule has been developed for New Zealand businesses receiving services and intangibles from a non-resident supplier other than for making taxable supplies and thus they must pay consumption tax on final consumption not for business purposes.76 In order to alleviate compliance costs this is subject in New Zealand to a de minimis rule.77 In addressing the expectation in OECD Guideline 5 that foreign businesses do not incur irrecoverable VAT, the New Zealand approach is to allow for consumption tax that has been incurred by a non-resident supplier in a foreign jurisdiction.78 White explains by example: 76 By operation of a new s20(3JC) in the Goods and Services Tax Act 1985. 77 The New Zealand de minimis rule requires that the proportion of taxable business use of the remote services consumed must be less than 95% of its overall use in order for this rule to apply. 78 Section 20(3) of the Goods and Services Tax Act 1985 now includes for deduction the elements set out in new s20(3)(dc) which allow for “(dc) an amount of output tax charged on a supply of remote services to the extent that the supplier has, in relation to the supply, incurred liability for, returned, and paid a consumption tax in another country or territory, when the remote services are (i) physically performed in New Zealand; and

“[This] rule … would prevent double taxation from arising on a supply of remote

services that are physically performed in New Zealand for an Australian-

resident consumer in New Zealand. It allows a deduction that would offset their

liability for GST in New Zealand to the extent that the supply has already been

taxed in another jurisdiction. The Bill Commentary contains the following

example:…

After the proposed Australian rules for cross-border services are

implemented, Book Co a New Zealand seller of e-books, supplies e-

books to an Australian resident who is temporarily in New Zealand on

holiday. Book Co is liable for and has returned and paid GST in Australia.

Therefore, new section 20(3)(dc) will allow it to claim a deduction against

the New Zealand GST charged on the supply. As the Australian GST

rate is 10%, Book Co effectively returns [New Zealand] output tax of 5%

on the supply.”79

In the case of South Africa, Guidelines 4 and 5 are worthy of comment. South African VAT legislation mainly complies with Guideline 4. One exception

involves non-residents acquiring inbound digital services that are consumed in South

Africa. South Africa’s legislation in this instance does not strictly follow the destination

principle that requires that the taxing right should be in the jurisdiction of consumption.

One should also note that the non-inclusion of certain digital services from the finite

list defining inbound digital supplies does not result in South Africa not levying VAT on

final consumption. The non-inclusion of certain digital supplies seems to result from

the fact that they apply mainly in the B2B context. To the extent that they apply in the

B2C context, the reverse charge mechanism is supposed to ensure VAT on final

consumption.

Guideline 5 provides for an option to allow the foreign business to obtain a refund

through a specific regime. In South Africa, the Davis Committee80 is of the opinion that

further consideration and evaluation should be given to the implementation of an

effective refund mechanism in respect of non-resident suppliers as well as the right to

claim input tax deductions in respect of taxable goods and services acquired (e.g.

similar to the provisions implemented in New Zealand’s recent GST amendments).

Guideline 5 also provides for the local registration of the foreign business to obtain a

VAT refund. In South Africa (as in Australia and New Zealand) foreign businesses

could obtain a refund through local VAT registration, but only to the extent that they

are carrying on an enterprise as defined and that they make taxable supplies in South

Africa exceeding R50 000 per annum. Unless their registration is required when it

meets the registration requirements of inbound digital service providers, they would

have to appoint a representative taxpayer in South Africa and they would also be

(ii) supplied to a non-resident person in New Zealand who is not a registered person;…” 79 David White. 2015. “New Zealand: Offshore Supplier GST Registration Legislation”. AGSTJ.115-120. at 120. 80 Davis Tax Committee (DTC) VAT First Interim Report for public comment. 2015.

required to open a South African bank account.81 They are therefore subject to

increased compliance responsibilities.

Guideline 6 raises an expectation that specific administrative requirements imposed on non-resident businesses will not be disproportionately greater than those imposed on resident businesses. Canada is unique in the group in that it requires security from certain foreign registered VAT vendors in Canada. That aside, the administrative compliance requirements do not seem to be disproportionate when compared with local Canadian VAT vendors. A solution to the non-neutrality would be to require a non-resident who has significant digital supplies into Canada to register for VAT in Canada. South Africa mainly complies with Guideline 6. A possible inappropriate compliance

burden relates to inbound digital supplies to recipients in a ‘group of companies’82 that

are not excluded from the ambit of the inbound digital supply provisions.

It is submitted that an inappropriate compliance burden is also created for foreign

suppliers of inbound digital supplies as the South African legislator does not

differentiate between B2B and B2C supplies. The legislator could consider simplifying

the administrative burden by adopting a de minimis rule (for example, 95% or more)

to allow non-resident digital services suppliers whose B2B supplies in relation to total

supplies are equal to or exceed the de minimis rule not to register for VAT purposes.

On the one hand, this would reduce compliance tasks and keep compliance costs to

a minimum, but on the other, it would require the non-resident to gather information

regarding the nature of use of each and every supply they bring into South Africa. It is

therefore not totally clear which option would result in the lowest compliance cost. As

for Australia, the most onerous of the Australian rules seems to be the requirement

that the foreign supplier must form a “reasonable belief” as to the residence and nature

of the Australian recipient of their supply. The uniquely Australian awkwardness

inherent in the fact that an Australian Business Number is not enough and there must

be further inquiry as to the GST registration status of the recipient is a burden. But it

is a burden that seems unavoidable at present and is shared by domestic suppliers.

The fact that the new legislation refers to “business processes” as a means of forming

an opinion about the recipient is welcome if it means natural business systems can be

used to assist tax compliance; as is the opportunity for limited registration and limited

involvement in the Australian tax system.

The New Zealand approach is also fairly described as compliant with Guideline 6.

Some effort has been made to achieve this. The report of the Parliamentary Finance

and Expenditure Committee which accompanied the Bill83 introducing the

amendments reveals that several considerations were taken into account. Inter alia it

reports on measures to:

smooth transition for fixed term contracts that span the introduction of the new

rules;84 reduce compliance costs and revenue risk by not charging GST on remote

81 Section 23(2) of the VAT Act. 82 As defined for Income Tax purposes, Act 58 of 1962. 83 The Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Bill. 84 These considerations suspend the rule that “treats periodic payments as successive supplies and applies GST to each payment”. These contracts are to be treated as not successively supplied for the earlier of 365 days or the term of the contract

supplies from offshore suppliers to New Zealand GST-registered businesses;85

clarify the means by which a non-resident supplier will predict (having regard to

currency fluctuations) whether there are reasonable grounds to believe that the

value of supplies in the next 12 months will exceed the $NZ60,000 threshold;86 and

ease the calculation burden associated with foreign currency conversions by

allowing non-resident suppliers to express the price of remote service supplies in

their own currency at the time of supply and to convert the aggregate amounts into

New Zealand currency at the last day of the relevant taxable period.87

3.2 Efficiency

Regarding compliance cost, the OECD Framework’s second principle of Efficiency

goes further than the Neutrality principle in that it not only requires equity of the

compliance costs between local and foreign businesses, but also requires that

compliance costs for businesses and administrative costs for the tax authorities in

general should be minimised as far as possible.88

VAT generally places a heavier compliance burden on non-resident than on resident

suppliers.89 Imported services (reverse charging) should apply to B2B internationally

traded services and intangibles that are taxable in the jurisdiction where the customer

is located, where it is consistent with the overall VAT design.90 This minimises the

administrative burden and complexity for non-resident suppliers and shifts the tax

burden from the supplier to the customer, relieving the non-resident supplier of foreign

VAT obligations.91

The Canadian VAT system seems not to be efficient as the Canadian Revenue

Agency will suffer revenue-loss due to its inability to effectively collect tax on all

inbound digital consumer transactions. There are further inefficiencies as market

distortions will result (e.g., a U.S. web-based business will avoid acquisition of a

Canadian affiliate because of potential VAT liability) that will inhibit overall economic

growth in Canada and harm Canadian economic welfare.92

and resulted in Clauses 68B and 85B in the Bill. See Commentary on Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Bill, p.8. 85 For their convenience an offshore supplier and a GST-registered recipient could agree to treat the supply as having been made in New Zealand and zero-rated. The Bill as enacted took this a step further allowing offshore suppliers to elect, unilaterally, to zero-rate supplies without consent from the New Zealand recipient. This resulted in the new s8(4D) of the Goods and Services Tax Act 1985. See Commentary on Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Bill, p.9. 86 The supplier is allowed to use any fair and reasonable currency conversion method for past supplies and may use the currency conversion based on the exchange rate at the start of the 12 month period to be predicted.This resulted in the new s51(1B) of the Goods and Services Tax Act 1985. See Commentary on Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Bill, p.9. 87 They can alternatively choose (with approval) a different date for making the conversion. This resulted in the new s77(3) and (4) of the Goods and Services Tax Act 1985. See Commentary on Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Bill, p.9. 88 OECD, International VAT/GST Guidelines, November 2015, p.56. 89 OECD, International VAT/GST Guidelines, November 2015. 90 OECD, International VAT/GST Guidelines, November 2015. 91 OECD, International VAT/GST Guidelines, November 2015. 92 MA Geist. 2002. “Canada’s GST e-commerce policy (how to catch the big fish)”. Internet and e-commerce law in Canada. 3(1). Butterworths.

As for South Africa, the Guide issued to assist foreign suppliers of digital services is very comprehensive and contributes to certainty regarding the administrative processes required.93 It will be evident from the preceding discussion on neutrality that the New Zealand

changes to cover intangible supplies will also be more efficient than they might

otherwise be in that non-resident suppliers of remote services will have a fair degree

of flexibility as regards how they arrange themselves with resident GST registered

recipients (when they have to engage in exchange rate calculations etc.). There is a

burden on suppliers in attempting to establish whether a recipient is resident and is

registered. Parliament in New Zealand appears to have deliberately tried to assist in

this by inserting in the law an explanation of how an offshore supplier is to decide the

residence of a customer.94

Other reliefs for non-residents include the fact that no GST need be charged on

supplies to New Zealand GST-registered businesses and thus there is no need to

provide invoices. But the efficiency is lost in cases where GST has been inadvertently

charged to a GST-registered business and the payment for the supply is less than

NZ$1,000 (in which case the non-resident is “allowed” to provide a tax invoice so as

to enable the registered business to claim the input tax). Firstly, it is not obviously in

the best interests of the non-resident to do so – unless it is sufficiently concerned about

its relationship with the recipient. If it is concerned to maintain goodwill, the to-and-fro

associated with such an arrangement will inevitably lead to complex communications

to resolve the matter. Where different languages are concerned the opportunity for

confusion is obvious.

The Australian rules for the taxation of inbound intangible consumer supplies are

largely efficient in that treating B2B supplies as GST-free (zero-rated in traditional VAT

terms) will narrow their incidence. The facility of a limited form of registration will lessen

the impact on foreign business and on the tax authority which will have little to do with

overseas suppliers other than to keep them informed of anything important and to

collect their money. It is, however, difficult to discern in the Australian rules many

special concessions to the needs of businesses in identifying features available

through their routine business systems to identify the residence of consumers or to

smooth foreign currency liabilities. This falls somewhat behind New Zealand.

3.3 Certainty and Simplicity

The third broad principle is the principle of Certainty and Simplicity. This principle suggests that VAT rules should be clear and easy to understand so that taxpayers can

93 2015. SARS. VAT registration guide for foreign suppliers of electronic services. Online. Available at: http://www.sars.gov.za/AllDocs/OpsDocs/Guides/VAT-REG-01-G02%20%20VAT%20Registration%20Guide%20for%20Foreign%20Suppliers%20of%20Electronic%20Services%20%20Extenal%20Guide.pdf 94 This involves the insertion of a new s8B in the Act and, for difficult cases the new subsection 8B(3) gives the Commissioner of Inland Revenue discretion “…to prescribe or agree to an alternative method for determining this.” A further concession to the need to support non-residents is the new s8B(3B) which affords guidance on what matters are to be taken into account for the purposes of this discretion. Commentary on Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Bill, p.10.

anticipate the tax consequences in advance. This includes the customer being aware of when, where, and how the tax is to be accounted for.95

Reverse charging is generally not an effective instrument to collect tax on cross-border

B2C supplies as compliance is low.96 The most effective approach is to require the

non-resident supplier to register for VAT in the foreign tax jurisdiction. A simplified

registration and compliance regime can aid compliance by non-resident suppliers.97

Canada’s rules relating to the supply of cross-border digital services are far from

simple. This can be the curse of a federal system. The mere fact that the ten different

provinces apply different rates and even levy different types of consumption taxes

complicates the VAT on the cross-border digital supplies. Canada, however, attempts

to create certainty and to contribute to simplicity with the Technical Information

Bulletins, specifically one entitled “GST/HST and electronic commerce.” The reader

notes that the document was last updated in 2002 and one cannot help wondering

how everything can be addressed in a bulletin that is already 14 years old and that is

intended to apply to so dynamic an environment as digital supplies.

Presumably certainty is assisted in Canada and the other three jurisdictions in that businesses are able to request a VAT/GST ruling from the Canadian Revenue Agency/Australian Taxation Office for certainty in respect of characterizing a particular transaction.98 The mere fact that this option is available, however, possibly suggests complexity. The fact that the VAT on digital supplies in Canada is dealt with under the traditional VAT rules, without specific provisions focusing on inbound digital supplies, contributes to the complexity of the Canadian VAT rules applicable to digital supplies. The South African system is complex in some aspects too. A foreign supplier of digital services will need to make itself aware of when, where and how the tax is to be accounted for. The finite list of digital supplies used in South Africa does not provide certainty regarding when a foreign provider of digital supplies should register for VAT. As already mentioned, however, there is an effective system where foreign providers of digital services could apply for a ruling if they are uncertain about the characteristics of their digital supplies.99

It is further unclear what the South African VAT situation would be in circumstances

involving mixed supplies. Possibly, in cases where a mixed supply of various

components contains even a single element defined as a digital supply, the whole

service will be caught in the South African VAT net.

Complexities also arise if the same foreign digital service provider provides two types

of services to a resident, but supplies only one invoice. If the two types of services

differ in nature to the extent that the one is included in “digital service” as defined but

95 OECD, International VAT/GST Guidelines, November 2015, p 56. 96 OECD, International VAT/GST Guidelines, November 2015. 97 OECD, International VAT/GST Guidelines, November 2015. 98 2002. Canada Customs and Revenue Agency.”GST/HST and electronic Commerce”. GST/HST Technical Information Bulletin, B-090. Australian Taxation Office Ruling 2006/11 99 The Davis Committee recommended that a guide be issued to accompany the Regulation to clarify the uncertainty.

the other not, one item on the invoice will carry VAT at 14% and the other will not have

any VAT consequences. This complexity will definitely increase tax compliance

requirements.

South Africa does not distinguish between the supply of digital services in a B2B and

B2C context as expected by the OECD Guidelines.100 The South African Revenue

Service is of the opinion that apart from avoidance opportunities, a distinction between

B2B and B2C might have resulted in an increased compliance burden on the part of

foreign digital service providers. Although the compliance burden for a registered

foreign digital service provider would have increased, the current situation increases

the total compliance burden as it requires many more digital service providers to

register for VAT purposes without a corresponding increase in VAT collected.

The fact that the whole registration process is electronic simplifies the administrative

burden, as does the fact that a foreign supplier of digital services is required to

commence VAT compliance from a date determined by the South African Revenue

Service.101

The South African Revenue Service has issued a very detailed guide with information

for inbound digital service providers that explains how to register and make VAT

payments. Apart from the registration process that could be completed electronically

in its entirety, the rendering of VAT returns and VAT payments are also conducted via

electronic channels and all digital service providers must register on the South African

Revenue Service electronic filing platform. 102

It is, however, submitted that non-residents filing VAT returns should have the option

to do so remotely and automatically – i.e. through a secure connection or protocol

without the foreign supplier (or their third-party compliance providers) having to access

the South African Revenue Service web portal and file the VAT return manually. This

makes sense especially for the foreign suppliers registered for VAT in many

jurisdictions that use global compliance software to handle all consumption tax

compliance and reporting.

Certainty is clearly addressed under the Australian rules wrapped up, as they are, with

multiple definitions designed to narrow and focus the incidence of the tax. This is a

distinct feature of the GST law in Australia where little is left to chance. It is accepted

that this focus has been effected with elegance of drafting. But is it simple? The use

of multiple-layered definitions creates a high level of complexity when attempting to

understand the rules with no background. The operation of the rules will, however,

probably be simple and the policy principles behind them (that foreign supplies made

on a sufficient scale to Australian resident final consumers are subject to Australian

GST which must be paid to the Australian tax authority) ought to lead to operational

100 The initial call by tax practitioners in South Africa was for foreign digital service providers to be required to register only if they provide their services in a B2C context. 101 SARS. 2015. “VAT registration guide for foreign suppliers of electronic services. Online. Available at: http://www.sars.gov.za/AllDocs/OpsDocs/Guides/VATREG01G02%20%20VAT%20Registration%20Guide%20for%20Foreign%20Suppliers%20of%20Electronic%20Services%20%20External%20Guide.pdf Accessed? 102 SARS. 2015. “VAT registration guide for foreign suppliers of electronic services”. Online. Available at: http://www.sars.gov.za/AllDocs/OpsDocs/Guides/VATREG01G02%20%20VAT%20Registration%20Guide%20for%20Foreign%20Suppliers%20of%20Electronic%20Services%20-%20External%20Guide.pdf Accessed?

simplicity and the rules ought to be relatively easy to follow for tax compliance

personnel in affected businesses. The real test of this simplicity will be the effective

communication of the rules to foreign businesses by the Australian Taxation Office. At

the time of writing no information about the new rules, which are due to take effect

from 1 July 2017, seems readily available on the website.103

On the one hand, the characteristically comprehensive nature of New Zealand’s

approach to GST will assist certainty and simplicity in relation to remote service

supplies. The definition is broad and inclusive so there should be little difficulty

associated with some intangible supplies being included and others not. On the other

hand, the definition is somewhat counter-intuitive. The idea that a book (even an e-

book) or an item of software is a “remote service” may seem surprising to ordinary

business people, especially those whose native tongue is not English. The authors

expect that some early education will be required if comprehensive compliance is to

be achieved.

That aside, the New Zealand collection system seems relatively easy to follow for any

taxpayer familiar with VAT. Simplicity through breadth is possibly a hallmark of the

New Zealand VAT system.104 It remains to be seen how easy it is to register for GST

as a non-resident supplier. At the time of writing the information for non-resident

suppliers was available from the New Zealand Inland Revenue Department website105

only via the “News and updates” links on its homepage. It was not obvious to the

authors of this paper that the relevant registration information is available to non-

residents in languages other than English.

3.4 Effectiveness

Effectiveness is identified as the fourth broad principle and determines that VAT rules

should produce the right amount of tax at the right time.

It is perceived that the different “categories” of digital services that Canada includes in

the definition of digital supplies provides for a more flexible and therefore more

effective legislative framework. It is, however, clear that the Canadian system is not

effective in ensuring that tax is levied on the final consumption of all inbound digital

supplies.

The future effectiveness of the South African VAT legislation on inbound digital

supplies depends on both the way “digital service” is defined, and on how and where

the legislator chooses to do so. The definition of “digital services” may decrease the

effectiveness of the legislation (as a finite list and not as broad categories). However,

the fact that South Africa specifically defines its “digital services” by regulation should

103 See https://www.ato.gov.au/Business/GST/ Accessed: 16 September 2016. 104 As White explains “… New Zealand policy makers have a fortunate starting point: a GST that has few exemptions and a single domestic rate should be relatively simple for offshore suppliers to comply with.” David White “New Zealand: Offshore Supplier GST Registration Legislation”. 2015. 15. AGSTJ 115-120 at p.115. 105 This may be found at https://www.ird.govt.nz/industry-guidelines/non-res-bus-gst/online-services/gst-supplying-remote-services.html Accessed 16 September 2016.

create the required flexibility to adapt to technological changes, but only if the

regulation is in fact revised frequently.

It is too early to judge whether the Australian rules will be effective. The legal

framework seems to be well-established. The test of efficacy will be the number of

registrations for GST that are forthcoming from the major suppliers of inbound

intangible supplies to Australian consumers. At the time of the announcement of these

changes it was far from clear and it seemed as though no meaningful data had been

obtained as to how many suppliers would be affected. The then Treasurer said at the

announcement of these new rules that “[t]here could be hundreds. In relation to digital

products, it’s easy to identify a number of those companies such as Netflix or

Facebook or others.”106 But when the Regulation Impact Statement for the relevant

Bill came to light the prediction was more modest and the Explanatory Memorandum

to the Bill suggests that the number of entities that will be impacted by the voluntary

compliance model will be relatively few. It said, “It is anticipated in the order of 100

non-resident entities will register for and remit GST, through either a simplified or full

registration regime, as a result of this measure.”107

It may indeed be the case that the meaningful majority of supplies of this sort (and

thus the majority of the revenue) will come from relatively few major providers of

intangible products accounting for the change in Australian consumption and

expenditure patterns.

New Zealand, like Australia, is not expecting a large number of non-resident suppliers

of remote service supplies to register and comply with the new requirements.108 But

the Government of New Zealand sees the impact of the tax as significant. Official

statements indicate that GST is 18% of the overall tax collection in New Zealand and

that the taxation of intangible supplies will plug a gap in that collection. The growth of

the internet has affected New Zealand as much as it has many other economies.109

As is the case in Australia and other jurisdictions, all hopes are pinned, so it seems,

on the “offshore supplier registration model” which has been reported to be successful

in other jurisdictions.110 Predicting future behaviour is difficult.111

3.5 Fairness

Fairness, requires that the potential for tax evasion and avoidance be minimised while keeping counteracting measures proportionate to the risks involved.

As regards competing business suppliers of digital services Canada, Australia and New Zealand all seem to be fair. Certainly, the latter two jurisdictions have made a point of describing their changes as intended to remove unfairness between local and

106 Press Conference Canberra 21/8/15. 107 Summary of Regulation Impact Statement, Tax and Superannuation Laws Amendment (2016 Measures No. 1) Bill 2016. 108 David White “New Zealand: Offshore Supplier GST Registration Legislation”. 2015. 15 AGSTJ. 115-120 at p.115. 109 The Hon Todd McClay, Minister of Revenue, “”GST: Cross-border Services, Intangibles and Goods: A Government discussion” document. August 2015 at para 2.6. Online. Available at: http://taxpolicy.ird.govt.nz/publications/2015-dd-gst-cross-border/overview). Accessed: 16 September 2016. 110 The Hon Todd McClay, Minister of Revenue, “GST: Cross-border Services, Intangibles and Goods: A Government discussion” document. at para 2.23. August 2015. Online. Available at: http://taxpolicy.ird.govt.nz/publications/2015-dd-gst-cross-border/overview. Accessed 16 September 2016. 111 David White. 2015. “New Zealand: Offshore Supplier GST Registration Legislation”, AGSTJ 15: 115-120 at 117.

overseas suppliers by taxing their supplies of services and other intangibles in the same way.112 New Zealand’s approach113 seems fairer still in the willingness to allow input tax credits for VAT incurred overseas.

South Africa stands out on account of its approach. It does not distinguish between digital supplies in a B2B and a B2C context. This is presumably so as to limit tax avoidance opportunities, but the verdict is still out on whether it is fair to register inbound digital service providers who only supply digital services in the B2B context.

4. Conclusion

In an attempt to untangle the World-Wide-Web of VAT on inbound cross-border supplies the OECD initiated a co-operative effort on an international level and proposed the OECD Framework that includes five broad tax principles. To evaluate the progress of co-operative efforts on an international level, this paper critically analyses – against the five broad tax principles - the VAT on inbound digital supplies in four countries.

Regarding the first principle, that is Neutrality, none of the jurisdictions is perfect and

each has wrinkles in their rules that will pose challenges for business which may result

in some loss of neutrality. New Zealand, however, stands out as a jurisdiction with the

simplest rules and the least differential burden and inherent distortions.

Efficiency is the second principle and the measures discussed suggest that the VAT

rules of all four jurisdictions are fairly efficient. The principal efficiency concern,

however, seems to be that which is common to all the systems using an offshore

supplier registration scheme, and that is how to ensure compliance by entities that are

not within the jurisdiction and are beyond the reach of legal enforcement measures. In

Canada’s and South Africa’s cases there will be a problem ensuring compliance with

reverse charging by consumers. For New Zealand, Australia and South Africa the

question inevitably remains as to the power of these tax authorities to enforce their

GST laws in cases where a non-resident supplier of remote services choses or fails to

comply. There may also be a need to consider what is to be done about late registrant

non-residents who have inadvertently failed to comply but later do so and seek

registration. Presumably it would be in the interests of efficiency to treat their earlier

non-compliance leniently in order to encourage them to join the system. Onerous

penalties and back interest may discourage compliance.

It is thirdly also proposed that the VAT rules comply with the principle of Certainty and

Simplicity. All four jurisdictions achieve a minimum level of certainty. None of them

can really claim simplicity. The use of broader inclusive definitions seems preferable

to approaches like that of South Africa which is to address certainty through lists. The

problem with lists is what they miss and with the penumbra sometimes associated with

112 Fairness has been an important part of the political mantra associated with the changes to the Australian rules and has been used as the major justification for their introduction. The unfairness of allowing the GST system to provide foreign suppliers with the means to compete with domestic suppliers has been referred to repeatedly in the run up to the changes. That this source of competition between Australian and domestic providers will be removed cannot be doubted. The same GST registration threshold will be applied to domestic and foreign suppliers and B2B supplies will for the most part not be impacted. See for example The Hon S. Morrison MP, Second Reading Speech Tax and Superannuation Laws Amendment (2016 Measures No. 1) Bill 2016, 10 February 2016; The Hon J.B. Hockey MP, Budget Speech 2015, delivered 12 May 2015. 113 David White. 2015. “New Zealand: Offshore Supplier GST Registration Legislation”. AGSTJ 5:115-120 at p.117.

certain items. All the jurisdictions make an effort to guide taxpayers – all have a rulings

system to assist in this. But it would appear that tax practitioners can rest easy in the

knowledge that there will still be a need for independent professional advice that is

able to cut through the layers of complexity in order to provide clients with the

necessary understanding.

It might be concluded in respect of Effectiveness (the fourth principle) that all the

systems discussed will be relatively effective, although Canada stands out as having

limitations. In every case the level of voluntary compliance will be the critical thing to

watch.

The evaluation of the final principle, Fairness, suggests that the three developed countries (Canada, Australia and New Zealand) are regarded as more fair in their approach to the taxing of inbound digital supplies. Although South Africa has a world-class revenue authority, one could not help but wonder what role its status as “developing country” played in their decision to cast their VAT net wider to also require the registration of businesses in the B2B context.

Our evaluation found that although all four countries used different terminology and have quite different structures in their various VAT rules, to a large extent they succeeded in complying with the majority of the broad principles as listed in the OECD framework. The next step would be to investigate more deeply the aspects where they seem to not comply and to find solutions that could further contribute to the co-operative efforts.

The fact that the Fourth Industrial Revolution is evolving at an exponential rather than a linear pace will also require constant evaluation not only of the OECD Framework, but also of the VAT rules of jurisdictions. We therefore acknowledge that the Untangling of the World-Wide VAT Web on inbound digital supplies is likely to be a never ending process...