GST and ecommerce - from traditional to marketplace consumption via the inernet
1. Please note that the views expressed in this paper are the personal views of the author and not necessarily the views of PwC
GST and ecommerce from
traditional to marketplace
consumption via the internet
Suzi Russell-
Abstract
This paper provides a brief overviewof the Base Erosion and Profit Shifting (BEPS)progress in
Australia as it relates to the digital economy, plus the complexities of taxing imported services
supplied via an internet marketplace platform from a GST perspective.
All legal references are to the A NewTaxSystem (Goods and Services Tax)Act 1999
The growth in online spending
In Australia, online retail spending increased to $16.6 billion AUD annually for the year to January
20151 and beat the growth in spending in traditional shop-front retail stores by approximately
4.3%.2 On 30th March 2015, the Australian Government released its Tax discussion paper (Re: think
Better tax system, better Australia). At 8.2, there is a recognition of the pressures being placed on
the system from online spending:
tionally and domestically that the strong growthin online
retail spending by consumers will continue to increase imports of lowvalue goods, services and
intangibles directly over the internet. Without reform, this would increase foregone GST revenue
and affect the competitiveness of
The exclusion from the GST base for imported services reflects howdifficult it is to identify the
supplier and recipient in a transaction because it has not occurred physically and, unlike imported
1 National Australia Bank, NAB Online Retail Sales Index in depth report (January 2015) (http://business.nab.com.au/wp-
content/uploads/2015/03/NAB-Online-Retail-Sales-Index_in-depth-report-January-20151.pdf)
2 Ibid
2. Please note that the views expressed in this paper are the personal views of the author and not necessarily the views of PwC
Globally, some commentators predict worldwide business to consumer ( B2C ) ecommerce sales to
increase by 17.7% this year to reach $1.77 trillion USD in sales.3 Alongside the rapid growth in
online spending, we are seeing the proliferation of innovative sales platforms and collaborative
consumption models with a noticeable departure from the traditional online merchant-2-
consumer model to an increasing reliance on marketplace models to introduce merchants to
customers and vice versa.
The advent of the online marketplace
Marketplaces by definition are places, real or virtual, where goods and services are exchanged. We
have had marketplaces almost as long as humans have had cities, but over the last few years,
advances in information technology and identity verification have increased their proliferation
sharing e the collaborative e
you can convince enough buyers and sellers to use your platform.
The online marketplace is a virtual platform (akin to an online shopping mall) where merchants can
display and sell their products to an enormous range of customers. The internet gives merchants
instant access to a global customer base without the need to incur significant selling costs. The
easiest way for merchants to convert advertising dollars to sales is to do this is via a marketplace
which acts as a funnel to potential buyers. There are examples of online marketplaces everywhere
and a range of platforms being used to provide marketplaces - from social media sites to search
engines to group buying sites. Three basic marketplace models prevail, which are examined in more
detail below.
Digital and the BEPS action plan
Fifteen specific actions were action plan4 with the
first set of measures and reports released in September 2014.5 The aim of these action points is to:
give countries the tools they need to ensure that profits are taxed where economic activities
generating the profits are performed and where value is created, while at the same time give
business greater certainty by reducing disputes over the application of international taxrules, and
standardising requirements. 6
Action 1 of the BEPS Action Plan focuses on addressing the tax challenges of the digital economy
and possible options to address these challenges. In September 2014, the OECD produced a report
on the background and approach to addressing the tax challenges of a digital economy, which noted
that:
Because the digital economy is increasingly becoming the economy itself, it would be difficult, if
not impossible, to ring-fence the digital economy from the rest of the economy for tax
purposes he digital economy is in a continuous state of evolution and possible future
developments need to be monitored to evaluate their impact on taxsystems
3 eMarketer, Global B2C Ecommerce Sales to hit $ 1.5 Trillion this year driven by Growth in emerging markets: Asia Pacific leapfrogs
Nort largest regional ecommerce market (February 3 2014) (http://www.emarketer.com/Article/Global-
B2C-Ecommerce-Sales-Hit-15-Trillion-This-Year-Driven-by-Growth-Emerging-Markets/1010575)
4 OECD, Action Plan on Base Erosion and Profit Shifting (2013) (http://www.oecd.org/ctp/BEPSActionPlan.pdf)
5 OECD, About BEPS (April 2015) (http://www.oecd.org/tax/beps-about.htm)
6 Ibid
3. Please note that the views expressed in this paper are the personal views of the author and not necessarily the views of PwC
While the digital economy does not generate unique BEPS issues, some of its key features
exacerbate BEPS risks hese BEPS risks are being addressed in the context of the BEPS Project,
whichwill align taxation witheconomic activities and value creation. 7
Relevantly for this paper, the report also noted that:
the challenges related to nexus, data and characterisation overlap with each other to a
certain extent;
evolving ways of carrying on business raise questions about whether current nexus rules
continue to be appropriate;
increasing reliance on data collection and analysis, and the growing importance of multi-
sided business models raise questions about valuation of data, nexus, and profit attribution,
as well as characterisation;
the development of new business models raises questions regarding characterisation of
income; and
cross-border trade in goods, services and intangibles creates challenges for VAT collection,
particularly where such products are acquired by private consumers from suppliers abroad.
With respect to consumption-based taxes generally (such as VAT and GST), a first set of guidelines
was released after the second meeting of the OECD Global Forum on VAT in December 2014. These
guidelines have been created with the aim of ensuring VAT neutrality and implementing destination
An extension of these
guidelines is scheduled for completion in 2015 and aims to capture the cross-border sales of services
in the B2C industry.8
Overseas measures
In recognising the global trend in internet sales and the leakage of tax arising from the cross-border
nature of ecommerce to private consumers, many overseas countries have recently introduced
special taxing provisions for B2C ecommerce sales, for example:
South Africa 1 June 2014
EU 1 January 2015
South Korea 1 July 2015
Norway - 1 July 2015
Japan on 1 October 2015
Some of these jurisdictions impose the GST/VAT obligation on the overseas supplier; others have
adopted a simplified measure taxing the intermediary online platform.
Australia
Against this backdrop, the Australian government has faced increasing pressure to bring cross-
border online consumption into the GST net. Just this month (9th April 2015), the Treasurer, Joe
Hockey, announced at a Q&A Session following the Council on Federal Financial Relations Meeting,
that imported intangibles would
Treasurer announced:
7 OECD/G20 Base Erosion and Profit Shifting Project Executive Summaries 2014 Deliverables (http://www.oecd.org/ctp/beps-2014-
deliverables-executive-summaries.pdf)
8 OECD (2014), Consumption Tax Trends 2014: VAT/GST and excise rates, trends and policy issues, OECD Publishing, Paris. Page 10
(http://dx.doi.org/10.1787/ctt-2014-en)
4. Please note that the views expressed in this paper are the personal views of the author and not necessarily the views of PwC
should be charged at the source, so a company providing intangible services into Australia, such
as media services or so on, wherever they are located they should charge GST on those services. So
there are some obvious ones of more recent times engaged in that, and without naming companies,
I think you can work them out. And there are a number of those companies that are prepared to
charge the GST on the services that they are putting into Australia, but they want to knowthat
they are not at a competitive disadvantage. Now, the States agreed in principle that we should
move in that regard. I have offered to work as quickly as possible withthem to introduce
legislation to address that in relation to intangibles. If you were to apply it to goods under $1,000
for low-value thresholds, that would probably be the appropriate system to followas well, because
there are nowfewer providers of goods into Australia than there might have been two or three
years ago. Therefore, you can identify those major providers of goods and therefore ask them to
charge GST as well, so that there is competitive neutrality. I see those things as integrity measures
The legislation mentioned by the Treasurer is yet to emerge, but it seems clear that significant
moves are afoot.
The online marketplace - principal vs agent vs advertiser
As mentioned above, a critical piece of the online puzzle is the role of the marketplace bringing
buyers and sellers together.
Examining the contractual role of the online selling platform (for both goods and services) is key to
determining who in the supply chain is liable for remitting the GST. In a cross-border context this
becomes even more relevant, as the legal status of the online marketplace can be determinative of
whether any GST is payable in the first place.
Below, I have shown the three basic marketplace models diagrammatically.
The Principal model
5. Please note that the views expressed in this paper are the personal views of the author and not necessarily the views of PwC
The Agency model
The Marketplace Advertiser model
The models above demonstrate how the contractual relationship between the parties can drive the
underlying GST treatment of the transactions.
heart of the GST legislation and, as the models above demonstrate, they are also at the heart of the
issue concerning the taxation of ecommerce transactions. The last model shows the gap .
The relevant excerpt from the GST Act (section 9-25) is reproduced here for ease of reference.
6. Please note that the views expressed in this paper are the personal views of the author and not necessarily the views of PwC
Supplies connected with the indirect tax zone
Supplies of goods wholly within the indirect taxzone
(1)A supply of goods is connected withthe indirect taxzone if the goods are delivered, or made
available, in the indirect taxzone to the recipient of the supply.
Supplies of goods from the indirect taxzone
(2)A supply of goods that involves the goods being removed from the indirect taxzone is
connected withthe indirect taxzone.
Supplies of goods to the indirect taxzone
(3)A supply of goods that involves the goods being brought to the indirect taxzone is
connected withthe indirect taxzone if the supplier either:
a) imports the goods into the indirect taxzone;or
b) installs or assembles the
Supplies of anything else
(5)A supply of anything other than goods or real property is connected withthe indirect tax
zone if:
a) the thing is done in the indirect taxzone;or
b) the supplier makes the supply throughan enterprise that the supplier carries on in
the indirect taxzone;or
c) all of the following apply:
(i) neither paragraph(a)nor (b)applies in respect of the thing;
(ii) the thing is a right or option to acquire another thing;
(iii) the supply of the other thing would be connected withthe indirect taxzone.
When enterprises are carried on in the indirect taxzone
(6)An enterprise is carried on in the indirect taxzone if the enterprise is carried on through:
(a) a permanent establishment (as defined in subsection 6(1)of the Income Tax
Assessment Act 1936 )in the indirect taxzone;or
(b) a place that would be sucha permanent establishment if paragraph(e), (f)or (g)of
The supply of goods via the marketplace
In the above marketplace models, the GST analysis with respect to goods is fairly straightforward.
Regardless of the relationship between the parties, the goods will usually be taxable if supplied
within Australia (with the GST paid by the principal or by the resident agent if the seller is a non-
resident). The goods will be free of GST and duty if they are direct shipped to the customer from
overseas with a value of less than $1,000 (the low-value import threshold). The direct shipment
method of supplying goods can be used in any of the above models. The only practicality is that it
may not be cost effective for a supplier to direct ship every supply of goods to individual customers
and not bring product into the country in bulk.
7. Please note that the views expressed in this paper are the personal views of the author and not necessarily the views of PwC
The supply of services and intangibles via the marketplace
These cross-border supplies are the ones under scrutiny at the moment imports of video
streaming, games, movies, software, apps and other digital content are where the gaps in GST
collections start to appear.
The relevant
supplied through an enterprise carried on in Australia by the supplier.
Under the cross-border above, the parties simply operate as if the online
marketplace is the
difference between the resale price to the customer and the intermediary s purchase price from the
merchant. The GST treatment under this model is straightforward, in that the first supply is outside
here nor supplied through an enterprise carried on here. The second
supply is taxable as it is either done here or supplied through an enterprise carried on here.
For the agency model above, where the Australian online marketplace binds the principal by its
actions, then any supplies made through the marketplace entity as agent bring Division 57 of the
GST Act into play. Where digital content is provided to Australian customers
Australian agent, then that supply will be taxable and the GST will be remitted to the Australian
The intermediary marketplace (no agency)
It is the latter, intermediary , model which results in the loss of GST. This is effectively a direct sale
of digital content into the Australian market with the online marketplace simply providing an
advertising/introductory platform (and often a payment collection and remittance role) rather than
an agency role. It is no different in effect, to the overseas digital content providers selling direct to
Australian parties and paying no GST.
Where the supply is done in an intermediary model
The digital services are usually considered non-resident supplier has no
presence in Australia so regardless of the characteristics of the intangible, its creation, design and
performance
supply is one best characterised as rights, then assuming that the last on-line action necessary to
make the contract binding during the sign-up process
notification) is performed outside Australia, then the rights would not be connected with Australia
under the first limb of the test (per paragraph 76 of GSTR 2000/31 cted with
Is there a supply being made through an enterprise (the intermediary ) carried on
in Australia?
In this case, the answer to the second limb of the test has to be no, given the limited role of the
intermediary. It is simply advertising a non-resident intangibles on-line.
Here, it is worth remembering that the GST enterprise test applies an extended version of the
income tax definition of permanent establishment as its basis for whether or not the supplier carries
on an enterprise in Australia (through which it makes its supply).
8. Please note that the views expressed in this paper are the personal views of the author and not necessarily the views of PwC
The ATO guidance on the presence of servers in Australia for the non- s supply generally
comes from an income tax angle. The ATO in Tax Determination TD 2005/2 considers the issue of
whether a resident of a country with which Australia has a Tax Treaty, may have a permanent
establishment solely from the sale of trading stock through an internet website hosted by an
The ATO refers to the OECD Model and OECD Commentary in respect of whether computer
equipment in ecommerce operations can constitute permanent establishments. In this respect, the
ATO states the following (at paragraphs 7 and 8):
on, that equipment. A website is considered to be a combination of computer software and
electronic data. The distinction between the website and the server on whichthe website is stored is
important when, as in the case under consideration, the enterprise that operates the server is
different from the enterprise that carries on business throughthe website. The server on whicha
whichhas that server at its disposal. However, the fact that an
enterprise has a certain amount of space on the server of an ISP allocated for it to use to store
software and data does not result in the server being at the disposal of the enterprise. The
enterprise is not considered to have acquired a place of business by virtue of the hosting
arrangements.
Where an ISP is only in the business of providing access to the internet it operates as a mere
conduit for the business activities of the non-resident enterprise. The agreement withthe ISP
would not typically specify whichserver the website will be hosted on and the ISP may change the
server used at their discretion. The space used for a specific website on the server of the ISP is not
at the disposal of the entity that owns the website. Thus, the enterprise does not have a fixed place
of business in Aust
The ATO concluded in TD 2005/2 that, where the sole presence of an enterprise in Australia is a
website hosted by an Australian ISP, the enterprise does not have a permanent establishment in
Australia. Paragraphs 10 and 11 state:
establishment where a person, other than an agent of an independent status, acts on behalf of an
enterprise and habitually exercises an authority to substantially negotiate or conclude contracts
on behalf of the enterprise. However, under Article 5(6)an enterprise will not be deemed to have a
permanent establishment in Australia merely because that enterprise carries on business in
Australia througha broker, general commission agent or any other agent of independent status,
where the agent is acting in the ordinary course of their business.
In most cases, an ISP will not constitute a permanent establishment by virtue of it being a
dependent agent, because the ISP is not an agent of the enterprise and would lack the authority to
conclude, and would not regularly conclude contracts on behalf of the non-resident enterprise. The
taxtreaties. Furthermore, the ISP could constitute an independent agent acting in the ordinary
course of their business if, amongst other things, they host websites for a number of different
9. Please note that the views expressed in this paper are the personal views of the author and not necessarily the views of PwC
The marketplace model is even more remote than the examples from TD 2005/2 as it is not typically
the website of the overseas merchant through which the supplies are made; it is the website of the
intermediary. So, following the ATO s interpretation above that a website of the merchant hosted in
Australia is not sufficient to create a presence in Australia, then it would seem unlikely that a
marketplace website (owned and hosted by third parties) could constitute a permanent
establishment for the non-resident merchant.
Notwithstanding the above analysis, it is worth mentioning here that the extended definition of
permanent establishment (which applies for GST purposes) includes an independent agent, which
suggests that the
a permanent establishment for the non-resident supplier for GST purposes.
Gift vouchers for cross-border intangibles
significant volume of cross-
borer digital services are provided to customers as a result of gift cards bought in Australia.
The standard gift voucher attribution provisions (Division 100 of the GST Act) apply where the gift
cards are genuine face value vouchers. Subparagraph 100-
-25(2) as any article or facility
supplied for the primary purpose of enabling the holder to:
use, on a prepaid basis, telephone or like services supplied by a supplier of
telecommunication supplies; or
make, on a prepaid basis, acquisitions that are facilitated by using telephone or like
services supplied by a supplier of telecommunication supplies.
The Explanatory Memorandum to the TaxLaws Amendment (2006 Measures No. 1)Bill 2006
notes that:
4.15 messaging services
(short message service (SMS)or multimedia messaging service (MMS)), text, graphics,
images, sound, video, information, software content and data transmission services
It seems that gift cards for cross-border intangibles should often meet the criteria of a face value
voucher including a prepaid phone card. If so, subsection 100-5(1) of the GST Act confirms that the
activities distributing the cards are ignored for GST purposes and only the redemption of the cards
for services/intangibles triggers the GST liability (if there is any).
It is less clear cut, however, where the gift card does not meet the definition of a face value voucher
including a prepaid phone card (which seems to be the prevailing ATO view). In these
circumstances, the card would seem to evidence a right to a future supply of something that is most
likely to be outside the scope of GST. In the absence of a specific taxing provision to make the
supply of the right follow the treatment of the ultimate supply for which the voucher is to be
redeemed (similar to subsection 9-30(1)(b) and 9-30(2)(b) of the GST Act), then this supply appears
to be taxable (as it is a supply for consideration to a customer in Australia). This seems to be an
unintended outcome even if it is a way of inadvertently taxing these types of gift vouchers!
10. Please note that the views expressed in this paper are the personal views of the author and not necessarily the views of PwC
Possible way forward
It is difficult to see how the issue of taxing cross-border intangibles can be remedied quickly. Joe
Probably on the
some of the previously mooted cross-border GST changes, that they are difficult to effect and often
lapse with a change in government. Could that happen here?
My view is that cross-border intangibles may be brought into the GST net using one or more of the
suggested measures below:
1. this would be a fundamental change to the
way the GST applies, however, it seems obvious that this part of the GST Act will require
expansion. Perhaps through an expansion of the definition of the enterprise being carried
on in Australia test at subsection 9-25(6) of the GST Act through which the supply is made,
specific to the supply of
digital rights and services.
It is worthwhile also considering whether there is scope for the ATO s interpretation of the
GST permanent establishment test to broaden without the need for a law change.
2. Expanding the reachof Division 57of the GST Act similar to the Norway VAT mechanism
for non-resident suppliers of electronic services, Division 57 could be broadened so that
intermediaries (who are not acting in as significant a capacity as an agent) could collect the
GST on behalf of the non-
expanded. This is related to (abandoned) Proposal 7 from the Board of Ta
Discussion Paper on cross-border transactions issued on 15 February 2011.
Where there is no intermediary in Australia (apart from the internet service provider
through which the customer accesses the non-resident digital supply), then it may be
appropriate to collect GST from the non-resident supplier.
3. Utilising the special telecommunication supplies rules in Division 85 of the GST Act- section
85-5 of the GST Act states:
A telecommunication supply is connected withthe indirect taxzone if the recipient
of the supply will effectively use or enjoy the supply in the indirect taxzone.
(2) However, subsection (1)does not apply to a telecommunication supply, or a
telecommunication supply included in a class of telecommunication supplies, if:
(a) the supplier makes the supply throughan enterprise that is not
carried on in the indirect taxzone;and
(b) the Commissioner determines that collection of GST on that supply or
class of supplies would not be administratively feasible.
(3) This section has effect in addition to section 9-25 (whichis about when supplies are
11. Please note that the views expressed in this paper are the personal views of the author and not necessarily the views of PwC
This part of the GST Act already has the measures in place to tax telecommunications supplies in the
place where they are used or enjoyed (e.g. Australia). Telecommunication supplies are defined
broadly and would, arguably, cover the majority of the digital supplies mentioned in this paper.
Subsection 85-5(2) could be amended so that the tax is imposed on the non-resident supplier where
the supplies are used or enjoyed in Australia.
Conclusion
The question for the government will be how far-reaching it wishes to be in terms of collecting GST
on cross-border digital services.
If there is a desire to collect GST on 100% of the revenue streams generated by these activities, then
the law changes will be complex and it is unlikely that there would be 100% compliance with the new
measures. However, if the goal is to get the key 50-100 taxpayers to comply with the new rules and
capture the majority of the GST leakage, then it may be easier to implement a simplified method of
GST collection similar to that already adopted in some of the countries mentioned above, where the
taxpayer community was heavily consulted before the changes and some of the GST burden falls on
the intermediary in the supply chain.
Encouraging global consistency in the law-making is key as it will assist in ensuring equality in the
taxation of cross-border intangibles and will be helpful for the ecommerce companies who will
otherwise have to design multiple systems to capture their GST and VAT liabilities on these types of
supplies around the world.
Changes are coming so watch this space!
