VAT/ GST in a Global Digital Economy - Chapter 9_Conclusions: The future of VAT in a digital global economy - Innovation versus taxation

EUCOTAX Series on European Taxation
VAT/GST in a Global Digital Economy
Edited by
Michael Lang
Ine Lejeune

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Editors
Prof. Dr. Dr. h.c. Michael Lang is Head of the Institute for Austrian and International
Tax Law of WU (Vienna University of Economics and Business) and Academic Director
of both the LLM Program in International Tax Law and of the Doctoral Program in
International Business Taxation (DIBT) of this university. He is President of the
Austrian Branch of the International Fiscal Association (IFA). He has been a visiting
professor at Georgetown University, New York University, Sorbonne University,
Bocconi University, Peking University (PKU), University of New South Wales (Sydney)
and at other universities.
Ine Lejeune is an attorney at law and partner, leading the Tax Policy, Dispute
Resolution and Litigation practice at Law Square, a Brussels-based law firm. Before
joining Law Square, she held multiple leadership positions at PwC, including global
indirect taxes leader, partner in charge for services to the EU institutions and global
indirect taxes policy leader. She has delivered policy services, as well as advised and
been involved in litigation (e.g., the ARO Lease case). She has been a member of the
European Commission’s VAT Expert Group since 2012 and has lectured since 2010 at
the Vienna University of Economics and Business (WU) in the LL.M. International Tax
Law programme and as guest professor at other universities. In addition to having
published extensively, she was Belgian Taxman 2009, was elected 5th Global Most
Influential Tax Expert by Tax Business in 2006 and 1st Indirect Tax Expert.
v

Contributors
Francesco Cannas. After having worked for almost ten years as a civil servant in the
Italian public administration, Francesco switched his career to taxation. He obtained a
Masters Degree in Corporate Tax Law from Bocconi University (Milan) and an LL.M. in
International Taxation from the Vienna University of Economics and Business (WU).
Currently, he is Trainee Lawyer and will be soon eligible for training as a Chartered
Accountant. At the beginning of 2014, he was appointed as an external lecturer
(Cultore della Materia) at the University of Torino. Since September 2014, he has been
studying for his doctorate degree in the Doctoral Program in International Business
Taxation (DIBT) at the WU.
Sophie Claessens is a Senior Manager, Indirect Tax, PwC Belgium, and is based in
Antwerp, Belgium. A specialist in VAT for fourteen years with a particular focus on
business-to-consumer industries, including telecommunications, media, internet and
e-commerce. She supports major industry players on sector-specific issues, including
VAT compliance at both an operations and strategic level, and is directly involved in
policy work for businesses in these industries, both at the Belgian level and at the level
of the European Commission. She is responsible for indirect taxes in the communica-
tions sector at PwC Belgium and is a driver of PwC’s Business Working Group on the
EU 2015 VAT changes. She has authored articles for publication in Belgian and
international tax journals.
Tom Corbett is a partner in PwC’s tax services practice, specializing in VAT and
customs and international trade. He advises companies within the technology sector on
Irish and global VAT matters, with a particular focus on US-headquartered multina-
tionals investing in Europe. His clients include a number of household names in the
technology sector, primarily from the US West Coast, but also including the indigenous
sector. He has been at the forefront of contributing to and advising on the 2015 changes
affecting Irish and global companies.
Before joining PwC, Tom worked for the Revenue Commissioners, consulting
and also practising as a Barrister before the Irish courts. He is a Barrister at Law and an
Associate of the Irish Taxation Institute
vii

MMag. Dr Thomas Ecker is the Deputy Head of the VAT Unit in the Austrian Federal
Ministry of Finance. Before this, he worked as research associate at the Institute for
Austrian and International Taxation at the WU, where he still lectures. He is a delegate
to various EU and OECD bodies. His thesis, ‘A VAT/GST Model Convention’, was
awarded the IFA Maurice Lauré Prize in 2012.
Walter Hellerstein is Distinguished Research Professor and Shackelford Professor of
Taxation at the University of Georgia School of Law, Athens, Georgia, United States. He
is co-author of State Taxation, vols I & II (3rd ed., updated tri-annually); State and Local
Taxation (10th ed., 2014); and Taxing Global Digital Commerce (2013), as well as more
than 100 journal articles. He serves as an academic advisor to the OECD’s Working
Party No. 9 on Consumption Taxes and is a member of the Working Party’s Technical
Advisory Group on VAT/GST Guidelines.
Associate Professor Oskar Henkow is a teacher and researcher in indirect taxation
and EU law at the School of Economics and Management, Lund University, Sweden. He
has published extensively on European VAT, as well as comparative VAT/GST issues.
He is editor in charge of the case law and legislative development sections of the World
Journal of VAT/GST Law. He is also part-time partner at EY Sweden, and responsible
for indirect tax training at EY in the EMEIA area (Europe, Middle-East, India and
Africa).
Marie Lamensch obtained her Doctorate at the Vrije Universiteit Brussel (VUB) in July
2014. She teaches VAT law at the Catholic University of Louvain (UCLouvain) and
International and European Law at the VUB where she also works as Senior Research
Fellow. She participates in the OECD WP9 Technical Advisory Group on Consumption
Taxes and guest lectures at IBFD’s International Tax Academy. She previously acted as
researcher for the G20 task force on the Financial Transactions Tax, practiced as a
lawyer in Brussels and Luxembourg, and worked as teaching assistant in contract law
at the Université Libre de Bruxelles (ULB). She holds a Law Degree from the ULB and
an LLM degree in international and European Law from the VUB.
Costantino Lanza works in the field of VAT administrative cooperation at the
European Commission, DG taxation and customs union (TAXUD), where he has been
since 2007. He graduated in Law, Political sciences, and sciences of financial and
economic security. He has previously worked as an official of Guardia di Finanza, the
Italian economic and financial police.
Rebecca Millar is a Professor of Law at the University of Sydney Law School. She
specializes in Australian GST and comparative VAT and has published widely on both
topics, including as co-author of Taxing Global Digital Commerce (2013). She is on the
editorial board of the World Journal of VAT/GST Law, and is a pro bono academic
advisor to the secretariat of OECD Working Party 9 on Consumption Taxes and a
member of the Working Party’s Technical Advisory Group on International VAT/GST
Guidelines. She has also served as a member of the Australian Taxation Office rulings
Contributors
viii

panels and as an expert advisor to the Australian Board of Taxation and Treasury. From
2005 to 2012, she assisted in the design and drafting of indirect tax laws through the
IMF and World Bank technical assistance programs. Prior to 2002, she was a tax
practitioner.
Duy Nguyen works at EY Amsterdam and has in-depth VAT technical knowledge on,
and practical experience in advising companies with global operations in the digital
economy and telecommunications sector. In recent years, he has focused on advising
multinational e-services and telecommunications companies on the implementation of
the EU VAT 2015 changes. A global top-3 online gaming company has engaged him to
advise on their global VAT position, including the implementation of VAT 2015 in the
EU. In addition, a key player in the global telecommunications sector has requested
that he provide overall EU policy advice as regards VAT 2015 and the provision of
digital content, which policy will be implemented by each local subsidiary. He serves
as the key knowledge source on digital economy VAT matters within EY Netherlands
and has spoken regularly at seminars and webinars on this topic.
Christophe Waerzeggers is a Senior Counsel in the Legal Department of the Interna-
tional Monetary Fund. In that capacity he has provided advice on tax law reform to
countries in Asia, Europe, Africa, the Middle East, the Caribbean and the Pacific. Prior
to joining the Fund he worked in academia in The Netherlands (Utrecht University) and
in private practice in Brussels, Belgium (first with De Bandt, van Hecke & Lagae and
later with Hogan & Hartson). He is a co-author of Taxing Global Digital Commerce
(2013) and has published a number of articles on VAT and customs law. The views
expressed in this paper are those of the author. They do not necessarily represent IMF
views or IMF policy and should be attributed to the author, not to the IMF, its Executive
Board or its management.
Dr Björn Westberg is Professor in Tax Law at the Jönköping International Business
School in Sweden. He is a Doctor of Law, LL.M. and Master of Business Administration.
In addition to his academic career, he has experience in leadership positions in the
business community and as a judge on an Administrative and Tax Court of Appeals. In
2013, the European Commission appointed him as a Member of the High-Level Expert
Group on Taxation of the Digital Economy.
Contributors
ix

Summary of Contents
Editors v
Contributors vii
Preface xxi
List of Figures and Table xxiii
CHAPTER 1
The New Models of the Digital Economy and New Challenges for
VAT Systems
Francesco Cannas 1
CHAPTER 2A
The Treatment of ‘Digital Products’ and Other ‘E-Services’ under VAT
Marie Lamensch 15
CHAPTER 2B
Comments on Chapter 2: View of the Court of Justice on Rates and
Neutrality: Ruling in K Oy
Ine Lejeune 41
CHAPTER 3
VAT and Virtual Reality: How Should Cryptocurrencies Be Treated for VAT
Purposes?
Oskar Henkow 45
CHAPTER 4A
Intermediated Delivery and Third-Party Billing: Implications for the
Operation of VAT Systems around the World
Sophie Claessens & Tom Corbett 59
xi

CHAPTER 4B
Comments on the Discussion of Article 9a of Implementing Regulation
1042/2013
Duy Nguyen 79
CHAPTER 5
Exploring the Potential Linkages Between Income Taxes and VAT
in a Digital Global Economy
Walter Hellerstein 83
CHAPTER 6
VAT Collection and Compliance in the Digital Economy: Challenges and
Opportunities
Christophe Waerzeggers 119
CHAPTER 7A
Digital Economy International Administrative Cooperation and Exchange
of Information in the Area of VAT
Thomas Ecker 141
CHAPTER 7B
International Administrative Cooperation and Exchange of Information in
the Area of VAT
Björn Westberg 161
CHAPTER 7C
Digital Economy: International Administrative Cooperation and Exchange
of Information in the Area of VAT – EU Perspective
Costantino Lanza 169
CHAPTER 8
Looking Ahead: Potential Solutions and the Framework to Make Them
Work
Rebecca Millar 173
CHAPTER 9
Conclusions: The Future of VAT in a Digital Global Economy – Innovation
versus Taxation
Ine Lejeune & Sophie Claessens 197
Index 219
Summary of Contents
xii

Table of Contents
Editors v
Contributors vii
Preface xxi
List of Figures and Table xxiii
CHAPTER 1
The New Models of the Digital Economy and New Challenges for
VAT Systems
Francesco Cannas 1
§1.01 Introduction 1
§1.02 Background and Most Recent Developments 2
[A] The Ottawa Conference 2
[B] The E-Commerce Guidelines 3
[C] The Consumption Tax Papers 3
[D] Recent Developments 4
[1] The BEPS Project 4
[2] The EU Report on Taxation of the Digital Economy 5
§1.03 New Business Models and VAT-Related Problems 6
[A] Context 6
[B] E-Commerce Models 6
[1] Business-to-Business 6
[2] Business-to-Consumer 7
[3] Consumer-to-Consumer 8
[C] Payment Services and Virtual Currencies 9
[D] Digital Goods and Digital Services 10
§1.04 A Case Study: Newspaper Subscriptions 11
[A] Introduction and Facts 11
xiii

[B] The EU 11
[C] New Zealand 12
[D] Australia 13
§1.05 Conclusion 13
CHAPTER 2A
The Treatment of ‘Digital Products’ and Other ‘E-Services’ under VAT
Marie Lamensch 15
§2A.01 Introduction 15
§2A.02 Characterizing and Defining Digital Products and E-Services 15
§2A.03 Place of Taxation and Assessment Rules for Digital Products and
E-Services 18
§2A.04 Applying Reduced VAT Rates to E-Supplies: The Case of Books
Versus E-Books 27
§2A.05 Conclusion 38
CHAPTER 2B
Comments on Chapter 2: View of the Court of Justice on Rates and
Neutrality: Ruling in K Oy
Ine Lejeune 41
CHAPTER 3
VAT and Virtual Reality: How Should Cryptocurrencies Be Treated for
VAT Purposes?
Oskar Henkow 45
§3.02 The Virtual Reality and VAT 46
§3.03 Treatment of Money, Debts and Vouchers under EU VAT 50
§3.04 Virtual Currencies and Their VAT Treatment 55
CHAPTER 4A
Intermediated Delivery and Third-Party Billing: Implications for the
Operation of VAT Systems around the World
Sophie Claessens & Tom Corbett 59
§4A.01 Introduction 59
[A] The World’s Digital Transformation 59
§4A.02 Challenges Involved in Identifying the Business Liable for the
VAT where Digital Services Are Delivered through Intermediaries 61
[A] Are Sales to, or through, the Intermediary? 61
[B] Why Is It Important? 63
§4A.03 Different Business Scenarios and Their VAT Applications 64
[A] One Digital Content Service, Multiple Intermediaries 64
[1] Intermediated Delivery: Above-the-VAT-Line Billing 65
Table of Contents
xiv

[2] Intermediated Delivery: Below-the-VAT-Line Billing 67
§4A.04 EU VAT Directive Provisions and Implementing Provisions 70
[A] When Does Article 9a Apply? 71
[B] Taking Part in the Supply versus Carrying Content and/or
Processing Payments 73
[C] Conditions for Rebuttal of the Presumption 75
CHAPTER 4B
Comments on the Discussion of Article 9a of Implementing Regulation
1042/2013
Duy Nguyen 79
§4B.01 Introduction 79
§4B.02 The Rebuttal Game: Too Many Captains? 79
§4B.03 Payment Processors Exemption 80
§4B.04 Financial Service Exemption as a Consequence? 81
CHAPTER 5
Exploring the Potential Linkages Between Income Taxes and VAT
in a Digital Global Economy
Walter Hellerstein 83
§5.02 Jurisdiction to Tax in the Digital Global Economy: Linkages between
Income Taxes and VAT 84
[A] Jurisdiction to Tax: Substantive Jurisdiction and Enforcement
Jurisdiction 85
[1] Substantive Jurisdiction and Enforcement Jurisdiction 85
[2] The Relationship between Substantive Jurisdiction
and Enforcement Jurisdiction 86
[B] Substantive and Enforcement Jurisdiction for Income Taxes and
VAT in the Digital Global Economy 88
[1] Substantive Jurisdiction for Income Taxes and VAT
Based on Digital Activity 88
[a] Substantive Jurisdiction to Tax Income Based
on Digital Activity 88
[b] Substantive Jurisdiction for VAT Based on Digital
Activity 92
[2] Enforcement Jurisdiction for Income Taxes and VAT
Based on Digital Activity 93
[a] The VAT Reverse Charge Mechanism and B2B
Digital Supplies 94
[b] Virtual Presence as a Creating Enforcement
Jurisdiction for Income and VAT Purposes 94
Table of Contents
xv

§5.03 Delineating the Tax Base in the Digital Global Economy: Linkages
between Income Taxes and VAT 101
[A] The Fundamental Linkage between Income Tax and
Consumption Tax Bases 101
[B] Attribution of the Tax Base: Commonly Controlled and
Multiple Location Entities 102
[1] Commonly Controlled Entities 102
[2] Legal Entities with Multiple Locations 104
[a] The Income Tax Rules 105
[b] The VAT Rules and the OECD VAT/GST
Guidelines 106
[c] Linkages 109
§5.04 Concluding Observations regarding the Linkages between Income
Taxes and VAT in the Digital Global Economy 116
CHAPTER 6
VAT Collection and Compliance in the Digital Economy: Challenges and
Opportunities
Christophe Waerzeggers 119
§6.02 Thoughts on the VAT Collection Mechanism 120
§6.03 The Digital Economy: Anything New? 124
§6.04 Collecting VAT in the Digital Economy: Things That Don’t Work
That Well 127
[A] VAT Self-Assessment by Final Consumers 127
[B] Low-Value Goods Relief and VAT Collection by Customs 129
[C] Disproportionate Compliance Burdens on Non-resident Sellers 131
§6.05 Collecting VAT in the Digital Economy: Things That Might Work
Better 131
[A] Relying on Indirect VAT Collection, but with Appropriate
Simplification and Modification 132
[1] Simplified Supplier Registration 132
[2] Dealing with Intermediaries in the Digital Supply
Chain 135
[B] Simplified Supplier Registration May Also Be a Useful
Alternative to Low-Value Goods Relief 137
[C] Administrative Cooperation 138
CHAPTER 7A
Digital Economy International Administrative Cooperation and Exchange of
Information in the Area of VAT
Thomas Ecker 141
§7A.01 Growing Need for Dispute Prevention and Resolution in the Area of
VAT 141
Table of Contents
xvi

§7A.02 Existing VAT Dispute Resolution Mechanisms 143
[A] Courts as Binding Dispute Resolution Mechanism 143
[1] National Courts 143
[2] Supranational or International Courts 144
[B] VAT Dispute Resolution and Prevention in the EU 145
[1] The ECJ 145
[2] VAT Committee 146
[3] Opinions of the European Commission 146
[4] VAT Cross-Border Rulings Test Case 147
[5] Other Measures 147
[C] Income Tax Dispute Resolution Mechanisms and Their
Applicability to VAT 148
[D] OECD International VAT/GST Guidelines, Working Party
No. 9 and Global Forum 151
[E] Other Examples of Dispute Resolution Fora 154
[F] Interim Conclusion 155
§7A.03 Dispute Prevention Mechanisms 156
[A] OECD Guidelines 156
[B] Advance Agreements 156
[C] Cooperative Compliance 157
[D] Good Law and Helpful and Easily Accessible Information
Provided by the Tax Administration 157
[E] Exchange of Information 157
§7A.04 The Future: Binding Dispute Resolution Mechanisms Based on
Treaties? 158
[A] Disputes about the Facts of a Case 158
[B] Disputes about Legal Interpretation 159
[C] VAT Treaty as a Solution? 159
CHAPTER 7B
International Administrative Cooperation and Exchange of Information
in the Area of VAT
Björn Westberg 161
§7B.01 Key Points 161
§7B.02 The Digital Economy 161
§7B.03 The OECD Perspective 162
§7B.04 The EU Perspective 163
§7B.05 Principles of Neutrality 163
§7B.06 Substantive Jurisdiction 163
[A] Prerequisites for Efficient and Effective Enforcement 163
[B] B2B 164
[1] Application of Reverse Charge 164
[2] Consequences for Enforcement 164
Table of Contents
xvii

[C] B2C 165
[1] Application of the One-Stop-Shop Mechanism 165
[2] Consequences for Enforcement 166
[D] Different Treatment of the Substantive Jurisdiction 166
§7B.07 VAT Rates 166
§7B.08 Consequences for Enforcement 167
CHAPTER 7C
Digital Economy: International Administrative Cooperation and Exchange
of Information in the Area of VAT – EU Perspective
Costantino Lanza 169
§7C.01 VAT and Digital Economy in the EU 169
[A] Electronic Commerce, Compliance and Mutual Assistance in the
EU 169
[B] Challenges for Tax Administrations 171
[C] Conclusion 172
CHAPTER 8
Looking Ahead: Potential Solutions and the Framework to Make Them
Work
Rebecca Millar 173
§8.02 Does Anything Need to Be Done? 174
§8.03 Who Should Be Doing It? 185
§8.04 How Should It Be Done? 190
§8.05 A Few Suggestions on What Should Be Done 194
CHAPTER 9
Conclusions: The Future of VAT in a Digital Global Economy – Innovation
versus Taxation
Ine Lejeune & Sophie Claessens 197
[A] The Economy Is Becoming Digital 197
[B] Is the Current Tax Framework Fit for the Digital Environment? 199
§9.02 The Place of Taxation 201
[A] Direct Tax Concepts 201
[B] VAT Concepts for E-Commerce in the EU 202
[1] Place of Taxation of Digital Supplies for Consumption 203
[2] Intermediaries 205
[3] Role of the Permanent Establishment Concept 205
§9.03 The Specific Case of Bitcoins and Vouchers 206
[A] Electronic Money 206
[B] Vouchers 207
Table of Contents
xviii

CHAPTER 9
Conclusions: The Future of VAT in a
Digital Global Economy – Innovation
versus Taxation
Ine Lejeune & Sophie Claessens
§9.01 INTRODUCTION
[A] The Economy Is Becoming Digital
The digital economy is everywhere. Digitization has transformed and will continue to
transform the economy, in terms of productivity and connectivity, especially for small
and medium-sized enterprises (SMEs).
The electronic processing of data and transmission of data – including text, sound
and video – has allowed the emergence of new product offerings and business models.
The effects of new developments, such as the App economy, have transformed both the
way we do business and the way we consume goods and services and pay for them.
Digitization of goods and services shortens distances between people and things.
It increases mobility. It makes network effects decisive. It allows the use of specific data
to such an extent that it permits the satisfaction of individual customer needs – whether
it consumers (B2C) or businesses (B2B).
Remote supplies are often high volume but low value. This implies that digital
businesses will not likely be inclined to put much time and effort into establishing
where their customers actually belong. In the same vein, the more information that
customers need to provide, the more likely they are to cancel the deal, which is a risk
to business. On the other hand, tax authorities will not be inclined to check whether
suppliers are compliant on a transaction-by-transaction basis because of the high
volume of transactions.
197

E-commerce is big business and is growing every day. It covers both traditional
sales of physical goods sold within and across borders facilitated by online ordering
and payments systems (‘distance selling’), as well as the online provision of ‘digital
content services’. Goods, clothing, toys and hardcopy books are a few of the most
popular products bought online, while digital content services are typically related to
travel and holiday accommodation, event tickets, the download of music, games and
electronic publications. Spending intentions for each have risen at near double-digit
percentage point rates since 2011.1
While sales of online TV, music, games and movies were essentially non-existent
a few years ago, they have been growing at a rapid pace in recent years, and projections
suggest that this trend will continue. Games and music were the two main digital items
purchased in 2011, with online sales thereof accounting for a 42% and 32% of total
industry revenue, respectively. They are also likely to account for a larger future share
of e-commerce sales while, at the same time, being a key driver of the rapid historic and
expected growth of that sector as a whole.
Figure 9.1 (below) illustrates the various ways in which data are generated and
transformed into value in the digital economy.
Figure 9.1 The Generation of Value From Data in the Digital Economy2
1. Nielsen (2014)E-Commerce: Evolution or revolution in the fast-moving consumer goods world?
available at http://ir.nielsen.com/files/doc_financials/Nielsen-Global-E-commerce-Report-Aug
ust-2014.pdf.
2. https://cde.catapult.org.uk/data-value-chain.
£
Value
Cities
Creative
Education
Energy
Enviroment
Financial services
Health
Local and central
goverment
Retail
Transport
...which create
significant
value in
every sector.
Transport
...transported
over a range
of networks...
Outputs
...enabling
new
disruptive’
services,
applications
and products...
Knowledge
...and turned
into knowledge
and insight
using data
science tools...
Stored
Curated
Linked
Analysed
Visualised
Generation
Data is generated
from a huge
variety
of sources...
Public sector
Enterprise
Internet of Things
Creative content
Social media
Ine Lejeune & Sophie Claessens§9.01[A]
198

This new world was evident at the 2015 Consumer Electronics Show in Las Vegas.
Businesses from all industries demonstrated how disruptive technologies are playing a
role – from driverless cars, to 3D printing, to wearables.3
This new era, focused on the
delivery of information, goods, services and currencies throughout the world, provides
endless opportunities for innovation, investment, competitiveness and jobs. Online
start-ups grow and export twice as much as brick-and-mortar start-ups.. Increasing
broadband capacity brings an economic boost worth billions. The Internet creates two
and a half jobs for every job lost. Going forward, it will be one of the main drivers of
sustainable growth.
In recognition of the importance of the digitization trend for the world’s econo-
mies and the concomitant socio-economic benefits and challenges, a number of
initiatives have been taken and are ongoing at both an EU and a global level:
– the Digital Agenda for Europe4
was launched in 2010 as one of the seven
flagships of Europe 2020, Europe’s growth strategy for 2010–2020;
– the European Commission’s High Level Expert Group on Taxation of the
Digital Economy was established in 2013 and commissioned to examine the
best way of taxing the digital economy in the EU;5
and
– the OECD/G20 base erosion and profit shifting (BEPS) project provides for
fifteen actions, including identifying the tax challenges raised by the digital
economy and the necessary measures to address them (Action 1).6
[B] Is the Current Tax Framework Fit for the Digital Environment?
The increasing digitization of traditional businesses and the spread of purely digitally
operating companies poses challenges for the functioning of national and international
tax systems, not in the least in the field of VAT. Because the digital economy is
increasingly becoming the economy itself, it is impossible – and therefore not desirable
– to ring-fence digital business from regular business for tax purposes. Query: How do
new ways of interacting with customers; of marketing products and services; and of
delivering products impact the enforcement and collection of consumption taxes such
as VAT?
One of the most important tasks and biggest challenges that today’s VAT
legislation is facing is the design of a simple and fraud-proof taxation system. The
3. http://www.cesweb.org.
4. https://ec.europa.eu/digital-agenda/en/digital-agenda-Europe.
5. European Commission, Expert Group on Taxation of the Digital Economy, Report (28 May 2014),
available at http://ec.europa.eu/taxation_customs/resources/documents/taxation/gen_info/go
od_governance_matters/digital/report_digital_economy.pdf; European Commission, Expert
Group on Taxation of the Digital Economy, Working Paper: Digital Economy – Facts & Figures (4
March 2014), available at http://ec.europa.eu/taxation_customs/resources/documents/taxation
/gen_info/good_governance_matters/digital/2014-03-13_fact_figures.pdf.
6. OECD, BEPS Action 1: Address the tax challenges of the digital economy (16 September 2014),
available at http://www.oecd-ilibrary.org/docserver/download/2314251e.pdf?expires=142141
7191&id=id&accname=guest&checksum=FDB9A488B6D02C84CA445A2D88F1F49E.
Chapter 9: Conclusions §9.01[B]
199

recent financial and economic crisis has pushed governments to maximize their tax
collection, either by introducing a VAT system (which an OECD study sees as the best
tax to foster economic growth and provide revenue to countries) or by reforming the
existing VAT system to increase its efficiency.7
The design of a fraud-proof VAT system not only brings advantages to govern-
ments, but is also beneficial for businesses – which are actually the unpaid tax
collectors. Indeed, such a VAT system helps businesses to develop their global
activities without being confronted with inconvenient uncertainties and high compli-
ance costs due to unclear VAT rules. Citizens also benefit from a fraud-proof environ-
ment, as the tax system would then result, through investments, in better and more
sustainable employment, education, infrastructure, etc. The aim should be to deliver a
VAT system that is a win-win model for the various stakeholders involved, as
illustrated in Figure 9.2, below.
Figure 9.2 VAT Win-Win Taxation Model8
As the digital economy is global, it is critical that the national VAT legislations be in
sync, thus avoiding both double taxation and non-taxation. VAT laws should therefore
be aligned, using the same principles to define the place of taxation whilst being able
to keep up with the pace of business change and taking advantage of technology to
lower cost of collection and cost of compliance. It is within this framework that both
7. OECD, Tax Policy Reform and Economic Growth, OECD Tax Policy Studies, No. 20 (OECD
Publishing 2010), available at http://dx.doi.org/10.1787/9789264091085-en.
8. Law Square/PwC (2015).
Revenues
Business
attraction and
employment
Sustainable
global proﬁt
Total risk
management
BusinessesGovernment
Use of technology to
reduce
cost of collection
Equitable/Efﬁcient
Citizen
Long term
future and
employment
Non-
regressive
and fair
Ine Lejeune & Sophie Claessens§9.01[B]
200

the developments in the EU (namely the B2C 2015 changes)9
and the work of the OECD
on the Guidelines for VAT10
and the Global VAT Forum, are key.11
§9.02 THE PLACE OF TAXATION
[A] Direct Tax Concepts
According to the OECD, direct taxation in the digital economy must be looked at in the
market country, in the intermediate country and in the country of residence of the
ultimate parent. Each time, a number of aspects must be considered.12
First, as regards taxation in the market country, the following must be consid-
ered:13
– taxable presence. The domestic law of several countries requires a physical
presence of businesses in order to be subject to taxation. In the digital
economy, many businesses interact with their clients through digital means
without needing a (permanent) establishment in that country;
– functions, assets and risks in market jurisdictions. Many MNEs have a local
subsidiary or permanent establishment in several countries, with local activi-
ties being structured in a manner that generates little taxable profit;
– deductions in market jurisdictions. Deductions for payments made to other
group companies in the form of interest, royalties, service fees, etc. are also
relevant; and
– withholding tax.14
If a company receives payments, including interest or
royalties, from a foreign payer, the payments may be subject to withholding
tax in that foreign country. If there is an applicable treaty between two
countries, a company in the digital economy can benefit from withholding
9. Council Directive 2008/8/EC of 12 February 2008 – place of supply of services (see Article 5);
Council Implementing Regulation (EU) No. 1042/2013 amending Implementing Regulation
(EU) No. 282/2011 as regards the place of supply of services; Council Implementing
Regulation (EU) No. 967/2012 – obligations under the one-time registration scheme (mini
one-stop shop); Commission Implementing Regulation (EU) No. 815/2012 – standardized
information for registration and returns; for more information see also the EU Commission’s
dedicated web page available at http://ec.europa.eu/taxation_customs/taxation/vat/how_
vat_works/e-services/index_en.htm.
10. OECD, Centre for Tax Policy & Admin., Release of Discussion Draft of Two New Elements of
the OECD International VAT/GST Guidelines (18 December 2014), available at http://www
.oecd.org/ctp/consumption/release-of-discussion-drafts-of-two-new-elements-of-the-oecd-
international-vat-gst-guidelines.htm.
11. OECD, Global Forum on VAT, Tokyo, 17–18 April 2014, available at http://www.oecd.org/
ctp/consumption/statement-of-outcomes-on-vat-gst-guidelines.pdf.
12. OECD, Public Discussion Draft, BEPS Action 1: Address The Tax Challenges of the Digital
Economy (2014), available at http://www.oecd.org/ctp/tax-challenges-digital-economy-
discussion-draft-march-2014.pdf (accessed 13 January 2015).
13. OECD, Public Discussion Draft, BEPS Action 1, supra n. 12.
14. OECD, Public Discussion Draft, BEPS Action 1, supra n. 12, at 44.
Chapter 9: Conclusions §9.02[A]
201

reduction, or even exemption from withholding, for profit on payments made
in the form of royalties or interest to a lower-tax jurisdiction.
Second, as regards taxation in the intermediate country, the following must be
considered:15
– companies can eliminate or reduce tax in intermediate countries by applying
preferential domestic tax regimes, utilizing hybrid arrangements and making
deductible payments to related entities in low-tax or no-tax jurisdictions; and
– companies in the digital sector can locate their assets and functions in
countries with favourable tax regimes. They can also transfer the rights to
intangibles to jurisdictions where income derived therefrom is subject to
low-tax rates or even exempted from tax. Companies can also reduce tax by
means of deductible payments to affiliates that are established in low-tax
jurisdictions.
Finally, as regards taxation in the country of residence of the ultimate parent,16
the same taxation principles as in the market country could be applied. In addition,
companies in the digital economy might not pay tax in the country of their ultimate
parent if that country applies an exemption or deferral system for foreign-source
income and does not have a controlled foreign corporation (CFC) regime for income
earned by the CFCs of the parent company.
[B] VAT Concepts for E-Commerce in the EU
The principles to be applied for VAT differ fundamentally from direct tax principles.
These differences should be borne in mind when considering the taxation of the digital
economy.
VAT legislation makes a distinction between the supply of goods (‘the transfer of
the right to dispose of tangible property as owner’) and the supply of services (‘any
transaction which does not constitute a supply of goods’). Different rules apply for the
supply of goods and the supply of services, e.g., for the place of taxation; chargeable
event and chargeability of VAT; administrative obligations; and applicable VAT rates.
The rise of the digital economy has seen new types of transactions and new ways
of delivering traditional transactions for both goods and services. Increased mobility
and the blurring of borders creates challenges for VAT systems all over the world. The
digitization of the economy needs to be reflected in the VAT system to ensure equitable
distribution of VAT revenues and to facilitate compliance and administration of the tax
for both businesses and revenue authorities.
202

The overall purpose of VAT is to impose a broad-based tax on consumption.17
The tax is collected on the value added at each stage of production and distribution.
The basic principle of VAT is its neutrality: the burden of the tax should not rest on
businesses, but rather on final consumers. In principle, for every cost incurred or
turnover realized, there is an input/output VAT. The basic rule is that VAT applies,
meaning that no VAT due, is the exception. In order to determine whether VAT is due,
five questions are relevant: Was the transaction carried out by a taxable person? Is it a
taxable transaction for VAT? Where does the transaction take place for VAT? Are any
VAT exemptions or reduced rates applicable? Who is liable to account for the VAT due
on the transaction?
[1] Place of Taxation of Digital Supplies for Consumption
The main legislative act governing the application of VAT rules for e-commerce goods
and service transactions in the EU is Council Directive 2006/112/EC of November 2006
on the common system of value added tax (the VAT Directive). Council Directive
2008/8/EC, amending Directive 2006/112/EC as regards the place-of-supply of ser-
vices, is the most recent piece of legislation which defines, among other things, the
place of taxation for electronically supplied services, telecommunications and broad-
casting services.
The VAT place-of-supply rules for e-commerce goods and services in the EU can
be summarized within the context of:
– cross-border trade in physical goods (distance selling) versus trade in digital
services; and
– business-to-business (B2B) versus business-to-consumer (B2C) transactions
for digital services.
Distance selling means that a supplier sells goods to private individuals or
customers established in another Member State who do not apply VAT to their
intra-Community acquisitions of goods. The supplier takes care of the transport of the
goods to the customers. A typical example is mail-order and Internet-order companies.
The place of taxation for transactions in cross-border goods (distance selling of
goods) basically depends on the annual sales of the supplier, provided that the seller
organizes the transport service for the consumer. See Table 9.1.
Whenever a supplier’s annual sales value exceeds a threshold, which is applied
in the customer’s Member State, the VAT rule of the customer’s Member State (or
destination country) will be applied. However, the supplier may always opt on a
country-by-country basis to apply the VAT rule of the customer’s Member State
(destination country). Once so opted, the choice will be valid for two consecutive
calendar years in those Member States. The thresholds applied in the Member States
vary (EUR 100,000 or EUR 35,000 or the equivalent in national currency).
17. International VAT/GST Guidelines, global forum on VAT, 17–18 April 2014, OECD, available at
http://www.oecd.org/ctp/consumption/international-vat-gst-guidelines.pdf.
203

Table 9.1 EU VAT Place-of-Supply Rules for Distance Selling of Goods18
In the case of e-commerce services consumed in the EU, the place of taxation depends
on whether a transaction is B2B or B2C, and whether a customer is resident in the EU.
As from 1 January 2015, similar place-of-taxation rules apply for both EU and non-EU
based businesses.
With regard to B2B transactions relating to digital services, if an EU or non-EU
based business delivers a digital service to a taxable person established in the EU, the
place of taxation is deemed to be where the recipient of the service is established. See
Figure 9.3. If an EU-established business renders a digital service to a business
customer established outside the EU, the place-of-supply will be deemed to be where
the non-EU customer is established. Following that, and depending on the rules in
place in the country of the recipient, the recipient may or may not have to declare VAT
on the purchase.
With respect to B2C transactions involving digital services, as from 1 January
2015, if an EU or non-EU established business delivers a telecommunication, broad-
casting or electronically supplied service to a non-taxable person established in the EU,
the place of taxation will be deemed to be in the Member State where the customer
resides. See Figure 9.3. This rule forces businesses selling digital services to EU
consumer markets, to charge different VAT rates depending on where their customers
reside. To do so, a so-called ‘one-stop-shop scheme’ is made available for both EU and
non-EU based electronic e-commerce suppliers. A one-stop-shop scheme is a simplifi-
cation measure of compliance requirements, whereby suppliers of electronically
18. PwC (2015), source: European Commission, DG Taxation and Customs Union web page.
Place of Taxation Example
VAT of the Member State of destination for distance
sales when supplier’s annual sales exceed a certain
threshold in the customer’s Member State (EUR
100.000) or EUR 35.000 or the equivalent national
currency) and the supplier takes care of the
transport of the goods to the supplier takes care of
the transport of the goods to the consumer (Article
33 of VAT Directive 2006/112/EC)
VAT of the Member State of origin when distance
sales are below the threshold applied by the
customer’s Member State and the supplier has not
opted to identify for VAT in the customer’s Member
State
Opt-in: Even if the threshold is not exceeded, traders
can still opt to identify for VAT in the customer’s
Member State and charge the VAT applicable in that
country. The option will be valid for two consecu-
tive calender years Article 34 of VAT Directive
2006/112/EC)
A Dutch company is selling clothing via the internet
to private consumer throughout the EU and
organises the shipping service for its clients. When
clothing is sold to consumers in Belgium, Belgian
VAT must be charged when the Belgian threshold is
exceeded (35.000 EUR), whereas UK VAT must be
charged to consumers in the UK when the UK
threshold is exceeded (100.000 EUR)
If the annual sales by the Dutch company to a
consumer in Belgium do not exceed the Belgian
threshold, the clothing will be taxed with Dutch
VAT rate applicable (origin principle).
When the Dutch company supplies to consumers in
France below the threshold but the Dutch company
has taken the option VAT register in France, the
clothing will be taxed with the French VAT rate
(destination principle).
204

supplied services to B2C customers resident in the EU may opt to account for VAT
across the EU via a single registration and a single periodic electronic declaration.
These new rules should ensure the taxation of the economically significant B2C
supplies of most digital services, at the place of consumption.
Figure 9.3 EU 2015 VAT Place-of-Supply Rules for Digital Services19
[2] Intermediaries
The growing C2C economy, in which transactions between consumers take place, is
also a result of the digital economy. Business take a role here as well, but mostly as
intermediaries, for example by putting up a website that consumer can use to sell or
rent assets or services, such as holiday accommodation, residential property or cars.
Particularly in the area of the VAT, the classification of the services of an
intermediary is difficult, and the existing VAT rules seem unable to cope with
non-traditional types of intermediaries, such as those operating in the digital economy.
Unfortunately, the OECD does not address the C2C or collaborative economy as
regards VAT in its BEPS deliverables on Action 1.
[3] Role of the Permanent Establishment Concept
The OECD BEPS deliverables on Action 1 mainly deal with the digital economy’s
related direct tax challenges and solutions. Interesting points brought forward – which
are also relevant for VAT – are modifications to the exceptions from permanent
19. PwC (2015), source: European Commission, DG Taxation and Customs Union web page.
Sale from EU business to
Sale from non-EU business to
Non-EU
EU consumer
EU business
Non-EU
EU consumer
EU business
Valid VAT ID
Number?
Yes
Yes
No
No
N/A
N/A
N/A
N/A No EU VAT
VAT in customer country
except alternative proof
of business capacity
except alternative proof
of business capacity
Reverse charge VAT
Reverse charge VAT
No EU VAT
205

establishment status, the introduction of the notion of virtual permanent establish-
ment, the creation of nexus via a significant digital presence, etc.
The introduction of new permanent establishment concepts for direct tax and
new nexus rules based on mere ‘digital presence’ could possibly give rise to new
interpretations of these concepts for VAT purposes and their interaction with the VAT
place-of-taxation rules. It will be important to monitor if indeed the existing ‘VAT’
definition provided by the law or the in case law will be amended. For instance in the
EU we have extensive case law20
requiring sufficient human and technical means to
provide the taxable transactions. Technical means only may not suffice.
Any changes to the concept of permanent establishment will inevitably impact
business models and, as a result, change the way in which digitally driven businesses
manage VAT and other indirect taxes as a result of this interaction.21
These changes will need to be properly reflected in the way in which they have
set-up their compliance, systems, invoicing and intercompany agreements.
§9.03 THE SPECIFIC CASE OF BITCOINS AND VOUCHERS
The innovation of the global economy is also reflected in the use of alternative means
of payment, such as vouchers and bitcoins or other cryptocurrencies. The collaborative
economy is made possible by digitization.22
What should be their treatment from a
VAT perspective? Should alternative means of payment be within the scope of VAT, or
not?
[A] Electronic Money
The concept of electronic money is not defined in the VAT Directive. The closest
definition of money, for purposes of EU law, can be found in the Electronic Money
Directive.23
The EU VAT Directive contains only one provision specifically dealing with
‘currencies, bank notes and coins used as legal tender’, namely Article 135(1)(e) of the
VAT Directive, which exempt transactions in relation to legal tender from VAT.
20. Gunter Berkholz v. Finanzamt Hamburg-Mitte-Altstadt C-168/84; ECR [1985] 2251; Faaborg-
Gelting Linien A/S v. Finanzamt Flensburg, C-231/94, ECR [1996] I-02395; ARO Lease BV v.
Inspecteur van de Belastingdienst Grote Ondernemingen te Amsterdam, ECR [1997] I-04383;
Commissioners of Customs and Excise v. DFDS A/S, C-260/95, ECR [1997] I-01005; Planzer
Luxembourg Sàrl v. Bundeszentralamt für Steuern C-73/06 ECR [2007] I-5655; Daimler AG
(318/11) and Widex A/S (C-319/11) v. Skatteverket; Welmory sp.z o.o. v. Dyrektor Izby
Skarbowej W Gdánsku C-605/12.
21. LEJEUNE, I., VAN KESTEREN, H., The importance of ‘fixed establishments’ under the new EU
VAT rules on the place of supply of services, In: X., Les dialogues de la fiscalité. Anno 2010,
81-107 – 2010.
22. Collaborative economy refers to a socio-economic model that includes the shared creation,
production, distribution, trade and consumption of goods and services by different people and
organizations (Wikipedia).
23. Council Directive 2009/110/EC.
206

[B] Vouchers
In the Astra Zeneca case,24
the question was whether the provision of a retail voucher
by a company to its employees constituted a supply of services and should conse-
quently be subject to VAT. The European Court of Justice (ECJ) concluded that, if the
company bought the retail vouchers for a price inclusive of VAT, VAT will be due on
the ‘salary sacrifices’ the employer could profit from by providing its employees retail
vouchers as part of their remuneration.
In this regard, a proposal is pending with the European Commission to update the
EU VAT rules on voucher transactions in order to ensure the uniform tax treatment of
all types of vouchers across all EU Member States. Vouchers represent a market of more
than EUR 52 billion per year in the European Union. Prepaid telecommunications
vouchers account for almost 70% of the voucher market, followed by gift vouchers and
discount vouchers. However, differences in national VAT rules on vouchers lead to
serious market inefficiencies. Instead of being able to really benefit from the Single
Market, companies face problems of double taxation and difficulties in expanding their
business across borders. The new proposed rules seek to address this situation.25
[C] Bitcoins
Bitcoins could be regarded as money, a debt instrument, a security, a right under EU
law or a multi-purpose voucher. The International Monetary Fund (IMF)26
uses money
as a policy tool in order to achieve general macro-economic objectives. The central
bank of a country issues legal tender, which enables it to control inflation. The IMF can
also block the chain connections, as it can control financial transactions as a means to
replace banks in their role.
In Australia, bitcoins can be exchanged in ATM machines against cash.27
The
Australian authorities have ruled28
that bitcoins cannot be regarded as money, and
therefore bitcoins should be subject to VAT. This presents a risk of fraud, and there will
be no remittance of tax if the bitcoins are used across borders. Income derived from
mining bitcoins would be included in the taxable income of VAT persons.
Canada has also published some papers about the taxation of bitcoins, but has
not yet taken a position as regards the goods and services tax.
Governments and banks see bitcoins as a barter transaction, but not really as
money. The issue of this classification is to protect the currency.29
24. UK: ECJ, 29 July 2010, Case C-40/09, AstraZeneca UK Ltd.
25. Proposal for a Council Directive amending Directive Proposal for a Council Directive amending
Directive 2006/112/EC on the common system of value added tax, as regards the treatment of
vouchers, COM(2012)2016, 10 May 2012.
26. See www.imf.org.
27. P. Wood, Australia’s First Bitcoin ATM Launches, The Sydney Morning Herald (15 April 2014),
available at http://www.smh.com.au/technology/technology-news/australias-first-bitcoin-atm
-launches-20140415-zquxr.html.
28. AU: Taxation Ruling IT 2668 (20 August 2014).
29. See http://www.loc.gov/law/help/bitcoin-survey.
Chapter 9: Conclusions §9.03[C]
207

In the EU, the treatment of bitcoins is currently being debated by the VAT
Committee,30
and a ruling by the ECJ is expected.31
As bitcoins are ‘borderless’, a common global position will be needed in order to
provide the required legal certainty to traders and consumers, as well as to avoid the
risk of fraud through the use of bitcoins.32
§9.04 RATES AND THE DIGITAL ECONOMY: EQUAL TREATMENT AND
NEUTRALITY33
[A] Introduction
Although neutrality is one of the basic principles that has been incorporated in most
VAT systems around the world, it is still not always consistently achieved. A common
distortion as regards the principle of equal treatment and neutrality is the different
treatment of digital publications and their physical equivalent. There are several
arguments in favour of equal treatment of the digital and the physical versions of a
publication. One argument is that the start-up costs for a digital publication are
significant. New hires (such as web editors and IT specialists) are required. The rise in
costs goes hand in hand with a drop in margins. Thus, in order to support the survival
of the business, equal VAT rates should be applied. Moreover, an equal VAT rate
should be applied if the policy on books is to be applied consistently. The rationale here
is that books are also a source of culture and innovation, as they give the reader access
to knowledge.
An alternative and even better approach could be not to use VAT rates to pursue
a ‘book policy’, but rather to use direct subsidies instead. This, however, requires a
holistic approach to the overall taxation framework, and must be defined on a
country-by-country basis.
The EU has also taken a position on this policy, specifically in the statement by
the EU Commission on the matter.34,35
However, the study concerned will not be
published for political reasons. The French Commissioner agrees with low rates. There
are EU cases pending against France and Luxembourg for having applied reduced tax
rates on e-books, which is seen as an infringement.36
30. European Commission, VAT Committee, Working Paper No. 825 (20 October 2014) (not
published).
31. SE: ECJ, Case C-264/14, Hedqvist (pending).
32. Europol, Police Ransomware Threat Assessment (February 2014), available at https://www.
europol.europa.eu/content/police-ransomware.
33. International Publishers Association, VAT/GST/SALES TAX RATE: Global Survey on Books and
E-books: Europe, Latin America and Canada (2013), available at http://www.international
publishers.org/images/stories/news/VAT2013.pdf (accessed 13 January 2015).
34. European Commission, Economic Study on Publications on all Physical Means of Support and
Electronic Publications in the context of VAT (2013) (not published).
35. European Commission, Economic Study, supra n. 34.
36. FR: ECJ, Case C-479/13, Commission v. France; LU: ECJ, Case C-502/13, Commission v.
Luxembourg.
208

[B] European Court of Justice: K Oy Case37
On 11 September 2014, the Court of Justice of the European Union (ECJ) rendered its
decision in the K Oy case regarding the question as to whether reduced rates for printed
books should equally be applied to books published in another medium, or whether
different VAT rates can be justified. The Court ruled that a selective application of the
reduced VAT rates to printed books is not justified unless the printed books meet
different needs for consumers as compared to books published on ‘other physical
means of support’ (i.e., CD, DVD, USB stick).
The Court also concluded that, in order to determine whether goods or services
are similar, the average consumer in each Member State must be taken as a reference.
If what matters for that consumer is essentially the similar content of all books,
regardless of their physical support or characteristics, the selective application of a
reduced VAT rate is not justified.
Subsequent to the ECJ’s ruling in the K Oy case, the Finnish Supreme Adminis-
trative Court delivered its ruling at the end of December 2014. The Finnish Court
followed the argumentation of the ECJ and held that books on other physical means of
support are not similar to printed books because they do not satisfy the same needs of
the average consumer. According to the Finnish Court, books on physical means have
a closer link to e-books that are downloadable from the Internet, to which reduced VAT
rates cannot be applied under EU legislation. As a result, the application of different
VAT rates for printed books and books on other means of support, respectively, does
not violate the principle of fiscal neutrality. Consequently, the standard Finnish VAT
rate (currently, 24%) applies to audio books on other physical means of support such
as a CD, a CD-ROM or a memory stick, because, according to the Finnish judges, those
would not satisfy the same customer needs from a content perspective. This view could
be challenged where the content is the most important reason for buying the e-book.
§9.05 COLLECTING VAT ON DIGITAL SUPPLIES: ‘REVERSE CHARGING’
VERSUS ‘ONE STOP SHOP SCHEME’
The unpaid collectors of VAT are the taxable persons themselves. When engaging in
the global digital economy, they are confronted with compliance requirements in the
country of their establishment but also – especially for B2C transactions – in the
country where their customer is established. On the other side, tax authorities need the
necessary tools that will enable them to enforce compliance for both domestic and
non-domestic traders. This is particularly true, taking into account the volatility of
e-commerce and the difficulty to capture it from a VAT perspective.
Within this vacuum, the following question should be raised: Could the require-
ment that taxable persons fulfil their compliance obligations in all those jurisdictions,
be avoided? Taking into account the huge number of individual customers globally and
the vastness of e-commerce (indeed, e-commerce sales worldwide will reach USD 1.5
37. FI: ECJ, 11 September 2014, Case C-219/13, K Oy.
Chapter 9: Conclusions §9.05
209

trillion in 2014),38
one can picture the difficulties that non-established businesses will
inevitably encounter when monitoring and managing their VAT requirements. What
are the applicable VAT rates? Did I cross a VAT registration threshold?
It will therefore be key to begin thinking about new methods of collecting VAT
that do not place an (excessive) burden on the unpaid tax collector. One possibility,
particularly interesting in a B2C context, could be to opt for a ‘split-payment solution’,
with the VAT due being withheld by the credit card company, the bank responsible for
the payment or some other payment processor (e.g., PayPal). The latter would
probably also be able to verify certain information, such as the customer location,
thereby creating more certainty that the right amount of VAT is levied for the right
country. Evident difficulties – such as cost of collection and implementation, as well as
who will compensate those to the businesses that are the unpaid tax collectors (the
governments?); the use of a global standard; privacy concerns and the need for trust
between countries – will of course need to be considered and analysed in depth. A pilot
for testing this, once a framework is defined, would also be key.
How to ensure the VAT is remitted at the lowest possible cost?
The main cost components of a VAT system in the EU are the differences across
Member States in VAT-related administrative procedures, which cause a lot of extra
work and are responsible for the lack of non-alignment between VAT systems.39
On a
global level, this is equally true for non-EU countries. Therefore, a first opportunity to
ensure that VAT is remitted at the lowest possible cost, is through the work of the IMF.
The IMF’s Tax Policy and Administration helps low-income and lower-middle-income
countries establish properly designed and administered tax systems that generate
sustainable revenue to pay for essential public services.40
In this regard, the IMF also
provides assistance to countries in developing and improving a properly functioning
VAT system. Within this framework, the IMF should ensure that VAT systems are
developed in a consistent way and in line with the OECD principles41
with regard to the
use of the destination principle as place of taxation, the use of proxies and the necessity
of an easy compliance model, so as to achieve equal treatment of domestic and
non-domestic taxable persons. Developing a global compliance model should be
considered.
On a European level, in order to minimize VAT-related costs, the EU Commission
should expand the mini one-stop shop, currently limited to taxable persons supplying
telecommunication services, broadcasting services and electronically supplied services
to non-taxable persons, to a one-stop shop by 2020 both for EU and non-EU businesses
38. Nielsen, E-Commerce: Evolution or Revolution in the Fast-moving Consumer Goods World?
(2014), available at http://ir.nielsen.com/files/doc_financials/Nielsen-Global-E-commerce-
Report-August-2014.pdf.
39. European Parliament, Policy Department Economic and Scientific Policy A, Simplifying and
modernising VAT in the digital single market (2012), available at http://www.europarl.europa.
eu/RegData/etudes/etudes/join/2012/492432/IPOL-IMCO_ET(2012)492432_EN.pdf (accessed
13 January 2015).
40. IMF, Tax Policy and Administration (April 2011), available at http://www.imf.org/external/np/
otm/2011/100110.pdf.
41. OECD, International VAT/GST Guidelines, available at http://www.oecd.org/ctp/consumption
/international-vat-gst-guidelines.pdf.
Ine Lejeune & Sophie Claessens§9.05
210

that need to remit VAT for any kind of transaction in a certain Member State where they
are not established. The need for this has also been expressed by several respondents
to the Green Paper consultation, as they are confronted with the same difficulties when
engaging in cross-border trade,42
and also endorsed by the Commission, which stated
that ‘in a VAT system based on taxation at destination, a one-stop shop is a crucial
instrument to facilitate access to the single market, in particular for SMEs’.43
The authors expect that the collection and reporting model over time will evolve
from a mini one-stop shop to a global model or a regional model (see the expansion of
the EU mini one-stop shop system to Norway).44
The allocation of the VAT revenues
that are collected via the global one-stop shop or regional one-stop shop, between the
countries involved, could then perhaps be based on a formulary apportionment (e.g.,
consumption data). This method is already used, for example, in Canada, where the
goods and services tax (GST)/harmonized sales tax (HST) is remitted via the ‘GST/HST
NETFILE’ filing service. This system, which is run by the federal government of
Canada, also determines the proper allocation of the VAT revenues among the
Canadian provinces and territories.45
The discussion draft of the Guidelines on place of taxation for business of B2C
supplies of services and intangibles also recommends that non-resident suppliers be
required to register and remit the VAT/GST in the jurisdiction of taxation, and suggests
that countries implement a simplified registration and compliance regime to facilitate
compliance for non-resident suppliers.46
And, in a perfect world, taxpayers under the
global one-stop shop/regional one-stop shop/mini one-stop shop regime should also be
able to settle any issues in the local courts of the country where it is registered for VAT
purposes or through a ‘one-stop-shop for resolving disputes’, a general court with
jurisdiction across borders.
At this time, the mini one-stop shop system is the most achievable model to
optimize the collection of VAT, but, for the future, if better technology were to be
available, the OECD also considers other possibilities, such as split payments.47
Under
42. European Commission, Green Paper on the Future of VAT: Towards a Simpler, More Robust and
Efficient VAT System (2 December 2011), available at http://ec.europa.eu/taxation_customs/
resources/documents/common/consultations/tax/future_vat/summary_vat_greenpaper.pdf.
43. European Commission, Communication of 6 December 2011 from the Commission to the
European Parliament, the Council and the European Economic and Social Committee on the
future of VAT, COM(2011) 851, available at http://ec.europa.eu/taxation_customs/resources/
documents/taxation/vat/key_documents/communications/com_2011_851_en.pdf.
44. EU, Questions & Answers: VAT Changes from 2015, available at http://ec.europa.eu/taxation_
customs/resources/documents/taxation/vat/how_vat_works/telecom/q-a_vat2015.pdf.
45. CA: Canada Business Network, Overview of Charging and Collecting Sales Tax (12 December
2014), available at http://www.canadabusiness.ca/eng/page/2651.
46. OECD, Discussion Drafts for Public Consultation – International VAT/GST Guidelines – Guide-
lines on Place of Taxation for Business of B2C Supplies of Services and Intangibles (2014),
available at http://www.oecd.org/ctp/consumption/discussion-draft-oecd-international-vat-
gst-guidelines.pdf.
47. EU, Study on the Feasibility of Alternative Methods for Improving and Simplifying the Collection
of VAT Through the Means of Modern Technologies and/or Financial Intermediaries: Executive
Summary (20 September 2010), available at http://ec.europa.eu/taxation_customs/resources/
documents/common/consultations/tax/future_vat/vat-study_summ_en.pdf (prepared by PwC
for the EU Commission under the Leadership of Ine Lejeune, co-author of this chapter).
211

a split-payment model, the purchaser pays the VAT into a blocked VAT bank account
that can be used by the supplier only for paying over the VAT to the competent VAT
authorities. The advantage of this model is that, in an early stage of the VAT collection
process, the VAT collected is physically transferred to a blocked VAT bank account at
the bank of the tax authorities. This model allows the tax authorities to monitor and
block funds in the VAT bank accounts and prevent taxable persons from making off
with VAT funds paid to them.48
However, there are still various issues which make it unlikely that the introduc-
tion of such a split-payment model should be expected in the near future. First, there
is still no indication that it would work. Furthermore, the banks, which would have to
carry out several system changes, have so far not indicated a willingness to take it up.
Then again, other payment solution providers might be willing to do what it takes, or
the promise of a fee by way of compensation for such services, may change the state of
mind of financial institutions. But this would have an impact on the ‘free’ services,
including other withholding tax services, currently performed by banks for govern-
ments.
Another alternative that needs further study is the outsourcing of the VAT
collection process to businesses that have access to the data on end customers, such as
banks and other financial operators. The main challenges here will be the risk of data
manipulation and the necessity of consumer privacy protection.
In the meantime, solutions aimed at simplifying VAT compliance in different
regions should also be adopted. The biggest win in terms of reduced VAT compliance
costs could be achieved through standardization and harmonization of the different
VAT compliance obligations. For example the proposal for an EU Common Standard
VAT Return49
was applauded (during the Conference) by many businesses that do not
qualify for the mini one-stop shop and businesses that would benefit from this kind of
standardization. This is no surprise when one considers that the total annual cost of
preparing and submitting periodic VAT returns comes to EUR 39,347 billion, which
corresponds to 0.31% of EU-27 GDP in 2011. In addition, in Member States requiring
the filing of an annual summary return under VAT legislation in 2012,50
the cost linked
to this specific obligation was estimated at EUR 3.9 billion. Thus, in aggregate, the total
annual recurring cost for preparing and submitting VAT returns (both periodic and
48. European Commission, Commission Staff Working Document, Accompanying Document to the
Green Paper on the Future of VAT: Towards a Simpler, More Robust and Efficient VAT System
(2010), available at http://ec.europa.eu/taxation_customs/resources/documents/common/
consultations/tax/future_vat/sec(2010)1455_en.pdf.
49. Proposal for a Council Directive amending Directive 2006/112/EC on the common system of
value added tax as regards a standard VAT return, COM(2013) 721, available at http://ec.eur
opa.eu/taxation_customs/resources/documents/taxation/vat/key_documents/legislation_pro
posed/com(2013)721_en.pdf.
50. At the time of the study, summary annual VAT returns must be submitted in seven Member
States: Austria, Germany, Greece, Luxembourg, Malta, Portugal and Spain. Only Germany was
within the scope of the Common EU Standard VAT Return Study. Italy has an annual periodic
VAT return and was therefore not considered to have an annual summary return for the
purposes of the study.
212

summary) amounts to EUR 43.3 billion.51
Once this is achieved at a regional (Euro-
pean) level, it would be good if the OECD could also review the use of standardization,
technology and other means to lower the cost of compliance at a global level.
Moreover, keeping the cost of compliance and registration low will also stimulate
voluntary compliance. Businesses would have far less to gain from choosing the least
burdensome business flow instead of the most logical flow from a business perspective
(i.e., legal tax structuring), and from opting not to register even though it is required
(i.e., illegal tax avoidance).
§9.06 ENFORCEMENT OF VAT COLLECTION IN A DIGITAL
ENVIRONMENT
[A] Cooperation to Enforce and Facilitate Compliance and Legal
Certainty
[1] Instruments to Obtain Certainty
In a first phase, one should already be able to obtain certainty at the time of, or before,
starting up activities. Certainly in the complex world of e-commerce, this is of the
utmost importance. In times like these, taxable persons need means of protection and
defence. One significant initiative in this regard is the pilot for cross-border rulings
between fifteen EU Member States, which allows taxable persons to request confirma-
tion of the VAT treatment of a certain business set-up in the Member States involved,
through one ruling request. In addition, the VAT authorities or ruling bodies of the
Member States concerned may, upon request of the taxable person, engage in a
discussion in order to hopefully come to a joint consensus.52
One can only hope that
this initiative will be rolled out in all EU Member States and, perhaps one day, also on
a global level.
Another possibility that already exists today is the VAT Committee in the EU. The
VAT Committee is an advisory committee that provides guidance on the application
and interpretation of the VAT Directive, the implementing regulations, etc. However, at
this stage, the VAT Committee has no legislative powers and cannot take binding
decisions. Another issue is that taxable persons are dependent on a Member State or
the EU Commission to put a certain VAT topic on the agenda of the VAT Committee.
Such instruments, which ensure a priori certainty, are not only to the advantage
of taxable persons, but are equally beneficial for the VAT authorities. By not having to
engage in difficult and often lengthy discussions with taxable persons (e.g., after a VAT
audit), the VAT authorities can use these resources in view of efforts to combat actual
fraud.
51. PwC, Study on the Feasibility and Impact of a Common EU Standard VAT return (2013) available
at http://ec.europa.eu/taxation_customs/common/publications/studies/index_en.htm (ac-
cessed 7 May 2013).
52. I. Lejeune, S. Vandenberghe & M. van de Putte, VAT Rulings on Cross-border Situations in the
European Union, 25 International VAT Monitor 4 (2014).
213

Legal certainty should also be ensured in a judicial setting. Therefore, where EU
VAT principles (outlined in the EU VAT Directive, implementing regulations, etc.) are
the subject of discussion, taxable persons should be able to bring their case directly to
the Court of Justice of the European Union (ECJ). Currently, it is left to the discretion
of the local court whether a certain case will be referred to the ECJ. This is not fair to
(non-established) taxable persons because certain Member States, and their local
courts, are still not familiar with consistently applying the EU VAT principles and, if
necessary, referring the case to the ECJ.
[2] Dispute Prevention by Common Interpretation Guidelines
Nevertheless, if a certain dispute arises, it will be in the interest of all parties that it be
settled in the administrative (i.e., pre-court) phase. At a European level, common
explanatory notes have already been adopted on the application of the B2C rules.53
The
OECD is doing the same on a global level through the development of a guideline on
dispute minimization, which it is currently developing within the framework of
VAT/GST Guidelines.54
Following the adoption of these guidelines by the countries, a
detailed follow-up will be necessary to ensure that these countries actually put these
guidelines into practice. Regular updates will also be necessary. In order to stimulate
voluntary compliance, countries should strive to keep the costs of registration and
compliance low.
[3] Existing Means for Cooperation and Exchange of Information
In a digital environment, VAT authorities will have to work together. Indeed, on their
own, they will not be able to adequately address the challenges of cross-border fraud.
Furthermore, exchange of information will be vital to track down international
fraudsters.
There are already means for cooperation and exchange of information, such as
the Multilateral Convention on Mutual Administrative Assistance in Tax Matters
(which was developed by the OECD and the Council of Europe in 1988 and amended
in 2010) and Article 26 of the OECD Model Convention (and, more specifically, the
appendix relating to Article 26),55
which regulates the exchange of information and
multiple bilateral and multilateral agreements on information exchange-related
matters.
However, in the near future, such exchange of information will become increas-
ingly important. Therefore, initiatives should be taken to harmonize the exchange of
53. EC, Explanatory Notes on the EU VAT Changes to the place of supply of telecommunications,
broadcasting and electronic services that enter into force in 2015, Council Implementing
Regulation (EU) No. 1042/2013.
54. OECD, International VAT/GST Guidelines, supra n. 41, at 5.
55. Council of Europe, OECD Multilateral Convention on Mutual Administrative Assistance in Tax
Matters.
214

information. This is again beneficial for VAT authorities, which know what informa-
tion they will receive, as well as taxable persons, who will have to put less effort into
collecting the information.
[4] Administrative Cooperation and Enforcement
Taking into account the rapidity of e-supplies and the consequent difficulty to catch
fraudsters active in this sector, administrative cooperation should also be accelerated.
The benefits of real-time information would be tremendous, in view of the fight against
missing trader fraud. However, one should also consider potential privacy conflicts.
In future, joint or multilateral audits will also increase in importance. During such
audits, two or more tax authorities join forces and act as one single audit team to
examine the fiscal affairs of a taxable person in which the relevant countries have
common interests.56
The need for this is clearly demonstrated by the recent joint audit
known as Operation SNAKE. This joint audit, coordinated by the European Anti-Fraud
Office (OLAF) and involving both EU and national authorities, prevented losses of over
EUR 80 million in customs duties. This joint customs operation had particular
significance as, for the first time ever, it also involved Chinese customs authorities.57
[5] Multilateral Treaty
In his book, A VAT/GST Model Convention, Thomas Ecker analyses the possibility of a
VAT/GST model tax convention, in line with that which exists for direct taxes.58
The
OECD’s VAT/GST Guidelines can already be seen as a first crucial step in the right
direction. Given the time required to establish such a convention, countries today
should already consider implementing VAT/GST treaties.
Such initiatives are imperative, given the increasing problems that businesses
face with regard to double taxation in the area of VAT and GST. These problems have
a tremendous impact on international trade. SMEs, which do not have the possibilities
of optimizing their supply flows, are particularly heavily impacted.
It will, however, be pivotal to adopt a multilateral treaty and not to use bilateral
treaties, so as to avoid the situation where, for example, a business established in the
United Kingdom would have to analyse multiple treaties in order to define the
treatment of a single transaction.
As the first chapters of the OECD Guidelines were already endorsed during the
second Global VAT Forum organized by the OECD, it may be conceivable to consider
a roadmap for drafting and adopting a multilateral treaty.
56. Forum on Tax Administration, Sixth meeting of the OECD Forum on Tax Administration (2010),
available at http://www.oecd.org/tax/administration/45988932.pdf (accessed 14 January
2015).
57. See http://europa.eu/rapid/press-release_IP-14-1001_en.htm; EC, Report from the Commission
to the Council and the European Parliament on the application of council regulation (EU) No.
904/2010 concerning administrative cooperation & combating fraud in the field of value added
tax (2014).
58. T. Ecker, A VAT/GST Model Convention (IBFD 2013).
215

[6] Protection of the Taxpayer against Claims from the Government
A last action point to enhance certainty is the protection of the taxpayer. Non-
established taxpayers (a very common occurrence in a digital economy) are often more
vulnerable and less able to defend themselves in case of disputes with the local tax
authorities (e.g., because they are less familiar with local law, local procedural actions,
etc.). The same is true for virtual fixed establishments, which are also very common in
a digital economy. It should not be the case that they must comply with the local law
of the countries where such a virtual PE is ‘located’. Given the lack of harmonization,
even within the EU itself, this is simply impossible and is detrimental to the further
development of the e-economy.
In addition, fiscal representatives, who are not always able to assess the
intentions of the clients for whom they are liable, as well as intermediaries are finding
it increasingly difficult to cope with VAT (compliance) requirements, and therefore are
increasingly subject to VAT risks. A good example of this is express carriers, as, due to
the nature of their business, they are unable to comply with all ‘regular’ VAT
requirements. Therefore, they bear an increasing risk, which weighs heavily on their
business.
Moreover, the penalties triggered by a simple mistake (without any fraudulent
intention) are disproportionate. What is also unacceptable is the common practice of
certain tax authorities to attack the party that was not liable for the VAT due in the first
place (e.g., because a reverse mechanism applies).
Tax authorities and governments need to consider an efficient dispute resolution
and arbitration mechanism that could function at a ‘global’ level. It should be part of
the roadmap to adopt not only a multilateral treaty, but also a multilateral dispute
resolution mechanism offering easy access and protection for both taxpayers and tax
authorities.
§9.07 FINAL CONCLUSIONS
The global digital economy offers a unique opportunity for growth, new jobs and
innovation of the global economy. It is vital for business, especially for small
enterprises; citizens who can obtain access to new services in any part of the world;
and governments. It is indeed a global phenomenon.
It is necessary to rethink and amend some of the old-fashioned and outdated
VAT/GST concepts. In doing so, one must be careful not to ruin the opportunity that
the digital economy offers. Any amendments to the rules must pass the tests for
best-practice VAT/GST systems, namely being simple, certain, proportional, neutral
and sustainable. In cases of non-compliance, any penalty should be proportionate to
the loss incurred by the state, and consider the fact that B2C digital transactions are, in
the vast majority of cases, high volume but low value and low margin.
It is imperative that solutions be designed involving all stakeholders, and with an
aim of creating a level playing field for all businesses, which are the unpaid tax
collectors – whether they are larger or medium-sized or small businesses. The
216

collaborative design – which was used both by the EU Commission for the B2C 2015
changes, and at the OECD – should remain in place. Debating the outputs at the Global
VAT Forum of the OECD is also key. This creates the platform for alignment and, over
time, builds a window to agree on a roadmap for a global multilateral solution to define
the place of taxation and the collection model. Maximizing collection for the govern-
ments at the lowest cost of collection and enforcement, whilst minimizing costs of
compliance for businesses by using technology, is what should be aimed for.
The solution should be thoroughly tested – even piloted – to ensure that all
businesses, be they large or small, will be able to trade globally. Entering the digital
economy should not be restricted by the global VAT/GST solution’s becoming a barrier
to innovators and start-ups, or any business that wants to take advantage of the global
economy.
The authors are looking forward to further contributing to this dialogue and
journey in order to help deliver these benefits for all stakeholders.
217

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