ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
INTERNATIONAL VAT/GST GUIDELINES
February 2006
CENTRE FOR TAX POLICY AND ADMINISTRATION
INTERNATIONAL VAT/GST GUIDELINES
PREFACE
1. The spread of Value Added Tax (also called Goods and Services Tax – GST) has been the most important development in taxation over the last half-century. Limited to less than ten countries in the late 1960s it has now been implemented by about 136 countries; and in these countries (including OECD member countries) it typically accounts for one-fifth of total tax revenue. The recognised capacity of VAT to raise revenue in a neutral and transparent manner drew all OECD member countries (except the United States) to adopt this broad based consumption tax. Its neutrality of principle towards international trade also made it the preferred alternative to customs duties in the context of trade liberalisation.
2. At the same time as VAT was spreading across the world, international trade in goods and services was expanding rapidly as part of globalisation developments, spurred on by deregulation, privatisation and the communications technology revolution. As a result, the interaction between value added tax systems operated by individual countries has come under greater scrutiny as potential for double taxati
on and unintentional non-taxation has increased.
3. When international trade was characterised largely by trade in goods, collection of taxes was generally undertaken by customs authorities, and when services were primarily traded within domestic markets, there was little need for global attention to be paid to the interaction between national consumption tax rules. That situation has changed dramatically in recent years and the absence of internationally agreed approaches, which can be traced back to that lack of need, is now leading to significant difficulties for both business and governments, particularly for the international trade in services and intangibles, and increasingly for the trade in goods.
4. Even though the question remains difficult –and sometimes controversial- for interstate trade within federations or within economically integrated areas, the destination principle (i.e. taxation in the jurisdiction of consumption by zero rating of exports and taxation of imports) is the international norm. The issues therefore arise primarily from the practical difficulty of determining, for each transaction (i.e. the sale of a good, a right or a service), the jurisdiction where consumption is deemed to take place and therefore where it should be taxed. In addition, it should be borne in mind that value added tax systems are designed to tax final consumption and as such, in most cases it is only consumers who should actually bear the tax burden. Indeed, the tax is levied, ultimately, on consumption and not on int
ermediate transactions between firms as tax charged on these purchases is, in principle, fully deductible. This feature gives the tax its main characteristic of neutrality in the value chain and towards international trade.
deductible5. Nevertheless, although most countries have adopted similar principles for the operation of their value added tax system, there remain many differences in the way it is implemented, including between OECD member countries. These differences result not only from the continued existence of exemptions and special arrangements to meet specific policy objectives, but also from differences of approaches in the definition of the jurisdiction of consumption and therefore of taxation. In addition, there are a number of variations in the application of value added taxes, and other consumption taxes, including different interpretation of the same or similar concepts; different approaches to time of supply and its interaction
with place of supply; different definitions of services and intangibles and inconsistent treatment of mixed supplies.
6. Since the late 1990s, work led by the OECD’s Committee on Fiscal Affairs (CFA) in cooperation with business, revealed that the current international consumption taxes environment, especially with respe
ct to trade in services and intangibles, is creating obstacles to business activity, hindering economic growth and distorting competition. The CFA recognised that these problems, particularly those of double taxation and unintentional non-taxation, were sufficiently significant to require remedies. This situation creates increasing issues for both businesses and tax administrations themselves since local rules cannot be viewed in isolation but must be addressed internationally.
7. Businesses are increasingly confronted by distortions of competition that sometimes favour imports over local production or prevent them outsourcing activities as a means of improving their competitiveness. Multi-national businesses are confronted with laws and administrative requirements that may be contradictory from country to country. This generates undue burdens and uncertainties, in particular when they specialise or group certain functions in one particular jurisdiction, such as shared service centres, centralised sales and procurement functions, call centres, data processing and information technology support. Businesses can incur double taxation when two different jurisdictions both tax the same supply, the first one because it is the jurisdiction where the supplier is established and the second one because it is the jurisdiction where the recipient is established. In the case of leasing of goods, for example, a third jurisdiction, i.e. the jurisdiction where the goods are located, may also claim the tax. Uncertainties also arise in situations where, for example, the headquarters of a com
pany established in one country provides supplies to customers in another country where it has a branch (force of attraction). Even if some countries implemented refund schemes of tax incurred by foreign business or registration procedures to achieve the same effect, which are intended in part to address some of the consequences of these different approaches, such schemes are, when they exist, often burdensome, especially for SMEs.
8. Tax administrations are often confronted with unintentional non-taxation that mirror the double taxation situations referred to above. Consumption taxes are normally predicated on the basis that businesses are responsible for the proper collection and remittance of the revenue. Complex, unclear or inconsistent rules across jurisdictions are difficult to manage for tax administrations and create uncertainties and high administrative burdens for business, which can lead to reduced compliance levels. In addition, such an environment may also favour tax fraud and evasion.
9. The OECD has long held a lead position in dealing with the international aspects of direct taxes. The Organisation has developed internationally recognised instruments such as the Model Tax Convention on Income and on Capital and the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Until now, no such instrument was available in the field of consumption taxes. Only the Ottawa Framework Conditions (1998), the Guidelines on Consumption Taxation of Cross-Border S
ervices and Intangible Property in the Context of E-commerce (2001) and Consumption Tax Guidance Series (2003) have been published. The Committee on Fiscal Affairs therefore began work on a set of framework principles on the application of consumption taxes to the trade in international services and intangibles. These principles form the first part of the OECD VAT/GST Guidelines. These principles will be developed in order that countries (both OECD and non-OECD) can implement them in legislation. The table of contents will evolve in the light of experience and will be amended and completed over time.
TABLE OF CONTENTS
PREFACE
GLOSSARY
CHAPTER I BASIC PRINCIPLES
Introduction
I.A.
I.B. Application to International transactions
I.B.1. Services and intangibles
(i) Place of Consumption Principles
I.B.2. Goods
I.C. Interaction of VAT/GST with Sales, Excise and other Transactional Taxes CHAPTER II APPLICATION OF PLACE OF CONSUMPTION PRINCIPLES
Introduction
II.A.
II.B. Application of Principles to Services and Intangibles to Achieve Greater Compatibility II.B.1 Defining Place of Consumption
(i) Use of Proxies
•Performance
•Customer Location
•Other
II.B.2 Specific treatment for Business to Consumer Transactions
II.B.3 Customer Location Issues
Annex: Framework (Decision Chart) for Determining Place of Taxation
II.C. Tax Collection Methods
II.D. Services Characterisation Issues
II.D.1.Characterisation/Definition of Services
II.D.2. Mixed and Bundled Supplies
II. E. Application to Goods
CHAPTER III TAXATION OF SERVICES IN SPECIFIC SECTORS III. A. Introduction
Telecommunications
III.B.
III.C. Electronic Commerce
Services
Financial
III.D.
III.E. International Transport
Gambling
III.F.
CHAPTER IV TIME OF SUPPLY AND ATTRIBUTION RULES
Introduction
IV.A.
Issues
IV.B.
CHAPTER V VALUE OF SUPPLY
Introduction
V.A.
Issues
V.B.
CHAPTER VI COMPLIANCE ISSUES
VI.A.
Introduction
VI.B. Automated Tax Collection
IV.B.1. Criteria
IV.B.2. Application
VI.C. Simplified Administrative Procedures
VI.C.1. Cross-border invoicing
Registration
VI.C.2
Simplified
VI.D. International Tax Cooperation
VI.D.1. Exchange of Information
VI.D.2. Mutual Administrative Assistance
Legal
Issues
VI.D.3.
Exchange
for
Practical
VI.D.4
Methodologies