JANUARY 18, 2016

By Neeraj Prasad

NETFLIX is here in India & despite the limited oeuvre on offer, I and many others are certainly going to be its subscribers, after all, who would not like an uninterrupted viewing of the latest season of "House of Cards".

The "Netflix" Tax has already been introduced by many jurisdictions/countries by now. Important VAT changes commenced across the European Union ("EU") from 1 st January 2015 (refer: Commission explanatory notes published on 3 rd April 2014 on the EU VAT changes to the place of supply of telecommunications, broadcasting & electronic services; Council Implementing Regulation (EU) No 1042/2103). The key features of The EU framework which came into effect on 1 st January 2015, is as follows:

In the EU VAT context, the "place of supply rules" govern where a particular supply takes place. This is relevant for determining which party must pay the VAT to the tax authority and the jurisdiction in which it must be paid. From 1 st January 2015, these rules have changed for cross-border supplies of e-commerce services, which are provided to consumers. Since 1 st January 2015, the general rule is that the place of supply for both EU and non-EU suppliers of e-commerce service has become the non-business customer's place of "belonging". EU Regulation 1042/2013 has been introduced to assist suppliers to determine the place of supply of their e-commerce services. One-Stop-Shop facility has also been extended to e-commerce services. The One Stop Shop allows a business supplying e-commerce services to non-taxable persons in member states in which the business does not have an establishment, to account for the VAT due on those supplies via a web-portal in a member state in which they are identified. The One Stop Shop is an optional scheme. Non-EU suppliers can use the OSS only if they have no EU establishment; this is called the "Non-Union Scheme", they can choose whichever jurisdiction they wish to make their electronic registration, that jurisdiction called the member state of identification, will receive all returns and payments and distribute the VAT payments to the member states where the customers are based. For EU businesses, they must register for OSS in the jurisdiction where they have their main place of business ("the Union Scheme"). Agents will be able to submit the OSS VAT returns on behalf of their clients, in accordance with the rules and procedures in the member state of identification.

Comparing key provisions of tax jurisdictions with respect to registration, return filing requirements, threshold exemptions, rate of tax etc. of digital services, the following pattern emerges. Like EU, Norway and South Africa enable digital service merchants to register via an online portal, however, Japan requires digital service merchants to appoint a Japanese-resident tax agent (known as a ‘zeimu dairinin') to complete the procedures related to Japanese tax payments, such as filing a tax return on behalf of the foreign digital service merchant. EU and Norway require digital merchants to file returns on a per-quarter basis, in Japan the requirement is of yearly return, while South Africa prescribes digital service merchants to file monthly returns. EU has no prescribed threshold limit, the Japanese threshold requirement for foreign suppliers to Japanese consumers is JPY 10 million, the Norwegian threshold requirement for foreign suppliers of digital services to Norwegian consumers is NOK 50,000, the South African threshold requirement for foreign suppliers of digital services to South African consumers is ZAR 50,000. Foreign digital service suppliers with sales in Norway must charge a VAT rate of 25%. In Japan, the new consumption tax rate introduced on October 1, 2015, is 8%, while South African VAT is set at 14% for supplies of digital services, while there are upwards of 70+ VAT rates in the EU among the 28 member states, however, not all of these rates apply to digital service.

In an attempt to standardize the framework of taxation of digital services, on October 5, 2015, the Final Report on Action Plan 1 of the Base Erosion and Profit Shifting (BEPS) project was released by OECD. Action Plan 1 of the BEPS report focuses on the taxation challenges of the digital economy. The report recommends that rules and implementation mechanisms be adopted to "enable efficient collection of value-added tax (VAT) in the country of the consumer in cross-border business-to-consumer (B2C) transactions, which will help level the playing field between foreign and domestic suppliers," further mentioning that the evolution of the digital economy has "dramatically increased the capability of private consumers to shop online and the capability of businesses to sell to consumers around the world without the need to be physically present or otherwise in the consumer's country.'' This lack of a requirement for physical presence is the heart of this taxation issue, and it produces numerous obstacles for digital tax legislators. The challenges is to implement a taxation registration, collection and remittance systems that simplifies the taxation process for digital service merchants and does not affect the consumer's online transaction flow. Elaborating upon B2C digital supplies, the report recognizes that the main VAT challenges relate to (i) imports of low value parcels from online sales which are treated as VAT - exempt in many jurisdictions , and (ii) the strong growth in the trade of services and intangibles, particularly sales to private consumers , on which often no or an inappropriately low amount of VAT is levied due to the complexity of enforcing VAT-payment on such supplies. Therefore, jurisdictions are increasingly looking at ways to ensure the effective collection of VAT on services and intangibles acquired by resident consumers from suppliers abroad through a digital platform, in line with the destination principle , relying primarily on a requirement for non-resident suppliers to register and collect and remit the tax . To address these concerns , OECD has recommended adoption of International VAT/GST Guidelines dealing specifically with B2C supplies. The B2C Guidelines present a set of standards for determining the place of taxation for B2C supplies of services and intangibles , in accordance with the destination principle. They provide that the jurisdiction in which customer has its usual residence has the right to collect VAT on remote supplies , including digital supplies by offshore suppliers. The implementation of these standards aims at ensuring that VAT on such supplies in the market jurisdiction applies at the same rate as for domestic supplies. This ensures level playing field between domestic and offshore suppliers , so that there is no tax advantage for foreign companies based in low or no tax jurisdictions selling to final consumers relative to domestic companies. The Guidelines indicate that the most effective and efficient approach to ensure appropriate collection of VAT is to require non - resident supplier to register and account for VAT in the jurisdiction of taxation. They recommend that jurisdictions consider establishing a simplified registration and compliance regime to facilitate compliance by non-resident suppliers. Recognising that a proper balance needs to be struck between such simplification and the need of governments to safeguard the revenue , the B2C guidelines indicate that it is necessary that jurisdictions take appropriate steps to strengthen international administrative co-operation , which can be enhanced through the development of a common standard for the e x change of information that is simple , minimises the costs for tax administrations and businesses by limiting the amount of data that is exchanged , and which can be implemented in a short timeframe. Further , the Report recognizes a range of possible approaches for a more efficient collection of VAT on importation of low value digital goods . The Report recommends adoption of combination of models viz. tradit i onal collection , purchaser collection, vendor collection and/or intermediary collection models; Jurisdictions could also opt for a combination of models.

The globalization of the digital economy has led to tax jurisdictions worldwide seeking to improve revenues by applying tax on the consumption of digital services. What is clear is that it is the job of tax authorities to assist these businesses in this desire by coding their laws with the practicalities of compliance in mind . Hopefully, in the Budget proposals of 2016 we will get our "Netflix" Tax framework.

(The author is Additional Commissioner, IRS (C&CE) & the views expressed are personal and not reflective of government viewpoint.)