The rise of e-commerce has caused tax authorities around the world to struggle with keeping up with the rapid changes in consumer behaviour.
As a result, the Organization for Economic Co-operation and Development (OECD) has proposed global measures to create a mechanism for the taxation of the digital economy.
This means that suppliers will have to consider their tax obligations in jurisdictions where they may have no physical presence. GCC legislators have made strides in creating a fluid framework to capture the digital economy as part of the taxing rules, which places the responsibility on suppliers to determine the place of supply of the respective electronic services based on the global principle of “use and enjoyment.”
In this article, we will delve deeper into the complexities that have arisen as a result of the change in consumer behavior for e-commerce providers and what it means for tax authorities in the GCC.
As a starter, for those unfiamiliar with GCC, it is worth quickly describing what this refers to. The Gulf Cooperation Council is a political and economic alliance of six Middle Eastern countries:
The article refers to the tax and e-commerce regulations within these countries.
When it comes to the sale of physical goods via e-commerce, tax authorities can track and enforce VAT compliance adequately, as the goods have to be physically imported into the final destination and delivered to the end consumer.
The close relationship between Customs and VAT means that physical goods will seldom result in a VAT revenue loss for tax authorities.
However, in the case of non-resident GCC suppliers selling physical goods to GCC resident customers, the transfer of ownership generally occurs before the goods are shipped to the customer, and VAT will be due upon importation.
In these scenarios, international courier companies are tasked with shipping and delivering goods and will also be responsible for paying any import VAT associated with the importation of the goods, which will later be recovered from the end consumer upon actual delivery.
In this way, the non-resident GCC supplier of goods avoids having to register for VAT in the GCC on the basis that there is someone in the GCC member state who is responsible for paying the import VAT.
However, when it comes to the supply of electronic services via online marketplaces, there are two distinct issues that e-commerce providers face: determining the place of supply of electronic services and the challenges of VAT compliance obligations and enforcement by tax authorities.
GCC tax authorities use the principle of “use and enjoyment” to determine the place of supply in respect of electronic services. When the customer uses and enjoys the electronic service in the GCC, the place of supply will be in the GCC member state, which in turn triggers a VAT obligation.
However, determining the place where the customer uses and enjoys a service is more complex where consumers are able to obtain services from anywhere in the world via online marketplaces.
The use of virtual private networks or other location-masking software makes pinpointing the most accurate location of the online consumer even more challenging.
GCC VAT legislation provides a variety of indicators that can be used as guidance, including:
However, obtaining sufficient evidence to prove the place of use and enjoyment is challenging and requires addressing concerns such as whether meeting one criterion is sufficient to prove the customer’s location, what to do if conflicting pieces of information are obtained, and how many checks are expected to be completed by the supplier.
It is generally supported that the type of evidence to support the place of use and enjoyment should be sufficient to enable an “objective reasonable person” to draw the same conclusion as the supplier.
In conclusion, the rise of e-commerce has caused tax authorities around the world to struggle with keeping up with the rapid changes in consumer behaviour.
GCC legislators have made strides in creating a fluid framework to capture the digital economy as part of the taxing rules, which places the responsibility on suppliers to determine the place
If you have any queries about E-Commerce and Taxation in the GCC or GCC tax matters more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article
In a recent court case, the Court of Justice in the European Union (EU) has ruled that it is legally acceptable for Italy to impose a withholding tax (WHT) and data-gathering obligations on non-resident online platforms that facilitate short-term property rentals like holiday lets.
However, the obligation to appoint an Italian tax representative liable to pay the WHT was prohibited by the EU law fundamental freedom to provide services.
The ruling has implications for other EU member states with similar rental markets, as they might also be tempted to bring in their own WHT regimes that could impact non-resident platforms.
The case began when Italy introduced three obligations on non-resident platforms in the short-term letting sector in 2017:
(1) collecting income-related data on Italian rentals,
(2) withholding tax on rental income, and
(3) appointing a local tax representative with responsibility for withholding the tax.
Airbnb challenged these rules, arguing that they were incompatible with the freedom to provide services.
The ruling is part of the EU’s ongoing attempts to regulate the economic models of online platforms in areas such as tax and data-protection.
The judgment concerns tax and data-collection and sharing obligations imposed on online platforms and the extent to which tax authorities can use platforms as a de facto compliance arm for the ‘gig’ economy.
The court held that the obligations to collect data and withhold tax at source did not constitute a restriction on the freedom to provide services. However, the obligation to appoint a tax representative in Italy was deemed a breach of the freedom to provide services.
The ruling confirms that direct taxation is not an EU-competence yet, and in principle, each member state could introduce its own WHT regime applicable to online platforms.
One key part of the case is DAC 7, a council directive that requires most online platforms to conduct due diligence on their service-providing users and report the information to one or more EU tax authorities.
DAC 7 does not require platforms to act as tax collectors; only as information providers.
In the short-term, the case allows Italy to impose WHT obligations on non-resident platforms.
The long-term implication is that other EU member states might be tempted to introduce their WHT regimes, which could impact non-resident platforms in the medium term.
If you have any queries relating to the Airbnb WHT case or Italian tax matters more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.