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Article: VAT and e-Commerce operations control strategy

By ALFREDO COLLOSA

 The Covid-19 pandemic has produced an exponential increase of e-commerce, with new business models to market goods and services, and also a profound change in the consumption habits of the population with various forms of electronic payments, such as wallets, virtual, virtual currencies, among others.

On the one hand, there is a huge loss of revenue from this crisis. Still, at the same time, everyone is looking more closely than ever at the performance of the Tax Administrations (TAs), as there is a need to safeguard tax revenue to protect the financing of expenditures needed to address the crisis, including the maintenance and expansion of government social protection programs.

Above all, the TAs must be ready to restore levels of compliance as soon as possible.

For this reason this comment’s aim is to try to provide some ideas of what actions the TAs should promote as a control strategy for VAT and e-commerce operations.

  1. TAX ADMINISTRATIONS AND THE CONTROL STRATEGY OF E-COMMERCE OPERATIONS

 I believe that the first task of the TAs is to know this type of operations, i.e. to identify massively the agents that have seen their e-commerce activities increased through the use of digital platforms and social networks.

This is because today not only large companies are marketing by these means, but also small and medium-sized companies.

In principle, it would seem that the e-commerce of goods would be easier to identify and control by TAs than that of services, due to its traceability.

In this regard, there is what is called the “physical circuit” relating to the transfer of goods where we can inquire about the subjects in charge of logistics and its transport.

On the other hand, with regard to the “financial circuit” of the operation, that is to say, how it has been paid, a basic control is that of monitoring the banking transactions of a taxpayer, which often do not coincide with the income declared to the TAs.

However, I warn that sometimes it is not so simple to follow because today there are electronic payment means with sophisticated financial systems, mediating or not cryptocurrencies, to which many TAs do not have access to information.

This identification task is not simple because companies can have a website without performing electronic commerce automatically, that is, do not have a cart, or can also receive orders or reservations on the Internet, without being clear if that this is electronic commerce or not.

Often there are one or more intermediate subjects between the seller or service provider and the buyers or users. These subjects can range from digital platforms (marketplaces) created to market, to affiliates that are subjects that put in contact the sellers or service providers that advertise on various web pages with consumers who, by viewing such advertisements, want to buy these products.

Another problem is the offshoring, since a seller or provider can use a server located in another country to make the offer of their products and their sales or even pretend and simulate misleadingly that the server is in another country.

Today, several TAs use modern technology to perform this task, but as we see the difficulties are not few when identifying the subjects, and also often the data obtained from social networks and other media do not allow to be crossed with some subject.

The European Commission launched a new customs union action plan[1] which specifically addresses the issue of new business models and e-commerce and proposes actions such as a new Data Analysis Centre, strengthening the obligation of payment service providers and online sales platforms to help combat cross-border tax fraud and a one-stop-shop environment characterised by extensive cooperation in information exchange and risk assessment.

For its part, the OECD published a new global tax reporting framework[2], which requires digital platforms to collect information on the income earned by those who offer accommodation, transport and personal services through platforms and to report the information to the Tas.

A reference document is the CIAT manual of Risk Management[3], which states that the challenge is that inspectors need to update themselves and acquire knowledge about e-commerce, for which it is advisable to develop specialized guides.

The necessary tools must be acquired to obtain information from the Internet, debug it, identify it and integrate it into databases.

It is recommended to set up a group of people to carry out these works, whose profile is a technician specialized in Information Systems.

Basically you need a “Crawler“, a tool that travels the network in search of information, a” Scrapper“, a tool that reads the contents found on webpages, such as phones or prices, recognizes and downloads them, a programming layer, and a system of consolidation in repositories.

The information downloaded from the Internet must be uploaded to the databases associated with the rest of the information of those taxpayers, to perform the risk analysis.

The manual also states that information should be available in addition to the traditionally required information. For example:

  • Information provided by banks on operations carried out through virtual terminals.
  • Information obtained by periodic requirements to the franchisors of the transport companies.
  • Information about existing advertisements on the Internet, for example, of rentals obtained with own tools on the Internet.
  • Information of the affiliates obtained by request or by international data exchanges.
  • Information on transfers ordered by payment gateways obtained from banking.
  1. NEW TOOLKIT TO STRENGTHEN VALUE ADDED TAXES ON E-COMMERCE IN LATIN AMERICA AND THE CARIBBEAN.

 A new toolkit released on June offers timely and valuable assistance to TAs in the Latin America and the Caribbean region  (LAC) for the effective collection of VAT revenues from e-commerce activities.

The VAT Digital Toolkit for Latin America and the Caribbean (LAC)[4] provides detailed guidance for the successful implementation of a comprehensive VAT strategy directed at e-commerce. It is designed to help governments secure significant VAT revenues and to ensure a level playing field between brick-and-mortar stores and foreign online sellers.

The toolkit is directed at all types of e-commerce and takes account of the specific circumstances in LAC countries. It includes detailed guidance on designing policy and legislation, on the administration of effective collection mechanisms and on a comprehensive audit and enforcement strategy.

In addition to building on the internationally agreed OECD standards, it draws on expertise and best practices from jurisdictions that have already successfully implemented these standards.

This toolkit is the first in a series of three Regional VAT Digital Toolkits, produced by the OECD in partnership with the World Bank Group, with editions for Asia-Pacific and Africa currently under development. The Inter‑American Center of Tax Administrations (CIAT) and the Inter‑American Development Bank (IDB) have contributed considerably as regional partners for the LAC region.

The Regional VAT Digital Toolkits are being developed in response to a growing number of countries, particularly developing and emerging economies, expressing interest in more detailed practical guidance for the effective implementation and administration of the OECD’s international VAT standards and recommendations.

This work is also part of a wider strategy of the OECD to address the tax challenges arising from the digitalisation of the economy[5].

  1. DEC SYSTEM (DIGITAL ECONOMY COMPLIANCE. HANDBOOK). CIAT.

 In line with this development, CIAT published the guidelines for the open software tool developed to support the collection of indirect taxes in operations carried out without physical presence in a jurisdiction[6].

In the quest to facilitate the implementation of effective mechanisms for the application of the tax to the digital economy, developed a technological registration system simplified and in compliance with tax obligations for the management of the tax regimes of the digital economy, which consists of a computer tool, low cost, open-source and fully parameterizable, which allows implementing the administrative management of the VAT applied on the digital transactions.

This tool was designed in order to be used for the effective implementation of mechanisms that allow implementing the administration of indirect taxation of the activities carried out within the digital economy, through the VAT by the TAs with limited financial resources to carry out implementation processes for this type of tax.

In summary, the proposal focuses on requiring those companies to voluntarily adhere to the mechanism, collect the corresponding taxes in B2C-type operations (with consumers) and carry out the transfer of corresponding funds; all supported by a simplified mechanism for registration, declaration, and provision of information that would not require any physical presence either.

The mechanism could be complemented by a withholding on the means of payment for transactions made with companies that are unwilling or unable to join.

In addition, a country may decide sovereignly, based on the general approach, how to define specific characteristics, such as the type of economic activity covered, the information elements for registration and declarations, the procedure to follow in case of overpayments, the establishment of minimum thresholds of total operations to be incorporated into the regime, or of minimum limits for individual operations to require additional details on the transaction, and so on.

A country, in order to implement the recommendations of the guidelines with its own adaptations and parameters, needs to adjust its legal framework to tax these operations and allow for registration and declaration without physical presence; design or adjust processes and procedures so that the different actors are aware of their responsibilities, the means to communicate and make requests; and, very importantly, to have a technological solution that allows implementing and articulating the above two elements.[7]

  1. FINAL IDEAS

 It is essential to expand the tax bases by including new taxpayers or capturing taxable matter that is hidden inside or outside each country, thus avoiding directing the controls always to the same group of taxpayers.

It is vital that the TAs have information on the agents and their economic activities, as well as the regulatory capacity to determine their obligations and the management capacity to efficiently apply the legislation.

I understand that TAs should enhance or exploit the data mining offered by e-commerce, also including a strategy of identifying transactions through virtual wallets and other digital payment and investment tools, to achieve control of operations and movements of funds through these tools and above all enhance internal collaboration with other agencies in the country, and also international collaboration.

This is because we must keep in mind that many of these operations can have consequences, not only tax implications but could be linked to crimes of money laundering, drug trafficking, and corruption.

Obviously, in many cases the control strategies of these operations require regulatory changes, very good information management, intelligent control plans and training of human resources with new digital skills.

TAs should explore the use of new technologies, like Artificial Intelligence, Blockchain, analytical tools and data analysis for improving compliance, reducing the administrative burden, creating efficiency and improving taxpayer services.

  • The New toolkit to strengthen VAT on e-commerce in LAC and the Digital Economy compliance handbook offers timely and valuable assistance to TAs for the effective collection of VAT revenues from e-commerce activities.

In short, today more than ever it is vital that TAs obtain information about the actors and their economic activities, as well as the regulatory capacity, to determine their obligations and the management capacity to efficiently implement legislation.

This is not only to be able to verify that all e-commerce operations pay the taxes in force in each country but also for the sake of equality and equity with other forms of traditional commerce, thus avoiding unfair competition in the market.

[1]   https://ec.europa.eu/taxation_customs/customs-action-plan-supporting-eu-customs-protect-revenues-prosperity-and-security_en?s=03

[2]   https://www.oecd.org/tax/exchange-of-tax-information/model-rules-for-reporting-by-platform-operators-with-respect-to-sellers-in-the-sharing-and-gig-economy.htm

[3]   https://biblioteca.ciat.org/opac/book/5741

[4]    https://www.oecd.org/tax/consumption/vat-digital-toolkit-for-latin-america-and-the-caribbean.htm

[5]   https://www.oecd.org/tax/beps/beps-actions/action1/

[6]   https://biblioteca.ciat.org/opac/book/5772

[7]    https://www.ciat.org/ciatblog-the-digital-economy-the-norwegian-cooperation-and-ciat-an-essential-tool/?lang=en

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