I. Introduction
The growth of the digitalised economy has placed unforeseen pressures on all aspects of society, the economy, and the law.Footnote 1 States have reacted to these pressures as they have to all technological and economic developments—with a host of unilateral laws, anti-trust, intellectual property, tax, contract, tort and many others, which are inconsistent and often incompatible with those of others. It has yet to dawn on many policymakers that responses previously relied on are no longer suitable for an economy that transcends national borders and is truly global both in reach and in its underlying nature. Nor have they appreciated the extent to which the digital economic revolution will upend many of the domestic legal foundations on which societies are currently constructed. Most importantly, they have yet to realise that multilateral economic issues, just like multilateral environmental and health issues, require a multilateral response.
Nothing illustrates the need for multilateral responses to the challenges posed by the global nature of the digitalised economy better than the global adoption of value-added tax (VAT), the consumption tax designed to apply to the final consumption of cross-border sales of goods or services. The tax has been adopted by over 170 jurisdictions,Footnote 2 and has been the reliable, stable backbone of governmental revenues worldwide.Footnote 3 The tax was adopted at a time when international trade largely comprised tangible assets and was designed to be imposed as they physically crossed into the importing country. The drafters of VAT laws never conceived of an economic model based on digital goods and services supplied from a digital cloud, and the tax they designed had no collection mechanism that could be applied to supplies that were not stopped for border controls or checked by local tax authorities.
The widespread use of information and communication technology (ICT) has transformed global economies, and new business models, such as mobile payment services, cloud computing and App stores, have emerged.Footnote 4 Cross-border transactions in services and intangibles related to these new business models, together with traditional services enabled by ICT, have grown rapidly,Footnote 5 particularly during the global pandemic, and this trend is likely to accelerate.Footnote 6 The rise in suppliers selling globally through online platforms and the popularity of digital content supplies have a significant impact on VAT.Footnote 7 The tax, designed to be a levy on final consumption, was devised to suit the modes of twentieth century commerce, characterised by physical delivery and consumption of goods and services. A fundamental principle of VAT design is that the tax should fall on final consumption and thus be levied and collected where final consumption takes place.Footnote 8 Applying this destination principle to digital supplies where no physical property crosses borders is challenging.
There are also concerns of base erosion and profit shifting (BEPS) relating to cross-border digital supplies.Footnote 9 These concerns may be heightened when highly digitalised businesses structure their operations to pay little or no VAT on offshore digital supplies of services and intangibles. Highly digitalised businesses may be able to manipulate points of sale to minimise VAT liability,Footnote 10 making digital supplies through jurisdictions with low or zero VAT rates. Digitalised businesses in the services sector are particularly sensitive to VAT rates.Footnote 11 Concerns also arise regarding cross-border transactions involving businesses that do not need to be registered for VAT purposes (and file tax returns) but do not receive tax credits for any VAT paid.Footnote 12
These challenges arising from the digitalised economy are not negligible. Existing legal systems are inadequate to sustain the development of the economy. Without effective rules and mechanisms to determine the place of consumption and for tax collection, the growth in cross-border digital supplies could result in loss of revenue and unequal tax treatment between domestic and foreign businesses. The global pandemic has led to soaring consumption of digital supplies of services and intangibles, making this of paramount concern.Footnote 13
It is only over the course of much of the last decade, as the threat to national revenue multiplied,Footnote 14 that policymakers began to appreciate the challenges of applying a final destination tax when there is no identifiable border nor an obvious final destination. The result has been a hodgepodge of ad hoc responses that could easily result in double taxation or non-taxation.Footnote 15
The international response to date has been underwhelming—there have been a handful of guidelines issued by the the Organisation for Economic Co-operation and Development (OECD),Footnote 16 to which most countries do not belong, and a skeletal academic literature produced.Footnote 17 The EU has been concentrating on internal mandatory rules and has largely ignored the broader international implications of the digitalised economy, whilst the United States (US), the only major economic power without a VAT,Footnote 18 is unsurprisingly indifferent to the problem.
Although a multilateral solution to the issues raised by the digitalised economy is not on the immediate horizon, it is not too early to consider this option. This article sets out why a multilateral approach is preferable and how this might be achieved.
Following this introduction, Part II examines the challenge of applying destination based taxation to cross-border digital supplies. Part III considers what individual jurisdictions have done to address these challenges and why such unilateral approaches cause problems. Part IV explores multilateral options for achieving consistency in the implementation of technical rules to meet the challenges. It canvasses two options: a soft international response in the form of non-binding guidelines, and a hard multilateral response in the form of binding treaties. It will be seen that the major problem is not the lack of technical solutions to the challenges but the lack of coordination mechanisms to enhance consistent implementation. It will be seen that soft international responses are unlikely to achieve consistency and that a hard international response is therefore to be preferred. Part V argues that there is a need for an internationally coordinated multilateral agreement that can facilitate consistent implementation.
II. The Challenge of vat in a digitalised Economy
The destination principle operates in a cross-border context, which means that VAT is ‘ultimately levied only on the final consumption that occurs within the taxing jurisdiction’.Footnote 19 A uniform adoption of VAT laws based on the destination principle is neutral in that it taxes local and imported supplies in the same way,Footnote 20 and is combined with a zero rate for exported supplies together with a full refund of VAT paid by the exporter. However, this approach is difficult to apply to cross-border digital supplies because of difficulties in determining the place of consumption and, in the case of some foreign-sourced digital supplies, difficulties in collecting the tax.
The legitimacy of applying VAT to cross-border supplies depends on the nexus between the taxing jurisdiction and consumption,Footnote 21 in contrast to income tax where the nexus is the source of income or the place of residency of the taxpayer.Footnote 22 While all parties may agree that the place of consumption is the final destination of a supply or sale,Footnote 23 the practical application of this principle may be difficult. A customer viewing an image on their computer in jurisdiction A may consider that jurisdiction to be the place of consumption, whereas the supplier's jurisdiction may view the supply as taking place when the image is uploaded to the server and made available to customers.Footnote 24 Moreover, even if there is agreement regarding which is the taxing jurisdiction, there may be serious practical limitations on that jurisdiction's power to tax where supplies reach customers by way of ICT.Footnote 25
In business-to-business (B2B) transactions, it may be necessary to determine the place of taxation (which should be the place of consumption) under each of the VAT laws involved. The difficulty of doing this varies, and the consequences of inconsistent determinations need to be considered. As VAT is intended to be a tax on final consumption, and not on businesses, intermediaries registered for VAT receive tax credits for any VAT paid, with the final supplier remitting the VAT paid by the ultimate customer to the tax authorities, thus rendering VAT a tax on final consumption.
In a cross-border context, the ability of business customers to receive VAT credits encourages them to declare and self-assess VAT when importing digital supplies.Footnote 26 There are, however, businesses not entitled to claim credits for the VAT included in the cost of imported supplies and these businesses have no incentive to declare and self-assess a VAT liability. Businesses in this category include, for example, enterprises applying acquisitions to make financial supplies such as banks acquiring computer software used to make loans and unincorporated businesses acquiring supplies for the personal use of the proprietor.Footnote 27 A different challenge arises in the case of business-to-consumer (B2C) transactions where digital supplies are acquired over the internet or other telecommunication means, sometimes making it difficult for the supplier to identify exactly where the consumer is located.
Another challenge relates to collection. VAT is collected through a multi-staged processFootnote 28 through an invoice-credit method, under which businesses are taxed on their sales at each stage of production but obtain credits for the VAT paid on inputs.Footnote 29 As the tax is collected from business suppliers through multiple stages and, because of the credits available for businesses to deduct input VAT, the tax burden is actually borne by the final consumer. However, in an international context this staged collection process is disrupted, as the destination jurisdiction where consumption takes place may lack the means to collect the tax from the foreign supplier. The tax might be collected from the domestic customer registered for VAT purposes, such as a business. However, when both services and payment are executed seamlessly through the internet and other digital technologies, it is difficult to collect the tax from the customer, especially when the customer is the final consumer without any incentive to assess and remit the tax to the tax authority.
III. Unilateral Responses
In recent years responses have been made by individual jurisdictions to these twin challenges of determining whether consumption has taken place within their territory and adopting mechanisms to impose and collect tax when the supplier is located abroad.
A. The Place of Taxation Rules
The first and foremost issue when applying the destination principle is where consumption takes place. Legal rules developed by jurisdictions for determining the place of consumption are often described differently, such as place of taxation rules, place of consumption rules, or place of supply rules.Footnote 30 The article uses the term ‘place of taxation rules’.
The rules adopted are consistent neither in terms of style nor effect. The EU, for example, groups supplies into several categories (eg, supply of goods, supply of services, supply of services connected with immovable property) and provides specific place of taxation rules for each category of supply.Footnote 31 An alternative approach, adopted in some jurisdictions including Australia, New Zealand and Singapore, provides a series of rules to be applied in sequence until the place of taxation can be determined.Footnote 32 This iterative approach is viewed as a principle-based method for determining the place of consumption, and hence the place of taxation. The two approaches are not mutually exclusive and can be used in combination.Footnote 33
Such differences in approach mean that there is a real possibility that consumption might either be double taxed or left untaxed. Coordinating responses within an economic union is relatively simple—common rules for VAT in Canadian provinces and in EU Member States provide clear examples—but achieving similar outcomes on an international level has proved more problematic.
In an attempt to foster consistency in determining the place of taxation, the OECD recommend a set of general and specific place of taxation rules in the International VAT/GST Guidelines (‘OECD Guidelines’).Footnote 34 Under the general rule, cross-border B2B supplies use the customer location as a proxy to determine the place of taxation, while for cross-border B2C supplies, other than on-the-spot supplies, the location of the customer's usual residence is used.Footnote 35 For on-the-spot services, it is evident that the place of performance should be identified as the place of taxation because it is where consumption takes place.Footnote 36 The general rule for B2B transactions will apply in any situation.Footnote 37 This categorical application is to ensure that the tax is imposed and collected in the destination jurisdiction.
Specific rules under the OECD Guidelines, such as those on supplies involving movable or immovable property, are to be used only if and when the application of the general rules undermines neutrality, efficiency, certainty, fairness and effectiveness, and only when they are clearly specified in the relevant laws.Footnote 38
Conceptually, these rules cannot always provide precise conclusions as to where the customer is located, particularly in B2C cross-border transactions, but rather can only estimate an outcome with reasonable accuracy.Footnote 39 Such limitations reflect the very nature of the digitalised economy, in which digital supplies of services and intangibles can be consumed anywhere via ICT. The ‘proxy’ approach may be needed in designing place of taxation rules for digital supplies, even though it can be arbitrary. On the other hand, the use of proxies to determine the outcome with reasonable accuracy meets the ‘administrative ease’ or efficiency objective in taxation, which requires that tax be collected with minimal administration and compliance costs.Footnote 40
An increasing number of individual jurisdictions have taken measures to address this problem and achieve destination taxation.Footnote 41 These vary considerably from jurisdiction to jurisdiction, though they are generally aligned with the destination principle.
In order to target digitally supplied services and intangibles, some jurisdictions have extended an existing general definition of ‘services’ in their VAT laws to include those that are supplied electronically by non-residents to domestic consumers, thus rendering them liable to VAT.Footnote 42 Others have developed a definition of digital services which aims to cover as wide a range of electronically supplied services as possible,Footnote 43 providing examples in a non-exhaustive list.Footnote 44 Some jurisdictions that initially adopted a relatively narrow definition have recently expanded it to include more types of digital services.Footnote 45 There are also jurisdictions which distinguish digital or the remote supply of services from non-digital supply of services, and provide a broad definition of the former, accompanied by examples intended to clarify but not to limit.Footnote 46 Digitally supplied services covered in the various definitions usually include ICT services (such as cloud computing) and ICT-enabled services (such as consultancy). While there appears to be a general convergence on a broad definition, the scope of what falls within it varies considerably.Footnote 47
When determining the place of consumption, the proxy approach is usually adopted, but the details of this vary. Within the EU, for example, it was not until 2015 that the place of taxation for both intra-EU digital supplies of services and supplies from outside the EU became aligned with the jurisdiction of customer location, ie, destination taxation.Footnote 48 For B2C supplies, the place of taxation depends on the location of the customer, being either a place where the final consumer is established or has an establishment (if it is a non-taxable legal person) or a place of permanent address or usual residence (in the case of a natural person).Footnote 49 Suppliers are required to determine the customers’ location on the basis of two pieces of evidence such as billing addresses, bank details, and IP addresses.Footnote 50 Simplified evidence requirements apply to small EU-established businesses.Footnote 51
New Zealand also introduced rules in 2015 which require suppliers of remote services (ie services supplied from offshore jurisdictions) to use two pieces of evidence to determine when a service is supplied to a person resident in New Zealand.Footnote 52 The place of taxation rules are modified to tax remote services supplied to consumers resident in New Zealand.Footnote 53 A difference between the EU and New Zealand rules is that under the latter, suppliers of remote services are presumed to make sales to final consumers, ie B2C supplies, unless the recipient provides their Goods and Services Tax (GST) registration number or a New Zealand business number.Footnote 54 Several other jurisdictions have also implemented rules requiring evidentiary documentation to determine customer location.Footnote 55
Other measures have been developed to solve this difficulty. In Japan, the place of taxation rules for the digital supplies of services were revised, also in 2015, to be the ‘address of the service recipients’,Footnote 56 ie the customer location. The Japanese rules seem to rely on a combination of subjective and objective methods to determine whether an address is in Japan.Footnote 57
In contrast to the rules applied in other jurisdictions or the recommended place of taxation rules by the OECD, China's VAT rules generally mean that VAT liability arises if the supplier or the recipient of services is located in China.Footnote 58 Either will, prima facie, result in taxation in China, which would result in double taxation if services provided by a foreign supplier to a Chinese customer, or services made by a Chinese supplier to a foreign customer, were actually consumed overseas and that jurisdiction applies the destination principle. Special rules are therefore applied to prevent this.Footnote 59 VAT (with or without credits) is either exempted or excluded for exported services and intangibles when they are consumed ‘completely outside China’,Footnote 60 meaning that services supplied offshore should have no connection with any goods or real property in China and the recipient is outside China.Footnote 61
The proxy approach may help address the difficulty in determining the place of customer location in the case of B2C supplies, but will be onerous where single transactions are conducted instantaneously. The difficulty could be compounded where jurisdictions use different proxies and evidence requirements. Where consumers use virtual private networks (VPNs) to acquire services or intangibles from offshore suppliers, foreign suppliers could be misinformed by the VPN when seeking to identify the consumers’ location.Footnote 62 Moreover, notwithstanding the convergence towards imposing taxation in the place of customer location, jurisdictions differ in interpreting where that is. Disparities exist between the understanding of even seemingly simple terms such as ‘business’ and ‘final consumer’ and this has direct relevance to the application of the place of taxation rules in many jurisdictions, which depend on whether the customer is a business or a final consumer.Footnote 63 So far, however, there has been little coordination at the international level.
B. Collection Mechanisms
The absence of physical border controls over cross-border digital supplies challenges tax collection. Alternative collection mechanisms are thus needed. Two have been commonly used to date, one for B2B sales and the other for B2C sales.Footnote 64
The method used most often for B2B sales is known as the reverse charge or self-assessment mechanism. This mechanism overcomes the disruption of the staged collection process in a cross-border context, that is, the practical difficulty of collecting the tax from the offshore supplier on sales to domestic customers. When supplier and customer are located in different jurisdictions, the reverse charge mechanism shifts the tax collection from the supplier to the customer and the customer is required to account for and remit the VAT on the imported supply. Provided the customer is a registered business, it would be entitled to an offsetting credit for the tax at the same time the import VAT is reported,Footnote 65 although the credit is not available to some customers such as financial suppliers. No similar incentive exists in B2C supplies and thus the reverse charge mechanism is ineffective for VAT collection.Footnote 66 The foreign-vendor registration mechanism has consequently developed. Instead of shifting the VAT obligation to the final consumer, foreign suppliers are required to account for VAT and remit taxes from the consumer in the consumer's jurisdiction through tax registration.Footnote 67 A common approach is to adopt a simplified registration process to reduce compliance costs.Footnote 68
Another collection mechanism in B2C transactions is to require online marketplaces or electronic platforms, such as Amazon Kindle, Apple App Store and Google Play, to account for VAT on sales of services and intangibles made by sellers through their platforms and to be jointly and severally liable for VAT.Footnote 69 The advantage of this approach is that these multi-sided platforms usually have a greater capacity to comply with VAT obligations required by various jurisdictions to which services and intangibles are sold, than individual players trading in the platforms.Footnote 70 It is also easier to regulate a few big platforms than to deal with a vast number of small business players. Particular attention is also required to the role platforms can play in VAT collection in the sharing and gig economy which is comprised of an escalating number of small traders.Footnote 71
A similar inconsistency exists with respect to the collection mechanisms. The mechanisms are usually differentiated between B2B and B2C supplies, with a reverse charge applying to the former and a foreign-vendor registration requirement to the latter. The EU adopts such an approach. Under EU rules, as with the determination of the customer location, evidence is required for the identification of the type of customer. In B2C transactions, foreign suppliers are required to register for VAT in the EU, without any threshold, and to charge VAT at the rate applicable in the customer's Member State. The EU has very recently moved to a simplified registration scheme to enable both EU- and non-EU-established suppliers of digital services to fulfil VAT reporting and collection obligations on consumption of all digital supplies made to other EU Member States.Footnote 72
Similar mechanisms for B2B and B2C digital supplies are applied in other jurisdictions such as Australia. However, Australia's reverse charge rules for B2B supplies require the business customer, rather than the foreign supplier, to determine whether the imported services have been purchased for business use and must therefore apply the reverse charge.Footnote 73 For cross-border B2C supplies, foreign suppliers are required to register for GST, subject to a threshold.Footnote 74 The approach to using a threshold for foreign-vendor registration is also adopted in New Zealand,Footnote 75 but the threshold does not apply to cross-border B2B supplies because such supplies are out of scope in the tax law.Footnote 76 This use of thresholds to implement foreign registration mechanisms is common practice, but varies significantly by jurisdiction in monetary value and scope of supplies included.Footnote 77
Although there is a tendency among jurisdictions to use the reverse charge in B2B supplies and foreign registration in B2C supplies to collect taxes, some jurisdictions have applied the single method of foreign registration to both types of supplies, while others have used an agency approach, requiring the foreign supplier to designate a local tax agent to file tax returns and collect taxes in B2C transactions.Footnote 78 There are also jurisdictions that do not adopt either mechanism but instead adopt a withholding mechanism. For example, China uses this method to collect VAT from cross-border B2B transactions where the foreign supplier has no Chinese business establishment or local agent. In this scenario, the Chinese customer is required to withhold and remit the VAT to the tax authority before final payment is made to the foreign supplier.Footnote 79 As the international norm is the reverse charge mechanism, with the importer responsible for the VAT in addition to the purchase price, foreign sellers to China have no way of recovering the withheld amount in their domestic jurisdictions. As a result, they would receive less than the agreed sales price, prompting them to charge Chinese business customers higher amounts than to customers in jurisdictions with a reverse charge system.Footnote 80 In these circumstances, the tax would act as a non-recoverable tariff for Chinese importers.
Lastly, the mechanism of using online marketplaces to collect VAT on B2C digital supplies has become increasingly common. Australia, the EU and New Zealand are among the first jurisdictions to require online marketplaces or platforms to register for and collect VAT on digital supplies of services, although the rules may differ.Footnote 81 Other jurisdictions, such as Mexico and Singapore, have followed suit.Footnote 82 Even within the US, where there is no VAT at the federal level, around 80 per cent of states require online marketplaces which meet specified state sales thresholds to collect the state-level retail sales tax on sales they facilitate, including those related to services and digital goods.Footnote 83 Some similar, yet distinctive, approaches are used in other jurisdictions. In the UK, for example, online marketplaces are responsible for checking and reporting on compliance with VAT requirements by non-UK sellers registered on their marketplaces.Footnote 84
Thus, various unilateral actions have been taken by jurisdictions to address the VAT challenges of cross-border digital supplies. Although the actions have largely followed the destination principle, global VAT systems are far from harmonised.Footnote 85
IV. Option for Multilateral Responses
Unilateral approaches to the challenges raised by the operation of VAT in a digitalised economy have been only partially able to achieve the necessary harmonisation and reconciliation. In federal systems (or the EU), where multiple provinces, states or countries levy VAT separately, jurisdictions can agree to adopt harmonised legislation to address the challenges, but this solution only applies within the region. There are two possible paths to a true international solution: universal adoption of a soft international response in the form of non-binding international guidelines, or a hard international response in the form of a binding treaty.
A. Soft International Response
International guidelines have been developed in order to respond to the global VAT challenges in the digitalised economy.Footnote 86 Unlike income taxes, VAT was not subject to any internationally agreed standard until 2015 when the OECD Guidelines on international trade in services and intangibles were formally endorsed by over 100 participating jurisdictions and international organisations at the Global Forum on VAT.Footnote 87 The Guidelines were incorporated into an OECD Council Recommendation adopted in 2016, which was the first OECD legal instrument on VAT/GST and the first internationally agreed framework for the application of the tax to cross-border trade.Footnote 88 Given the acceptance of the OECD Guidelines by non-OECD member jurisdictions, they have a multilateral reach.Footnote 89 Subsequent international guidelines (which serve as implementation packages for the OECD Guidelines) have also achieved international acceptance.Footnote 90
The various recommendations on taxation rules and collection mechanisms in the OECD Guidelines appeared in the report on BEPS relating to the digital economy.Footnote 91 The OECD Guidelines offered a technical solution for jurisdictions to consider in designing domestic rules to address VAT challenges. National laws to address taxation of cross-border digital supplies that were newly introduced or modified around that time are broadly aligned with the solution, demonstrating the influence of the OECD Guidelines on national legislation.
The intent of the OECD Guidelines was to facilitate a consistent approach to VAT taxation. As stated within the Guidelines, the objective is to ‘facilitate a coherent application of national VAT legislation to international trade’ and to ‘minimise inconsistencies in the application of VAT in a cross-border context’.Footnote 92 This intention is endorsed in subsequent implementation packages, including guidance on collection mechanisms, the role of digital platforms in collecting the VAT on online sales, VAT policy and administration with respect to the sharing and gig economy, and model rules for platform reporting.Footnote 93 This series of guidelines is a direct response to the call for policy development to address emerging VAT issues and for coherent implementation from tax authorities of both OECD and non-OECD jurisdictions. The series also reflects the absorption of unilateral measures pioneered in early-mover jurisdictions. The series of international guidelines, particularly the OECD Guidelines, are the result of the collective effort of a wide range of jurisdictions confronting global VAT challenges presented by the ever-evolving digitalised economy.
So far 70 jurisdictions have aligned their national rules with the recommended solution under the international guidelines and around 40 further jurisdictions are moving towards alignment.Footnote 94 In theory, this should allow enhanced consistency with the implementation of destination taxation on cross-border trade in services and intangibles and avoidance of double taxation or unintended non-taxation. However, not all jurisdictions’ VAT rules align with the guidelines.Footnote 95 Even if all jurisdictions follow the guidelines, inconsistent implementation exists due to differing interpretation and application in individual jurisdictions, and the lack of effective coordination to mitigate inconsistency. The constant call for consistency and coordination in the set of guidelines and considerable variations of national rules is revealed in large global surveys of VAT (or similar tax) systems.Footnote 96
An illustration of the inconsistency problem occurs when determining the location where taxation should be applied where a B2B transaction occurs with a multiple location entity (MLE).Footnote 97 The standard rule is that VAT should be levied and collected in the jurisdiction of the customer location (a proxy for the place of consumption).Footnote 98 However, there is variability between jurisdictions as to the questioning process for determining that location in VAT laws. In the EU, the questions are what digital services are supplied, to whom the services are provided, why the services are supplied, and where and when the services are supplied. In contrast, the questions in Australia are whether services supplied are connected with Australia, whether they are supplied to Australia or from Australia, and whether the supply is GST-free (with input credits) or input taxed (exempt from the tax without input credits). In China, the questions pertain to whether the services supplier or recipient is located in China, whether the services are consumed completely outside China, and whether the supply is connected to any goods or real property in China. The questions are likely to differ again in other jurisdictions. Answers to the questions based on domestic place of taxation rules may lead to outcomes that contravene the destination principle in a cross-border context.
Consider the following scenarios. Company A, located in country A, concludes a contract for the provision of online training with company B, located in country B, for employees of company B's branch in country C. Company A invoices company B for the services and gets paid by company B. If country A is China, the services would be prima facie taxable in China since the services supplier is located in China as discussed above. However, if country B is Australia, the services would also be prima facie taxable in Australia as the services are connected with Australia, resulting in double taxation. In practice, the training services will be treated, under China's VAT law, as a supply that is exempt from VAT without input credits for the supplier, provided the services are consumed completely outside China and have no connection with any goods or real property in China.Footnote 99 However, except for China and a few other jurisdictions, many countries (country A) would treat the digital supply provided by company A as a zero-rated export, ie no VAT on the export with input credits for the supplier. Thus, there can be no double taxation from the perspective of country A vis-à-vis countries B and C, but there may be risks of double taxation or non-taxation if both or neither B or C regard the supply as consumed in their respective jurisdiction.
If country A is Australia, company B is in the UK and Canada is country C, the place of taxation would be determined as the UK (country B) as this is where the contract was concluded. Provided Australia zero-rates the supply and the UK company applies reverse charge (ie self-assess and pay VAT), the VAT chain is complete. Canada would not tax the training services as the Canadian branch did not make any acquisition. However, if country C, where the branch is located, is instead an EU Member State, the services would be taxed according to the effective use and enjoyment rule in the EU.Footnote 100
Now if country B is China, the supply of the training services would be subject to China's VAT since the services recipient is in China. There will be a risk of double taxation if country C is an EU Member State because of the application of the effective use and enjoyment rule. China might exclude the training services from taxation if the tax authority can be persuaded that the actual customer of the services is outside China and the services have no connection to any goods or real property in China, even though the recipient who purchased the services under the contract is in China. If that is the case, there might be a risk of non-taxation if country C is Australia as the services would be an out-of-scope acquisition in its GST law and no reverse charge or tax would apply.
More complicated scenarios could arise with respect to cross-border digital supplies to MLEs. The OECD Guidelines offer three methods for jurisdictions to use to ensure destination taxation on supplies to MLEs, with the guiding principle that the taxing rights accrue to the jurisdiction(s) where the establishment(s) using the service or intangible is (are) located.Footnote 101 The more jurisdictions that adopt the same method, the greater the ‘reduction in complexity, uncertainty and risks of double taxation and unintended non-taxation’.Footnote 102 Nevertheless, the flexibility allowed to individual jurisdictions to adopt the suggested methods, including the possibility that jurisdictions may not be prepared to adopt any method owing to the administrative and compliance complexities of the methods, suggest that the implementation of destination taxation in relation to MLEs is not consistent and the risks of both double and non-taxation are unlikely to be mitigated.
The inconsistency problem could be more pronounced in cross-border B2C supplies even if the recommended place of taxation rules are applied. This is because jurisdictions use different presumptions, have different requirements for the number and type of forms of evidence, and interpret what would be deemed as a B2C supply differently. To increase consistency, an alternative solution may be needed. As VAT is ultimately levied on final consumption, the place of taxation could be determined by following the cash-flow of the cross-border payment. The jurisdiction in which the financial institution or e-payment operator settling the payment is located would therefore be the place of taxation, unless evidence shows the consumption takes place outside that jurisdiction.Footnote 103 Continuing advances in technology and ever-increasing use of digital payment will enable the focus on cash-flow of cross-border payments to become a more reliable and manageable methodology to determine the place of taxation in B2C transactions. Hence, the ‘follow the money’ approach could be an alternative solution to the discrepancies in applying the destination principle.Footnote 104
With regard to tax collection, while there has been a general convergence in the collection mechanisms, a substantial divergence in specific rules and procedures between jurisdictions has occurred.Footnote 105 Further, some potential solutions are not fully considered in the set of the international guidelines. An example is the withholding mechanism, an alternative to the more widely adopted reverse charge for B2B supplies which is a mechanism recommended in the international guidelines. Both the withholding and reverse charge mechanisms shift the tax collection obligation from the foreign supplier to the registered domestic customer and have the same effect when the customer is liable to pay the full amount of VAT and entitled to input credits on the tax paid. However, compared with a reverse charge, withholding would achieve better tax enforcement as it ensures effective tax collection, although it may cause the offshore supplier to bear the tax.Footnote 106 The relatively wider use of the reverse charge raises a question of whether the reverse charge is a one-size-fits-all method for B2B tax collection. The actual implementation of the reverse charge, while anticipated to result in efficient collection,Footnote 107 may in fact cause uncertainty, increased administrative burden and potential risk of double taxation due to inconsistent rules and lack of bilateral agreements in VAT matters.Footnote 108
Whether withholding could be an appropriate alternative to the reverse charge is not directly considered in the international guidelines, which might be due to the fact that no OECD countries use the mechanism.
Both the mechanisms have pros and cons. While it has the potential for better tax enforcement, withholding requires the foreign supplier to determine the customer's location at the time of pricing (which could be well before the time of the supply and the taxable event) to enable correct pricing, taking into account the amount of VAT to be withheld.Footnote 109 Under the reverse charge, in contrast, the foreign supplier is not required to determine the exact customer location before the actual supply, only whether the customer is an intermediate business or a final consumer. However, the reverse charge can be vulnerable to revenue risks.Footnote 110 Thus, to foster greater consistency in implementation, the international guidelines need to provide advice on the practice and rationale of the withholding system and, where individual jurisdictions choose not to utilise the reverse charge, a way of coordinating the two mechanisms.
For VAT collection in the B2C context, where jurisdictions have adopted the simplified registration mechanism, the use of the mechanism as well as the use of online marketplaces, appears to be effective in overcoming the collection challenges.Footnote 111 However, the lack of coordination arising from differences in domestic rules and concern over the incompatibility of the mechanism with domestic legal and regulatory systems has meant not all jurisdictions adopt the mechanism.Footnote 112 Improving consistency of implementation is not yet discussed in the guidelines.
B. Hard International Response
As shown above neither unilateral actions nor multilateral responses in the form of soft international guidelines (including the OECD Guidelines and the subsequent implementation packages) can create consistent implementation of rules and measures to address the VAT challenges arising from the digitalised economy. Therefore, a multilateral response that can effectively coordinate the implementation of destination basis taxation at the international level can also be considered.
1. The status quo
To date, unilateral responses introduced by individual jurisdictions have largely focused on domestic taxation and collection issues. As such, they do not contribute to international coordination and offer no support for an internationally coordinated system to address the two VAT challenges in a consistent manner. In practice, unilateral actions have created more diversity than harmonisation.Footnote 113 Within the EU, cross-border coordination of national VAT systems has taken place to ensure taxes are levied consistently on a destination basis.Footnote 114 The EU VAT harmonisation, however, has, until very recently, focused more on intra-State transactions than trade with non-EU jurisdictions.Footnote 115 Outside the EU, there are only a few regional VAT coordination arrangements.Footnote 116
The international guidelines have played a key role in building up a general alignment of national policy objectives with the guidelines, but they have not increased consistency of implementation. The problem may be partly attributed to the design features of domestic rules that are embedded in a jurisdiction's legal and regulatory systems as well as socioeconomic conditions. However, and perhaps more significantly, the inconsistency relates to a fundamental limitation of the guidelines, which recommend rather than direct. That is, the guidelines are no more than a soft law. They are flexible,Footnote 117 and provide jurisdictions discretion to decide the extent to which they wish to adopt recommendations, if at all. Unlike bilateral agreements on avoiding double taxation of income and capital (DTAs) or a multilateral convention on preventing tax avoidance and evasion, the guidelines lack the necessary legal formality and cannot bind participating parties. They only recommend rules and mechanisms.Footnote 118 The flexibility afforded by the guidelines reflects concerns about national sovereignty, and, from a practical perspective, the non-binding feature allows the guidelines to be updated to accommodate continuing evolution in technological and regulatory fields. However, the flexibility offered for jurisdictions to adopt the rules in the guidelines may mean the efforts of inaugurating the guidelines to achieve consistency in tax enforcement would be to little avail. Risks of double taxation or non-taxation may not be effectively reduced as intended.
The role of the international guidelines in improving consistency may be further limited in four respects. First, the guidelines, in particular the OECD Guidelines, are considered ‘extremely high level’ and ‘hedged with provisos’.Footnote 119 The various principles and recommendations are stated in general terms, leaving their interpretation and translation into specific rules to individual jurisdictions. This generality contributes little to the mitigation of significant discrepancies in defining, interpreting, and applying the destination principle across jurisdictions.Footnote 120 Second, the guidelines have only recently been published and their influence may not yet be fully recognised in those jurisdictions that have less cross-border trade in digitally supplied services. Third and relating to the second aspect, the guidelines, however relevant they may be to non-OECD jurisdictions, may not be achievable in those jurisdictions that lack the necessary administrative and compliance capabilities to give effect to them.Footnote 121 Additionally, there might be a concern of developing jurisdictions that the international guidelines do not sufficiently represent their interests and needs as they are developed by a group of developed jurisdictions. Implementing recommendations of the OECD Guidelines is a low priority when these developing jurisdictions consider tax reforms for the purposes of raising revenue and attracting foreign investment in an economically difficult time. Fourth, although the guidelines aim to align national VAT rules to the destination principle, they cannot completely reduce instances of disputes. It is not entirely clear whether the dispute resolution mechanisms, primarily the mutual agreement procedure currently available under DTAs on income and capital, is available to disputes in VAT matters.Footnote 122
The four problematic aspects of the OECD guidelines may be as important as their ‘soft law’ status in explaining why the guidelines have failed to produce sufficient harmonisation or consistency in the implementation of destination basis taxation in cross-border digital supplies. Even if the same guidelines were incorporated in a binding international treaty, the four issues would remain and many jurisdictions, particularly developing jurisdictions, would be as reluctant to sign up to a treaty as they are to adopt the current guidelines. A broadly accepted international treaty would only be possible if the four issues were fully addressed.
This does not mean that uniform application of the same rules is an unachievable ideal. In the case of income taxes, near uniform application in respect of rules on cross-border transactions has been possible with the assistance of bilateral and multilateral agreements. The essential difference between VAT and income tax is the lack of a coordinating framework for VAT to reduce and resolve conflicts arising from variations in specific rules and interpretations and provide an effective dispute resolution mechanism for taxpayers. Thus, the critical issue for VAT may be not that the guidelines lack fixed standards and guidance, but rather that they are insufficient to establish a coordinating framework to deal with inconsistency in implementing national rules on destination basis taxation.
While addressing the issue might not necessarily involve creating a hard multilateral treaty from a broader international law perspective, the experiences in dealing with cross-border income tax issues and the impact of the VAT systems on government revenue and business operations do seem to point to a hard multilateral approach, which should be accompanied by a coordinating framework to resolve disputes.
2. Pathways to a hard multilateral response
The lack of an international VAT coordinating framework is largely a reflection of political economy: in the absence of any existing suitable mechanisms to resolve international issues in a coordinated fashion policymakers focus instead on domestic debates about VAT.
Broadly, there are three options for establishing an international coordinating framework with formal legal effect. The first is to incorporate rules and mechanisms implementing the destination principle into existing bilateral agreements or DTAs on income and capital. Many jurisdictions have entered into DTAs with their major trading partners to relieve double taxation for taxpayers and agree approaches to allocating tax revenues between contracting jurisdictions. A majority of the DTAs follow the OECD Model Tax Convention (‘OECD Model’).Footnote 123 The other major model, the United Nations Model Tax Convention (‘UN Model’), is also largely based on the OECD Model, albeit with more consideration given to revenue interests of developing jurisdictions.Footnote 124
The second option is a standalone bilateral agreement on VAT,Footnote 125 such as a Model Tax Convention on VAT (‘VAT Model’), using the international guidelines as a basis to craft articles. OECD member countries could be required to apply the VAT Model to negotiate and conclude bilateral agreements on VAT with other jurisdictions. Non-OECD jurisdictions that are participants in the Global Forum on VAT might follow if an increasing number of jurisdictions started doing so.
The third option is to bypass the existing income tax treaty practice and adopt a multilateral treaty on VAT, which incorporates some OECD Guidelines and other related guidance but goes further in terms of legal effect and formality. A multilateral treaty would reduce the need for negotiation between individual jurisdictions, either for the inclusion of VAT rules into existing DTAs on income and capital or for a separate bilateral agreement on VAT. This would also mitigate the associated potentially high coordination costs.
The first two options, focusing on bilateralism, may not be optimal and feasible for several reasons from both substantive and procedural perspectives. First, they can complicate the already complex bilateral tax treaty systems, which have only become more complex with the introduction and implementation of new measures introduced to combat tax avoidance and evasion.Footnote 126 While the bilateral income tax treaty systems may have become more robust specifically to prevent tax avoidance and evasion, there may still be opportunities for abusive behaviours and the international move towards harmonised income tax rules still does not ensure alignment of tax outcomes for international dealings.Footnote 127 Second, the experiences with using either the OECD Model or the UN Model to negotiate, conclude and modify a vast number of actual DTAs have shown that it is a protracted process requiring significant effort for contracting jurisdictions to reach an agreement, which can be a particular concern for resource-constrained developing jurisdictions. Similarly, once an agreement is reached it can be difficult, or at least time-consuming, to modify it.Footnote 128 Even if the two Models can be modified to include articles on VAT, or a separate VAT Model can be introduced, it is uncertain how long the process will take and whether the final outcomes can keep pace with the development of the digitalised economy. Third, it can be argued that existing mechanisms for mutual assistance under both DTAs on income and capital and multilateral agreements on tax administration are not restricted to income taxes, applying also to VAT and other taxes.Footnote 129 Such mechanisms include information exchange, assistance in tax collection, and the countering of tax avoidance and evasion. This suggests that relying on DTAs with inclusion of VAT rules or creating a standalone VAT Model for the application of the destination principle may be not necessary if the purpose is to utilise the mutual assistance mechanisms.
The first option of incorporating rules and mechanisms for the application of the destination principle into existing DTAs has been rejected in its totality in some studies.Footnote 130 Essentially, VAT does not fit within the existing DTA structure as it is a tax on final consumption and based on staged collection.Footnote 131 Income tax treaties fundamentally require persons entitled to benefits to be residents of one of the contracting States, and allocate tax revenue from a certain type of income or profit to a contracting State to avoid double taxation. However, since VAT is widely agreed to follow the destination principle and should always be imposed in one jurisdiction (namely, the jurisdiction of consumption, using the customer location as a proxy), income tax treaties cannot readily apply to VAT. As an indirect tax, VAT contrasts distinctly with income taxes whereby taxpayers bear the tax burden directly. This contrast renders it difficult to apply the principle of granting a personal benefit (as used with income taxes) to VAT taxpayers.Footnote 132 Existing bilateral income tax treaties are, thus, conceptually unfit to be extended or adapted to VAT.
There are a number of arguments against the second option of creating a standalone VAT Model.Footnote 133 On a substantive level, unlike DTAs that are mainly adopted to prevent double taxation through the allocation of tax revenues between residence and source jurisdictions, there is no dispute under VAT that the jurisdiction to tax is always the destination jurisdiction in a cross-border context. At least in theory, if the benchmark place of taxation rules implementing the destination principle are interpreted and applied consistently, there should be no double taxation in both B2B and B2C transactions.Footnote 134 Moreover, businesses’ concerns over double taxation in addition to a high income tax burden, especially in the early twentieth century when tax rates were generally high, was one of the main reasons for the emergence and development of bilateral tax treaties.Footnote 135 This concern does not arise with VAT as ultimately businesses are able to shift the tax costs to final consumers. The more concerning issues for VAT are, first, non-taxation which is inconsistent with the fundamental destination principle and amounts to a failure to apply the neutrality principle in VAT,Footnote 136 and second, the high compliance burdens imposed on businesses caused by the wide variety of different rules. Indeed, the differences in specific rules and their interpretation, rather than the conflict of determining jurisdiction to tax (as occurs under international income tax), are the most likely causes of double and non-taxation under VAT. There are also specific concerns with the creation of a VAT Model to consider. The experiences with bilateral agreements on income and capital illustrate that a bilateral VAT treaty network might create arbitrage opportunities for businesses, increasing the possibilities of non-taxation. Additionally, once established, variations to a VAT treaty could undermine the application of the destination principle.Footnote 137 The inherent drawbacks indicate why the idea of a separate VAT Model of a bilateral nature has not obtained international attention.
The recent significant growth of digital supplies, particularly during the global pandemic, has fuelled continuing effort and international discussion on ways to improve VAT enforcement, though this has been confined to the set of the international guidelines. The timing for considering a multilateral VAT convention is therefore propitious.
While VAT challenges and the inconsistency issue have been considered before, a multilateral response would have been unthinkable a decade ago. However, the recent adoption of a multilateral income tax treaty, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (‘MLI’), has created a precedent. The MLI was formally adopted in the BEPS project in 2016, with over 100 jurisdictions participating in the negotiations; and 99 jurisdictions signing it as of 16 September 2022.Footnote 138 Given the short timespan since its adoption and the magnitude of changes it brings to the over 3,000 existing DTAs, the achievement has been remarkable. Such achievement would have not been possible without a shared political will that base erosion and profit shifting is detrimental to the interest of most, if not all, jurisdictions. This means that a multilateral VAT convention may be attainable if there is sufficient political support and general understanding of the challenges global VAT systems face.
A bilateral model, whether incorporated in the income tax treaties or as a standalone treaty, has shortcomings related to the bilateral nature of such treaties that cannot be overcome. Therefore, a multilateral model is suggested which improves consistency in the implementation of the rules and mechanisms for applying the destination principle to cross-border trade in services and intangibles in the digitalised context. The merits of multilateral tax treaties are acknowledged as such treaties will ‘generally promote legal certainty’, offer ‘uniform interpretation’ (that is problematic in bilateral tax treaties), and permit efficient updates or revision, an ‘advantage over coordination instruments of bilateral treaties’.Footnote 139 A multilateral treaty will also facilitate exchange of information and assistance in tax collection.Footnote 140
A multilateral VAT treaty would no doubt draw on both existing practices and measures that are reflected in the OECD Guidelines. To be effective, however, a multilateral treaty must not only set out the common rules to be adopted by signatory jurisdictions, but also contain an effective enforcement and dispute resolution mechanism and agreed meanings for key terms and principles.
3. Political economy feasibility of a multilateral treaty
The multilateral treaty option could enable the consistent taxation of digital supplies on a destination basis. It is therefore notable that this option has not been seriously discussed at the international level. Indeed, the OECD, which took on a leadership role in coordinating and developing the MLI, has all but retreated to the form of guidelines only for VAT. Reaching a wide agreement on a multilateral VAT treaty depends on the political will of jurisdictions based on their national interests and needs.
An important factor behind the lack of serious consideration of a multilateral VAT treaty is the limited input to date of the OECD. That input has focused solely on soft law in the form of international VAT guidelines, notwithstanding the explicit recognition by its technical working party of the inconsistency problem attributable to the flexibility of soft guidelines. The limited OECD involvement is compounded by the UN's silence on VAT issues until very recently,Footnote 141 which is in contrast to its relatively active role in shaping the international rules and norms on income taxes.
Perhaps the relative lack of discussion is because the US, a driver of international tax policy and a dominant funder of the OECD, is the only member country that does not have VAT and therefore could be largely indifferent to the pressing concerns about the tax across the rest of the world.Footnote 142 In contrast, the EU, the home of VAT and a significant contributor to the development of international tax policy, has developed a Union-wide harmonised VAT system to address the problems of taxing digital supplies and allocating VAT revenue from cross-border trade within the Union. Since most commerce by European companies relates to cross-border trade within the Union, the EU may also be largely indifferent to the problems faced by jurisdictions outside the trading bloc.Footnote 143
Despite limited OECD and UN involvement on a multilateral treaty to date, developing a multilateral VAT treaty would still be valuable to support international discussion on VAT as well as protection of revenue interests for individual jurisdictions. Harmonisation of global VAT systems for the application of the destination principle would not be an insurmountable task. This is because, while national VAT laws are designed in very different ways, they are ‘remarkably similar’ compared to income tax lawsFootnote 144 and there is already wide agreement on the destination principle. As such, a consensus on the content of a multilateral treaty may not be too difficult to attain.Footnote 145 Support from the G20, which has a more balanced representation of developed and developing jurisdictions, will be crucial. In addition to its substantial work on VAT to date, the OECD has the Global Forum on VAT, a wide international community, to assist its ongoing work on VAT. It could therefore act as the major operational body, with political backing of the G20, to develop the treaty. The UN should be encouraged to join the two organisations in developing the multilateral treaty to address global VAT challenges.
The convention may enlist necessary and imperative support from key members of the G20. The US, albeit with no VAT at the federal level, has state-level retail sales taxes. The US Supreme Court, in South Dakota v Wayfair, recognised that in the era of internet services, economic and virtual contact were a significant nexus in addition to the physical presence rule.Footnote 146 Many US states have since introduced or modified rules to ensure remote B2C transactions are taxed at the place of consumption. The US may be interested in having a uniform solution rather than unilateral actions across the states to mitigate compliance costs and facilitate trade.Footnote 147 Participation in a multilateral VAT convention could, indirectly, help the government, at both federal and state levels, achieve a uniform solution. It might even rekindle the country's interest in replacing the retail sales taxes with a federal VAT to boost its tax revenue,Footnote 148 though it could be politically difficult to do so.
The EU, as the most developed single trading bloc, has taken steps to develop its VAT law in both substantive and procedural aspects to meet challenges of the digitalised economy. Its experience in establishing harmonisation of the VAT system in general, and the application of the destination principle to digital supplies in particular, can provide a useful reference for the G20 and the OECD in designing a multilateral treaty.
As an important G20 member with a leading digital market, China may be eager to participate in the process of negotiating the multilateral treaty due to its primary reliance on VAT for revenue purposes.Footnote 149 Moreover, China would be an active participant given its recent shift of interest from being merely a rule-taker towards being a rule-shaker or even a rule-maker in international tax policy.Footnote 150 Importantly, as a developing economy, it can contribute different perspectives and experiences that reflect developing jurisdictions’ interests to the design of the treaty. The growth in international trade in services among developing jurisdictions underlines their importance in this process. An international coordination framework must attend to their interests to achieve the critical mass needed for the multilateral treaty approach to succeed.
Probably more importantly, a leader is needed to initiate a dialogue on the hard multilateral option and drive it to realisation. The vacancy of the leadership role could be filled by jurisdictions which support multilateral cooperation and have pioneered VAT policy related to cross-border digital supplies. For example, Australia has been among the first jurisdictions to introduce rules and measures to tax cross-border digital supplies on a destination basis. Some of the measures adopted, such as using online marketplaces to collect VAT in B2C transactions, have influenced the development of the international guidelines and VAT practices in other jurisdictions. During Australia's presidency of the G20, the government expressed a view that pressing issues can best be addressed by global governance initiatives.Footnote 151 Australia also showed support for a multilateral approach in international taxation through signing, ratifying and implementing the MLI.Footnote 152 Success of the multilateral convention will be dependent on the initiative shown by the jurisdiction leading the process. The leader must drive international tax policy on VAT, and promote consistent implementation of the destination principle to the benefit of both international trade and the interests of most jurisdictions.
This kind of leadership is crucial at the present time given the considerable impediments in international politics and the economy to multilateral initiatives ranging from trade to the environment. The geopolitical tensions and ongoing frictions between the EU, the US and China, crises within Europe, and the entrenched division of the developed and developing jurisdictions are examples of the obstacles to the multilateral approach to tackling common problems of the contemporary world.Footnote 153
In one sense, as the global VAT issue is part of a larger and highly contested conversation about what constitute fair conditions of global competition for digital products and services, it is difficult to identify how the impediments can easily be overcome. At the same time, however, there appears to be a wide consensus in respect of international taxation issues that multilateral responses are required to address tax challenges posed by the digitalised economy.Footnote 154 The BEPS project in the twenty-first century, with the current round of international tax reforms commonly labelled BEPS 2.0, signals a desire for a multilateral treaty response to the global tax issues by the international community. This is embodied by the Inclusive Framework consisting of 141 jurisdictions as at November 2021.Footnote 155 The potential benefits of a multilateral VAT treaty in terms of securing tax collection and preventing distortions to trade due to double taxation or unintended double non-taxation are obvious.
The introduction of a multilateral VAT treaty could not come at a better time for three reasons. First, VAT is the most important revenue source for many developing jurisdictions and developing jurisdictions constitute an important and growing part of the global digital economy. A hard multilateral treaty will provide more effective measures to protect the revenue interests of developing jurisdictions. Second, VAT is of growing importance for advanced economies as competition for global capital has led to reductions in corporate income tax rates and the share of corporate tax in total tax revenue falls, most often replaced by revenue from VAT. Increases in VAT rates have been common in the global economy.Footnote 156 A multilaterally coordinated framework on VAT systems would benefit advanced economies in seeking new revenue sources to fund their activities, especially in the post-pandemic recovery era. Third, the growing importance of digital supplies will only become more relevant and important in the post-pandemic world with further advances in technology and increased preferences for online shopping. There is an urgent need to reach uniform responses to protect revenue and preserve trade neutrality in the years to come.
V. Conclusion
The significant development of the digitalised economy has challenged the world's VAT systems in taxing cross-border digital supplies on a destination basis. The problem with international VAT systems is not a lack of technical rules but an absence of an international coordinating framework to tackle inconsistency in implementation. Neither unilateral actions nor a soft international response in the form of non-binding guidelines lead to the desired consistency. The preferred and necessary option is a hard international response in the form of a multilateral treaty. The ever-increasing importance of cross-border digital supplies and the urgent need for uniform responses to the global VAT challenges make this response imperative.
The world has over 3,000 bilateral income tax agreements based on different models with countless variations. It took almost a century for jurisdictions participating in the global economy to learn that the only way to vary all of them, simultaneously and equally, was with a multilateral treaty. There are no such pre-existing constraints on VAT and, this time, policymakers can commence with a better plan—a single, multilateral treaty on the most important indirect tax in the digitalised era. Digitalisation is a global phenomenon. A multilateral approach to digital taxation is needed for VAT as much as for income taxes.
