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Australia’s Goods and Services Tax (GST) will be extended to all imports of digital goods and services by consumers in Australia from 1 July 2017. Despite the inclusion of digital goods and services in the GST, questions remain about how effective the inclusion will be in practice. In particular, to what extent can the Australian Government compel or acquire cooperation from non-resident enterprises to comply and collect the so-called ‘Netflix tax’?

Taxing the digital economy has never been easy. The development of the internet has increased cross-border exchanges. There is less need for firms to maintain a physical presence in the countries where their customers are located. Many goods and services can now be acquired and delivered online, and this may limit the state’s capability to capture tax on these goods and services.

States generally lack the power, and administrative capability, to execute tax claims outside their jurisdictional borders. There is little pressure for non-resident enterprises to comply because the likelihood of facing sanctions is slim. Neither is there an incentive to comply if the registration and payment processes impose significant red tape on the business.

This circumstance can be best understood through Margaret Levi’s conception of ‘quasi-voluntary compliance’. Levi argues that compliance is best achieved when taxpayers are provoked to comply through a calculated decision rather than coercion, thereby reducing the costs of enforcement. But coercion still plays an important role, ensuring that non-compliance is penalised, and also helping taxpayers to establish a reasonable expectation that others will also comply.

The digital economy is one area where the coercive power of the state is severely impaired. This is not to say that the state has no control over internet. But, due to the freedom principle of the internet, many governments have refrained from, or at least sought to avoid being seen to be constraining the digital sphere. Only a few countries like China and North Korea openly do so through a national cyber firewall. Therefore, it is virtually impossible for states to track and block digital supplies delivered via the internet and digital suppliers, who have no presence within the country, are more likely to resist the collection of GST.

In order to create an environment of ‘quasi-voluntary compliance’ among the non-resident suppliers, the Australian Government has introduced some complementary measures, which would come into force together with the extension of GST to digital imports.

First, in the case of intangible supplies made through an electronic distribution platform such as Apple’s iTunes and Google’s Play store, the responsibility for GST liability may be shifted to the operator of the platform, rather than the supplier. It is more likely that these operators, usually the large internet and technology companies, will be registered in Australia for GST or other tax purposes. The state can therefore create a direct tax relationship with these corporations and coerce them into compliance.

Second, penalties will be imposed on Australian consumers if they are found to be misrepresenting their place of residence. This is in recognition that there is practical limit on what foreign suppliers can reasonably do in determining the location of their customers and that customers may misrepresent such information to evade GST. This is a powerful measure to enhance compliance because the state has direct enforcement jurisdiction over Australian consumers.

Third, non-resident suppliers affected by the ‘Netflix tax’ are also allowed to become ‘limited registration entities,’ attracting a simplified registration and reporting regime. There are still some downsides to this regime, but the Australian Government is presumably hoping that the non-resident suppliers will be incentivised to comply by lowering the costs of compliance fort them.

The ‘Netflix tax’ is clearly targeting internet and technology giants such as Netflix, Google, Microsoft and Apple. The registration threshold for resident and non-resident companies is AU$75,000, ensuring the regime does not unnecessarily burden small and medium sized enterprises. This may be contrasted with the European Union’s recent reform on Value-Added Tax (VAT) for telecommunications, broadcasting and electronic services, which set no minimum registration threshold for cross-border trade.

Many large corporations which have a physical presence in Australia are likely to comply with the ‘Netflix tax’; some of them, like Apple and Google, have already collected the tax for their digital supplies in the online apps stores. For them, a greater concern might be the ‘Google tax’—a new diverted profits tax (DPT) proposed in the 2016 Budget to crack down on artificial or contrived arrangements to divert profits offshore. The draft legislation for the implementation of DPT had just recently closed for submission and the tax could possibly be applied from 1 July 2017 as well the earliest.

What about companies which have been resisting, particularly, those that have no physical presence within the country? For example, Netflix in 2015 said it would not charge GST on its online streaming television services because it was ‘not a local entity’. In this circumstance, the Australian Government would lack the coercive means to enforce tax claim if there is noncompliance.

In the short run, the government may rely on publicity and moral persuasion to solicit cooperation from non-resident enterprises. However, in the long run, it seems likely that Australia will require coercive means which can be utilised in cross-border context to make the ‘Netflix tax’ more effective.

In this regard, the Mini One Stop Shop’ (MOSS) scheme introduced by the European Union (EU) in 2015, together with its reform on VAT for telecommunications, broadcasting and electronic services, serves as an interesting example for Australia of how coercive power could possibly be extended across the border.

The MOSS scheme itself is revolutionary because it initiated a process where states collect VAT for one another. Before this, international cooperation on taxation was mainly confined to the information exchange and avoiding double taxation and non-taxation.

An EU supplier can choose either to pay VAT directly to the tax authority of the country where the consumer belongs, or to comply through the MOSS scheme, in which the supplier declares and pays the tax through the local authority where the supplier is registered. Such an arrangement of home country compliance helps to reduce the costs of compliance for businesses. But, at the same time, it also offers a practical solution for the problem of ineffective state coercion in cross border context.

By outsourcing the collection process to coercive apparatus of another country, the state of the country where the consumer belongs is in effect relying on the power and authority of its peers to coerce. There are two ways that this coercion occurs. First, because the VAT returns on electronic services are submitted by the suppliers to local tax agencies on top of other local taxation compliance, this makes them subject to cross-check with local taxation returns and any discrepancy and non-compliance detected would open to sanctions by both countries. Second, the scheme also provides a mechanism for cross-border audits, which will be assisted by the tax authority of the home country.

Preliminary data from the EU suggests there are some positive results from the MOSS scheme, although it is still early to make a conclusion. Thousands of businesses have registered for the scheme. Around €3 billion of VAT was received through the scheme in 2015, arising from estimated 70% of total cross-border trade of electronic supplies. The revenues from non-EU business have also tripled. The EU is now considering whether to expand the MOSS scheme to all cross-border transactions as part of the strategy to modernise and simplify VAT for e-commerce.

Replicating such a tax collection scheme is, however, not easy for Australia. We must first deal with the tricky issue of sovereignty. Even in the EU, there were initially some reservations against the scheme among some member countries, including Germany. The scheme was finally passed using the European Commission’s implementing powers (with qualified majority voting in the competent committee), which is the first time in EU history. Proponents argue that such a scheme in effect protects integrity of the tax system and thus helps the countries to keep their sovereignty. This may be more difficult in Asia.

Nonetheless, the MOSS scheme highlights the need and potential for greater cooperation between countries in establishing an international framework for cross-border GST/VAT collection and compliance. Australia may have to consider such a scheme to ensure an effective taxation regime for the digital economy.

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This article has 2 comments

  1. I have enjoyed reading the article. The larger issue is – how to create cooperative tax environment across tax jurisdictions. It is rightly pointed out that it would be difficult in Asia, however most of the vendors are located in OECD countries. How to ensure OECD countries cooperate with Asian countries?

  2. Hi Sacchidananda, thanks for your comment. You rightly point out that most of the vendors are located in OECD countries. The EU has expressed interest to expand the scheme and it has commenced negotiations on an agreement with Norway. This can possibly be a basis for countries in this region to seek cooperation with the EU.

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