The latest OECD taxation working paper explores the effectiveness of simplified registration and collection mechanisms on compliance for taxpayers that are not located in the jurisdiction of taxation. The problem considered by this report – how to collect tax from taxpayers that are not located in the jurisdiction of taxation – is a problem encountered by any tax regime where the jurisdiction asserts taxing rights over a tax base, but has limited power to compel the taxpayer to remit the tax.

This paper considers two principal approaches to addressing the problem:

  1. Jurisdictions may seek to enlist some other participant involved in the transaction or activity that generates the tax base over which it asserts taxing rights, and over whom it does have enforcement authority to collect the tax or otherwise satisfy the taxpayer’s compliance obligation (e.g., withholding taxes). However, it was identified that withholding taxes (for example on payment as part of options to address the broader direct tax challenges of the digital economy) are not an effective mechanism for tax collection in the business to consumer (B2C) context.
  2. As an alternative, jurisdictions may adopt a taxpayer registration and collection mechanism, and, in light of the absence of enforcement authority over the taxpayer, may seek to make compliance sufficiently easy or attractive to induce taxpayers to comply with their tax obligations. The authors identified this as the more effective approach and suggested that it is highly likely that an even greater number of jurisdictions will embrace simplified collection regimes in the future, especially in light of the growth of the digital economy and more particularly, B2C digital transactions.

The authors also noted that compliance costs for small and micro-businesses can be relatively high compared to the proportion of their revenue. Therefore, the adoption of tax thresholds may be an appropriate solution to avoid imposing a disproportionate administrative burden on these smaller businesses.

Read the report here or explore more of the OECD’s work on taxation here.


(Source: OECD)

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