Whilst the United States leads the world in so many areas – from technology to Olympic gold medals – it’s a rookie in the dark arts of tax. Whereas us Europeans are world class at squeezing taxpayers till the pipes squeak. After all, socialism doesn’t come cheap.
However, this is changing. On Tuesday 1 October, Europe is to get a major tax tutorial from the U.S. That’s when 12 U.S. states impose sales tax (U.S. version of VAT) on foreign e-commerce sellers and make online marketplaces liable for collections.
This U.S. ‘Super Sales Tax Tuesday’ transformation is a global phenomenon. Countries around the world are disrupting the VAT collections model by bringing in marketplaces and credit card companies into the tax collections role. But, rest assured, the UK’s HMRC is planning to “revolutionise how UK VAT is collected”, too.
U.S. spies the European tax $$$’s
Last year, the U.S. finally woke up to the bonanza of untaxed foreign online businesses selling to its consumers. The South Dakota vs Wayfair Supreme Court ruling freed states to start imposing sales tax collections on foreign (‘remote’) sellers. Crucially, the case also opened the way to impose tax collections on facilitating marketplaces. By the end of this year, 43 of the 50 U.S. states will have enacted Wayfair.
Guide to Implications of the Wayfair ruling for non-US multinational companies, from EY
Withholding VAT – interrupting the global VAT collections model.
Beyond the U.S. marketplace initiative, other countries are interrupting the VAT collections model to fight fraud. Argentina has imposed withholding VAT on credit card issuers where they see their card holders buying digital services from off-shore providers like Netflix, Google Play and Apple iTunes. The card companies then pay the deducted VAT direct to the tax authorities. Many other countries have similar schemes, with Vietnam, Mexico and Nigeria about to follow suit.
UK to take the European lead?
So far, EU states have only toyed with the historic VAT settlement model. The EU 2021 marketplace liability and deemed supplier make marketplaces responsible for VAT collections in a limited range of cases. But the European Commission (EC) ruled out split payments (withholding VAT by another name) in 2016 as not worth the payments infrastructure investment.
But the latest VAT gap analysis from the EC published on 5 September, shows how stubborn the VAT fraud problem of the current regime is. The EC puts the amount of missing VAT in Europe at €138 billion for 2017. States have only been making small inroads into this deficit over the past ten years.
So, can we expect to see European actions to mirror the U.S. Super Sales Tax Tuesday and global withholding tax measures? Yes. And expect the UK to take a lead. In the 2018 budget, a working group of government and industry experts was set up to review a UK split payments model. This month, HMRC said: “We are seeking to design a VAT collection mechanism that could reduce fraud and potentially revolutionise how UK VAT is collected”.
We’ll have to see what that means. But it looks like the UK could be leading the world in the VAT collections revolution, and not taking any more tax lessons from America.