Trends in enforcement of VAT remote-seller rules

Editor: Mary Van Leuven, J.D., LL.M.

Before the advent of the internet, most value-added tax (VAT) laws were designed for domestic brick-and-mortar sales, with VAT applied where the vendor was located. However, the digital economy’s rise, including the erosion of physical borders and the shift from tangible to intangible property, has challenged these traditional VAT rules, leading to potential revenue losses.

To address these challenges, governments, guided by the Organisation for Economic Co-operation and Development (OECD) 2015 International VAT/GST Guidelines, have begun to mandate that remote vendors or marketplaces facilitating sales register for, collect, and remit VAT on sales of digital services. A few jurisdictions have started to enforce similar rules for cross-border remote sales of low-value consignments. Currently, over 110 jurisdictions have implemented remote-seller VAT rules, with additional jurisdictions, predominantly in Africa, in the process of implementing similar rules.

The deployment of these measures can be succinctly divided into two phases: Phase 1 emphasizes the introduction of rules to tackle challenges in the digital economy, while Phase 2, which began recently, concentrates on enforcing the new rules against digital actors. As many articles have already been written on the complexities of Phase 1 (including differences in persons liable, scope, compliance requirements, etc.), this item focuses on Phase 2 — enforcement of the new rules.

Rationale behind the move toward enforcement

Phase 1 focuses on introducing VAT rules for remote sellers, educating taxpayers, and promoting voluntary compliance. Jurisdictions have recently shifted toward enforcing these rules, as they believe that taxpayers have now had ample time to understand the rules, and any current noncompliance may be viewed as potentially deliberate or even criminal. Phase 2, therefore, primarily emphasizes enforcing existing rules by identifying and pursuing non-compliant taxpayers. Observers of U.S. sales tax administration will recognize many of the steps being taken by VAT jurisdictions as bearing a striking similarity to steps taken by U.S. states in the wake of the U.S. Supreme Court case of South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).

Generally, jurisdictions implementing VAT rules for remote sellers apply their general civil tax administration statutes’ enforcement provisions to nonresidents. These often include standard penalties for violations such as nonregistration, late payments, and inaccuracies in returns. However, because of the unique challenges of enforcing tax laws against nonresidents, these standard penalties are increasingly supplemented by rules specifically designed for nonresident remote sellers.

Identifying noncompliant remote sellers

The primary challenge for foreign tax authorities typically lies in identifying noncompliant remote sellers, given the absence of a global register for these companies. In recent years, tax authorities have employed various measures to overcome this, including setting up specialized units to scour the internet, encouraging consumers to report noncompliant vendors, and identifying potential noncompliant remote sellers through purchases made by VAT-registered customers. However, two measures seem to yield the greatest success: (1) tracking the money and (2) exchanging information between tax authorities.

Digital economy transactions are, inherently, not cash transactions, rendering the data from financial intermediaries a valuable resource for tax authorities in their pursuit of noncompliant remote sellers. For instance, Australia was one of the first jurisdictions to leverage payment information obtained from its anti–money laundering authority to target remote sellers. In recent years, other jurisdictions, including Chile and Kazakhstan, have adopted similar approaches.

A significant shift, and a test of this method’s effectiveness, will be the newly implemented payment services providers reporting rules in the European Union (EU). Starting Jan. 1, 2024, EU-based payment services providers must share information on cross-border payments and their beneficiaries with member state administrations. This requirement applies to those receiving more than 25 cross-border payments per quarter. The shared information will assist tax authorities in identifying potentially noncompliant taxpayers. This data will Be stored in a European database, the Central Electronic System of Payment Information, and made accessible to anti-VAT-fraud experts via the Eurofisc network.

Besides leveraging financial data, tax authorities are also increasingly collaborating to identify noncompliant remote sellers. For instance, the tax authorities in Kenya and Tanzania proactively exchange information about registered remote sellers in their respective jurisdictions. The rationale is that if a nonresident is compliant in one of the jurisdictions, they are likely also selling and obligated in the neighboring jurisdiction.

In the EU, recent changes to the rules of administrative cooperation in the field of taxation require tax authorities to automatically exchange certain information. In this respect, Denmark has been actively sharing information with other tax authorities regarding any transaction that may be attributable to another jurisdiction.

In addition, tax authorities are increasingly leveraging the exchange-ofinformation clauses included in existing tax treaties and/or tax information exchange agreements that also apply to VAT. The French tax authorities, for instance, have recently leveraged these instruments to obtain information from their U.S. and Dutch counterparts while examining the VAT liabilities of remote sellers. South Africa and Australia have also recently announced that they might consider this option.

Enforcement: From gentle nudge to aggressive

Once noncompliant remote sellers are identified, the next step is to ensure they become compliant, starting with registration and continuing with accurate reporting of tax obligations. Because the nonresident seller is not physically present, traditional enforcement measures may not be effective, leading to the adoption of nontraditional enforcement measures.

An initial, gentle nudge may include reaching out to noncompliant taxpayers and requesting that they register, a practice adopted by several jurisdictions, including Australia, India, South Africa, and Singapore. Another approach is “naming and shaming,” as practiced by Kazakhstan and Chile (and recently announced by Bosnia and Herzegovina), which involves publishing a list of noncompliant remote sellers. While this method is relatively mild, it carries reputational risks for nonresident remote sellers who may not want to be publicly labeled as tax evaders.

A slightly stronger measure is automatic registration, whereby a tax authority automatically and retrospectively registers a noncompliant remote seller and imposes penalties for noncompliant periods. This approach has been adopted by the United Kingdom, and South Korea recently incorporated this mechanism into its VAT legislation, effective Jan. 1, 2024.

Tax authorities are gaining more powers to address the noncompliance of remote sellers. Some jurisdictions, such as Egypt, France, and Mexico, may resort to a “kill switch,” which involves blocking internet access to the noncompliant remote seller. Kazakhstan’s version stipulates that if a company’s name appears on the published list of noncompliant taxpayers three times, it may block internet access. However, this kill-switch measure has yet to be seen in practice. Alternative approaches are also being considered. For instance, Australia has indicated it may consider blocking the repatriation of funds by noncompliant remote sellers, and Egypt’s law provides that noncompliance may result in registering the VAT debt in a court in the seller’s jurisdiction of residence, which in practice will be difficult to implement.

As noncompliance with these remote-seller rules can be considered tax fraud under domestic laws, the most severe enforcement measure that jurisdictions may impose includes criminal penalties, potentially against individuals overseeing the company’s taxes. While this approach remains limited so far, some jurisdictions have started to leverage this tool. In Germany, tax officers are required to share the files of noncompliant taxpayers with the prosecutor’s office if the tax liability reaches a certain threshold. Additionally, Italy and Spain have recently started issuing formal criminal charge notifications to identified noncompliant remote sellers.

Regularization relief

While Phase 2 does not focus on voluntary compliance, many jurisdictions maintain efforts to promote voluntary compliance, with several jurisdictions running voluntary disclosure programs (VDPs). In the past year, Saudi Arabia, Singapore, Malaysia, Nigeria, and Kenya have implemented VDPs that also apply to remote sellers. Additionally, a few jurisdictions occasionally offer moratoriums when they recognize that compliance has been challenging and subsequently introduce a simplified compliance mechanism, as both Tanzania and Senegal have recently done.

Nevertheless, voluntary and timely compliance remains the most costeffective approach, considering that VAT should be economically borne by the consumer and not the remote seller in charge of collecting the VAT on behalf of the government. While VDPs offer penalty relief, the tax liability remains with the remote seller, which, in practice, will not be able to recover the tax from its historical customers. Moreover, filing VDPs may be more costly and time-consuming than immediate compliance. For instance, EU remote sellers can comply with the remote-seller rules through a single EU-wide registration, the One-Stop Shop, but this mechanism is available Only on a go-forward basis, and any historical liability must be cleared with each individual tax authority of the 27 EU member states.

What to expect: More data sharing and audits

In addition to enforcement actions against noncompliant taxpayers, there has been a notable increase in audit activity for registered remote sellers. Tax authorities are not merely accepting nonresident remote sellers’ estimated tax obligations; they are scrutinizing them closely. For instance, several tax authorities, including those in Denmark and Taiwan, have started leveraging payment data to audit remote sellers. It is also likely that tax authorities in jurisdictions with more mature remote-seller regulations will start auditing whether the remote sellers are fully compliant with the rules, such as those related to invoicing, determining where customers are located, or distinguishing between business and nonbusiness customers.

Simultaneously, jurisdictions are adopting information-reporting requirements for digital platforms to combat tax evasion in the digital economy. These include the OECD’s Model Reporting Rules for Digital Platforms and the Crypto-Asset Reporting Framework, which have been implemented in the EU under the EU’s Directives on Administrative Cooperation DAC7 and DAC8. The aim of these rules is to enhance tax transparency, improve compliance, and encourage cooperation among tax authorities. These regimes focus primarily on income taxes, but they will grant tax authorities unprecedented access to information to identify noncompliant remote sellers. This implies that even if a nonresident remote seller is not directly required to provide information under an information-reporting regime, its income, customers, and the payments it receives may still be deemed a reportable transaction for another taxpayer and thus made available to tax authorities. Once the identification hurdle is cleared, tax authorities have the ability to enforce compliance.

Not ‘if’ but ‘when’

The cross-border taxation of remote sellers is continually evolving. While the initial phase of this journey was primarily centered on voluntary compliance and clarifying the rules, the trend has shifted toward enforcement. In this context, tax authorities are adopting innovative measures to identify noncompliant remote sellers and to enforce compliance. This trend will persist as expanded information-reporting requirements provide tax authorities with greater access to taxpayer information.

The financial impact of these rules should not be underestimated; the average VAT rate, according to the OECD, is around 19%, and the average statute of limitation is around five years, with some jurisdictions extending it in cases of noncompliance. Consequently, companies subject to these remote-seller rules can no longer ignore them, as it is not a matter of “if ” but rather “when” foreign tax authorities will start knocking at their doors.

Editor notes

Mary Van Leuven, J.D., LL.M., is a director, Washington National Tax, at KPMG LLP in Washington, D.C. Contributors are members of or associated with KPMG LLP. For additional information about these items, contact Van Leuven at mvanleuven@kpmg.com.