Background (1/2)

1. Background (1/2) • 1998: OECD Ottawa Conference on Consumption Taxation in the context of E-Commerce • 2006: OECD launches a project related to the issuance of international VAT/GST guidelines • February 2010: Release of OECD VAT/GST guidelines on the place of taxation for public consultation • October 2010: Approval of guidelines on the place of taxation by OECD Committee on Fiscal Affairs (CFA) • December 2010: Release of OECD draft guidelines on neutrality • June 2011: Approval of guidelines on neutrality by CFA

2. Background (2/2) • Purpose of OECD VAT guidelines: Assistance on applying VAT to cross-border trade • Development of the guidelines: By CFA’s Working Party 9 on Consumption Taxes. • Guidelines are developed with the assistance of Technical Advisory Group (TAG) made up of government and business representatives. • TAG comprises of 3 Task Teams (TT): • TT1: Dealing with the Guidelines on place of taxation- B2B supplies • TT2: Dealing with the application of Neutrality Guidelines • TT3: Working on specific Rules for determining the place of taxation • OECD VAT Guidelines serve as “soft law”

3. Assumptions • All supplies are B2B • All supplies are legitimate and with economic substance • All supplies are between separate legal entities with single locations only

4. Fundamental principles for charging VAT on internationally traded services and intangibles A. Destination principle: “For consumption tax purposes internationally traded services and intangibles should be taxed according to the rules of the jurisdiction of consumption”. B. Neutrality principle: “The burden of value added taxes themselves should not lie on taxable businesses except where explicitly provided for in legislation”.

5. A. Guidelines for the application of Destination Principle (1/5) Guideline 1: For consumption tax purposes, internationally traded services and intangibles should be taxed according to the rules of the jurisdiction of consumption Guideline 2 (“Main rule”): For B2B supplies, the jurisdiction in which the customer is located has the taxing rights over internationally traded services or intangibles Guideline 3: The identity of the customer is normally determined by reference to the business agreement

6. A. Guidelines for the application of Destination Principle (2/5) Guideline 2 (Main Rule) - Effect on the Supplier Applying the main rule will not be influenced by the fact that the Supplier: • Supplies the customer who supplies onwards the services to a third party • Renders the services to a third party that is not the Customer under the business agreement • Is paid by a third party that is not the Customer under the business agreement

7. A. Guidelines for the application of Destination Principle (3/5) Guideline 2 (Main Rule) – Effect on the Customer The Customer will have to account for any VAT due under the reverse-charge mechanism where that is consistent with the overall design of the national VAT system. Such obligation shall not be affected by the fact that: • The Customer supplies onwards the services or intangibles to a third party • The service or intangible is not rendered to the customer • The customer does not pay for the supply

8. A. Guidelines for the application of Destination Principle (4/5) Guideline 2 (Main Rule) – Effect on Tax Administrations The determination of the place of taxation of a service or intangible for VAT purposes should be decided for each supply individually. It will therefore not be influenced by: • Any subsequent onward supply or lack of such supply • The mere rendering of the service or intangible to a third party business other than the customer • The direction of the payment flows and the identity and location of the customer

9. A. Guidelines for the application of Destination Principle (5/5) Guideline 3 – What is a “Business Agreement”? • Business Agreements consist of the elements that identify the parties to a supply and the rights and obligations with respect to such supply. They are generally based on mutual understanding. • The term “Business Agreement” is not restricted to a contract and is wide in its application (e.g. it may include purchase orders, invoices, audio recordings, telephone conversations, e-mails, etc.). • On occasion, supplies may be considered to occur without a mutual understanding (e.g. a court order imposing obligations to one or more parties)

10. B. Guidelines for the application of Neutrality Principle (1/2) I. Key principles of Neutrality • Guideline 1: The burden of value added taxes themselves should not lie on taxable businesses except where explicitly provided for in legislation. • Guideline 2: Businesses in similar situations carrying out similar transactions should be subject to similar levels of taxation • Guideline 3: VAT rules should be framed in such a way that they are not the primary influence on business decisions

11. B. Guidelines for the application of Neutrality Principle (2/2) II. Neutrality in international trade • Guideline 4: Foreign businesses should not be disadvantaged nor advantaged compared to domestic businesses (as regards the level of taxation) • Guideline 5: To ensure foreign businesses do not incur irrecoverable VAT, governments may choose from a number of approaches (such as the direct refund of local VAT incurred, the shifting of the responsibility to locally registered suppliers/customers, etc) • Guideline 6: Specific administrative requirements for foreign businesses should not create a disproportionate compliance burden

12. Indicative list with further issues to be covered by OECD guidelines regarding the application of VAT • Interaction of VAT/GST with Sales, Excise and other transactional taxes • Applying the main rule to legal entities with multiple locations • B2C transactions • Specific place of taxation rules • Services characterization issues • Time of supply and attribution rules • Value of supply • Compliance issues • Avoidance of double taxation issues (including refund mechanisms, dispute resolution and mutual co-operation)