Charles-Albert Helleputte, Issue Leader VAT, AmCham EU (Brussels)
Charles A. Helleputte is the issue leader for VAT questions at the American Chamber of Commerce with the EU (AmCham EU) in Brussels. He is chairing the VAT sub-group of the AmCham EU Tax Committee. He is also a counsel at Mayer Brown and a lecturer of VAT at the UCLouvain (catholic university of Louvain-la-Neuve, Belgium). Charles is active in the fields of corporate income tax (i.e. international tax planning and transfer pricing), indirect taxes and tax policy. Charles is a Belgian national and speaks Dutch, English and French.
Keynote speech presented at the Santa Monica BayPay Forum EU New VAT Rules for 2015 Conference
Ladies and Gentlemen,
I want first of all to thank Daniel Chatelain and The BayPay Team team for having organized this event and I also want to thank you for being here.
The topic and the timing of the event are particularly right and this for two reasons.
As we speak, the OECD has just released its first deliverables in the so-called « Base Erosion and Profits Shifting Action Plan » (BEPS, a word that you will be hearing a number of time today). Digital Economy is among the key item on the spot. Indeed, the very first BEPS Action Plan relates to the challenges that digital economy raises in international taxation. The digital economy is characterized by an unparalleled reliance on intangible assets. This, together with other aspects such as the massive use of data (notably personal data) raises fundamental questions. How enterprises in the digital economy add value? How they make their profits? How the digital economy business model fits with traditional tax concepts such as “source”, “residence” or “characterization” of income.
In addition to the OECD developments, the European Union (as well as other states around the world) are about to change or have introduced new measures in the way they tax and, even more importantly for them, the way they collect taxes for digital services. You will be learning more about that in the course of the day but, basically, the idea is to give the state of consumption of digital supplies the right to apply its own consumption tax and to give businesses technology-based tools to ease up compliance in the different places where they have customers. This is not for today but for tomorrow with the new rules coming in to play in Europe 1 January 2015 and registration steps to be undertaken by businesses starting 1 October 2014.
Is all this completely new? Not really.
At the Ottawa ministerial conference on E-Commerce back in 1998 the following set of taxation principles were endorsed: (i) neutrality, (ii) efficiency, (iii) certainty & simplicity, (iv) effectiveness & fairness, and (v) flexibility. Let me take them one by one.
Neutrality: the concept behind neutrality is that taxation should seek to be neutral and equitable between forms of electronic commerce and between conventional and electronic forms of commerce. Business decisions should be motivated by economic rather than tax considerations. Taxpayers in similar situations carrying out similar transactions should be subject to similar levels of taxation. Is this always the case, no (we have famous example in Europe, such as e-books who from country to country receives either better or worst consumption tax treatment than printed books).
Efficiency: the idea here is that compliance costs for taxpayers and administrative costs for the tax authorities should be minimized as far as possible.
Certainty and Simplicity: The tax rules should be clear and simple to understand so that taxpayers can anticipate the tax consequences in advance of a transaction, including knowing when, where and how the tax is to be accounted.
Effectiveness and Fairness: this is probably the more controversial or subjective but the idea is that taxation should produce the right amount of tax at the right time. The potential for tax evasion and avoidance should be minimized while keeping counteracting measures proportionate to the risks involved.
Flexibility: The systems for taxation should be flexible and dynamic to ensure that they keep pace with technological and commercial developments.
More importantly, and for our purpose today, it was recognized that consumption taxation at the place of destination was the best way to cope these principles. Further, to be effective, this should come hand-in-hand with technology-based collection mechanisms for non-resident traders.
The European Union was a pioneer in this area with the development, back in 2003, of a scheme allowing non-European union based traders to have one consumption taxation registration for their transactions in various member states, to file one single consumption tax return and to pay the tax due in the various member states to only one state of reference.
These principles are still relevant today, although since 1998 the digital economy has rapidly evolved.
Digitalization has emerged in recent years as a key economic driver that accelerates growth, transformation and value creation. From our own experience as customer of digital content, it is evident that digitalization has had a dramatic effect on the economy as a whole. According to data provided in the report published last May by the Expert group on taxation of the digital economy commissioned by the European Union, econometric analysis estimates that, despite the unfavorable global economic climate, digitalization created a 193 billion USD boost to world economic output and created 6 million jobs globally in 2011. Further, and in the same report, analysis shows that 64% of the growth in labor productivity in the US between 1995-2007 was led by ICT investments.
Defining what constitutes the digital economy has proven problematic, because of the ever-changing technologies of the ICT sector and the widespread diffusion of the digital economy within the whole economy; it can no longer be described as a separate part, or subset, of the mainstream economy. However, it is possible to characterize it through a set of key features: mobility, network effects and use of data.
The digital economy allows a new unprecedented level of mobility. Digitalization has made intangible assets more important than physical production; since a digital product can be replicated at almost no cost once its blueprint1 has been developed; the location of development of this blueprint is where value is often created.
New digital companies engage in a race to innovate in order to create better or new product lines; small differences in quality can cause millions of consumers to switch, translating into potentially huge profit differences. This reminds me the quote of Serge Brin, Google co-founder: Some say Google is God. Others say Google is Satan. But if they think Google is too powerful, remember that with search engines unlike other companies, all it takes is a single click to go to another search engine.
Big Data has helped digital firms develop innovative goods and services, with lower costs associated with innovation. It enables enterprises to increase competitiveness by meeting individual customer needs more accurately and by optimizing value chains.
The digital economy is the result of the transformational effects of new general-purpose technologies in the fields of information and communication. It is impacting all sectors of the economy and society: retail, transport, financial services, manufacturing, education, healthcare, media etc. Internet empowers people by enabling them to create and share ideas, giving rise to new content, entrepreneurs and markets as well as new opportunities for innovation and employment. It offers both great opportunities for business and solutions to radically simplify tax administration and collection. Nevertheless, digital economy also poses new challenges to which our tax systems will need to adapt.
In such a new world, what should be the policy options for the taxation of digital economy as a whole, and for consumption taxes in particular?
From a business perspective, simplicity, neutrality and better coordination or alignment of rules between the states (all of the standards developed back in 1998) would be key. Indeed, this will provide a level playing field and reduce the administrative burden.
In the consumption tax area, the European Union has currently a set of rules where taxation principles requires to look both at the type of transactions contemplated (supply of electronic services, supply over the internet of services other than electronic services, supply of goods ordered on line) and the status of the recipient of the good or service (whether the customer is a business or an end consumer). Indeed, the answer to those questions is relevant in terms of both the place of supply (country of taxation) and deductibility of VAT.
However, as complex as it could be, the guiding principle remains the taxation at the place of consumption. With the new changes coming into play in January this year, businesses, both in the EU and abroad will benefit from the broadening of the vendor registration/remittance principle, what we called in EU jargon, the MOOS, for the Mini One Stop Shop. MOSS is not only a solution for business but contains also some unique feature for government. Indeed, collecting tax for another state (or accept that another state collect tax for you) requires trust between Member States, trust of parliaments and citizens, and the trust of the business community. This can only be done with updated framework on exchange of information and collection of taxes. Consideration should also be given to revenue sharing for tax administrations to ensure that there is compliance in accounting correctly for taxes due in another Member State. While revenue sharing provides a monetary incentive, it also brings with it the responsibility on tax administrations to ensure that taxpayers are compliant with respect to their VAT obligations in other Member States.
A forthcoming broadening of the OSS, something that is contemplated at EU level, will significantly reduce the burden on businesses, which today have VAT obligations in many Member States.
The incremental approach taken at EU level is probably the right one for delivering a full destination based VAT system through a series of initiatives, each carefully implemented and reviewed.
I want to close by sharing another quote with you, one from Sir Martin Sorrell, CEO of WPP. He said, “The web attacks traditional ways of doing things and elites, and this is very uncomfortable for traditional businesses to deal with” This is probably right for business but certainly right for tax policy makers and tax administrations. Digital is bringing new challenges but also new opportunities. AmCham EU has been one of the watchdogs, together with the EU commission, to monitor uncoordinated, sudden policy changes at national level targeting digital companies. We are a great supporter of the EU efforts for a harmonized approach and for multilateral tax coordination.
With no further due, let’s dig into the heart of consumption taxation and the changes that 2015 will be brining.
I thank you for your attention and I whish you all a fruitful conference.
16 September 2014
Santa Monica, California
