GOVERNANCE GOVERNANCE EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT COVID-19 and Taxation: Between the Devil and the Deep Blue Sea A Dilemma: Budget Expenditures to Alleviate Cash Flow Constraints on Taxpayers and the Need to Generate Revenues to Create Fiscal Space Raúl Félix Junquera-Varela Daniel Álvarez Estrada Cristian Óliver Lucas-Mas © 2021 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Graphic Designer: Maria Lopez / lopez.ten@gmail.com >>> Contents Introduction 4 Background 5 Contention and Recovery Phases of COVID-19: Measures Related to Cash Flow Management 7 Measures to Alleviate Cash Management and Mitigate Adverse Economic Effects 7 Temporary Measures to Alleviate the Tax Burden From COVID-19-Related Activities and Their Economic Impact 11 Measures to Improve Compliance and Budget Management From Fiscal Authorities and Revenue Administrations 13 Measures to Compensate for the Fiscal Deficit Generated by Cash Flow Management and Temporary Tax Relief Measures 14 Taxation of Digital Consumption to Contain Decreasing Levels of VAT Revenue Collection 14 Cancellation or Amendment of Existing Tax Benefits and Increase of Tax Rates 15 Other Measures to Introduce New Taxing Rights 15 Appendix A: Design of Effective Measures for the Collection of VAT/GST on E-Commerce Sales and Digital Trade as Policy Response During and After COVID-19 17 Appendix B: Receipt Management Model for Revenue Administrations 24 >>> Introduction The objective of this working paper is to provide guidance economic, regional, sectoral, and tax administration capacity on the dilemma that governments are facing because of the circumstances of each country. It is important to stress the economic crisis triggered by COVID-19.1 Measures adopted need for context and localization of implementation of some by governments during the contention phase to alleviate cash measures, to ensure that policy makers and implementers flow pressures on taxpayers require budget expenditures adopt only measures and recommendations that are that exacerbate revenue losses from reduced tax bases. In appropriate to their jurisdiction. parallel, governments are struggling with public expenditure needs that call for creating fiscal space. During this crisis there The first part of this paper provides guidance on practical has been a significant increase in digital transactions as well measures that may be applied by tax authorities to strengthen as an acceleration of digital economy business models and cash management and alleviate cash flow constraints on trends. As a result, new income sources have appeared, and taxpayers. Most of these measures are applicable primarily governments must find ways of taxing them. during the contention phase of the COVID-19 health and economic crisis, but there are others well positioned to The degree of adoption and implementation of the measures support the recovery phase. This paper elaborates on suggested here will vary greatly depending on the specific some of the recommendations profiled in the “Revenue economic circumstances of each country and region, Measurements on Tax and Customs” document produced by especially with respect to tax administration capacity. the Fiscal Policy and Sustainable Growth unit,2 which serves Measures consisting of postponing or extending tax obligations as the umbrella document for this one. The main scope of will be easier to apply; measures involving tax exemptions, this paper is to further develop specific practical measures deferred tax payments, and other budgetary expenditures will for improving the cash management of businesses and be more challenging, particularly for some low- and medium- households faced with liquidity constraints during this period. income economies. Moreover, certain industries and sectors It also provides recommendations to revenue administrations will require tailor-made action plans from a tax administration for improving compliance and receipt monitoring during the perspective, such as specialized audits and tax benefit control; contention phase. The second part of this paper focuses this will translate into a need for additional resources. The on post-crisis measures that may compensate for the fiscal effectiveness of measures targeted at the digital economy will deficit generated by cash flow management and temporary be highly dependent on the available technological resources tax relief measures. This paper is a continuation, from a cash and trained staff in a government’s revenue administration; flow management perspective, of previous World Bank Group this may pose a challenge for many countries with low tax research conducted in the areas of fiscal policy and revenue administration capacity. The different measures laid out in this administration implications in response to the COVID-19 paper should therefore be considered in light of the specific pandemic.3 This note and its annexes were prepared by Raul Junquera-Varela, Daniel Alvarez, and Cristian Lucas-Mas. The authors wish to thank peer reviewers Ana Cebreiro, Viet Nguyen, and Ikechukwu Nweje, for valuable comments and observations. 1. The COVID-19 pandemic has affected the weightages among Adam Smith´s four canons of taxation (equity, economy, certainty, and convenience). Certainty has been greatly affected, which has had an effect on market conditions of the economy. Unless governments can appropriately adapt and align their policies to the new economic reality created by the pandemic, equity will be severely hindered at both the taxpayer and revenue administration levels. Equity requires a strong institutional role. 2. World Bank. 2020. “COVID-19 Revenue Administration Implications: Potential Tax Administration and Customs Measures to Respond to the Crisis.” World Bank, Washington, DC. https://openknowledge.worldbank.org/handle/10986/34152 License: CC BY 3.0 IGO. 3. World Bank. 2020. “The Fiscal Impact and Policy Response to COVID-19.” World Bank, Washington, DC. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 4 >>> Background From a business perspective, cash management stands out be employed to alleviate negative economic effects during as a critical function for strategic planning purposes, with the contention phase of the COVID-19 crisis, by providing implications on investment and employment strategies. Cash support to affected businesses and households through the management is very closely linked to treasury and financial tax system. The adoption of a well-designed package of tax strategy, investment appraisal, and risk management. The mitigation measures has the potential not only to mitigate treasury function in particular aligns with securing financing, liquidity constraints, but also to strengthen the collaboration maintaining funding, and managing risks in order to ensure between taxpayers and revenue administrations at a time that sufficient liquidity is available to pay business obligations when it is most needed. and secure funds to meet future obligations. Cash management considerations are similarly relevant As part of cash management, businesses need to exert to fiscal authorities and revenue administrations during adequate insight into future cash generation and necessary unanticipated economic shocks. Revenue shortfalls to expenditures, with a focus on short-term needs arising from treasury accounts materialize through different channels, day-to-day operations. Daily cash forecasts are driven by mainly lower turnaround levels of tax payments from cash- receipt and payment data from accounts receivable and constrained taxpayers, shrinking tax bases resulting from payable ledgers, tax information and net profit or performance, lower economic activity, and sudden declines in overall tax cash surpluses retained in the business, and short-term liquid compliance. Revenue collection is also likely to be affected investments. by the implementation of short-term and temporary policy measures aimed at improving the cash management of From a cash management perspective, payment of tax distressed taxpayers and protecting vulnerable populations obligations plays a critical role within the overall treasury from adverse health and economic effects. strategy and risk management of a business. Cash forecasts include tax provision estimations, and, from a cash During the contention phase of the pandemic crisis, management perspective, businesses will typically consider revenue administrations and fiscal authorities should adopt optimizing their resources to ensure enough liquidity to pay a comprehensive strategy from compliance and receipt taxes on time and to make a smart use of refund requests. management perspectives to mitigate adverse economic effects and introduce healthy revenue performance and budget During challenging economic times, when cash becomes a practices. Most early measures will target affected taxpayers, vital commodity as unanticipated shocks affect businesses’ which often may require them to prove that they are qualified short-term receipts and payments, fiscal authorities play to receive the relief. While eligibility criteria are necessary to a fundamental role in adjusting the tax system to ensure prevent the abuse of relief measures, there is a risk that in taxpayers improve their cash flow. Fiscal authorities and practice the criteria could become a burden for both taxpayers revenue administrations can provide valuable sources of and tax administrators. Tax administrators will have to spend liquidity, either through accelerated tax refund processes significant resources to approve and monitor taxpayers´ (based on risk-management parameters) or deferral of tax requests while the governments are already struggling to payments akin to interest-bearing loans from the treasury. cope with the pandemic. Therefore, the tax administration’s strategy should prevent cumbersome procedures that would Policy options and administrative resources have been used likely delay or prevent taxpayers´ compliance and increase the by some countries to help cash-strained taxpayers during risk of failure of the policy objectives. For example, because similar economic shocks in the past. Such resources can most tax revenue comes from very large taxpayers, in many EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 5 cases a government could offer relief to all small and medium The main VAT or general sales tax (GST) challenges related taxpayers without risking its overall revenue intake. to the digital economy are elaborated as follows: The following section presents a set of recommended short- • The strong growth in the trade of services, digital term mitigation measures to assist with the cash management products, and intangibles—particularly in sales to concerns of business and household taxpayers during the private consumers—is a challenge because often no contention phase of the pandemic, as well as temporary tax or an inappropriately low amount of VAT/GST is levied relief measures to alleviate the tax burden from COVID-19- because of the complexity of organizing, administering, related activities and their economic impact. It also includes and enforcing VAT/GST payments on such supplies under a set of good practices to be followed by fiscal authorities traditional VAT or GST rules. and revenue administrations to improve short-term risk • The exponential growth in the volume of imports of low- management strategies that mitigate erosion of compliance, value parcels from online sales presents a challenge and to strengthen monitoring of monthly tax receipts as part because VAT/GST cannot be collected under traditional of a healthy revenue-monitoring and budgeting practice (a customs procedures, so these imports often flow into receipt management model is included in the appendix). Many jurisdictions untaxed. This situation causes rapidly of these temporary measures are good practice, independent growing VAT/GST revenue losses and puts a growing of COVID-19-related cash constraints. As such, they can be and unfair competitive pressure on domestic businesses, implemented beyond the contention and recovery phases to which are increasingly incapable of competing against advance equity in tax administration; indeed, some measures the rising volumes of VAT/GST-free online sales of should be implemented by governments as a matter of goods. Moreover, this has a subsequent negative effect necessity and standard policy. on domestic employment, which in turn is likely to have a negative effect on other tax revenues, including personal Finally, some policy considerations are outlined for governments income taxes and local business taxes. to adopt tax measures aimed at compensating for the fiscal deficit generated by the previous cash flow management Consequently, governments should focus on designing and temporary tax relief measures. Such measures include effective measures to collect VAT/GST on e-commerce sales broadening the value added tax (VAT) base to include digital and digital trade, covering the domestic as well as cross- transactions of goods and services as a revenue buffer during border trade of goods, services, and intangibles. This program the contention phase of COVID-19 and a means to provide should cover all the key areas of digital trade that create a continuing source of revenue during economic recovery as challenges for VAT/GST policy and administration, including consumption levels regain strength. the following: (a) collection of VAT/GST on sales of services, digital products, and intangibles provided by foreign online Taxation of digital transactions, a trend triggered by the vendors; (b) collection of VAT/GST on imports of low-value increasing digitalization of the world economy in modern goods from online sales; (c) regulation of the role of online times, has gone from being a novel and appealing tool on marketplaces and other digital platforms in the collection of the menu of tax options for governments to being an effective VAT/GST; and (d) design of policy and administrative measures policy response both during and after the COVID-19 crisis. for the application of VAT/GST to the sharing economy. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 6 >>> Contention and Recovery Phases of COVID-19: Measures Related to Cash Flow Management Measures to Alleviate Cash stress. Although smaller in scale, similar provisions are needed for refunding other taxes when applicable, such Management and Mitigate Adverse as a personal income tax (PIT) refund to households that Economic Effects arises from an excess of periodic withholding taxes, when annual tax liabilities are assessed. Refunds should be made using well-established criteria, within a system of Proposed measures to be undertaken by tax administrations strong reviews and risk profiling. Jurisdictions commonly to improve cash flow and liquidity are divided into five opt to provide credit as a possible offset against future mechanism types: tax refunds; interest-bearing loans; efforts obligations. This approach provides extra time or a to alleviate the effects of economic losses on businesses; second window of opportunity for a more thorough review incentives to make critical investments; and measures to of such refund claims while the tax administration reviews alleviate cash flow management issues for businesses and the future obligations. households. Most of these measures entail actions that are within the purview of tax administrations (such as adjustment • Shortening the tax return filing period for small and of processes and regulations), while others require temporary medium enterprises (SMEs). In some countries, the VAT changes to tax policy tailored to address specific social and filing period for SMEs is extended beyond the standard economic objectives during the contention and recovery statutory monthly period in consideration of lower phase of the health and economic COVID-19 crisis. administrative capacities and cash flow profiles, among other reasons. However, during times of pressing liquidity, Cash Support Through Timely Tax Refunds SMEs should be allowed to request a VAT refund following the first month after excess credit arises, instead of waiting • Acceleration of due tax refund payments. The for the next statutory filing season (such as the end of the obligation for tax administrations to timely refund taxes quarter). to taxpayers becomes critical in distressed financial times. For example, in VAT administration any excess • Refund of excess PIT credits. To compensate poorer of input to output payments to exporters, or other types households for the economic and financial impacts of of net credit owed to taxpayers, should be paid within the pandemic, the PIT system could be effectively used 30 days, following best practices. Irrespective of the to convert tax credits into cash transfers. Tax credits are statutory timeline and current practices followed by tax granted by governments to provide social benefits, as administrations, special provisions need to be undertaken amounts deductible from tax liabilities. These could be to accelerate the risk-based backlog of tax refunds to designed either as wastable credits (that is, limited to improve the liquidity balance of distressed taxpayers the amount of tax liability), or nonwastable credits, in a while maintaining intact the consumption tax nature of the way that credit amount in excesses to tax liability can be VAT system. Furthermore, a VAT refund is preferred over paid in cash to qualified taxpayers, which better helps a carryforward of excess credits during times of financial to improve income redistribution. Governments can EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 7 implement nonwastable tax credit mechanisms with a application for deferral is answered by the tax office, no view to putting cash in the hands of taxpayers through payment obligation and no collection measures would be existing tax benefits, or by creating new relief mechanisms taken by the tax authorities. implemented in response to the economic crisis. These are also positive practices that help improve the equity of • Tax debt repayments. Taxpayers may be given the tax systems and could be introduced not only as temporary ability to refinance their tax debt through lower interest measures to alleviate cash constraints, but also as a good repayment options or extended down payment periods, practice beyond the contention and recovery phases of as a way to improve the cash profile of such payments to the COVID-19 crisis. businesses in financial distress. Debt recovery (such as direct debit into bank accounts) applicable to taxpayers Deferral of Payments (Interest-Bearing in arrears could also be postponed for several months in tandem with tax filing and payment due extensions, if the Loans) debtor is directly affected by the COVID-19 crisis. • Tax filing and payment due date extension. From a • Postponement of wealth tax with respect to value of cash flow perspective, extending the statutory due dates companies. Owners of companies operating at a loss by which taxpayers are required to file tax returns and during the COVID-19 crisis could be allowed to postpone pay taxes is akin to an interest-bearing loan from the payments of net wealth tax with respect to the companies’ government, with the potential benefits of improving the value. Such a measure would be intended to reduce the cash management, liquidity profile, and working capital need for family-owned businesses to distribute dividends stance of firms and households experiencing the negative to owners to cover the wealth tax. economic and financial effects of the COVID-19 crisis, without incurring in tax arrears. Similar provisions could be extended to other payments from taxpayers with fixed Alleviate the Effects of Economic Losses due dates, such as provisional and installment payments. Deferrals or reductions of payable income, corporate. and • Correction of advance payment rules. To avoid the cash trade taxes may also be granted if companies prove to be flow crunch typically originated by mismatches between directly affected by the COVID-19 crisis and if regular tax advance tax payments and final liability during economic collection would pose a substantial hardship. Late filing downturns, a temporary adjustment of advance payment and late payment penalties and interest could also be rules applicable to businesses would allow taxpayers reduced or waived upon request. to estimate streams of advance payments on the basis of profitability expectations for ongoing and future fiscal • Postponement of real estate taxes. Subject to conditions, years instead of using the previous year’s assessment taxpayers of real estate taxes on business property could as the baseline (applicable mainly in corporate income be allowed to temporarily postpone tax payments. Those taxation). When taxpayers can credibly state that their invoking such right to the postponement should be able business is affected by COVID-19, advance payments to prove substantial operational difficulties in 2020 due could be reduced even to zero as the case may be. This to immediate and unforeseen loss of income, directly or would be most relevant for industries in which a significant indirectly caused by the COVID-19 crisis. economic decline due to the COVID-19 crisis is expected. • Installment arrangements for distressed taxpayers. • Net operating loss (NOL) carryforward provisions. Extended payment periods and allowing tax payments Most corporate income tax (CIT) systems include these to be made in installments are useful temporary relief provisions as income-averaging mechanisms to induce measures to help keep taxpayers afloat during low neutrality in companies’ decisions to undertake projects profitable periods or periods of cash flow constraint. To regardless of their level of risk, such that tax losses be effective, such rules should include risk management incurred in one fiscal year could offset profits from other considerations, be enacted with clear eligibility criteria, years. For those companies incurring NOLs as a result and be designed for specific groups of taxpayers affected of the COVID-19 economic downturn, the application of by the economic downturn. The taxpayer would be allowed carryforward mechanisms (offset of losses against profits to apply to the tax office for deferral of tax payment, or to be accrued in future years in addition to carryback request to pay the tax in installments. When possible, provisions in place in most tax codes) will help alleviate such applications could be extended to all taxes. Until an the financial effects of a systematic economic downturn EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 8 in future fiscal years. The same income averaging as these tend to decrease tax compliance levels in the mechanism to carryforward NOLs is advised for ring- middle and longer term by undermining trust in a fair tax fenced application of CIT rules, such as capital gains. system. • Extension of NOL carryforward provisions. For those • Expansion of tax depreciation write-off rules. To businesses enduring negative economic consequences accelerate business investment, governments could directly attributable to the COVID-19 crisis, carryforward significantly expand tax depreciation write-off rules. claim periods could be extended in time to alleviate those Eligible businesses would be able to immediately deduct consequences. purchases of eligible assets, and the asset threshold could apply on a per asset basis, which would enable businesses • Simplifying procedures for claiming relief from VAT to immediately write off multiple assets. Alternatively, an on bad debts. This could include reducing the minimum accelerated depreciation deduction could be granted in period of payment delay that is required for VAT on issued addition to the existing depreciation deduction. invoices in order for them to be eligible to obtain relief. • Flat-rate calculated loss for 2020. Small companies • Adjustment of transfer pricing arrangements to in certain sectors and industries (such as retail, cultural, allocate group losses. Most groups have established hospitality, tourism, and restaurant) that expect to report a transfer pricing systems that ensure stable, benchmarked loss in 2020 due to the COVID-19 crisis could be allowed profit margins for a large majority of group functions and to apply to their tax office in advance for a refund of taxes legal entities. The result is that most of the remaining paid for 2019 in addition to advance payments made for group profit—or loss—is concentrated in a few central 2020. The basis for this could be a flat-rate calculated entrepreneurial entities. In the case of a major downturn, loss for 2020. Similarly, affected taxpayers with profit and such systems mean the group would still make substantial rental income could be allowed to apply for a retroactive cash tax payments, exacerbating their cash flow pressure. reduction of the advance payments already made for To alleviate this situation, transfer pricing rules could allow income or corporate tax for 2019 on the basis of a lump- multinationals to make their transfer pricing models more sum loss carryback, if certain conditions are met (e.g., it is flexible in order to share the burden of losses more broadly regularly assumed to be affected if the advance payments within the group, helping the group to survive the liquidity for 2020 have already been reduced to zero, no taxation crunch. for 2019, and a maximum limit of loss carryback). These tax measures could be particularly helpful for freelancers Incentives to Critical Investments and small businesses. • Implementation of focused tax stimulus packages. Tax- • Tax credits to promote work from home policy for based relief programs during economic stress periods are companies affected by the COVID-19. To promote usually implemented using a combination of instruments, working from home, governments could introduce a such as tax exemptions granted to taxpayers located in tax reduction scheme to give employers a double tax emergency zones (such as temporary exemptions from deduction with respect to emoluments payable to staff property and land taxes); tax incentives to investments in members who work from home, as well as a tax credit focused regions; tax rebates, credits, and rates cuts; and on the acquisition of information technology systems. others. Following principles of tax policy neutrality and These measures should be transitional and apply for only healthy compliance management for tax administrations, a limited time. in the current crisis immediate expense of fixed assets should be the preferable policy tool, not only applicable Other Measures to Alleviate Cash Flow to affected taxpayers, but also to bring forward needed Management to Businesses and investments in critical economic sectors such as health Households providers or pharmaceutical firms. To be used as temporary mitigation measures, these need to be designed within • Wage subsidy paid to employers. Businesses that well-defined tax periods; use simple and unambiguous withhold tax on employee salaries and wages might be eligibility criteria; and be closely monitored by a special entitled to a tax credit equivalent to a fixed percentage task group within the tax administration. Tax amnesties, of the amount withheld to employees. This measure aims audit deferrals, and similar measures should be avoided to provide temporary cash assistance to employers as EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 9 an incentive to sustain their payroll and disincentivize to those taxpayers who pay their taxes on time or provide layoffs. To attain a similar objective, tax authorities could advance payment on obligations for the first quarter of also authorize a temporary double or triple dipping of tax 2020 (and may be extended beyond this period). This deductions on wages and salaries paid to employees. measure would incentivize tax compliance, and the discount could be adjusted for different types of taxes, • Reduction of withholding tax to employees. Tax relief taxpayers, or circumstances. Such a discount could could be delivered to wage earners through automatic relief increase the liquidity of the taxpayer when compared with of taxes withheld by employers by applying proportional their budgeted tax payments under the regular tax regime. reductions to the tax liability resulting from the application of each bracket of the PIT tariff structure. This relief • Favorable application of administrative decisions. mechanism is better positioned to target lower-income Negative tax administrative decisions and deadlines for wage earners, in comparison with blanket relief measures claims against tax assessment could be frozen, while applicable to the critical mass of wage earners whose tax all positive tax decisions could be applied. For example, is withheld and paid to authorities by employers. issuance of preliminary and final tax assessment notes for taxes and penalties in the course of ongoing tax audits • Tax waivers to cash transfers. Grants provided by could be suspended for the duration of the COVID-19 governments as a relief measure to businesses and crisis. households could be tax-exempt. Such grants could be provided through cash transfers or through allowances • Postponement of deadline for finalizing and supplements paid to employees engaged in home- contemporaneous transfer pricing documentation. based work arrangements. These tax obligations have significant economic costs for companies that may be in need of liquidity during the • Temporary easing of thin capitalization rules. Domestic crisis; providing an extension may help temporarily reduce subsidiaries that rely heavily on borrowing from parent their expenses and allow them to prioritize the use of companies overseas to finance working capital could limited funds. (In this context, contemporaneous means benefit from temporary suspension of thin capitalization that documentation must be ready no later than the date rules. This temporary easing could also apply to resident for filing the tax return.) companies affected by the COVID-19 crisis that require additional borrowing that exceeds the equity-to-debt ratio, • Postponement of deadline for other reporting irrespective of the source of funding, whether domestic obligations. If allowed a reporting deferral, businesses or foreign. Such easing could be especially applicable could make more efficient use of their resources without to subsidized public loans to distressed companies. being sanctioned with fines and other tax penalties, A temporary easing could apply not only to thin especially since regular business operations have ceased capitalization rules, but also to earnings before interest, or been interrupted during the COVID-19 crisis. For taxes, depreciation, and amortization (EBITDA) rules for example, the time limit for exchanges of information on limitation of interest deductibility. reportable financial accounts could be deferred, such as for the Common Reporting Standard (CRS) or the Foreign • VAT assessment based on cash flow. In most countries, Account Tax Compliance Act (FATCA), as well as on the VAT is collected on an accrual-accounting basis. In transfer pricing (such as country-by-country reporting). some cases, governments can explore temporarily This can also include suspending the requirement to shifting this from accrual to cash basis. The downside of submit consolidated financial statements, management this approach is that VAT included in stock or inventory reports, consolidated management reports, and audit of a company could pose problems in the transition reports on the financial statements of legal entities. period. This would in any case be a temporary measure to alleviate cash pressures during the initial period of • Deferral of the introduction of planned new taxes and distress. An alternative would be to postpone the inclusion increases of tax rates. Tax authorities are encouraged of unpaid invoices in VAT returns, which would require that to defer the introduction of new taxes, as well as tax rate adequate control mechanisms be in place. increases in existing ones, until the COVID-19 crisis is over, to prevent additional tax burden on taxpayers; some • Discount for on-time payment of taxes. Tax authorities jurisdictions have already adopted this measure (for could reward compliant taxpayers by granting a discount example, Germany and the United Kingdom). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 10 • Waiver of down payment requirement. For taxpayers extensions), and support would be withdrawn if a collective seeking amicable settlements of their tax obligations insolvency procedure (such as bankruptcy) arose. A separate arising from audits, tax authorities could waive the down application would need to be filed for each tax debt through payment requirement of a percentage of the outstanding a specific form, at the moment of receipt of the assessment tax liability that ought to be paid before the case is or payment notice. Temporary measures to alleviate the tax accepted by the revenue authority. burden from COVID-19-related activities and their economic impact might include the following: • Tax-free withdrawals from pension funds. Tax authorities could grant households tax-free withdrawals • Temporary waiver of COVID-19-related stamp tax from company pension plans. duties. Stamp tax duties could be waived on any documents directly or indirectly related to measures Temporary Measures to Alleviate the required to deal with the COVID-19 crisis. Tax Burden From COVID-19-Related • Temporary waiver of pay as you earn (PAYE) and Activities and Their Economic Impact employer social insurance contributions. The payment of salaries to employees by affected businesses in certain sectors and industries (such as hospitality, leisure, Businesses would be eligible for these support measures distribution, catering, or health care) could benefit from not only if they are adversely affected by the COVID-19 crisis being subject to PAYE obligations and social insurance (for example, banned, disabled, or significantly impeded by contributions for a certain and limited period during the decisions of the competent authority) and if they are able to COVID-19 crisis. This measure could be also targeted to substantiate such effects (such as a drop in turnover, or a low-income or low-skill individuals. serious drop in orders or reservations as a result of a domino effect within a group). Particularly during the recovery phase, • Expenditures on necessary preventive measures. For many of these measures could be targeted to those most all entrepreneurs, expenditures on necessary COVID-19 vulnerable, which could also help with fiscal constraints on the preventive measures, including disinfection, carried out government side. Businesses would not be eligible for support by the taxpayer in order to prevent the epidemic and if they were already facing structural payment difficulties before protect the life and health of the population could be the COVID-19 crisis. Support also should be conditioned on deductible without restriction. For example, the tax credit compliance with the timely filing of tax returns (with the given for sanitization costs, where existent, could be extended EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 11 to include the costs of purchasing personal protective measures should be temporary, and the burden of proof equipment (PPE), hand cleaners, and disinfectants, or the that the tax relief requested is specifically to deal with the cost of purchasing and installing other safety equipment effects of the COVID-19 crisis should rest on the taxpayer. to protect workers from accidental exposure to biological agents or to ensure that people are at a safe distance from • Review of advance pricing arrangements (APAs) in one another. place. In cases where it can be explicitly demonstrated that the underlying fact pattern no longer applies, tax • Temporary exemption from VAT of certain types of authorities could facilitate the renegotiation of APAs in products. The import of medical equipment and medical place, since these arrangements are usually based on the accessories necessary for the fight against COVID-19, assumption of profits; and as a result of COVID-19 crisis, as well as certain types of food to meet the food needs the estimates and economic assumptions on which APAs of the population, including food for children, could be were initially negotiated may no longer apply. temporarily exempted from VAT. • Review of previously issued binding tax rulings. • Temporary reduction of VAT for certain industries and Tax authorities may allow taxpayers to request that activities. Governments may, as part of their economic previously issued binding tax rulings be discussed and stimulus package, agree to a temporary decrease of the revised on a case-by-case basis because of the economic VAT standard rates. For example, the VAT rate could be consequences of the pandemic. reduced for food in the catering trade, as well as for other industries and activities either that have been impacted • Temporary suspension of interest on tax arrears. To negatively by the COVID-19 crisis, or that the government alleviate the financial burden faced by companies, revenue wants to promote. authorities could suspend the calculation of interest on tax arrears for the crisis period with limited retroactive effect. • Temporary suspension of government fees. Tax authorities could suspend government fees charged on • Tax concessions for workers in health and other informal sector operators for rent, security, and parking emergency-related sectors. To reward people for working in urban markets, and lower the business license fees for extra hours and in potentially dangerous conditions, companies in certain sectors (such as transportation and governments could provide tax concessions (for example, tourism). exempting overtime income from labor taxation) or could incentivize retired workers to temporarily reenter the • Tax relief for donations. Temporary tax relief could be workforce by ensuring that their pensions or retirement provided for qualifying donations, extending their scope accounts will not be not affected. and their beneficiaries. Qualifying donations could include medical aid devices and their auxiliary parts, as well as • Tax deductibility of rental debt waivers. Rental debt protective gear and clothing for care providers and patients. waivers granted by lessors related to lease agreements Qualifying beneficiaries could include governmental on real estate properties could be made fully tax institutions and other public bodies, hospitals, and care deductible if certain conditions are met. For example, they institutions providing VAT-exempt health care services, could be applicable only to rental debt waivers granted and humanitarian charitable institutions. Accordingly, to professional lessees (not individuals) who are not businesses would not be required to pay VAT on qualifying considered as related parties with the lessor, or rental donations; import of goods for the purpose of mitigating fee waivers could be granted with no required justification adverse COVID-19 effects would be exempt from customs after the start of the pandemic until a certain date. and import VAT; and import VAT would not need to be paid to be recoverable (a reverse charge mechanism would • Disregard taxable presence for corporate tax. Where apply). At the same time, the costs incurred in relation to an individual is present in the country and that presence is the donated products could be tax deductible for income shown to result from travel restrictions related to COVID-19, tax purposes. Another example would be allowance of tax administration could disregard such presence for a charitable (donation) deduction by individuals who corporate purposes for a company in relation to which the forfeited a right to claim a refund of the amount they paid individual is an employee, director, service provider, or for admission to a cultural, arts, or sporting event that agent. Likewise, where relevant, the same could apply if was cancelled because of the pandemic. These tax relief an individual is present in another jurisdiction as a result EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 12 of COVID-19-related travel restrictions. In either case, diligence, both in terms of transfer pricing documentation the individual and the company should maintain a record and underlying analytics, as well as in providing a of the facts and circumstances of the bona fide relevant framework for intertemporal evolutions of the transfer presence in the country or outside it to provide to tax pricing model. In post-crisis tax audits, tax administrators authorities if such evidence that it was due to COVID-19- should also closely analyze and challenge any COVID-19- related travel restrictions is requested. induced group losses, to ensure that they would not have arisen even without the crisis and to verify that they are • Local tax relief measures. Subnational authorities could aligned with reviewed transfer pricing policies to allocate grant local tax relief measures, such as a grace period group profits and also group losses. Tax officials may take for tax collection and reduction of property tax on certain the exceptionality of the current situation into account property owned by small and medium-sized entities. for comparability analysis purposes and, if necessary, accordingly adjust the pre-crisis comparability analysis in Measures to Improve Compliance addition to reviewing related-party transactions. and Budget Management From • Audits on compliance of conditional tax benefits and Fiscal Authorities and Revenue subsidized loans. Many companies and entrepreneurs may benefit from tax advantages (such as tax rebates Administrations or postponements) and subsidized loans at beneficial or zero-interest rates, if they comply with certain conditions and commitments of responsibility (for example, to not • Strengthening of tax compliance monitoring within distribute dividends, not perform any share buyback, or, tax administrations. The formation of special task in the case of large companies, not be established in a forces within revenue administrations could be a useful noncooperative state or territory). Tax authorities should short-term institutional response to mitigate the short- place extra care and resources on auditing and verifying term effects of economic shocks. The task force should that taxpayers benefiting from such special aid measures be able to closely monitor the effect of potential tax base appropriately qualify. erosion or the exposure of higher levels of compliance risk in the face of economic emergencies. A task force could • Increase the limit of the company tax account. Tax also be instrumental to establishing effective feedback authorities could opt to increase the limit of a company’s loops with the economic team at the relevant ministry of tax account, and businesses could be allowed to adjust finance tasked with the monitoring of revenue collection and set the amount limit in their tax account. With the and the preparation of budgets for the midterm economic new increased limit, companies with excess liquidity framework, to better estimate the revenue effect of would have an increased possibility to insert an amount economic shocks. on the company tax account in order to avoid negative interest, and at the same time ease the pressure on public • Monthly receipt monitoring. In addition to the finances. development of revenue forecasting and estimation tools (mostly tailored for macroeconomic management • Suspension of the statute of limitations for tax and tax policy objectives), countries should have a authorities. All statutes of limitations should be suspended reliable monthly revenue receipt model in place. When until the end of the COVID-19 crisis to prevent expiration appropriately calibrated with reliable tax elasticity and of ongoing tax audits and to allow the initiation of new tax buoyancy coefficients (in relation to underlying tax audits that would have expired during the pandemic and bases, such as gross domestic product [GDP] or private thus would have impaired audit and revenue procedures. consumption) these models have the potential to help Such a suspension should be applicable only for the year, revenue administrations to timely determine the effects with a statute of limitations expiring on December 31, of revenue shortcomings in the very short term and to 2020. The suspension would be applicable to both the estimate those effects against the annual revenue budget. taxpayer and the tax authority, and no tax audit would be initiated during the suspension period. Identical provisions • Enhanced transfer pricing audits. Any adjustments should be applied to rules for all time limitations applicable made to transfer pricing arrangements should be closely to recovery, inspections, and tax rulings under Customs audited to ensure that they are applied with extreme regulations. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 13 >>> Measures to Compensate for the Fiscal Deficit Generated by Cash Flow Management and Temporary Tax Relief Measures Taxation of Digital Consumption to trade, covering domestic as well as cross-border trade of goods, services, and intangibles. This will cover all the key Contain Decreasing Levels of VAT areas of digital trade that create challenges for VAT policy Revenue Collection and administration, including the following: • VAT collection on sales of services, digital products, Unlike during previous financial downturns, the ongoing and intangibles provided by foreign online vendors COVID-19 health and economic crisis will have a significant • VAT collection on imports of low-value goods from impact on VAT collection, which is the largest source of online sales (alternative mechanisms to traditional revenue for many low-income countries. Despite predictions customs processes) for this otherwise stalwart source of tax revenue, the • Regulating the role of online marketplaces and other accelerated pace of online commerce worldwide presents digital platforms in the collection of VAT, including an opportunity for governments to use digital taxation as a through measures to hold these platforms liable for VAT revenue buffer during the contention phase of COVID-19 sales they have facilitated through data sharing and as a revenue source during economic recovery as • Designing policy and administrative measures for the consumption levels regain strength. Governments should application of the VAT to the sharing economy focus on the design and implementation of policy measures for the efficient and effective collection of VAT on e-commerce • Implementation and operational roadmap for the sales of goods, digital products, services, and intangibles, effective collection of VAT on online trade. This based on internationally agreed-upon standards and best will include a comprehensive implementation strategy practices, to ensure the application of the VAT neutrality and and roadmaps covering all key operational elements, destination principles. Such policy measures include the including concrete implementation steps such as following elements: building registration and filing processes, VAT collection and remittance processes, communication and other • Develop an analytical guide for country-specific related taxpayer services, and information technology e-commerce business models and processes, from development and frameworks. a VAT policy and operational perspective. This should include analysis of the sales and delivery processes, the • Effective audit and administrative risk management role of the relevant actors in these processes, and the strategies and processes, including concrete measures infrastructure employed in digital trade. to tackle VAT fraud associated with online trade. This guidance can also include potential avenues for regional • Legislative design of effective measures for the cooperation based on successful initiatives in other collection of VAT on e-commerce sales and digital jurisdictions. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 14 Cancellation or Amendment of • Taxation of digital transactions and business models. A trend triggered by the increasing digitalization of the Existing Tax Benefits and Increase of world economy in modern times, taxation of digital Tax Rates transactions and new digital business models has gone from being a novel and appealing tool on the menu of tax options for governments to becoming an effective policy • Renegotiation of reduced withholding tax rates of response during and after the COVID-19 crisis. tax treaties. Governments may consider renegotiating their tax treaties with the intent of increasing minimum • Creation of new digital taxes if no global agreement is withholding tax rates for certain streams of income (for reached, building on the work done by the Organisation example, dividends, interest, and royalties) and should for Economic Co-operation and Development (OECD). especially consider doing so with low-tax jurisdictions that International organizations and regional organizations may pose tax evasion and avoidance schemes´ issues. have introduced or are considering alternative approaches to the taxation of the digital economy, most frequently in • Cancellation of tax exemptions. For example, the form of digital services taxes (DSTs). If no agreement governments could cancel tax exemptions for interest can be reached by the OECD’s Inclusive Framework by the income on state and regional treasury securities. mid-2021 target, or if a consensus position is considered unacceptable by some countries, it can be expected that • Evaluation of the tax relief framework. As a way of this taxation trend will continue. broadening the tax base and making the tax system fairer, more efficient, and easier to administer, jurisdictions • Creation of a new digital data tax (DDT) on contracted should rethink the current tax relief framework (including internet bandwidth.4 The new DDT would be levied on tax incentives) from a cost-benefit analysis. the use of internet bandwidth and digital access to national markets, which would be applied to all internet users • Increase of tax rates of existing taxes. Some jurisdictions conducting business online. It would work as a toll tax for have already announced that, once the COVID-19 crisis gaining internet access to the country. It would measure is under control, tax rates for certain taxes (such as the the size of the digital presence and be assessed on the VAT) will be increased as a response to the pandemic’s basis of the number of digital transactions conducted with unprecedented economic fallout. However, this should be users physically located in the territory and the number of considered as only a temporary measure, with the longer- visits to online websites from users physically located in term objective of rethinking the design of the tax system the country. The DDT does not conflict with other income (for example, the balance of labor and capital taxes, tax proposals (such as the OECD´s Unified Approach), property taxes, and environmentally related taxes). because it aims to tax different transactions from the opposite tax perspective. The DDT proposal would tax foreign digital companies as consumers, while income Other Measures to Introduce New tax proposals tax them as suppliers. Therefore, the DDT Taxing Rights could be implemented in parallel to any tax agreed upon within the OECD Inclusive Framework. • Creation of a new “COVID-19 levy.” Governments could • Creation of a new tax on nonrecycled plastics. Similar opt to introduce a COVID-19 levy that would be imposed to the current proposal by the European Union, such a levy on companies, individuals, and other beneficiaries of would tax the quantity of nonrecycled plastic packaging government wage assistance. Calculation of such a levy waste generated in each jurisdiction. Alternatively, the could be limited to the lower of the amount of financial new tax could be levied on firms that manufacture or support received or a percentage of the employer´s tax- import plastic packaging that does not meet recycled adjusted income, and payable over a two-year period or material specifications. This measure would attempt to longer. reduce waste and help tackle climate change, while also 4. Lucas-Mas, Cristian Oliver, and Raul Felix Junquera-Varela. 2021. Tax Theory Applied to the Digital Economy: A Proposal for a Digital Data Tax and a Global Internet Tax Agency. Washington, DC: World Bank. https://openknowledge.worldbank.org/handle/10986/35200 License: CC BY 3.0 IGO. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 15 stimulating investment in plastic recycling innovation and COVID-19 crisis, excess profits taxes could be designed capacity and providing recycled plastic feedstock to the and introduced to tax the proportion of profits that derives industry. from some external event not of the taxpayer´s making. This type of tax has its roots in wartime, when it was • Creation of other new environmentally related deployed to prevent opportunistic and unjust enrichment. taxes. While nonrecycled plastics may constitute the Some jurisdictions have reintroduced a version of this in greatest challenge in some jurisdictions, other countries the form of surtaxes on certain sectors (such as retail and may have more immediate but equal or even more credit institutions) or on sources of income (for example, devastating challenges. Examples include gas flaring interest accrued on deposits exceeding the statutory and vehicle- or machine- generated toxic fumes. Other threshold, or outbound paid dividends and interest); these new environmentally related taxes may be introduced are comparable to a “crisis tax.” according to the needs of each jurisdiction and particular local circumstances. The elimination of subsidies to • Creation of taxes on other modern economic carbon-based energy suppliers should also be considered. activities. Governments may wish to explore taxing relatively new types of economic activity, such as artificial • Creation of new excess profits taxes. Given the intelligence and robots, use of blockchain technology, or diversity of the corporations likely to profit from the global financial transactions using cryptocurrencies. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 16 >>> Appendix A: Design of Effective Measures for the Collection of VAT/GST on E-Commerce Sales and Digital Trade as Policy Response During and After COVID-19 This appendix5 provides guidance on practical measures consumers, who are much harder to trace and monitor. This applicable by tax authorities on the design and implementation creates opportunities for tax evasion when the nonresident of policy measures for the efficient and effective collection of digital suppliers violate their obligation to register for the value added tax (VAT)/ general sales tax (GST) on e-commerce VAT/GST in the market jurisdictions and choose to keep the sales of goods, digital products, services, and intangibles, collected taxes, exploiting the lack of physical presence and based on internationally agreed-upon standards. the intangible nature of the goods and services rendered in the territory; it is very difficult to monitor and identify such digital Collection activity. On the other hand, in business to business (B2B) transactions, the reverse charge mechanism applies and resident customers Tax collection is by far the most challenging phase of tax must withhold the output indirect tax (such as the VAT) and administration—even more so for digital transactions involving declare in their VAT returns both their purchases (input VAT) nonresidents, which bear a higher tax-evasion risk because and their suppliers´ sales (withheld output VAT), which offset of the greater difficulty of traditional local tax enforcement each other from a cash payment viewpoint, minimizing the risk mechanisms to reach internationally. Indirect taxation of the of tax evasion. digital economy is internationally accepted (for example, International VAT/GST Guidelines and other related materials issued by OECD´s Global Forum on VAT), and countries are Status of Customers increasingly expanding the scope of indirect taxes (VAT/GST) to digital supplies. Additional efforts are being made to develop mechanisms for the effective collection of the VAT/GST when Determining the status of customers (business or nonbusiness) the supplier is not located in the jurisdiction of taxation (the is an indispensable step for foreign digital suppliers in order to market jurisdiction), as well as to define the role of digital identify their VAT/GST compliance obligations; tax authorities platforms in the collection of VAT/GST on online sales. should therefore provide clear practical guidance on how nonresident providers of electronic services can establish Business to consumer (B2C) digital transactions involve an the status of their customers. Consequently, countries should additional layer of complexity for tax administration purposes, consider adopting a requirement for foreign digital suppliers to since nonresident digital suppliers or tax agents (such as digital provide one or more indicators to determine the status of their platforms) are responsible for collecting the VAT/GST from customers. A list of such indicators is provided as follows and is users and remitting the taxes collected to tax administrations based on countries´ research and experience in designing and of the market jurisdictions where those users are located. operating regimes for VAT/GST collection on digital supplies Moreover, collected VAT/GST derive from transactions with by foreign suppliers in a VAT/GST system that differentiates EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 17 between B2B and B2C supplies. The suggested indicia are the case where the customer provided a VAT/GST registration or following: identification number that was rejected or reported as invalid, the supplier may presume that its customer is a nonbusiness • An identification number, such as a VAT/GST registration and apply the rules for B2C supplies. number or a business tax identification number indicating the business identity and registration of the customer. Registration It is recommended that an easy-to-use process be implemented, one which would allow nonresident suppliers to verify the validity of the identification information. As discussed in the previous section, determining and • A certificate issued by the customer´s competent authority, evidencing the status of customers implies that nonresident legal which indicates the business identity and registration of the entities must provide tax authorities with one or more indicia to customer. determine the status of their customers. This is necessary for • Information available in commercial registers. nonresident digital providers to be relieved from the burden of • Commercial indicia that may provide reliable evidence of calculating and paying VAT/GST, which is shifted to tax agents the status of the customer, individually or in combination (such as resident legal entities, permanent establishments, with other indicia. These may include and nonresident legal entities acting as intermediaries), all of which should have the obligation to register. Thus, if • The nature and specific features of the supply. For nonresident legal entities provide services to individuals (B2C example, the supply of digital music files with no transactions) through nonresident intermediaries or permanent entitlement to the embedded intellectual property rights establishments, or provide services to business customers might indicate that the customer is not a business, (B2B transactions, when customers are resident legal entities whereas the supply of software that is licensed for or permanent establishments), such nonresident digital business use across a large number of networked suppliers may not have the obligation to register, since their computers would indicate that the customer is a tax agents assume their VAT obligations. business. • The value of the supply. For example, the high value of Unfortunately, the lack of registration of such nonresident a software package could indicate that the customer is digital suppliers that do not carry out transactions directly with a business. individuals may create some issues, mainly the following: • The customer´s trading history with the foreign supplier. This may include records from prior • If the nonresident digital suppliers are not registered, then transactions that could provide information on the they have no formal procedure to provide tax authorities status of the customer. with the indicia to determine the status of their customers. • Digital certificates or identity certificates—for example, This is a serious issue because the VAT obligations of electronic credentials that are used to certify the nonresident digital providers vary depending on the online identity of their owner. These could serve to business or nonbusiness status of their customers, and establish the status of the customer, particularly when evidence must be provided to determine whether the they include specific information about the customer´s nonresident legal entity is responsible for calculating and VAT/GST registration or business tax status. The paying VAT as a taxpayer, or if otherwise such obligations use of these certificates currently appears to be less are assumed by the respective tax agent. widespread among private customers than among • The lack of registration would increase the risk of businesses. noncompliance by tax agents, because tax authorities would be deprived of an additional mechanism of control When a supplier, acting in good faith and having made and monitoring. For example, even if nonresident digital reasonable efforts to obtain the appropriate evidence, is unable suppliers are not responsible for calculating and paying to establish the status of its customer, international standards VAT/GST, if they have the obligation to register and to provide that this could lead to a presumption that it is a declare the transactions carried out with or through other nonbusiness customer, in which case the rules for B2C supplies legal entities or permanent establishments and to report would apply. What may be considered as reasonable efforts the evidence of their status, then the tax authorities would will generally depend on the circumstances. For example, in a have access to an additional valuable piece of information 5. Adapted by World Bank staff for operational purposes from the OECD´s reports listed at the end of this appendix. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 18 that could be used to double-check against the tax returns its permanent business presence. For B2C supply of services submitted by the tax agents. It would also allow tax in electronic form, international standards recommend a place authorities to identify not-registered tax agents that are of taxation rule based on the customer´s usual residence. responsible for calculating, withholding, and paying the VAT/GST of both the B2C and B2B transactions, especially For B2B supplies, it is likely that the supplier will have sufficient when tax agents are nonresident entities. This measure information to determine the location of the business customer would also avoid any inequality in competition. (such as written contracts, general correspondence, purchase orders, invoices, payment instruments, or receipts). However, It is therefore recommended that countries extend the obligation determining the usual residence of the customer in connection to register to all nonresident legal entities that provide services with B2C supplies of services in electronic form may be more in electronic form in the territory to both individuals (B2C) or challenging, since activities frequently involve high-volume, businesses (B2B), directly or indirectly, irrespective of whether low-value supplies that rely on minimal interaction and or not a tax agent is responsible for fulfilling VAT obligations. This communication between the supplier and its customer, where measure is currently applied in many countries; for example, it may be difficult to determine the customer´s place of usual as of January 1, 2019, Turkey has introduced the obligation residence. Thus, international standards recommend that for nonresident electronic service providers registered as jurisdictions provide clear and realistic guidance to suppliers “Special VAT Registration for Electronic Service Providers” to on what is required to determine the usual residence of their declare their sales of electronic services to businesses (B2B), customers in a B2C context. despite the application of the reverse charge mechanism. The declaration is prepared as a list and uploaded to the system, Generally, the information provided by customers may be which must be submitted in the same period as the VAT/GST considered important evidence in determining the jurisdiction of return period, and the following information must be provided: the customer´s usual residence. This could include information tax registration number of the business purchaser; name and collected within business processes (such as ordering), surname (or trade name) of the purchaser; address of the including country address, bank details (notably country of purchaser; currency of payment; price of the service; payment the bank account), and credit card information. If needed, method; and the date and number of the invoice issued. jurisdictions may require that the reliability of such information be further supported through appropriate indicia of residence. Usual Residence of Customers In some cases, such indicia might be the only indication of the jurisdiction of the customer´s usual residence. The available indicia will vary depending on the type of business or product involved, and might include the contact telephone number, the According to international standards, internationally traded internet protocol (IP) address of the device used to download services and intangibles should be taxed for consumption digital content, or the customer´s trading history (which could tax purposes according to the rules of the jurisdiction of include information on the predominant place of consumption, consumption. For B2B supplies, the jurisdiction that has the language of digital content supplied, or billing address). These taxing rights is determined by reference to the location of the indicia are likely to evolve over time as technology and business customer, that is the jurisdiction where the customer has located practices develop. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 19 International standards provide additional guidance on the compliance for digital businesses faced with obligations application of these rules and requirements for determining and in multiple jurisdictions. Where traditional registration and evidencing the usual residence of customers with respect to compliance procedures are complex, their application for B2C services supplied in electronic form. Hence, countries may foreign digital suppliers may lead to noncompliance or to certain want to consider incorporating into their VAT/GST regulations digital suppliers declining to serve customers in jurisdictions some or all of such guidance and specific requirements, which that impose such burdens. Moreover, complexity may create an are summarized as follows: uneven playing field between foreign and domestic suppliers, resulting in market distortions and, ultimately, substantial • Requiring at least two noncontradictory pieces of effects on governments´ VAT/GST revenues. Therefore, it is information. Certain regimes (such as the European Union, recommended that countries implement a simplified registration India, and Spain) require two noncontradictory pieces and collection regime to facilitate compliance for foreign digital of information that suppliers routinely collect from their suppliers. customers in the normal business activity to determine and evidence their customer´s usual residence. In principle, A simplified registration and collection regime for digital suppliers this appears to have the potential to provide a high level of would operate separately from the traditional registration and proof and certainty. collection regime, without the same rights—such as input tax • Implementing a fallback rule in cases where no or recovery or obligations such as full reporting—as in a traditional limited reliable information is available. If unreliable regime. The following features should be present in such a or no information is available to a specific supplier (or regime in a B2C context to balance the need for simplification to a business sector more generally) to determine the and the need of tax administration to safeguard the revenue: customer´s usual residence, a country could consider a tailored approach per supplier or sector of business activity • Simplified registration procedure, with required information that would offer a good approximation of the place of usual kept to a minimum and the availability of online registration residence in an administrable manner. Such a tailored at the tax administration´s website approach may allow reliance on only one available piece • No input tax recovery, but nonresident digital suppliers may of evidence for determining the customer´s place of usual register under the normal collection regime and recover residence, which could be developed in consultation with input tax according to normal rules the business sector in question, and its key elements (such • Simplified returns, with options to file electronically as its scope and application in practice) should be clearly • Electronic payment methods published. • Simplified and electronic recordkeeping requirements • Adopting a safe harbor rule. It is recommended that • Elimination of invoicing requirements, or issuing invoices countries consider implementing a safe harbor rule for in accordance with rules of the supplier´s jurisdiction suppliers acting in good faith and having made reasonable • Online availability of all information necessary to register efforts to determine the usual residence of the customer. and comply with the simplified regime What may be considered as reasonable efforts will depend • Use of third-party service providers to assist in tax on circumstances; for example, under a safe harbor rule, compliance the reliance on good faith on two nonconflicting pieces of • Compliance burdens that are proportional to revenues evidence (wherever available) at the time of supply or the involved and that maintain neutrality between domestic correct application of a fallback rule in good faith might and foreign suppliers protect the supplier against challenges by tax authorities, including situations in which the determination of the usual It is recommended that countries introduce a simplified residence of its customer turns out to be inaccurate. regime for B2C cross-border transactions involving services in electronic form, fully compatible with the reverse charge Simplification as an available, separate collection mechanism for B2B supplies. This shifts the liability to account for the tax from the supplier to the customer. Accordingly, when B2B supplies are involved, the application of the reverse charge mechanism Country experience shows that the highest levels of compliance relieves the foreign digital supplier of any requirements to be by foreign digital suppliers are likely to be achieved if identified for VAT/GST purposes or to account for tax in the compliance obligations in the jurisdiction of taxation are limited jurisdiction of taxation, thus minimizing the administrative to what is strictly necessary for the effective collection of the tax. burden and complexity for foreign digital suppliers. Despite Appropriate simplification is particularly important to facilitate EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 20 this, it is recommended that jurisdictions extend registration to increased efficiency and effectiveness of concentrating all foreign digital suppliers. their administrative capacity on fewer taxpayers with presumably higher tax liabilities. Threshold • The determination of the threshold level, including the calculation method. Considerations include whether the threshold should be based on the supplier´s turnover in the For the purposes of this paper, the term threshold refers to a taxing jurisdiction or its worldwide turnover (including how level of supplies (measured in currency) into the jurisdiction the tax administration could monitor such a threshold) and of taxation below which a foreign digital supplier is relieved whether the threshold should be limited to B2C supplies of the requirement to register for, collect, and remit the VAT/ into the jurisdiction of taxation or should take into account GST on these supplies in that jurisdiction; nor is a tax agent all types of supplies made by the foreign supplier in that responsible. jurisdiction. In the B2C context, international standards recommend that • The implementation of anti-abuse measures. For any registration-based collection regime be implemented example, to counter foreign businesses that artificially without creating compliance and administrative burdens divide their activities among a number of entities to stay that are disproportionate to the revenues involved or to the below the threshold. objective of achieving neutrality between domestic and foreign suppliers. Some countries have implemented thresholds as a • The provision of clear guidance on the operation of the tool to minimize the risk of disproportionate administrative and threshold. This includes the need to make this information compliance costs for small and medium enterprises (SMEs) accessible to foreign suppliers in multiple languages. and tax administrations; these countries include Australia; Bangladesh; Canada (Quebec); Iceland; India; Japan; New Given these key policy aspects, the desirability of introducing Zealand; Norway; South Africa; Switzerland; Taiwan, China; a registration threshold is neither a straightforward nor an easy and the United States. decision; for some jurisdictions the inconveniences and risks may outweigh the benefits. Other jurisdictions have no registration threshold for cross- border supplies of electronic services; therefore, the registration obligation arises as of the first revenue. This is the case in Third-Party Service Providers Albania, Angola, Bahrain, Belarus, the European Union, the Republic of Korea, Saudi Arabia, Serbia, and Turkey. International standards recognize that compliance for foreign In case any country decides to consider the implementation of suppliers could be further facilitated by allowing such suppliers a threshold, it is recommended that they review and take the to appoint a third-party service provider to act on their behalf in following key policy aspects into consideration: carrying out certain procedures, such as submitting returns. This could be especially helpful for small and medium enterprises • Neutrality. The potential effects of a threshold on the and businesses that are faced with multijurisdictional competitive position of domestic and foreign suppliers. obligations. Similar advantages may be recognized for tax authorities, because such specialized service providers are • Simplification. The potential reduction of compliance likely to improve the quality of compliance by foreign suppliers costs for foreign businesses, particularly for SMEs (for with their VAT/GST obligations. which the costs of foreign registrations may be prohibitive in light of their low sales volumes) and for foreign suppliers The functions of such third-party service providers in VAT/ who may not have a sufficient level of trade within the GST compliance can range from purely administrative tasks, taxing jurisdiction. such as VAT/GST calculation and remittance, return filing, and recordkeeping to assuming full responsibility for the foreign • The impact on the efficiency and effectiveness of supplier´s obligations abroad. The involvement of specialized the tax administration. This includes the possible third-party service providers may be particularly beneficial reduction of administrative costs for tax authorities that in reducing compliance burdens and administrative costs, result from removing the need to pursue the collection of particularly when they can support VAT/GST compliance for potentially large numbers of small tax payments, and the their business clients in multiple jurisdictions from one location. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 21 The rapid development of technology has made such services • Consulting with the business community is necessary for increasingly accessible for businesses that make supplies tax authorities to acquire a thorough understanding of abroad, including SMEs. digital platforms´ capabilities to fulfill VAT/GST obligations as tax agents, in light of the functions performed by these Intermediaries as Tax Agents platforms without creating disproportionate compliance and administrative burdens. • It is important to provide clear and easily accessible information, preferably online, of the indicators that allow Intermediaries (including digital platforms and online digital platforms to be considered as tax agents. marketplaces) that are in some way involved in the digital supply chain could play an important role in collecting and A crucial element is the taxing point—that is, the time at which accounting for VAT/GST on behalf of foreign suppliers; indeed, the digital platform is required to account for VAT/GST on the they are already playing an important role in some cases. supplies carried out through its platform for which it has VAT/ This often involves intermediaries supporting compliance with GST liability, which must be clearly defined. A practical solution registration-based collection regimes, where foreign legal is to define the taxing point at the time at which the payment entities acting as intermediaries for the provision of services has been accepted or authorized by or on behalf of the in electronic form to individuals in the market territory are underlying supplier, which does not necessarily mean that the considered as tax agents and are therefore assigned the actual money transfer has been made. Moreover, it should not obligation to correctly calculate the VAT/GST, withhold VAT/ matter whether the digital platform (that is, the intermediary) GST from the payment made to the foreign digital supplier, and is operated by a resident or by a nonresident of the market make the payment of such VAT/GST to the tax authorities. jurisdiction given the intangible nature of electronic services. Therefore, it is recommended to analyze the tax treatment of As regards a digital platform´s capability to comply with VAT/ resident intermediaries in the provision of electronic services. GST obligations as tax agent, it is reasonable to assume that the intermediary will be in a position to comply with these obligations if the platform holds or has access to sufficient References and accurate information, and if the platform has the means to collect the VAT/GST on the supply. Bearing these two key requirements in mind, tax authorities should develop specific This appendix draws substantially on the work developed guidance on the digital platforms that they consider to be by the OECD and contained in the following reports, which within the scope of such a regime, which could be achieved provide much greater detail and analysis of the issues laid by reference to the functions performed by digital platforms out. that are indicative of these platforms´ capabilities to comply with VAT/GST obligations as tax agents. Therefore, it is OECD (Organisation for Economic Co-operation and recommended that countries develop and set indicators for the Development). 2015. Addressing the Tax Challenges of eligibility of intermediaries (digital platforms) as tax agents, and the Digital Economy, Action 1—2015 Final Report, OECD/ in so doing, take into consideration the following broader policy G20 Base Erosion and Profit Shifting Project. Paris: OECD. aspects: http://dx.doi.org/10.1787/9789264241046-en. • Any indicators for the eligibility of digital platforms to serve OECD (Organisation for Economic Co-operation and as tax agent should be based on functions rather than on Development). 2017. International VAT/GST Guidelines. types of platforms or business models, since it is likely to be Paris: OECD. http://dx.doi.org/10.1787/9789264271401-en. more future-proof and to encourage greater consistency in the tax treatment of platforms performing similar functions OECD (Organisation for Economic Co-operation and irrespective of the business and delivery models used. Development). 2017. Mechanisms for the Effective • Tax authorities could apply hierarchy rules to address Collection of VAT/GST Where the Supplier Is Not Located in cases in which more than one digital platform in a supply the Jurisdiction of Taxation. Paris: OECD. http://www.oecd. chain is eligible as tax agent. org/tax/tax-policy/mechanisms-for-the-effective-collection-of- • Any approach for defining digital platforms´ eligibility to VAT-GST.pdf. serve as tax agents should be reviewed regularly in light of technological and commercial developments to ensure OECD (Organisation for Economic Co-operation their efficiency and effectiveness. and Development). 2018. Tax Challenges Arising EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 22 from Digitalization—Interim Report 2018: Inclusive OECD (Organisation for Economic Co-operation and Framework on BEPS. Paris: OECD. http://dx.doi. Development). 2020. “Model Rules for Reporting by org/10.1787/9789264293083-en. Platform Operators with Respect to Sellers in the Sharing and Gig Economy.” Public Consultation Document, OECD, OECD (Organisation for Economic Co-operation and Paris, February 19–March 20. https://www.oecd.org/tax/ Development). 2019. The Role of Digital Platforms in the exchange-of-tax-information/public-consultation-document- Collection of VAT/GST on Online Sales. Paris: OECD. www. model-rules-reporting-platform-operators-with-respect-sellers- oecd.org/tax/consumption/the-role-of-digital-platforms-in-the- sharing-gig-economy.pdf. collection-of-vat-gst-on-online-sales.pdf. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 23 >>> Appendix B: Receipt Management Model for Revenue Administrations Introduction Methodology and Data Requirements An effective monitoring of short-term tax revenue collections • In any given month, annual tax receipts for the fiscal year represents one of the most important contributions of revenue can be expressed as the sum of two parts: (a) actual administrations for annual fiscal management and budget revenues collected up to the month for which receipt data purposes.6 For this purpose, proper monitoring systems fed are available and (b) forecasted receipts for each of the by updated databases are necessary to properly measure remaining months of the fiscal year. actual versus expected revenue collection. This function • To project the second part of monthly receipts, the model becomes of utmost importance when unanticipated economic takes into consideration the actual growth of year-to-date shocks threaten to downsize tax receipts in the short term, tax collections as compared with that of the same period undermining initial fiscal and budget baseline assumptions. in the previous fiscal year and the projected growth of tax base proxies (such as GDP, private consumption, or The receipt management model is proposed as a functional tool imports). to monitor and project short-term receipts from major taxes for • The general form of the monthly tax receipt of fiscal year, a close monitoring of tax collection by revenue administrations. y, is as follows: It uses past seasonal tax collection patterns on monthly basis to predict collections in the following fiscal year, adjusted for forecasting parameters such as expected real growth of tax bases from underlying macroeconomic variables, inflation, and changes in effective tax rates. For monitoring purposes, the model provides estimated tax receipts for each month to (1) date during the current fiscal year, and projected receipts for each month over the remainder of the fiscal year once real collection is observed. where Ty : Annual tax receipts for the fiscal year y. Ta,y : Actual monthly tax receipts in fiscal From a cash management perspective, the receipt year y, where tax collection data is model represents a simple yet functional tool for revenue available. administrations and fiscal authorities to monitor short-term tax Ba,y−1: Actual monthly tax base in fiscal year receipts, enabling more accurate predictions of fiscal year-end y−1. revenue collection, allowing fiscal authorities to make timely m : Number of months up to which actual policy responses to address the effects of tax receipt shortfalls tax receipts data in fiscal year y are due to unanticipated external shocks or other factors. available. δ : Growth factor. τi,y : Proposed average tax rate in month i of fiscal year y defined as the ratio of tax revenues to the tax base. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 24 τa,y−1 : Actual average tax rate in month i of • The growth factor, δ, can be measured by a weighted fiscal year y−1 defined as the ratio of average of two growth factors: tax revenues to the tax base. η : User defined elasticity of the tax base (a) the expected growth rate of tax base proxies (such with respect to changes in the tax as GDP) in the current fiscal year; and rate. This is the assumed elasticity (b) the actual growth of year-to-date receipts in the defined as the percentage change in current fiscal year over that of the same months in the tax base when effective tax rate is the previous fiscal year. changed by 1 percent. This is a strong assumption and could be calibrated; • The weight for the first growth factor is the fraction of details are explained below. the number of months in a fiscal year for which no tax collection data are available. • Since last year’s tax base is equal to the actual tax • The weight for the second growth factor is the remaining collection divided by the effective average tax rate, fraction. equation (1) can be rewritten as follows: • If the weight for the first growth factor is α, then the weight for the second growth factor is (1−α). Therefore, (2) (5) or where g : Expected growth of a tax base proxy (such as GDP, private consumption, or imports) for the current fiscal year. (3) • Generally, the factor g is estimated based on nominal values. Doing so captures both the price effect and the underlying real change in the value of the tax base. In • From equation (3), we find that at any given month i, in the excise tax, however, real values should be used because current fiscal year y, the general form of the monthly tax excise tax is usually a unit tax; the effect of the change in receipt forecasting model is as follows: price level is not accounted for in the change in tax base. • The second term in equation (5) represents the growth rate of actual monthly receipts in the current fiscal year over that of the same period in the previous fiscal year. • The weight α can be calculated as (1−m/12), and it varies linearly from 1 (when no tax receipt data are available for any month in the current fiscal year) to 0 (when tax receipt data are available for all of the months in the current fiscal (4) year). • The term (τi,y / τa,y−1 )1+η in equation (4) represents the If the actual tax receipt data for month i is available, then Ti,y ratio of the current year’s average tax rate over the previous is equal to the actual tax receipts. Otherwise, Ti,y is projected year’s effective tax rate for the same month. Effective tax using the previous year’s actual receipts for the same month, rate for a particular month is defined as actual tax receipts multiplied by a growth factor and adjusted by a user-defined divided by the effective tax base for that month. If there elasticity, η, to capture behavioral effects if there were policy were no tax policy changes which affected both tax rate changes during the fiscal year which modified the effective and tax base during the fiscal year, this ratio would be average tax rate. equal to 1. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 25 • If some policy changes (for example. rate structures modified or new exemptions introduced) take place in a given month, the effective average tax rate ratio should (6) be estimated using other source information through microsimulation or structural adjustment techniques. Alternatively, this ratio can be calibrated by comparing the • The effective growth factor would become (1+δ) times actual collection against projection results. 0.95. This adjusted growth factor multiplied by the actual • Initially, the user-defined elasticity of the tax base with monthly receipts in the previous fiscal year generates the respect to changes in the tax rate, η, is suggested to be forecast revenues for the corresponding months of the set to zero. Under this condition, it is assumed that a 1 current fiscal year. percent increase or decrease in the effective average tax rate would increase or decrease the tax revenue by the Data Requirements and Likely same rate. However, the tax base will not change with changes in tax rate in the short run. Over time, as more Sources actual tax receipt data become available, this elasticity— as well as the tax base proxy growth rate—should be calibrated by comparing the actual and projected tax • Actual monthly receipt data for the type of tax under receipt figures. consideration: Respective tax department. • For illustrative purposes, let’s assume that the effective • Information for projection of GDP growth or other tax base average tax rate in July 1999 is lowered by 5 percent from proxy (such as private consumption or imports) growth: that of 1998, because the government introduced new General statistics office; national accounts. tax exemptions. Let’s also assume that the elasticity of • Assumptions like user-defined elasticity (that is, elasticity the tax base with respect to the tax rate, η, is –0.05. This of tax base with respect to tax rates) and adjustment implies that the growth factor, (1+δ), in equation (4) would coefficient capturing the effects of monthly discretionary be adjusted downward by approximately 5 percent, since: changes: Discussion within the respective tax department. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 26