GST and ecommerce - from traditional to marketplace consumption via the inernet

Please note that the views expressed in this paper are the personal views of the author and not necessarily the views of PwC

GST and ecommerce from

traditional to marketplace

consumption via the internetSuzi Russell-

Abstract

This paper provides a brief overviewof the Base Erosion and Profit Shifting (BEPS)progress in

Australia as it relates to the digital economy, plus the complexities of taxing imported services

supplied via an internet marketplace platform from a GST perspective.

All legal references are to the A NewTaxSystem (Goods and Services Tax)Act 1999

The growth in online spending

In Australia, online retail spending increased to $16.6 billion AUD annually for the year to January

20151 and beat the growth in spending in traditional shop-front retail stores by approximately

4.3%.2 On 30th March 2015, the Australian Government released its Tax discussion paper (Re: think

Better tax system, better Australia). At 8.2, there is a recognition of the pressures being placed on

the system from online spending:

tionally and domestically that the strong growthin online

retail spending by consumers will continue to increase imports of lowvalue goods, services and

intangibles directly over the internet. Without reform, this would increase foregone GST revenue

and affect the competitiveness of

The exclusion from the GST base for imported services reflects howdifficult it is to identify the

supplier and recipient in a transaction because it has not occurred physically and, unlike imported

1 National Australia Bank, NAB Online Retail Sales Index in depth report (January 2015) (http://business.nab.com.au/wp-content/uploads/2015/03/NAB-Online-Retail-Sales-Index_in-depth-report-January-20151.pdf)2 Ibid


Globally, some commentators predict worldwide business to consumer ( B2C ) ecommerce sales to

increase by 17.7% this year to reach $1.77 trillion USD in sales.3 Alongside the rapid growth in

online spending, we are seeing the proliferation of innovative sales platforms and collaborative

consumption models with a noticeable departure from the traditional online merchant-2-

consumer model to an increasing reliance on marketplace models to introduce merchants to

customers and vice versa.

The advent of the online marketplace

Marketplaces by definition are places, real or virtual, where goods and services are exchanged. We

have had marketplaces almost as long as humans have had cities, but over the last few years,

advances in information technology and identity verification have increased their proliferation

sharing e the collaborative e

you can convince enough buyers and sellers to use your platform.

The online marketplace is a virtual platform (akin to an online shopping mall) where merchants can

display and sell their products to an enormous range of customers. The internet gives merchants

instant access to a global customer base without the need to incur significant selling costs. The

easiest way for merchants to convert advertising dollars to sales is to do this is via a marketplace

which acts as a funnel to potential buyers. There are examples of online marketplaces everywhere

and a range of platforms being used to provide marketplaces - from social media sites to search

engines to group buying sites. Three basic marketplace models prevail, which are examined in more

detail below.

Digital and the BEPS action plan

Fifteen specific actions were action plan4 with the

first set of measures and reports released in September 2014.5 The aim of these action points is to:

give countries the tools they need to ensure that profits are taxed where economic activities

generating the profits are performed and where value is created, while at the same time give

business greater certainty by reducing disputes over the application of international taxrules, and

standardising requirements. 6

Action 1 of the BEPS Action Plan focuses on addressing the tax challenges of the digital economy

and possible options to address these challenges. In September 2014, the OECD produced a report

on the background and approach to addressing the tax challenges of a digital economy, which noted

that:

Because the digital economy is increasingly becoming the economy itself, it would be difficult, if

not impossible, to ring-fence the digital economy from the rest of the economy for tax

purposes he digital economy is in a continuous state of evolution and possible future

developments need to be monitored to evaluate their impact on taxsystems

3 eMarketer, Global B2C Ecommerce Sales to hit $ 1.5 Trillion this year driven by Growth in emerging markets: Asia Pacific leapfrogsNort largest regional ecommerce market (February 3 2014) (http://www.emarketer.com/Article/Global-B2C-Ecommerce-Sales-Hit-15-Trillion-This-Year-Driven-by-Growth-Emerging-Markets/1010575)4 OECD, Action Plan on Base Erosion and Profit Shifting (2013) (http://www.oecd.org/ctp/BEPSActionPlan.pdf)5 OECD, About BEPS (April 2015) (http://www.oecd.org/tax/beps-about.htm)6 Ibid


While the digital economy does not generate unique BEPS issues, some of its key features

exacerbate BEPS risks hese BEPS risks are being addressed in the context of the BEPS Project,

whichwill align taxation witheconomic activities and value creation. 7

Relevantly for this paper, the report also noted that:

the challenges related to nexus, data and characterisation overlap with each other to a

certain extent;

evolving ways of carrying on business raise questions about whether current nexus rules

continue to be appropriate;

increasing reliance on data collection and analysis, and the growing importance of multi-

sided business models raise questions about valuation of data, nexus, and profit attribution,

as well as characterisation;

the development of new business models raises questions regarding characterisation of

income; and

cross-border trade in goods, services and intangibles creates challenges for VAT collection,

particularly where such products are acquired by private consumers from suppliers abroad.

With respect to consumption-based taxes generally (such as VAT and GST), a first set of guidelines

was released after the second meeting of the OECD Global Forum on VAT in December 2014. These

guidelines have been created with the aim of ensuring VAT neutrality and implementing destination

An extension of these

guidelines is scheduled for completion in 2015 and aims to capture the cross-border sales of services

in the B2C industry.8

Overseas measures

In recognising the global trend in internet sales and the leakage of tax arising from the cross-border

nature of ecommerce to private consumers, many overseas countries have recently introduced

special taxing provisions for B2C ecommerce sales, for example:

South Africa 1 June 2014

EU 1 January 2015

South Korea 1 July 2015

Norway - 1 July 2015

Japan on 1 October 2015

Some of these jurisdictions impose the GST/VAT obligation on the overseas supplier; others have

adopted a simplified measure taxing the intermediary online platform.

Australia

Against this backdrop, the Australian government has faced increasing pressure to bring cross-

border online consumption into the GST net. Just this month (9th April 2015), the Treasurer, Joe

Hockey, announced at a Q&A Session following the Council on Federal Financial Relations Meeting,

that imported intangibles would

Treasurer announced:

7 OECD/G20 Base Erosion and Profit Shifting Project Executive Summaries 2014 Deliverables (http://www.oecd.org/ctp/beps-2014-deliverables-executive-summaries.pdf)8 OECD (2014), Consumption Tax Trends 2014: VAT/GST and excise rates, trends and policy issues, OECD Publishing, Paris. Page 10(http://dx.doi.org/10.1787/ctt-2014-en)


should be charged at the source, so a company providing intangible services into Australia, such

as media services or so on, wherever they are located they should charge GST on those services. So

there are some obvious ones of more recent times engaged in that, and without naming companies,

I think you can work them out. And there are a number of those companies that are prepared to

charge the GST on the services that they are putting into Australia, but they want to knowthat

they are not at a competitive disadvantage. Now, the States agreed in principle that we should

move in that regard. I have offered to work as quickly as possible withthem to introduce

legislation to address that in relation to intangibles. If you were to apply it to goods under $1,000

for low-value thresholds, that would probably be the appropriate system to followas well, because

there are nowfewer providers of goods into Australia than there might have been two or three

years ago. Therefore, you can identify those major providers of goods and therefore ask them to

charge GST as well, so that there is competitive neutrality. I see those things as integrity measures

The legislation mentioned by the Treasurer is yet to emerge, but it seems clear that significant

moves are afoot.

The online marketplace - principal vs agent vs advertiser

As mentioned above, a critical piece of the online puzzle is the role of the marketplace bringing

buyers and sellers together.

Examining the contractual role of the online selling platform (for both goods and services) is key to

determining who in the supply chain is liable for remitting the GST. In a cross-border context this

becomes even more relevant, as the legal status of the online marketplace can be determinative of

whether any GST is payable in the first place.

Below, I have shown the three basic marketplace models diagrammatically.

The Principal model


The Agency model

The Marketplace Advertiser model

The models above demonstrate how the contractual relationship between the parties can drive the

underlying GST treatment of the transactions.

heart of the GST legislation and, as the models above demonstrate, they are also at the heart of the

issue concerning the taxation of ecommerce transactions. The last model shows the gap .

The relevant excerpt from the GST Act (section 9-25) is reproduced here for ease of reference.


Supplies connected with the indirect tax zone

Supplies of goods wholly within the indirect taxzone

(1)A supply of goods is connected withthe indirect taxzone if the goods are delivered, or made

available, in the indirect taxzone to the recipient of the supply.

Supplies of goods from the indirect taxzone

(2)A supply of goods that involves the goods being removed from the indirect taxzone is

connected withthe indirect taxzone.

Supplies of goods to the indirect taxzone

(3)A supply of goods that involves the goods being brought to the indirect taxzone is

connected withthe indirect taxzone if the supplier either:

a) imports the goods into the indirect taxzone;or

b) installs or assembles the

Supplies of anything else

(5)A supply of anything other than goods or real property is connected withthe indirect tax

zone if:

a) the thing is done in the indirect taxzone;or

b) the supplier makes the supply throughan enterprise that the supplier carries on in

the indirect taxzone;or

c) all of the following apply:

(i) neither paragraph(a)nor (b)applies in respect of the thing;

(ii) the thing is a right or option to acquire another thing;

(iii) the supply of the other thing would be connected withthe indirect taxzone.

When enterprises are carried on in the indirect taxzone

(6)An enterprise is carried on in the indirect taxzone if the enterprise is carried on through:

(a) a permanent establishment (as defined in subsection 6(1)of the Income Tax

Assessment Act 1936 )in the indirect taxzone;or

(b) a place that would be sucha permanent establishment if paragraph(e), (f)or (g)of

The supply of goods via the marketplace

In the above marketplace models, the GST analysis with respect to goods is fairly straightforward.

Regardless of the relationship between the parties, the goods will usually be taxable if supplied

within Australia (with the GST paid by the principal or by the resident agent if the seller is a non-

resident). The goods will be free of GST and duty if they are direct shipped to the customer from

overseas with a value of less than $1,000 (the low-value import threshold). The direct shipment

method of supplying goods can be used in any of the above models. The only practicality is that it

may not be cost effective for a supplier to direct ship every supply of goods to individual customers

and not bring product into the country in bulk.


The supply of services and intangibles via the marketplace

These cross-border supplies are the ones under scrutiny at the moment imports of video

streaming, games, movies, software, apps and other digital content are where the gaps in GST

collections start to appear.

The relevant

supplied through an enterprise carried on in Australia by the supplier.

Under the cross-border above, the parties simply operate as if the online

marketplace is the

difference between the resale price to the customer and the intermediary s purchase price from the

merchant. The GST treatment under this model is straightforward, in that the first supply is outside

here nor supplied through an enterprise carried on here. The second

supply is taxable as it is either done here or supplied through an enterprise carried on here.

For the agency model above, where the Australian online marketplace binds the principal by its

actions, then any supplies made through the marketplace entity as agent bring Division 57 of the

GST Act into play. Where digital content is provided to Australian customers

Australian agent, then that supply will be taxable and the GST will be remitted to the Australian

The intermediary marketplace (no agency)

It is the latter, intermediary , model which results in the loss of GST. This is effectively a direct sale

of digital content into the Australian market with the online marketplace simply providing an

advertising/introductory platform (and often a payment collection and remittance role) rather than

an agency role. It is no different in effect, to the overseas digital content providers selling direct to

Australian parties and paying no GST.

Where the supply is done in an intermediary model

The digital services are usually considered non-resident supplier has no

presence in Australia so regardless of the characteristics of the intangible, its creation, design and

performance

supply is one best characterised as rights, then assuming that the last on-line action necessary to

make the contract binding during the sign-up process

notification) is performed outside Australia, then the rights would not be connected with Australia

under the first limb of the test (per paragraph 76 of GSTR 2000/31 cted with

Is there a supply being made through an enterprise (the intermediary ) carried on

in Australia?

In this case, the answer to the second limb of the test has to be no, given the limited role of the

intermediary. It is simply advertising a non-resident intangibles on-line.

Here, it is worth remembering that the GST enterprise test applies an extended version of the

income tax definition of permanent establishment as its basis for whether or not the supplier carries

on an enterprise in Australia (through which it makes its supply).


The ATO guidance on the presence of servers in Australia for the non- s supply generally

comes from an income tax angle. The ATO in Tax Determination TD 2005/2 considers the issue of

whether a resident of a country with which Australia has a Tax Treaty, may have a permanent

establishment solely from the sale of trading stock through an internet website hosted by an

The ATO refers to the OECD Model and OECD Commentary in respect of whether computer

equipment in ecommerce operations can constitute permanent establishments. In this respect, the

ATO states the following (at paragraphs 7 and 8):

on, that equipment. A website is considered to be a combination of computer software and

electronic data. The distinction between the website and the server on whichthe website is stored is

important when, as in the case under consideration, the enterprise that operates the server is

different from the enterprise that carries on business throughthe website. The server on whicha

whichhas that server at its disposal. However, the fact that an

enterprise has a certain amount of space on the server of an ISP allocated for it to use to store

software and data does not result in the server being at the disposal of the enterprise. The

enterprise is not considered to have acquired a place of business by virtue of the hosting

arrangements.

Where an ISP is only in the business of providing access to the internet it operates as a mere

conduit for the business activities of the non-resident enterprise. The agreement withthe ISP

would not typically specify whichserver the website will be hosted on and the ISP may change the

server used at their discretion. The space used for a specific website on the server of the ISP is not

at the disposal of the entity that owns the website. Thus, the enterprise does not have a fixed place

of business in Aust

The ATO concluded in TD 2005/2 that, where the sole presence of an enterprise in Australia is a

website hosted by an Australian ISP, the enterprise does not have a permanent establishment in

Australia. Paragraphs 10 and 11 state:

establishment where a person, other than an agent of an independent status, acts on behalf of an

enterprise and habitually exercises an authority to substantially negotiate or conclude contracts

on behalf of the enterprise. However, under Article 5(6)an enterprise will not be deemed to have a

permanent establishment in Australia merely because that enterprise carries on business in

Australia througha broker, general commission agent or any other agent of independent status,

where the agent is acting in the ordinary course of their business.

In most cases, an ISP will not constitute a permanent establishment by virtue of it being a

dependent agent, because the ISP is not an agent of the enterprise and would lack the authority to

conclude, and would not regularly conclude contracts on behalf of the non-resident enterprise. The

taxtreaties. Furthermore, the ISP could constitute an independent agent acting in the ordinary

course of their business if, amongst other things, they host websites for a number of different


The marketplace model is even more remote than the examples from TD 2005/2 as it is not typically

the website of the overseas merchant through which the supplies are made; it is the website of the

intermediary. So, following the ATO s interpretation above that a website of the merchant hosted in

Australia is not sufficient to create a presence in Australia, then it would seem unlikely that a

marketplace website (owned and hosted by third parties) could constitute a permanent

establishment for the non-resident merchant.

Notwithstanding the above analysis, it is worth mentioning here that the extended definition of

permanent establishment (which applies for GST purposes) includes an independent agent, which

suggests that the

a permanent establishment for the non-resident supplier for GST purposes.

Gift vouchers for cross-border intangibles

significant volume of cross-

borer digital services are provided to customers as a result of gift cards bought in Australia.

The standard gift voucher attribution provisions (Division 100 of the GST Act) apply where the gift

cards are genuine face value vouchers. Subparagraph 100-

-25(2) as any article or facility

supplied for the primary purpose of enabling the holder to:

use, on a prepaid basis, telephone or like services supplied by a supplier of

telecommunication supplies; or

make, on a prepaid basis, acquisitions that are facilitated by using telephone or like

services supplied by a supplier of telecommunication supplies.

The Explanatory Memorandum to the TaxLaws Amendment (2006 Measures No. 1)Bill 2006

notes that:

4.15 messaging services

(short message service (SMS)or multimedia messaging service (MMS)), text, graphics,

images, sound, video, information, software content and data transmission services

It seems that gift cards for cross-border intangibles should often meet the criteria of a face value

voucher including a prepaid phone card. If so, subsection 100-5(1) of the GST Act confirms that the

activities distributing the cards are ignored for GST purposes and only the redemption of the cards

for services/intangibles triggers the GST liability (if there is any).

It is less clear cut, however, where the gift card does not meet the definition of a face value voucher

including a prepaid phone card (which seems to be the prevailing ATO view). In these

circumstances, the card would seem to evidence a right to a future supply of something that is most

likely to be outside the scope of GST. In the absence of a specific taxing provision to make the

supply of the right follow the treatment of the ultimate supply for which the voucher is to be

redeemed (similar to subsection 9-30(1)(b) and 9-30(2)(b) of the GST Act), then this supply appears

to be taxable (as it is a supply for consideration to a customer in Australia). This seems to be an

unintended outcome even if it is a way of inadvertently taxing these types of gift vouchers!


Possible way forward

It is difficult to see how the issue of taxing cross-border intangibles can be remedied quickly. Joe

Probably on the

some of the previously mooted cross-border GST changes, that they are difficult to effect and often

lapse with a change in government. Could that happen here?

My view is that cross-border intangibles may be brought into the GST net using one or more of the

suggested measures below:

1. this would be a fundamental change to the

way the GST applies, however, it seems obvious that this part of the GST Act will require

expansion. Perhaps through an expansion of the definition of the enterprise being carried

on in Australia test at subsection 9-25(6) of the GST Act through which the supply is made,

specific to the supply of

digital rights and services.

It is worthwhile also considering whether there is scope for the ATO s interpretation of the

GST permanent establishment test to broaden without the need for a law change.

2. Expanding the reachof Division 57of the GST Act similar to the Norway VAT mechanism

for non-resident suppliers of electronic services, Division 57 could be broadened so that

intermediaries (who are not acting in as significant a capacity as an agent) could collect the

GST on behalf of the non-

expanded. This is related to (abandoned) Proposal 7 from the Board of Ta

Discussion Paper on cross-border transactions issued on 15 February 2011.

Where there is no intermediary in Australia (apart from the internet service provider

through which the customer accesses the non-resident digital supply), then it may be

appropriate to collect GST from the non-resident supplier.

3. Utilising the special telecommunication supplies rules in Division 85 of the GST Act- section

85-5 of the GST Act states:

A telecommunication supply is connected withthe indirect taxzone if the recipientof the supply will effectively use or enjoy the supply in the indirect taxzone.

(2) However, subsection (1)does not apply to a telecommunication supply, or atelecommunication supply included in a class of telecommunication supplies, if:

(a) the supplier makes the supply throughan enterprise that is notcarried on in the indirect taxzone;and

(b) the Commissioner determines that collection of GST on that supply orclass of supplies would not be administratively feasible.

(3) This section has effect in addition to section 9-25 (whichis about when supplies are


This part of the GST Act already has the measures in place to tax telecommunications supplies in the

place where they are used or enjoyed (e.g. Australia). Telecommunication supplies are defined

broadly and would, arguably, cover the majority of the digital supplies mentioned in this paper.

Subsection 85-5(2) could be amended so that the tax is imposed on the non-resident supplier where

the supplies are used or enjoyed in Australia.

Conclusion

The question for the government will be how far-reaching it wishes to be in terms of collecting GST

on cross-border digital services.

If there is a desire to collect GST on 100% of the revenue streams generated by these activities, then

the law changes will be complex and it is unlikely that there would be 100% compliance with the new

measures. However, if the goal is to get the key 50-100 taxpayers to comply with the new rules and

capture the majority of the GST leakage, then it may be easier to implement a simplified method of

GST collection similar to that already adopted in some of the countries mentioned above, where the

taxpayer community was heavily consulted before the changes and some of the GST burden falls on

the intermediary in the supply chain.

Encouraging global consistency in the law-making is key as it will assist in ensuring equality in the

taxation of cross-border intangibles and will be helpful for the ecommerce companies who will

otherwise have to design multiple systems to capture their GST and VAT liabilities on these types of

supplies around the world.

Changes are coming so watch this space!

© 2015 PricewaterhouseCoopers. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers a

partnership formed in Australia, which is a member firm of PricewaterhouseCoopers International Limited, each member

firm of which is a separate legal entity. This publication is a general summary. It is not legal or tax advice. Readers should

not act on the basis of this publication before obtaining professional advice. PricewaterhouseCoopers is not licensed to

provide financial product advice under the Corporations Act 2001 Cth). Taxation is only one of the matters that you need to

consider when making a decision on a financial product. You should consider taking advice from the holder of an Australian

Financial Services License before making a decision on a financial product.

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GST and ecommerce - from traditional to marketplace consumption via the inernet

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