New paper on the efficient collection of VAT

Date: 11 Feb 2013 Comments: 0

In an article entitled ‘Are ‘reverse charging’ and the ‘one-stop-scheme’ – efficient ways to collect VAT on digital supplies?’, published in the World Journal of VAT/GST Law, Marie Lamensch, a doctoral researcher at the Institute for European Studies, Vrije Universiteit Brussel, Belgium, considered the efficiency of the collection of VAT, particularly with regard to electronically supplied services.

In her paper, Ms Lamensch referenced the RTvat proposals as follows:

The RTvat project, which is aimed at curbing missing trader types of fraud, suggests eliminating the possibility of suppliers receiving VAT from their customers (and eventually disappearingwith it, or claiming credit without first remitting the tax due), by organising the collectionof the tax at the level of banks.

Virtually all digital supplies are paid for by electronic means. Electronic payment is therefore an essential complement to e-commerce. Transposed to the digital supply sector, the collection of VAT at the level of the banks in charge of organising online payments, as suggested under the RTvat project, would remove unimplementable collection obligations from online suppliers’ shoulders, and at last take account of the specifics of the e-marketplace. For that purpose, the existing online payment schemes could be coupled with the appropriate software which would extract the relevant data collected by banks in accordance with KYC regulations,
as follows:

  • When the customer enters his credit card details in the ‘secure payment area’ in order to proceed to payment (often using a token or similar device), his bank identifies him (status and location) with certainty, based on the data provided upon opening the account, that were verified as is required under the KYC regulations.
  • The supplier enters the transaction price, exclusive of tax, in the payment system. A software program then calculates the related amount of VAT that is due, based on the status and location data that were collected by the bank upon the account being opened.
  • The customer makes one single payment (price including tax), and the bank transfers only the net price to the supplier, retains the VAT, and wires it to the competent VAT au thorities. Reverse charging becomes unnecessary. Importantly, payments to suppliers are coupled with payment of the VAT due to the tax authorities.

As long as the payment is made by electronic means, any kind of payment device or system may be used, including intermediary payments systems like Paypal, because suppliers do not need to check customers’ credit cards details as is the case under the current system. Intermediaries simply channel the information. Likewise, the use of foreign credit cards would not create distortions either, because a bank issuing a credit card knows when the customer is a non-resident, and only this information is relevant for applying the correct tax rate. The tax is paid at the moment of the transaction, and in a completely transparent way, which also has the advantage of reducing risks of fraud. Finally, tax authorities may proceed to VAT refunds on the same day as they receive the related VAT payment, which also results in an advantage in terms of cash flow for suppliers.”

Ms Lamensch’s paper makes many good points, particularly with regard to the EU Commission’s ongoing discussions on the future of VAT and how this compares with the 1998 OECD recommendations on e-commerce.

However, it should be noted that Ms Lamensch has not fully considered RTvat’s proposal for implementing a central server based ‘gateway’ through which all electronic payments, of whatever type would flow. The consequence is that while commercial banks would remain important partners in the collection process, they are not the primary point at which due taxes are extracted – this would instead occur at the central server level, overseen by a trusted third party – in most cases, the country’s Central Bank.

If you would like to download a pdf copy of the full article, please go to

We are grateful to Hart Publishing Ltd, publishers of the World Journal of VAT/GST Law, for making this article available.

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