Generally, VAT applies the destination principle to determine tax jurisdiction regarding cross-border transactions. In other words, goods and services should be taxed in the country where they are used, consumed or enjoyed. Goods and services consumed outside a certain territory must, therefore, leave that territory untaxed.
This also allows these exported goods and services to compete on equal terms in foreign markets with locally produced goods and services. Exported goods are, generally, untaxed under a VAT through the zero-rating arrangement, which is a legal mechanism to achieve full VAT relief of export sales.
The export sale is subject to 0 per cent VAT, and the exporter maintains full eligibility to input-VAT credit in relation to the exported goods. Through this arrangement, exported goods leave the country of origin free of tax and should be taxed on importation in the country of destination.
The physical verification of goods, however, depends on the presence of a customs agency. That will be the case at the outer borders of a state and verification of the traffic of goods with third countries will be possible, but no border controls generally exist, nor should they exist, at interstate borders within a federal state, or a Customs Union, such as the EU or, indeed, the GCC.
Due to the absence of fiscal borders within a Customs Union, taxing intra-state sales of goods, that is the sale of goods from one member state to another, is not possible. So, no import declaration is filed as a basis for the assessment of VAT. In the EU, this has been resolved for business-to-business transaction by making the recipient of the goods liable for the tax, and since the recipient will already be registered for VAT, it can simple report the acquisition in its tax return. The GCC VAT Framework Agreement takes a similar approach and makes the recipient liable through the so-called reverse charge mechanism, which in essence shifts the tax liability from the supplier to the recipient.
That system works satisfactory in the EU for business-to-business transactions but cannot work when goods are sold directly to private consumers, since they will not be registered for VAT. The EU has solved this by allowing businesses to charge the VAT of the country where they are located, unless total sales in a year exceed a certain threshold at which point the seller will have to register in the country of consumption and collect local VAT.
In other words, below the threshold the origin principle, and above the threshold the destination principle is applied.
Because the flow of goods can be physically followed, it is relatively simple to determine whether a good is exported. There exists no straightforwardness regarding export services because of their intangible nature. There are no transportation or comparable document or Designing rules on VAT jurisdiction for services has solved this. The country where a service is deemed to take place on the basis of these rules has jurisdiction for VAT purposes.
Generally, the destination principle is honoured when the service is sourced to the country where the recipient of the service is located. Regarding the procurement of services by businesses, this has been realised in most counties by applying the reverse charge rule, but not as concerns services rendered to private consumers. With some exceptions, most services rendered to private consumers in other countries are taxed with the VAT applicable in the origin country. With the emergence of e-commerce and the Internet, fiscal coordination is crucial in preventing double or non-taxation of cross-border services to consumers.
Dr Robert F van Brederode is of counsel to Horwath Mak Ghazali in Oman. He is a tax lawyer, practitioner and scholar with over 30 years of experience in global VAT. He served Crowe Horwath International as the global indirect tax leader, and was the national practice leader of the US member firm. Robert is the author of dozens of academic journal articles and 8 books. He can be reached at Robert.firstname.lastname@example.org.
Dr Robert F van Brederode