Today’s blog is written by Mr. Atiq Ur Rehman, International VAT Consultant and Senior Manager Taxation and Corporate Advisory Services.
Atiq Sahib is currently working on an International Assignment in Kingdom of Saudi Arabia. Atiq Sahib has brilliantly articulated a genuine complex topic in a most simple and commonly understandable way. Please read this blog and provide your valued comments.
Cross Border Consumption Taxes on Goods and Services
Consumption taxes also referred to as indirect taxes are present in majority of the countries of the world. More than 165 countries of the world have indirect taxation (Value Added Tax, Sales Tax etc) as their source of revenue. Indirect taxes contribute heavily to the national exchequer in developing countries.
Consumption taxes seems simple as the entire burden of taxes is passed on to the end consumer who ends up paying higher price. However the scenario becomes a little complex when an international transaction is involved i.e. goods or services are manufactured or generated in one country while they are consumed in another country. As per the general principle of consumption taxes the country where these goods or services are consumed has the right to collect consumption tax on these goods or services.
In most of the taxation systems around the world the exports of goods and services are subject to zero percent tax rate. This entices business operating in the country to export as many goods and services as possible and earn foreign exchange for the country. This in turns increases the foreign currency reserves of the country and improves the balance of payments for the country.
The modalities for businesses when exporting goods and services can be divided into two main items namely goods and services.
The international taxation of goods is relatively simple as the country exporting the goods zero rates them while the country importing the goods taxes them at the point of entry into the country (Ports). Once the goods enter the country after payment of initial consumption taxes, the general principle of supply chain taxation apply and the tax is passed on and on until it is recovered in total from the end consumer.
The case of services is however complex as there is no physical barriers in rendition of services. Since services are an intangible. These can be rendered from anywhere in the world especially in the current age of latest technology and high speed interfaces.
However some entities or persons were using the cover of services for money laundering and tax evasion causing a nightmare for the administrative bodies. A solution was required to identify genuine transaction of services versus those cover up transactions.
The taxation bodies around the world developed a taxation method called “Reverse Charge Mechanism”. It can be defined as a method of consumption taxation in which a taxable customer is responsible for payment of consumption taxes on the transaction to his government unlike the usual mechanism of consumption taxes where the supplier is responsible for payment of taxes. Under the reverse charge mechanism the customer should be registered with the local tax collection body and should calculate and pay tax on the amount of services it has consumed from outside the country. The amount of such tax paid may or may not be claimed as an input tax depending upon the nature of services received and local legislation.
Atiq Ur Rehman