Austaxpolicy blog

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The ‘Netflix Tax’: What can we learn from the EU-MOSS scheme?
9 January 2017, by Teck Chi Wong

Australia’s Goods and Services Tax (GST) will be extended to all imports of digital goods and services by consumers in Australia from 1 July 2017. Despite the inclusion of digital goods and services in the GST, questions remain about how effective the inclusion will be in practice. In particular, to what extent can the Australian Government compel or acquire cooperation from non-resident enterprises to comply and collect the so-called ‘Netflix tax’?

Taxing the digital economy has never been easy. The development of the internet has increased cross-border exchanges. There is less need for firms to maintain a physical presence in the countries where their customers are located. Many goods and services can now be acquired and delivered online, and this may limit the state’s capability to capture tax on these goods and services.

States generally lack the power, and administrative capability, to execute tax claims outside their jurisdictional borders. There is little pressure for non-resident enterprises to comply because the likelihood of facing sanctions is slim. Neither is there an incentive to comply if the registration and payment processes impose significant red tape on the business.

This circumstance can be best understood through Margaret Levi’s conception of ‘quasi-voluntary compliance’. Levi argues that compliance is best achieved when taxpayers are provoked to comply through a calculated decision rather than coercion, thereby reducing the costs of enforcement. But coercion still plays an important role, ensuring that non-compliance is penalised, and also helping taxpayers to establish a reasonable expectation that others will also comply.

The digital economy is one area where the coercive power of the state is severely impaired. This is not to say that the state has no control over internet. But, due to the freedom principle of the internet, many governments have refrained from, or at least sought to avoid being seen to be constraining the digital sphere. Only a few countries like China and North Korea openly do so through a national cyber firewall. Therefore, it is virtually impossible for states to track and block digital supplies delivered via the internet and digital suppliers, who have no presence within the country, are more likely to resist the collection of GST.

In order to create an environment of ‘quasi-voluntary compliance’ among the non-resident suppliers, the Australian Government has introduced some complementary measures, which would come into force together with the extension of GST to digital imports.

First, in the case of intangible supplies made through an electronic distribution platform such as Apple’s iTunes and Google’s Play store, the responsibility for GST liability may be shifted to the operator of the platform, rather than the supplier. It is more likely that these operators, usually the large internet and technology companies, will be registered in Australia for GST or other tax purposes. The state can therefore create a direct tax relationship with these corporations and coerce them into compliance.

Read the full article at Austaxpolicy blog.

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