Digitalization And Tax Law 2023

S. 2971. Introduction

1.1. Background

Value-added tax (“VAT”) is a multi-stage tax, aimed at taxing consumption of goods or services. A fundamental pillar of the VAT system is its credit mechanism that allows VAT registered businesses a deduction of the VAT they pay on expenses to avoid a cascading effect of the tax. Consequently, the burden of VAT falls on the final consumer. The mechanism of the VAT system works well where the VAT registered supplier and recipient reside in the same country, but poses a challenge where they are situated in different countries.

Globalization has expansively enabled international trade, alongside ensuring growth supply of digital products which has made it easier for businesses to be established in countries other than where their consumers are based. This has opened the door for establishing businesses in countries which operate a destination-based VAT system. Such systems tax goods or services in the country where they are consumed and assume that the supply will be taxed in the country of destination, but this may not always be the case. There is no standard set of VAT rules for cross-border transactions that can readily be applied internationally to eve...