Taxation of e-commerce as challenge for budget of AlbaniaALTax
Historically goods were physical, the production, distribution and consumption of these goods was easily taxable. Physical goods were produced at a manufacturing plant, shipped off to wholesalers and boxed on retailers’ shelves, with the final consumer walking away with a paid for (and taxed) product. Tax collection was in the hands of the retailers. The retailer charges the consumer VAT or sales tax and then remits this to the government.
Globalization makes the cross-border movements in goods, capital and labour less transparent allowing companies and individuals to exploit tax differences between countries. The Internet eliminates borders between countries making businesses virtually invisible. Any taxation solutions adopted should be efficient, simple, flexible and have neutral effect.
Consumption taxes, or sales taxes, are intended to be borne by consumers, and are dependent upon retailers acting as tax collectors. If not properly designed, however, sales taxes may impose an economic burden on business. Sellers bear the cost of determining the applicable tax rate, which may depend on the type of product and the location and type of customer; preparing invoices according to tax rules; collecting tax; filing and remitting tax; and maintaining tax records. If the tax is assessed incorrectly, the seller (or its third- party agent) typically will be held responsible for any shortfall and will not be able to reclaim it from the customer.
Intangible products include products such as music, software and services such as medical or legal consultations, that are “produced” at one location and “consumed” somewhere else. It is generally accepted that tax rules for sale of intangible products and services should be same, as those of other goods, that the means of delivery should not govern tax treatment.
Such “technologically neutral” taxation would not treat the sale of a paperback book any differently than the sale of a digitized book.
On the other hand, determining which products are functionally equivalent is a tricky proposition. Is the text displayed on computer screen really the same thing as a printed book?
Is a movie downloaded to computer hard drive really the same thing as a video rental?
The answer is not obvious. If digitized products are treated as services, then further guidance is needed to specify which source of supply rules for services shall govern because there are many different rules for different types of services. Moreover, most of the countries do not have comprehensive taxation to services and few intangible products aside from basic utilities, which are subject to special taxes.
E-commerce provides a qualitatively different challenge to tax regimes than has appeared before.
The erosion of the consumption tax base resulting from e-commerce has caused considerable concern also in Albania, given the steep growth of e-commerce in the past years and predictions for the next years. Consumption taxes are borne by the consumer and collected by the seller; different rules apply depending on the product or service sold, the location of consumer and seller, and the type of consumer (business or individual). With e-commerce, the number of foreign on-line suppliers, who are often subject to different taxation rules, has increased considerably.
Hence, differentiated Internet taxation rules could have a significant impact on consumers’ purchasing behavior, shifting from domestic to foreign suppliers.
This raises several problems for tax authorities.
First, it leads to the gradual elimination of intermediaries, such as wholesalers or local retailers, who in the past have been critical for identifying taxpayers, especially private consumers. Second, foreign suppliers may be tax-exempted, whereas local suppliers are normally required to charge value added tax (VAT) or sales taxes. Third, direct orders from foreign suppliers could substantially increase the number of low-value shipments of physical goods to individual customers. These low-value packages now fall under so-called de minimis relief from customs duties and taxes in many countries, basically to balance the cost of collection and the amount of tax due. A substantial increase in these shipments as a result of e-commerce (where foreign suppliers replace domestic ones) could pose an additional challenge to tax as well as customs authorities.
The Albania derives a large proportion of government tax revenue from consumption taxes on domestic goods and services (mainly VAT). In addition, VAT extra charges contribute 35 per cent to the state budget. The main concern is the increasing import of digital content and services from outside, which would be exempted from VAT payments in Albania.
It is not surprising, therefore, that the issue of consumption taxes has received most attention, in particular, because budget feels very strongly about maintaining VAT duties and is likely to modify tax rules in a way that will ensure a continuation of VAT contributions, rather than lowering or eliminating them.
Imported goods from outside are subject to (import duties and) VAT of the importing country. Sales inside country are subject to the VAT of the receiving country in the case of business-to-consumer trade. Businesses selling to businesses are also subject of VAT. Exports to other countries are zero-rated.
Services differ according to the type of services traded. In the case of information (currently the majority of e-services), imports from outside to Albanian consumers are not subject to customs duties and are VAT-exempted. Sales from nonresident businesses to Albanian businesses are subject to self-accounted VAT at the domestic rate (a so-called reverse charge). The service suppliers inside Albania are required to charge VAT.
The challenges to tax authorities that arise from e-commerce therefore lie in nonresident supplies of e-services to Albanian consumers that are non-businesses. Under current tax law, these are exempted from VAT for purchases under 22 Euro of value, while at the same time their share is increasing, in direct competition with Albanian suppliers who are subject to VAT payments.
To avoid double taxation, some multi- or bilateral agreements have to be adopted on where consumption taxes are to be collected: in the country where the supplier is established, the country where the customer is established or the country of consumption. A proposal by the EU to require non-EU suppliers to register for and charge VAT in a EU country would not favor providers from developing countries, thus placing an additional burden on their e-commerce exports.
No matter what changes to existing tax legislation are adopted, without a certain degree of international cooperation and harmonization of existing tax rules, the expansion of e-commerce will be hampered. Traditionally, tax collection has been based on the belief that individual countries have the right to set their own tax rules and little international cooperation and few multilateral agreements have been put in place. Unless this approach changes and countries agree to enter into multilateral tax agreements, tax competition will intensify with e-commerce.