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28 April 2014 | Will Green
The OECD has agreed the first ever international framework for applying VAT rules to cross-border transactions.
The new guidelines seek to ensure “VAT neutrality” on the sale of goods and simplify the way businesses buy services from abroad.
While at present various states use different rules to determine who has the right to tax a transaction, under the framework VAT on services should only be levied in the country of the recipient of the service.
Rintaro Tamaki, OECD deputy secretary-general, said: “These guidelines provide standards on the neutrality of the VAT in international trade and on the coherent application of VAT to cross-border trade between businesses.
“This represents a very significant step towards a more coherent and consistent application of VATs to international trade and reduced risks of double taxation and non-taxation.”
The move was endorsed at the OECD’s Global Forum on VAT in Japan, attended by representatives of 86 countries.
The forum agreed measures to promote VAT neutrality on goods by ensuring the tax targets private consumption and not businesses so “it has a neutral effect on production and levels the playing field for domestic and foreign businesses in cross-border trade”.
The OECD also said measures, such as reduced rates on certain goods, to alleviate the “regressive” nature of VAT, which “can place a disproportionate burden on poorer households who spend a large part of their income on necessities”, were costly because they benefited all consumers. It instead recommended direct cash transfers to low income households through income tax or benefits.
An OECD spokesman said the guidelines were not legally binding but offered a set of "soft law principles for the application of the tax to cross-border trade that countries are encouraged to follow".