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Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International

Document Type

Article

Publication Date

11-12-2010

Publisher

Boston University School of Law

Language

en-US

Abstract

Tradable services – VoIP termination services, mobile minutes, software as a service (SaaS), or almost any service bought or sold in the “cloud” – are a distinct class of taxable supplies. These service-based supplies both resemble and differ fundamentally from goods. They also differ from services that are consumed-on-purchase (consumed services).

Tradable services are designed from the beginning for re-sale. They are hybrid supplies that behave commercially like goods, but have functional attributes that make them hard to distinguish from servicesgenerally. When determining the place of supply/ place of taxation for these kinds of supplies, their hybrid character presents difficulties. These difficulties are a doorway for fraud in some VAT/GST regimes.

Tradable services are not defined, distinguished or otherwise identified as a class of supplies in any VAT/GST. Jurisdictions that adopt the EU VAT as a model have more of a problem with this omission than do those modeled after the New Zealand GST. Under EU rules tradable services are highly vulnerable to both (a) missing trader intra-community (MTIC) fraud, and (b) missing trader extra-community (MTEC) fraud. In fact, MTEC fraud is unique to tradable services, and to the EU rules. MTEC cannot arise under the New Zealand GST.

In jurisdictions where missing trader fraud in tradable services is a problem, two approaches can be taken to prevent it. The jurisdiction could either: (a) adopt a statutory design solution. This would require that a clear definition of tradable services be added to the law and that these services be treated as a discrete class of services to which New Zealand-type place of supply/place of taxation rules would apply. The alternative is to (b) adopt a technology-based administrative solution without a major (substantive) tax law change. Theleading solutions in this area are the VAT Locator Number (VLN) system and the certification of tax software proposal offered under the D-VAT.

Considered only within the EU, options are more limited. The reason is that MTIC fraud thrives in goods as well as tradable services in the EU. Within the EU one of the technology-based solutions (broadly applied either to (a) all transactions within a vulnerable market, or (b) throughout the entire VAT/GST system) is preferable.

Comments

Published as: "VAT Fraud: The Tradable Services Problem," 61 Tax Notes International 217 (Jan 17, 2011).

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