Tax Administrations and the control strategy of e-commerce operations

The Covid-19 pandemic has produced an exponential increase of e-commerce[1], with new business models to market goods and services, and also a profound change in the consumption habits of the population with various forms of electronic payments, such as wallets, virtual, virtual currencies, among others.

Given this, the objective of this comment is to try to analyze what should be the control strategy by the tax administrations (TAs) so that these operations pay the corresponding taxes in each country, this not only to ensure tax compliance of those who are currently generating more income, but also to avoid unfair competition in the market.

I believe that the first task of the TAs is to know this type of operations, i.e. to identify massively the agents that have seen their e-commerce activities increased through the use of digital platforms and social networks.

This is because today not only large companies are marketing by these means, but also small and medium-sized companies.

In principle, it would seem that the e-commerce of goods would be easier to identify and control by TAs than that of services, due to its traceability.

In this regard, there is what is called the “physical circuit” relating to the transfer of goods where we can inquire about the subjects in charge of logistics and its transport.

On the other hand, with regard to the “financial circuit” of the operation, that is to say, how it has been paid, a basic control is that of monitoring the banking transactions of a taxpayer, which often do not coincide with the income declared to the TAs.

However, I warn that sometimes it is not so simple to follow because today there are electronic payment means with sophisticated financial systems, mediating or not cryptocurrencies, to which many TAs do not have access to information.

At this point it seems important to me to mention what Ignacio González García[2] states, that because there are more and more means of payment, regulatory changes and/or agreements with payment service Providers (PSPs), Payment Processors (PPs) and financial institutions should be promoted so that they can keep and supply identification data, account numbers, amounts paid in a country.

In addition, this identification task is not simple because companies can have a website without performing electronic commerce automatically, that is, do not have a cart, or can also receive orders or reservations on the Internet, without  being clear if that this is electronic commerce or not.

Often there are one or more intermediate subjects between the seller or service provider and the buyers or users. These subjects can range from digital platforms (marketplaces) created to market, to affiliates that are subjects that put in contact the sellers or service providers that advertise on various web pages with consumers who, by viewing such advertisements, want to buy these products.

Another problem is the offshoring, since a seller or provider can use a server located in another country to make the offer of their products and their sales or even pretend and simulate misleadingly that the server is in another country.

Today, several TAs use modern technology to perform this task, but as we see the difficulties are not few when identifying the subjects, and also often the data obtained from social networks and other media do not allow to be crossed with some subject.

In Spain, the plan of control of the AEAT 2020[3] contemplates the analysis of the information, such as the Internet research, and obtaining information related to new models of economic activity, especially in e-commerce, which will develop different ways of obtaining information, to obtain the amount, nature, and the identification of the parties that are part in an operation.

The European Commission recently launched a new customs union action plan[4] which specifically addresses the issue of new business models and e-commerce and proposes actions such as a new Data Analysis Centre, strengthening the obligation of payment service providers and online sales platforms to help combat cross-border tax fraud and a one-stop-shop environment characterised by extensive cooperation in information exchange and risk assessment.

For its part, the OECD has recently published a new global tax reporting framework[5], which requires digital platforms to collect information on the income earned by those who offer accommodation, transport and personal services through platforms and to report the information to the TAs.

In some countries, such as Argentina, VAT withholding and profit regimes have been established for these types of transactions.[6]  However, there may be operations that circumvent these regimes, when they receive payments through virtual currencies or other electronic means of payment not covered.

Other control strategies used by many countries include tax machines, limitations on cash transactions, and of course the obligation to issue electronic invoices.

The Internal Revenue Service of Chile[7] is carrying out surveillance actions especially aimed at frequent importers and recurring sellers who use platforms or Marketplace, and who do not have activities started or may be under-declaring VAT. Initially, more than 3,400 regular importing taxpayers have already been identified, with a high volume of transactions on platforms already indicated.

At this point, a recently published reference document is the CIAT manual of Risk Management[8],  which states that the challenge is that inspectors need to update themselves and acquire knowledge about e-commerce, for which it is advisable to develop specialized guides.

The necessary tools must be acquired to obtain information from the Internet, debug it, identify it and integrate it into databases.

It is recommended to set up a group of people to carry out these works, whose profile is a technician specialized in Information Systems.

Basically you need a “Crawler“, a tool that travels the network in search of information, a” Scrapper, a tool that reads the contents found on webpages, such as phones or prices, recognizes and downloads them, a programming layer, and a system of consolidation in repositories.

The information downloaded from the Internet must be uploaded to the databases associated with the rest of the information of those taxpayers, to perform the risk analysis.

The manual also states that information should be available in addition to the traditionally required information. For example:

  • Information provided by banks on operations carried out through virtual terminals.
  • Information obtained by periodic requirements to the franchisors of the transport companies.
  • Information about existing advertisements on the Internet, for example, of rentals obtained with own tools on the Internet.

  • Information of the affiliates obtained by request or by international data exchanges.
  • Information on transfers ordered by payment gateways obtained from banking.

In this regard, Spain has established the obligation to submit an Information Statement for real estate rental platforms in which information must be provided about the landlords, the operation, and the property. However, a recent court ruling has put an end to the regime for the time being.[9]

I understand that TAs should enhance or exploit the data mining offered by e-commerce, also including a strategy of identifying transactions through virtual wallets and other digital payment and investment tools, to achieve control of operations and movements of funds through these tools and above all enhance internal collaboration with other agencies in the country, and also international collaboration.

This is because we must keep in mind that many of these operations can have consequences, not only tax implications but could be linked to crimes of money laundering, drug trafficking, and corruption.

Obviously, in many cases the control strategies of these operations require regulatory changes, very good information management, intelligent control plans and training of human resources with new digital skills.

In short, today more than ever it is vital that TAs obtain information about the actors and their economic activities, as well as the regulatory capacity, to determine their obligations and the management capacity to efficiently implement legislation.

This is not only to be able to verify that all e-commerce operations pay the taxes in force in each country but also for the sake of equality and equity with other forms of traditional commerce, thus avoiding unfair competition in the market.

[1] The White Paper on electronic commerce defined it as the purchase and sale of products and services through electronic systems, mainly the Internet.
[2] Ignacio Gonzalez Garcia the control of electronic commerce and the collaborative economy. He refers to Digital Wallets (Android Pay, Google Wallet, ApplePay, PayPal); Mobile Payments ( Mobile Wallets, Mobile Network Operator (MNO) Payments; Criptocurrencies and virtual currencies (Amazon Coins, Facebook Credits); Crypto-Currencies (Ripple, Stellar, Bitcoin), which have been categorized as (Non-Bank/Third-party Alternative Payments).
[6] In Argentina since November 2019 there is a VAT and profit withholding regime for payments made by merchants, lessor or service providers who use the electronic services of payments and/or collections by account and order of third parties, including through the use of any mobile device or virtual electronic support. RG 4621 (AFIP).
[8] Manual sobre Gestión de Riesgos de Incumplimiento para Administraciones Tributarias / 2020 (Soon available in English)

Disclaimer. Readers are informed that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group the author might be associated with, nor to the Executive Secretariat of CIAT. The author is also responsible for the precision and accuracy of data and sources.

1 comment

  1. Antonio Yesca Reply

    El comercio electrónico también incorpora características propias de la venta directa tradicional. La relación con el cliente se realiza a distancia en todo momento. Hacemos llegar la oferta a los potenciales clientes y recibimos sus órdenes de compra independientemente de donde se encuentren.

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