• Tuesday, Aug 16, 2022
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OP-ED: VAT payments by foreign tech giants

  • Published at 10:16 pm September 2nd, 2021
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Residents are making payments with VAT to non-resident service providers

Many global companies having no physical operations in Bangladesh are reported to have been registered under value added tax (VAT) regulations with concerned authority.

The companies are Google, Facebook, Amazon and the like.

Reports also indicate that they have started making payments to Government coffers. It is really good news.

VAT is an indirect tax meaning that the taxpayer is not making payment directly, rather the tax is paid by consumers to sellers while purchasing goods which are embedded with VAT.

There are two types of consumers - natural persons (individuals) and legal persons (firms, companies, institutions and so on).

Whatever the type is VAT is included in product price but there are many products which are out of VAT officially. 

In case of individual purchase, sellers are to collect VAT and make payments to government exchequer periodically as prescribed in the regulations. Individuals are not aware of what happens at that end. On the other hand, there are institutional purchases for which purchasers deduct VAT at source from the bill amounts of sellers.

The amount so deducted is deposited to the government exchequer by buyers themselves.

As we all know that Bangladesh exports goods abroad. The price negotiated with foreign buyers is of different types like FOB price, CFR price, FCA price and so on.

The goods are not embedded with VAT.

If such tax of similar type is applicable, the same will be collected at assessment point at destination. Exporters in Bangladesh do not receive these types of payments, so no question of refund arises. 

But global giants are reported to have remitted VAT to Bangladesh.

What is indicated by this payment is nothing but service purchases by residents are included with VAT.

As such, residents are making payments with VAT to non-resident service providers.

It is not known whether any mechanism exists to identify the receivable amounts from global giants and types of service provided.

If no mechanism is available, collection of VAT depends on the compliance framework of non-resident remitters.

In the same way as said with regards to export trade, goods import is executed at CFR, FOB or such other prices which do not include VAT.

Importers in Bangladesh make payments while releasing the shipment from customs.

In this context, no issue arises from VAT payments by foreign suppliers.

But payments of VAT by non-resident service providers to Bangladesh by remittances indicate that service payments include VAT which is being remitted by service receipts.

Bangladesh is making payments of VAT against services which are sent back by non-residents.

This seems to be a risky game.

As such, there comes a question whether it is mandatory to pay VAT with service prices to non-resident service providers. It is known from an article of a VAT expert that there is a reverse charge mechanism (RCM). Under the mechanism, VAT can be made by consumers. 

Tax deduction 

With regards to outward remittances on account of service payments, remitters need to make deductions of taxes at sources from the bill value of foreign service providers.

The payments made in Bangladesh by foreign service providers can be claimed as rebate by service providers in their countries in accordance with double taxation avoidance agreements.

Outward remittances are executed through banking windows.

As per rules of the central bank, banks can execute transactions for which general authorization is available.

Otherwise, specific permission from the central bank is required.

In what cases regarding the formalities of remittance approval, banks need to be ensured of deduction of source taxes applicable as per tax regulations.

In case of non-deduction by remitters, banks need to deduct such tax before affecting remittances.

The remittance formalities undergo different stages which may ensure proper deduction of taxes. 

VAT collection

Collection of VAT by sellers as per regulations is an age-old system since sellers work as a stakeholder.

It is rarely possible by individuals other than corporate entities to make VAT payments against their consumption.

There are different supervisory units to look after the deductions of VAT and payment thereon.

But realization of VAT is not easy from foreign service providers against their income remitted from Bangladesh with VAT.

It is embedded with challenges.

They may be categorized as – whether service price is properly included with applicable VAT, how their return is considered to be justified since their financial activities are reported to concerned authorities in different jurisdictions, safeguards in case of non-payment by non-resident service providers and many more.

Under four modes, cross border services are traded – more 1: cross border service delivery, mode 2: consumption abroad, mode 3: commercial presence for service delivery, and mode 4: physical presence of natural persons.

Mode 1 is as good as cross border trading in goods. For export transactions, exporters ship goods after completion of customs formalities.

The transactions are recorded in the form of issuance of ‘Bill of Export’.

On the other hand, importers release goods through customs formalities for which ‘Bill of Entry’ is issued as assessment orders.

Based on the assessment, importers make payments of customs duty, advance income tax, VAT and other regulatory levies applicable for the particular imports.

This way of VAT collection is very simple.

Importers are making payments to exporters abroad based on the underlying arrangements there.

The payments include price of goods if priced on FOB basis, price of goods with freight charges if priced on CFR basis and others depending on terms used for the transactions.

The system does not allow prices to include VAT to be realized later from exporters abroad.

Taking this view in consideration, there comes a question: what is the necessity to allow service importers to make payment abroad with VAT.

Payments abroad with VAT are in real sense excess remittances.

Central bank can clarify whether such excess is permissible or not. In a simple sense, it should not be permissible.

On the other hand, Payments including VAT are involved in the cost of funds lost by the country.

VAT authority may also lose payments due to cross border payment settlement for which there is every possibility to face exchange loss for conversion of foreign currencies into local currency, expenses involved in repatriation by way for different nostro accounts, etc.

As such, whether it is justified regarding remittances with VAT and receipts back the same after losing a few amounts in the name of different expenses.

The foreign exchange regulatory regime allows specific current account transactions within indicative limits.

Beyond the limit, specific authorization is required from the central bank.

The transactions are executed mostly by banking channels and a few by international card channels.

Whatever the channels are used and authorization is required, banks are well aware of the transactions based on documentation.

They can easily identify the transactions with VAT or without VAT.

For each transaction, banks can ensure VAT payments through remitters.

Without payment evidence, they can show inability to execute transactions.

In respect of payments by cards, an automatic system should be developed to determine VAT amount. Based on the determination, banks can make payments on behalf of customers out of their card limit or credit limit or by debit from their deposit accounts. This proposition will ensure realization of VAT against every payment.

Just simple operational modalities need to be devised by VAT authority.

Accordingly, the central bank should disseminate the instructions to all banks for compliance including reporting procedures.

The proposition may work for which authorities concerned can think of it.

 

The author works in the development sector and can be reached at [email protected]