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OECD Publishes International VAT Guidelines

At its meeting held in Tokyo, Japan on 17-18 April 2014 and attended by the representatives of more than 100 countries and international organisations, the Organization for Economic Coordination and Development (OECD) discussed and approved the Guidelines on certain issues of the VAT treatment of international transactions.

OECD is an organisation primarily consisting of European and North-American countries whose members include, among others, Japan, Mexico, Australia and New Zealand. The model convention of the OECD with respect to taxes on income and on capital and its Commentary is an essential point of reference in the interpretation of international treaties on the avoidance of double taxation. However, until now, OECD has not published a major technical document on value added taxation.

Instead of specific tax rules, the recently published International VAT Guidelines lay down fundamental principles and recommendations that can contribute to the implementation of the principle of VAT neutrality in international transactions. The Guidelines strongly suggest that countries should tax transactions in the country of destination rather than in the country of origin in the case of international trade in both goods and services, because the wide-spread application of this principle can ensure the avoidance of double-taxation or non-taxation and market neutrality to the fullest extent, while the rules applied by other countries would also become more transparent and less complex and administration would become more cost-efficient. These are objectives that provide advantages to both taxpayers and the tax authorities of the countries concerned as transparent and simple taxation involving low administrative costs yields higher tax revenues.

In addition to the fundamental principles, the Guidelines also provide detailed guidance on the determination of the place of supply of services, highlighted by practical examples. This chapter outlines thought-provoking solutions for the determination of the place of supply (and thus the place of taxation) of services that can be treated by legislators as recommendations or rather a common regulatory framework.

These OECD Guidelines (similarly to all other publications of the organisation) do not qualify as legislation but should rather be treated as recommendations that may, in future, help harmonise the regulations applicable to international transactions in the various member countries. As VAT is one of the most harmonised tax types within the European Union, the OECD Guidelines can be a useful tool in promoting the launch of harmonisation with third countries outside the European Union.

The full text of the Guidelines can be downloaded from this link in English.

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