Complete Report

The complete background and feedback can be accessed and read via OECD International VAT/GST Guidelines Draft Commentary On The International VAT Neutrality.

Invitation For Comments

This discussion draft has been prepared as part of the work of the Working Party No. 9 on Consumption Taxes of the Committee on Fiscal Affairs on the International VAT/GST Guidelines, with significant input from its Technical Advisory Group (TAG) made up of academics and representatives from governments and business.

This document contains the draft of the Commentary on the International VAT Neutrality Guidelines that were approved by the Committee on Fiscal Affairs in June 2011 after public consultation. This draft Commentary should not be considered in isolation but as part of the OECD International VAT/GST Guidelines applicable to the cross-border trade in services and intangibles.

The attention of participants is drawn to the fact that this document reflects work in progress and that one or another country may not be in full agreement with one or more of its provisions. Nevertheless, the Committee on Fiscal Affairs believes that it will be extremely helpful to have input from all interested stakeholders. It should not be considered, at this stage, as final.



This commentary on the International VAT Neutrality Guidelines is part of the OECD International VAT/GST Guidelines (the Guidelines), which are currently being developed by the Committee on Fiscal Affairs of the OECD. The Guidelines provide rules for the application of VAT to cross-border trade.

They are based on the destination principle, which provides that internationally traded services and intangibles should be taxed according to the rules of the jurisdiction of consumption.

The Guidelines specify that, for internationally traded business-to-business supplies of services and intangibles, the application of this principle is, in most cases, best achieved by allocating the taxing rights to the jurisdiction in which the customer is located (the “Main Rule”). As a consequence of the Main Rule, such supplies are not taxed in the supplier's jurisdiction but are instead taxed on the same basis and with the same rates as local supplies in the jurisdiction of the customer (if VAT is applicable in that jurisdiction).

The Guidelines recommend that the customer should be liable to account for any tax due through the reverse-charge mechanism where that is consistent with the overall design of the national consumption tax system. In order to ensure the neutrality of the tax, the Guidelines also provide that businesses should in principle not bear the burden of VAT itself. In cross-border trade VAT neutrality is achieved relatively simply through the use of the Main Rule when the business customer that receives an imported service or intangible has a full right to deduct the input tax.

In addition, even when the right to deduction of the business customer is limited, if that limitation is the same for imported services and intangibles as it would be for domestic supplies, neutrality may also be achieved.

However, it is recognised that the application of the Main Rule will not be possible in all situations. Under certain conditions, some supplies could be taxed in a jurisdiction other than that where the business customer is located.As a result, the foreign business customer may incur VAT in jurisdictions where it cannot recover the input tax by way of deduction through the same procedures as domestic businesses.

This may happen in situations where specific place of taxation rules are applied as an exception to the Main Rule.

In such situations, alternative ways of ensuring neutrality should be available. The overall neutrality of VAT on cross-border trade would be ensured by the application of the Main Rule to the widest extent possible and a consistent use of a limited number of specific place of taxation rules, together with a range of adequate relief mechanisms.

However, in some instances, differences in the way two or more countries interpret place of taxation rules may create situations where neutrality is not achieved. This may also happen when businesses with no or limited right of deduction are involved. Further work may be needed to address such situations.


The aim of this Commentary is to provide guidance for the implementation of the International VAT Neutrality Guidelines in practice. The Guidelines are reproduced below.

Guideline 1: The burden of value added taxes themselves should not lie on taxable businesses except where explicitly provided for in legislation. Guideline 2 Businesses in similar situations carrying out similar transactions should be subject to similar levels of taxation. Guideline 3 VAT rules should be framed in such a way that they are not the primary influence on business decisions. Guideline 4 With respect to the level of taxation, foreign businesses should not be disadvantaged nor advantaged compared to domestic businesses in the jurisdiction where the tax may be due or paid. Guideline 5 To ensure foreign businesses do not incur irrecoverable VAT, governments may choose from a number of approaches. Guideline 6: Where specific administrative requirements for foreign businesses are deemed necessary, they should not create a disproportionate or inappropriate compliance burden for the businesses.

For each guideline, there is a specific commentary that is intended to illustrate or provide further details on, but not change, its provisions. The International VAT Neutrality Guidelines and this Commentary form a coherent whole. In addition, they are to be read and understood in the light of the OECD International VAT/GST Guidelines more generally.


The International VAT Neutrality Guidelines are not intended to interfere with the sovereignty of jurisdictions to apply tax rules for limiting the right to deduct input VAT or to establish specific administrative requirements for dealing with different categories of business (including foreign businesses).

However, in order to ensure neutrality, governments are encouraged to apply the General Administrative Principles approved in 2001 by the OECD Forum on Tax Administration4 (GAP001 Principles of Good Tax Administration – Practice Note), which are reproduced in Box 1 below.page5image5472page5image6168

Box 1.Guidance - Relations with Taxpayers - Revenue authorities are encouraged to:

1.1  apply tax laws in a fair, reliable and transparent manner; 1.2  outline and communicate to taxpayers their rights and obligations as well as the available complaint procedures and redress mechanisms; 1.3  consistently deliver quality information and treat inquiries, requests and appeals from taxpayers in an accurate and timely fashion; 1.4  provide an accessible and dependable information service on taxpayers rights and obligations with respect to the law; 1.5  ensure that compliance costs are kept at the minimum level necessary to achieve compliance with the tax laws; 1.6  where appropriate, give taxpayers opportunities to comment on changes to administrative policies and procedures; 1.7  use taxpayer information only to the extent permitted by law; 1.8  develop and maintain good working relationships with client groups and the wider community.


According to the International VAT Neutrality Guidelines, foreign businesses should not be disadvantaged or advantaged compared to domestic businesses. This notably means that foreign businesses should not incur irrecoverable VAT when this would constitute an unjustified discrimination compared to domestic businesses.

A number of approaches could be used for this purpose such as direct refunds to foreign businesses, refunds through a domestic registration procedure or making supplies VAT-free. Some jurisdictions5 require that the granting of refunds to foreign businesses be conditional upon similar relief being granted by the jurisdiction of the foreign business claimant.

These requirements for reciprocity generally take two forms: the requirement for formal bilateral agreements between jurisdictions or unilateral decisions to recognise jurisdictions considered as having (or not having) appropriate features in their legislation. Where jurisdictions adopt such requirements, reciprocity could only be applied between two countries that each has a VAT system.

The International VAT Neutrality Guidelines take no position on the desirability of jurisdictions adopting reciprocity requirements. However, insofar as jurisdictions choose to adopt such requirements, they should do so in a manner that minimises their impact on neutrality. Jurisdictions are therefore encouraged to treat other jurisdictions’ mechanisms designed to ensure VAT-neutral treatment for foreign businesses as satisfying reciprocity requirements where these mechanisms achieve a substantially equivalent treatment.

A substantially equivalent treatment might, for example, result from a mixture of VAT-free supply and local registration mechanisms as much as the application of a direct refund approach.


Based on the principle set out in the Guidelines on Consumption Taxation of Cross-Border Services and Intangible Property (in the context of e-commerce) and in accordance with the Ottawa Taxation Framework Conditions, where specific measures are adopted by a group of countries bound by a common legal framework for their VAT system, such measures may apply to transactions between those countries.

If this gives rise to a difference of treatment between member countries of such a group and non- member countries, and the treatment of non-member countries would not otherwise be inconsistent with the International VAT Neutrality Guidelines, that should not be regarded as being inconsistent with these Guidelines.

Read complete report: OECD International VAT/GST Guidelines Draft Commentary On The International VAT Neutrality