Annex I. GST Treatment of Real Estate in Small Tourist-Dependent Countries
Annex II. Design Issues for B2C Taxation of Imported Services
This Appendix discusses a number of technical issues concerning the legislative design for the taxation of remote services. Sample legislation is provided at the end of this Appendix for the GST taxation of remote services and electronically ordered goods. The sample legislation is provided for guidance only and any actual legislation developed will need to be consistent with the overall design and structure of the GSTA.
Aslam, Aqib, and Alpa Shah. 2017. “Taxation and the Peer-to-Peer Economy.” In: Sanjeev Gupta, Michael Keen, Alpa Shah, and Geneviève Verdier (eds.), Digital Revolutions in Public Finance. International Monetary Fund, Washington, DC.
Benedek, D., De Mooij, R.A., Keen, M. and others, 2020. Varieties of VAT pass through. International Tax and Public Finance 27, 890–930.
Brondolo, John, and Mark Konza. 2021. “Administering the Value-Added Tax on Imported Digital Services and Low-Value Imported Goods.” IMF Technical Notes and Manuals, Washington, DC.
Hebous, S., Burns, L., and Norregaard, J., 2019, Maldives—Reform Options to Strengthen Tax Policy. Technical Assistance Report, IMF. Washington DC.
Hebous, S., and Burns, L., 2020, Maldives—Income Taxation: Recent Progress and Prospective Improvement. Technical Assistance Report, IMF. Washington DC.
Hebous, S., Seguin, M., Vernon, N., 2021. Maldives—Estimating Tax Expenditures. Technical Assistance Report, IMF. Washington DC.
Organisation for Economic Co-operation and Development (OECD). 2020. “Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy.” Paris.
The GST was imposed at a rate of 3.5 percent from its commencement in October 2011, and then increased to 6 percent from 1 January 2012. From January 2013 the GST rate on tourism was increased to 8 percent and then to 12 percent from 1 November 2014.
Using a weighted average GST rate of 8.8 percent for the whole economy. Focusing more narrowly only on GGST collection at a 6 percent rate, the measured C-efficiency for the Maldives would be 0.7, still higher than most peers.
Maldives consists of 1,192 islands spread across 26 atolls. Approximately 200 islands are inhabited; a further 100 are designated ’resort islands’, each consisting of only one resort per island.
For cross-country comparative purposes, these terms are used interchangeably in the report.
At the extreme, Israel regards tourism as service exports for tax purposes, rather than as final consumption by foreigners in Israel; since export supplies are zero-rated, it therefore zero-rates most tourism services entirely. See also Corthay and Loeprick (2010) for a discussion of tourism taxation challenges in developing countries.
The mission is only aware of one such case at present, in Aruba. Fiji used to have a tax system that was effectively a higher tax on the tourist sector. The GST rate was the same as for the non-tourism sector, but an additional Services Turnover Tax was applied to goods and services mostly consumed by tourists. This effectively increased the rate of tax applying to the tourism sector. The Services Turnover Tax was abolished in 2020, partly in response to the impact of COVID on Fiji’s tourism sector.
This has some parallel with international experience applying higher sectoral VAT rates as a second-best rent tax in the telecom sector in Argentina, Brazil, Jamaica, and Mauritania.
The SAARC countries include Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. Afghanistan does not have a VAT, while Bhutan is intending to introduce a VAT later in 2022.
For a discussion of the elasticity of tourism, including ’high-end’ tourism, see Laframboise et al (2014), which discusses these issues in relation to tourism in the Caribbean.
Tourism Land Rent Regulation 2010/R-20.
Section 22(b) of the GSTA
Regulations 104 and 104-1
The value of tax expenditures does not include the cost of non-compliance, which can be estimated using a separate VAT Gap Analysis.
There is room to make education and healthcare exemptions more narrowly defined in the Maldives, by excluding private service provision, as well as certain elective healthcare procedures (e.g., aesthetic interventions). However, at present the mission considers there is greater value in prioritizing rationalization of exemptions and zero-rating in other areas, both from a social and revenue perspective.
See United Nations Guidelines on the Tax Treatment of Government-to-Government Aid Projects, April 2021 available at: https://www.un.org/development/desa/financing/sites/www.un.org.development.desa.financing/files/2021-04/g-to-g-web.pdf.
A timeshare is a contractual agreement under which a person is granted a right to occupy accommodation for a specified number of days per year (e.g., 14 days) with the right granted for a specified period of years.
For a further discussion of the distributional aspects of a VAT, see ’The VAT Experience in LIDCs’ in Macroeconomic Developments and Prospects in Low Income Developing Countries—2019, December 2019, IMF Policy Paper.
Further improvement in the depth and breadth of coverage of social protection programs in the Maldives in parallel with GST exemption rationalization would be critical to mitigate any regressive impact from the reforms.
In Indonesia and Singapore, for example, e-commerce sales grew by 30-50 percent in 2020 alone, some of the fastest rates in the world.
Applying the 12 percent TGST rate to mobility and travel services and the 6 percent GGST rate to everything else. We assume 100 percent of transactions of digital media content, 10 percent of all e-commerce transactions, 5 percent of digital advertising, and 15 percent of e-services, mobility and travel services captured by Statista are provided by unregistered remote suppliers to final consumers and/or unregistered resident entities. E-commerce includes B2C sale of physical goods via a digital channel; e-services capture sales of services and digital goods (event ticket reservation, dating, food delivery, etc) with an online checkout process; digital media captures spending on audiovisual media contents and applications distributed online; digital advertising captures advertisement spending for online channels.
Another option used in Latin America, and also in the Maldives’ region, such as Bangladesh and Vietnam, involves requiring financial intermediaries (e.g., banks and payment service providers) to withhold GST on consumers’ payments to foreign businesses, but such an alternative is considered more limited in scope and difficult to operate particularly as it assumes that the only amounts paid into the account are for taxable supplies. Further, this may be difficult to apply in the Maldives context because of the dual rate structure.
For examples of simplified registration processes see: Australia, https://www.ato.gov.au/Business/International-tax-for-business/Non-resident-businesses-and-GST/Simplified-GST-registration/; Norway, https://www.skatteetaten.no/en/business-and-organisation/vat-and-duties/vat/foreign/e-commerce-voec/electronic-services/.
These rules are discussed in the OECD’s International VAT/GST Guidelines: https://www.oecd.org/ctp/international-vat-gst-guidelines-9789264271401-en.htm.
Some countries (e.g., Indonesia) initially also listed particular companies in scope rather than activities, which brings its own challenges. While the idea of targeting just a few large players initially may help address concerns on administrative burdens created by the new rules, it comes with the challenge of identifying relevant companies and creates distortions between included and excluded suppliers.
Section 79(kk)(1)(ii) of the ITA
Though some make a distinction between the terms (depending on the platform’s direct involvement in the final stage of the transaction), this report uses the terms electronic marketplace and platform interchangeably.
Based on an average daily rate of USD 132 per night and barely over 500 current listings, the mission estimates the potential added GST revenue from starting to tax existing Airbnb hosts in the Maldives is minute at present (only about 0.01 percent of GDP). However, estimates from other small tourism dependent countries with a larger presence of online marketplaces for vacation homes go up to 0.3 percent of GDP, suggesting this potential could grow over time as these types of platforms expand their presence in the country.
Law No: 31/79 (Maldivian Import Export Act).
Including Australia in 2018, New Zealand 2019, Norway 2020, and EU members in 2021.
Based on guest information collected through the green tax form.
Based on the relative size of the online segments of the travel, tourism and mobility services surveyed by Statista worldwide, adjusted for the absolute size of the Maldivian tourism sector, and assuming an offshore seller markup of 5 percent.
The Australian rules for GST on sales of Australian accommodation by offshore sellers are illustrated by examples at: https://www.ato.gov.au/Business/GST/In-detail/Your-industry/Travel-and-tourism/GST-on-sales-of-Australian-accommodation-by-offshore-sellers/
As an evolving issue, there is still significant international disparity in the treatment of booking fees related to accommodation services in each jurisdiction charged by a foreign platform to an overseas consumer. As of 2021, many countries (including Australia, Singapore, Japan, the EU, etc) do not apply domestic VAT to such fees unless the customer resides in their jurisdiction, as they are considered to be services consumed overseas. In contrast, Mexico, South Korea, and Malaysia do apply domestic VAT to booking fees paid by overseas consumers upon booking accommodation located in their respective jurisdictions.
The number of total active GST taxpayer identification numbers have increased from 2,474 in 2011 to 15,623 in 2021.
Section 55(a)(1) and (2) of the GSTA.
Note the rate recommended here is slightly lower than that in Hebous and others, as the latter was based on hypothetical higher personal income tax rates and lower personal income tax brackets than those that were ultimately introduced in 2020. Given current BPT and GGST (TGST) rates, a domestic (tourism) company with a 10 percent taxable profit margin and 15 percent value-added in sales would break-even at a 2.4 (3.3) percent rate. Applying the same rate to all sectors, and to dissuade currently registered small taxpayers from switching to the presumptive regime after an increase in the registration threshold unless truly encumbered by compliance costs, the mission recommends a 2-3 percent range.
Understood to be individuals exercising activities regulated by professional bodies, on the basis of special skills.
See IMF (2021a) for an overview of best practices in management of VAT refunds.
A partnership is a contractual relationship that exists between two or more persons carrying on business for joint profit. An unincorporated joint venture is usually structured so that the participants share output rather than profit. If they do share profit, then the relationship is a partnership, which are usually registered for GST as a separate entity.
Section 84 of the TAA
Section 12 of the GSTA
Section 28(a)(1) of the GSTA requires tax returns to be filed by the 28th day following the end of the taxable period (calendar month or quarter).
Section 28(a)(2) (the granting of an extension of time to file a tax return) and section 30 (the presumption of authority).
Where a vacation property has been previously occupied for more than two years, focusing on whether input tax credits have been claimed is preferable to a purpose test in determining whether a sale of residential property should be a taxable supply. It would be difficult for the tax administrator to verify whether the use of the property was primarily commercial with all rentals at arms-length (i.e., the property has been operated like a hotel) and relatively easier to examine the history of input tax credit claims.
The GST deferral regime should not affect the payment of customs duties, charges and excise taxes. If desired, these taxes and charges could be independently relieved under separate rules in the relevant laws.
Section 62(a), although the Minister of Finance may determine that TGST is payable in MVR (section 62(b)).