By Jurian Lock and Irma Mosquera
Keynote Session 3 Asian Development Bank High-Level Regional Tax Conference 4-6 November. Manila, Philippines. Slides available here
1. The digital shift: re-emergence of local production
Value Added Tax — VAT — was designed and implemented in Europe in the second half of the twentieth century, in a world shaped by industrialization. Nowadays we have countries around the world that have implement a VAT or sales tax.
At the same time these countries are facing challenges resulting from digital trade which have changed the structure of production. A new digital layer has emerged above the traditional industrial economy — one that blurs the old distinction between producer and consumer. Furthermore, digital business that can operate using technologies are now arising.
| VAT is at the crossroads, and therefore, more attention should be given by countries to the challenges of VAT not only for digital business, but for digital trade in general. And that presents a structural challenge for countries, to develop a tax on the very distinction that the digital economy is eroding. |
2. From E-commerce to taxation of digital business[1]
International organizations have dealt with e-commerce transactions from the beginning from a trade, tax, and investment perspective. The OECD has defined an e-commerce transaction as, “the sale or purchase of goods or services, conducted over computer networks by methods specifically designed for the purpose of receiving or placing of orders. The goods or services are ordered by those methods, but the payment and the ultimate delivery of the goods or services do not have to be conducted online”. [2]
At that time, the main feature was the use of the internet to purchase goods and services. Therefore, the rules applicable to these transactions considered the payment of customs duties or taxes if goods or services were paid/received abroad. The proposals at that time aimed to facilitate e-commerce.
Later on, with the development of digital technologies, it was possible to not only purchase goods/services via the internet but also to create digital business models and digital markets that resulted in 3 main features that are frequently observed in certain highly digitalized business models: (i) scale without mass; (ii) reliance on intangible assets; and (iii) data and user contributions.
The first feature makes it possible for businesses: to locate various stages of their production process across different countries, having access to consumers across the globe, and without needing any significant presence, thus “achieving operational local scale without local mass”. [3] The second and third features result in the business being able to rely on their intangible assets including intellectual property assets such as software, and algorithms supporting their platforms, websites, and (iii) to introduce in their business models, the collection and analysis of data linked to a specific user/customer, “user participation, network effects and the provision of user-generated content”.[4]
Due to these developments, the focus of governments and international organizations is no longer e-commerce, but digitalization and taxation of digital business in general.[5]
Digital business are businesses using digital technologies and can generally be divided into two types:
- Digital manufacturing. Examples: IBM,Siemens
- Automated service providers (e.g., social media platforms, search engines, online marketplaces, online content providers, intermediation platforms, among others). Examples Facebook, Google, Alibaba, Amazon, Netflix, Uber, Booking, Jumia, etc.
These companies offer their business directly either to consumers (B2C) or to businesses (B2B).
Taxation of digital business has become an issue of great concern of both governments and international organizations. A major concern is whether the current tax system allows the taxation of digital businesses and whether digital companies pay their fair share. This concern arises out of (i) the lack of physical presence or a limited presence in the country that affects the revenue of countries and (ii) the use by (mainly) digital companies of favorable tax regimes to structure their activities and to pay less taxes.
Therefore, countries are searching for solutions either multilateral (currently under discussion such as Pillar 1, UN Framework Convention Protocol 1, unilateral (digital services tax, withholding tax, or significant economic presence among others). However, these solutions represent a challenge agreement at a multilateral level, trade retaliations, complexity, etc. Therefore, other alternatives should be investigated such as VAT/GST on Digital Transactions.
With this in mind, the following part of this keynote speech will focus on the challenges of VAT in a digital era and how countries can build VAT systems for the digital economy.
3. Digital Trade and Prosumer markets: from marginal to systemic
Nowadays, people can produce locally while reaching global markets:
- A student can create an app in a basement and sell it worldwide through an app store. A craftsperson can make jewelry at home and sell it through Etsy;
- Some households now contain 3D printers, which are essentially production plants at a micro scale, and can be used to make artifacts for fun; for house-hold applications; and certainly also for the production of sellable items, think for example of model construction parts;
- And furthermore, platforms like Airbnb and Uber enable people to use private assets — a spare room, a car — as productive capital.
This new pattern mirrors pre-industrial dynamics, with production and consumption occurring again in the proximity of the household, with the exception that the value created can also be supplied to consumers globally.
With the lines between producers and consumers blurring, the term “prosumer” has be coined to denote this characterization of someone who is simultaneously producer and consumer.
Prosumer activity now appears across a wide range of sectors:
- Hospitality, via short-term accommodation platforms such as Airbnb;
- Passenger transport, via ride-hailing platforms like Uber and Lyft;
- Retail trade, through platforms such as eBay and Etsy;
- Energy, through households generating and selling electricity from solar panels;
- Media and digital content, where individuals monetize online videos or designs;
- Finance, through peer-to-peer lending and crowdfunding.
Initially, these activities were too small to matter. They fell outside VAT thresholds or formal economic definitions. But collectively, they have become macroeconomically relevant — competing directly with conventional businesses and, in the process, undermining established VAT bases.
From a governance standpoint, extending traditional VAT rules to these micro-actors is problematic. Prosumers are not firms with back offices; they are casual, often occasional market participants. Compare a hotel that fills rooms daily to a couple who rent out their guestroom once a month. Requiring the latter to register as VAT entrepreneurs, keep books, and file returns would make participation uneconomical. Thus, regulators long relied on thresholds and exemptions, assuming such cases to be negligible. Yet, as the collective volume of these activities expands, the fiscal and competitive impact can no longer be ignored.
A similar logic once justified the low-value consignment exemption for small parcels entering the EU – however, the de minimis threshold for VAT has been removed, because – while individually having negligible values, collectively, they represented billions of euros in untaxed trade. Thus, the EU abolished the de minimis threshold for VAT (for customs duties it still exists at 150 euro, but there are reform plans to abolish this too). In other countries, including also ADB Member , de minimis threshold for VAT still exists, but with different values/thresholds.
| Thus, if one considers the big picture, one can observe the emergence of a “prosumer segment” that runs across sectors and borders. The transactions are often negligible on the individual level but as a collective they cannot be ignored. And thus, the challenge is to adapt the collection models in order to effectively deal with many micro-transactions, and particularly in a cross-border context. |
4. The EU’s response: platform liability as a collection model
Faced with this challenge, the EU has bet on online platforms — the very intermediaries that enabled prosumer markets to flourish.
Ecommerce
Since 2021, platforms facilitating e-commerce have, in certain cases, been made liable for VAT collection on transactions they enable. The logic is straightforward: if buyers and sellers are too small or too dispersed to administer, shift the collection responsibility to the digital intermediaries that already process the payments and data.
ViDA
The upcoming VAT in the Digital Age (ViDA) reform extends this platform-collection model to other sectors — notably passenger transport and short-term accommodation. Under this system, it is no longer the driver or passenger, nor the homeowner or tenant, who is liable for VAT. Instead, the platform — Uber, Airbnb, or their equivalents — must charge, collect, and remit VAT on the underlying transaction.[6]
It is unsurprising that the EU turns to the platforms that created the challenge for a potential solution. They are digitally sophisticated, possess the transaction data, and operate across borders. However, whether this model will work sustainably remains an open question. Large, established platforms — Amazon, AliExpress, Airbnb, Uber — can likely comply. But there exists a vast ecosystem of smaller or lightly facilitating platforms whose business models make them structurally ill-suited to act as tax collectors. For these actors, the administrative and legal burden may be disproportionate. The long-term effects on innovation, competition, and the diversity of digital intermediation remain to be seen.
| Thus, the EU is betting on online platforms to take on the role of VAT collector, as if not the prosumer, but the platform were the vendor. |
5. To sum up where things stand….
| In short, VAT — born in the industrial age — now faces a structural test in the digital era. The economy it was built to tax has changed: production has dispersed, intermediaries have become digital, and the producer–consumer divide that made VAT efficient is eroding. The policy response — shifting liability to platforms — represents a bold experiment in adapting twentieth-century tax architecture to twenty-first-century realities. Whether this will prove sustainable, equitable, and administratively efficient is the crossroads where VAT now stands. |
6. Strategic reflections for ADB member states: the role of harmonization
For the Asian Development Bank (ADB) member countries, the European experience offers important lessons — not only in policy design, but in recognizing the new dimensions of harmonization that the digital economy demands. I will elaborate:
The EU, with its single market and common VAT framework, has pursued legal and institutional harmonization for decades. However, a more tacit but increasingly critical form of harmonization is now emerging: technical harmonization.
As digitalization expands, tax administrations face a surge in the volume, velocity, and granularity of taxable events. There are more actors, more cross-border transactions, and more low-value supplies — all at near real-time speed.
This amplifies the well-known VAT risks: missing trader fraud, underreporting, and non-reporting. In response, the EU is investing in real-time data collection, transaction-level monitoring, and pattern recognition — not just within member states, but across them. In practice, this means that harmonization is extending beyond law and policy, into IT-infrastructure: including APIs, data schemas, and interoperable IT systems.
To give a practical example of this need: one may think of VAT collection upon import. Under the conventional import collection system, VAT is collected upon entry. However, the new IOSS (Import One Stop Shop) system allows registrants to pay the due VAT periodically, while exempting the goods upon import. Akin to prepaid concert tickets, the EU customs administration(s) must then be able to distinguish parcels for which VAT is paid through the IOSS-system – preventing double taxation[7] – and those that still require payment – preventing non-taxation. Each individual parcel for which VAT is paid via the IOSS must therefore be registered in a database as ‘VAT paid’. Once the parcel arrives it should be exempted, and subsequently the status of the parcel should be changed to ‘exempted’, preventing that the VAT exemption is granted again in case the same parcel code is used again – similar to how an entry ticket should be invalidated once it is used, otherwise people could simply copy their tickets and distribute them. In the context of EU VAT, this signifies the need for technical harmonization, because each member state has to be able to cross-match against the same database.
| Thus, VAT administration is becoming more and more a data infrastructure challenge. The EU’s current trajectory points toward a centralized processing hub, enabling real-time information exchange and cross-border audit trails. This marks a profound shift: VAT coordination is evolving from a shared legal framework into a shared technological ecosystem. |
For ADB member countries, this raises several strategic considerations:
First, whether to pursue interoperability at an early stage — ensuring that digital reporting systems can communicate regionally.
Second, whether to leapfrog legacy models, moving directly to real-time data capture and analytics. Note that this does require comparable levels of IT-infrastructure.
Third, how to design governance arrangements that balance data sovereignty with the efficiency gains of shared information infrastructures. Data about one’s residents, especially tax-sensitive data is not something countries tend to share lightly. It raises questions of trust: such as pertaining to how trust might be built, institutionalized and sustained.
Returning to the platform-collection model, harmonization still remains important on the legal side. When platforms act as VAT collection agents, they often operate across multiple jurisdictions, each with different place-of-supply rules, thresholds, and definitions of liability. Without coordination, this can lead to gaps or overlaps in taxation.
For example, a platform might be deemed liable for VAT in both the country of the consumer and the country of the supplier, creating a risk of double taxation — or conversely, a non-taxation gap if each jurisdiction assumes the other will collect.
Clear and harmonized rules on which jurisdiction has taxing rights, how liabilities are allocated, and how information is exchanged are therefore essential to prevent friction and revenue loss.
Thus, for ADB member states, the strategic takeaway is twofold:
- Legal harmonization ensures predictability and avoids jurisdictional conflict in cross-border platform transactions.
- Technical harmonization ensures that digital monitoring, reporting, and enforcement mechanisms can interoperate at scale.
Both dimensions are indispensable if VAT systems are to remain effective in a digital economy characterized by speed, decentralization, and cross-border intermediation.
7. The strategic crossroads: building VAT systems for the digital economy
VAT systems across the world — including in ADB member countries — are standing at a strategic crossroads. The traditional VAT model, built for the industrial economy, relied on a limited number of large, easily identifiable firms. Today, the digital economy is disaggregated, fast-moving, and data-intensive. Production and consumption increasingly intersect within households, platforms, and networks rather than factories or retail outlets.
The core challenge is that VAT must continue to deliver revenue, fairness, and neutrality under conditions that no longer resemble the system it was designed for. In this context, three strategic directions emerge.
I. Invest in digital tax infrastructure
The future of VAT administration is data-driven. As transactions multiply and value chains fragment, the ability to capture, verify, and analyze data in real time becomes central to enforcement. This requires investment not only in software and servers, but in institutional interoperability — shared data standards, secure APIs, and analytics capacity. Countries that build these capabilities early will be better positioned to manage risk, reduce compliance costs, and detect fraud pre-emptively rather than reactively.
For many ADB member states, this represents an opportunity to leapfrog. Rather than replicating legacy systems, they can move directly toward digital-first VAT architectures, integrating e-invoicing, digital payment data, and platform reporting into a coherent (eco)system.
II. Design for proportionality and inclusion
The prosumer economy highlights a new tension between administrative simplicity and tax equity. The challenge is to capture revenue without suffocating participation. For low-scale or occasional actors, full registration and filing obligations are disproportionate. Future VAT models must therefore differentiate compliance regimes — using platforms, automated reporting, or simplified digital interfaces to maintain proportionality.
This is not only about efficiency but about social legitimacy. If the digital economy is to remain dynamic, compliance must be simple enough to be perceived as fair and manageable.
III. Strengthen regional coordination
Finally, the regional dimension of VAT governance cannot be ignored. Digital transactions routinely cross borders, and platforms often operate regionally or globally. Without coordination, fragmented rules create both compliance burdens and opportunities for arbitrage. Regional cooperation — for example, through ADB-supported frameworks — can help establish shared standards, common reporting formats, and interoperable audit trails.
| In essence, this is not only about aligning tax law, but about aligning digital capacity. The next phase of VAT cooperation may be less about treaties and directives, and more about shared infrastructure, data pipelines, and analytical interoperability. |
8. Closing reflection
In summary, VAT was the fiscal innovation of the industrial age — a mechanism that translated centralized production into stable consumption-based revenue. The digital age demands an equivalent innovation: a VAT architecture capable of operating in a decentralized, data-rich, and globally networked economy.
For ADB member states, this is not merely a technical reform agenda. It is a strategic governance choice — whether to adapt incrementally within industrial-age paradigms, or to design VAT/GST systems that are digitally native from the ground up. The outcome will determine not only how effectively states collect revenue, but how fairly and efficiently they participate in the next phase of economic globalization.
[1] Mosquera Valderrama I.J. Trade, Digitalisation and Taxation. Book Chapter The Elgar Companion to the World Trade Organization. Editors J. Chaisse and C. Rodríguez-Chiffelle.
[2] ‘OECD Glossary of Statistical Terms – Electronic Commerce Definition’ <https://stats.oecd.org/glossary/detail.asp?ID=4721> accessed 17 October 2025.
[3] ‘Tax and Digitalisation’ [2019] OECD Going Digital Policy Note 8 at 3 <http://www.oecd.org/going-digital/tax-and-digitalisation.pdf>. accessed 18 February 2022.
[4] ibid. This is linked to the Automated Digital Services (ADS) that recognises that certain MNEs can generate revenue from the provision of ADS (including revenue from the monetisation of data) that are provided on an automated and standardised basis to a large and global customer or user base and can do so remotely to customers in markets with little or no local infrastructure. They often exploit powerful customer or user network effects and generate substantial value from interaction with users and customers. They often benefit from data and content contributions made by users and from the intensive monitoring of users’ activities and the exploitation of corresponding data. In some models, the customers may interact on an almost continuous basis with the supplier’s facilities and services”. ‘Tax Challenges Arising from Digitalisation- Report on Pillar One Blueprint: Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project’ [2020] OECD at 19. <https://doi.org/10.1787/beba0634-en>
[5] See also Rifat Azam, ‘Global Taxation of Cross-Border E-Commerce Income’, (2012) 31 VA. Tax Rev. 639 and Rifat Azam, ‘Ruling the World: Generating International Tax Norms in the Era of Globalization and BEPS’ (2017) 50 Suffolk U L REV 517.
[6] For some reflections see Merkx, M., Lamensch, M., Janssen, A., & Lock, J. (2024). Qualitative Assessment of Two Recent EU Commission Proposals to Impose (More) VAT Obligations on Platforms. World Tax Journal, 16(1), 3-53. https://doi.org/10.59403/x52sh9
[7] Once via the IOSS and again upon import.