Sri Lanka to charge VAT on Paypal, Stripe
Sri Lanka is planning to charge 18 percent value-added tax on PayPal, which is considered a financial service, and also Stripe, at a time when smaller taxes on credit cards have fallen foul with the International Monetary Fund, under new rules to tax foreign services.
“Financial Technology (FinTech): online banking, payment processors (PayPal, Stripe, and cryptocurrency exchanges),” the new gazette, which requires VAT to be collected by foreign platforms from October 1, says. PayPal, a financial service, is exempt from VAT in countries like the UK and the EU, which have well-functioning tax systems.
Stripe, which also collects money on behalf of third parties, is subject to a so-called ‘reverse charging’ process, which offsets the value-added tax on the underlying service in countries with well-functioning systems.
Paypal however, has a service where they can collect VAT on behalf of the underlying service or good when payment is made.
By charging VAT on services like PayPal and Stripe, the State can also collect VAT from individuals who purchase underlying services that fall below the 60 million rupee threshold sanctioned by parliament, analysts say.
Financial services are exempt from VAT in countries with well-functioning tax systems.
Sri Lanka’s chaotic tax system, which is further complicated by ad hoc new taxes in IMF programs following each currency crisis triggered by rate cuts, also imposes a tax on financial services, unlike in other countries.
The so-called ‘financial VAT’ primarily operates based on emoluments and functions as an additional income tax in Sri Lanka.
Sri Lanka is also charging a 2.5 percent tax on foreign purchases made via credit cards, which has been deemed a violation of IMF rules on external payments and constitutes a Multiple Currency Practice.
Since PayPal is used to make payments for an underlying service, or a good, Sri Lankans could end up paying more than twice the VAT rate, or 36 percent, plus the credit card tax when buying services and goods online.
If the existing 2.5 percent tax on credit cards is not removed (the IMF has granted a waiver at present), the VAT on services overall would be even higher than 36 percent through credit cards, including due to cascading effects.
Under the IMF program, Sri Lanka has not undertaken to introduce new MCPs while seeking approval to maintain the existing ones as a continuous performance criterion.
“We are seeking temporary approval of all exchange restrictions and MCPs,” the latest IMF program documents said.
“During the program period, we will not: (i) introduce or intensify exchange restrictions or multiple currency practices (MCPs).”
It is not clear whether taxes on VAT on PayPal and Stripe would lead to violating the IMF rules.