The digital economy, tax, and evolving rules

Thu May 11, 2017

Digital disruption has laid waste to numerous traditional industries, from the ramifications of internet publishing on the print media to the effects of the Uber and AirBnB models on the car travel and lodging sectors.

Digital tax evolution

An increasingly connected (and smartphone-obsessed) population expects this disruption. Today, consumption is all about the now economy. It is now easier than ever, thanks to infrastructural advances in broadband and WiFi, for consumers to access digital content from anywhere in the world.

Figures from the Organisation for Economic Cooperation and Development (OECD) show just how fast cross-border eCommerce is growing. B2C e-commerce sales in 2014 were estimated at over USD$1.4 trillion, up nearly 20% from 2013. By 2018 sales are estimated to hit USD$2.4 trillion. This rise in cross-border Business-to-Consumer (B2C) online transactions has been the spur for legislative revamps across the globe.

These figures, and the new disruptive business models, have created challenges for governments as they struggle with antiquated taxation systems in the new digital world. Age-old tax mechanisms are no longer fit for practice and, as a result, billions of indirect taxes go uncollected. In 2014, for example, the VAT Gap in the E.U. (the difference between expected and actual VAT collected) was calculated at €159.5 billion. This figure represents a loss of 14% of the total expected VAT revenue in the E.U.

These reasons are the backdrop as to why international indirect tax systems are evolving rapidly.

A trickle of rule changes at first

It started as a trickle of legislative introductions back in 2003. The U.S. and the E.U. were the pioneers in introducing rules aimed at taxing companies that sold digital services without having a physical establishment in the jurisdiction where the sales were consumed. These models taxed the supplier at source. As eCommerce developed it became apparent that the E.U. model was not suitable as the suppliers simply established a HQ in a low-tax jurisdiction. In the E.U., for example, it meant that many multinationals created a home in Luxembourg for low-tax reasons.

In January 2015 the E.U. enacted new rules aimed at taxing digital services. The key tweak to the original 2003 rules was that the place of consumption would determine the tax to apply, not the place of supply. Norway had introduced such rules (including a threshold), with success, in 2011. South Africa did likewise in June 2014. Crucially, all three implementations enabled digital service suppliers to register via an online portal. Finally, indirect taxation systems had arrived in the digital world.

Various versions of these models of indirect taxation are now spreading across the globe. Some implementations also include thresholds while others require suppliers to identify a tax agent in the local jurisdiction. No matter the implementation the obvious language and foreign exchange rate issues that are always present in international tax compliance.

Acceleration of digital economy taxation

On July 1 Australia extends its Goods and Services Tax (GST) system to cover supplies made by foreign companies to domestic consumers. When it does so it will become the sixth international tax jurisdiction to do so since October 2016. Others to do so include:

  • Taiwan (rules changed on May 1, 2017)
  • Serbia (April 1, 2017)
  • Russia (January 1, 2017)
  • India (December 1, 2016)
  • New Zealand (October 1, 2016)

One of the key characteristics of these rules is that the place of taxation changes from that of the supplier to the place of consumption. Digital service suppliers with customers in these jurisdictions, therefore, must now identify who the end consumer is.

Six digital economy tax plans in the pipeline

A host of international tax jurisdictions are exploring the possibility of following the lead of those named above. Here are a handful of examples.

China

China has undertaken a stunning reformation of its VAT system. Tax authorities and the relevant government agencies there are now investigating potential methods to tax the digital economy.

Thailand

The Thai government is seeking a “specialised tax on e-commerce operators with a presence either inside or outside of the country.”

Canada

In March 2017 the federal government unveiled a tax on ride-sharing services (such as Uber). Commentators feel that it is just a matter of time before Canada’s sales tax system is extending to more digital services.

Malaysia

A request was recently sent to Malaysia’s Inland Revenue Board (IRB) to conduct a thorough evaluation of the country’s digital tax plan, one that would – if adopted – tax the digital and sharing economies. A decision is expected later this year. The digital economy is expected to contribute 20% to Malaysia’s gross domestic product by 2020.

Israel

The Israeli Tax Authority has plans to amend its VAT law so that foreign providers of digital services to consumers resident in Israel have to register and collect the tax due on their B2C sales. The draft bill leans heavily on existing EU rules for inspiration.

Singapore

The Singapore government is looking to collect Goods and Services Tax (GST), currently at 7%, from digital transactions. Currently, no tax is collected on digital services supplied from outside Singapore to domestic consumers.

Partner with Taxamo

Taxamo takes on the digital tax liability in countries where such place of consumption rules have been introduced. This service allows affected merchants to concentrate on their core area: selling digital services.

Our model is such that we become the liable party for the tax due. This means that we remove the regulatory headaches attached to international online sales.

We also know that every business is different, we use this knowledge to create bespoke solutions for each partner.

We will tend to your global tax liabilities so you can continue to sell your services.

Note: Taxamo content is created for guidance only, please consult your local tax advisor.

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