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If You Sell Online, You’re Going to Be Affected by These 3 Tax Factors

Tax Experts

A perfect storm is brewing in the tax world and it’s heading straight for the digital economy and the businesses that operate within it.

Currently, three factors that would each in themselves result in substantial changes and compliance challenges are happening simultaneously, magnifying the individual impacts on businesses. Whatever the size of your business, transactional or subscription-based, if you sell online, you’ll be affected.

So, what are the three factors?

First is the pandemic.

On top of the unspeakable human health toll, Covid 19 continues to create incredible stress on the financial capacity of all levels of government in every part of the world. To fund Covid measures and at the same time compensate for lost tax revenues, jurisdictions are borrowing heavily against tax revenue streams well into the future.

The situation promises to get worse before it gets better, as the vaccination rollout requires yet more billions of unplanned spending. At some point – probably sooner rather than later – governments will be examining every possible option for increasing tax revenues.

Second comes the speedy evolution of the digital economy itself.

In recent years, there’s been an increasing recognition that tax laws based on the physical presence of a business are no longer fit for purpose and that vast amounts of potential tax revenue are being lost.

To recover this revenue, governments are developing new “virtual nexus” approaches that will enable them to capture tax arising from sales through “remote non-present” merchants and service providers – including, of course, subscription-based businesses selling across borders.

In the U.S., this evolution reached a tilting point with the now-famous 2018 U.S. Supreme Court decision known as Wayfair. The Wayfair ruling put an end to the 25-year old requirement of physical nexus in a state before that state can subject a remote seller to its sales tax laws.  

Third is the growing determination amongst governments to tackle the issue of e-commerce operating models that exploit tax law differences between jurisdictions to create “stateless income” income that escapes (or indefinitely defers) income taxation in any particular jurisdiction.

The previous 5 years have seen numerous “only partially successful” international attempts to find an approach to cross-border sales tax collection that is widely accepted as fair and equitable. The OECD is currently developing proposals for an international digital services tax framework with a (Covid-extended) deadline of July 2021.

But in the meantime, jurisdictions are individually creating their own solutions to capture their piece of the pie. At the time of writing, for example, the EU is set to debate a new digital levy within the next few months. 

As all these factors come together, businesses face a rapid reshaping of tax regulations alongside an immediate and dramatic increase in complexity. The already challenging task of keeping on top of compliance requirements in multiple jurisdictions is becoming exponentially harder. Watch out for changes to VAT/GST/sales tax rates and scope, a blurring of the distinction between digital and physical goods and services, an expansion of the place of consumption rules, and the introduction of both new digital services taxes and low value goods taxes. And be aware that many of these changes are likely to happen at short notice.

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