Over the next year, governments around the world hope to dig up treasure for their tax coffers. Not buried underground but hidden in the Internet cloud. The US, EU and OECD are behind this, and the UN wants to tighten it further.
Double taxation and other risks may be around the corner. Preparation and compliance are necessary to help avoid criminal sanctions and reputational damage. The potential reward is international expansion with the least taxes.
The big change
Until now, nobody expected you to pay tax in a country if you and your products were not physically there. Soon, e-commerce suppliers may find themselves owing multiple taxes wherever they have customers or users, regardless of where those suppliers are located. The taxes include value-added tax (VAT)/sales tax/goods and services tax (GST), income tax and digital services tax (DST).
US sales tax
The US offers a large affluent market. But in 2018, the Supreme Court allowed US states to collect sales tax from out-of-state suppliers, and nearly all US states now do so, typically 5%-15%. The rules vary from state to state, with even some cities and metropolitan areas charging these taxes, resulting in about 20,000 US sales-tax rates! Online platforms often serve as reluctant tax collectors.
EU countries now impose VAT on B2C (business to consumer) supplies at rates typically ranging up to 25%. If you don’t want to register for VAT in more than one EU country (there are 27), you can register on a one-stop shop basis in one country, but then you forfeit input VAT on your expenses. Again, online platforms should collect the tax, when involved.
Many other countries with VAT or GST are copying the EU.
The OECD has made recommendations to about 140 countries on how to impose income tax on e-commerce.
Businesses of all sizes should check out the OECD Multilateral Instrument (MLI). The MLI is basically a global treaty that updates bilateral tax treaties, e.g., regarding warehouses, commissionaires (“secret agents”) and companies with foreign sales subsidiaries.
Larger multinationals may soon have to pay a 15% minimum global tax if total sales exceed €750 million (“Pillar 2”). And if annual sales exceed €20 billion, some taxable profits may be reallocated to countries where the consumers are “Pillar 1”.
Digital-services tax (DST)
DST is a second sales tax/VAT at rates of 2%-7.5% generally! It has been enacted in the UK, France, Spain, Turkey, India and elsewhere. The OECD hopes Pillar 1 will eventually replace DST.
What about Israel?
Israeli online sellers will need to note the above. The Israeli government has indicated it may soon propose a general reform of Israel’s international tax rules, having regard to OECD and other developments.
A tax circular in 2016 (4/2016) claims that a taxable fixed place of business (permanent establishment, PE) for Israeli income-tax purposes includes a “significant digital presence.” According to the circular, indicators of a “significant digital presence” include: (a) signing a substantial quantity of contracts for providing digital services (not defined) with Israeli residents via the Internet; (b) services provided by a foreign entity consumed by many customers in Israel via the Internet; and (c) where a foreign entity supplies a service via the Internet that is adapted to Israeli customers or users, e.g., Hebrew, Israeli style, shekel billing, Israeli credit cards accepted.
However, Tax Circular 4/2016 is considered controversial, as many think such activities are preparatory or auxiliary and hence not part of a PE. In practice, Israel has largely held back from enforcing Tax Circular 4/2016.
On the Israeli VAT side, if any part of a business is conducted in Israel, a foreign supplier must register and appoint an Israeli fiscal representative. That includes supplying services to Israeli residents directly or via an online platform. In the case of B2B (business to business) supplies of digital products (e.g., electronic books), the Israeli banks have been instructed to withhold 17% VAT from payments to the foreign suppliers and issue substitute tax invoices, known confusingly as “other documents.” This is instead of allowing the Israeli purchaser to apply the reverse-charge (self-billing) approach.
The Israeli banks are also required to withhold up to 25% income tax on most outbound payments, although a $250,000 per year de minimis exception and other special rules may sometimes be invoked.
Action to consider: E-commerce companies should urgently consider actions A to F below, namely:
- Automated reporting.
- Business nexus review.
- Comprehensive structural planning.
- Double tax avoidance (an absolute must).
- Evaluating it all.
- Further implementation points.
As always, consult experienced advisers in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.