E-commerce could prove a viable answer for under-employed people
E-commerce businesses should note that the international tax landscape is changing and monitor developments.
By LEON HARRISSmall toy figures are seen in front of diplayed Amazon logo(photo credit: REUTERS/ DADO RUVIC)
As countries around the world struggle to escape the corona effect, some have turned adversity to advantage.We all mastered Zoom and online purchases. But some resourceful under-employed people have taken to e-commerce, for example, buying widgets from China and selling them to America. They use a platform like Amazon to sell and ship stored goods, and a payment service like Paypal. Others provide software as a service, or SAAS.The global e-commerce figures are huge; around $6 trillion of business to business transactions (B2B) per year and around $3 trillion of business to consumer transactions (B2C).What tax do e-commerce players owe if any?Until recently, the incredible answer was not much, because business is done on the cloud and nobody (almost) knows how to tax it. This was true not only for income tax, but also for VAT/sales tax purposes. All that is changing.Apple lessonIn 2016, the European Union was enraged to discover that Apple’s EU profits were taxed in Ireland only, at the miniscule rate of 0.005% in 2014. Apple was apparently doing business from a cloud somewhere outside Ireland. Something had to give.So the EU has taken Apple to court. The OECD, representing over 130 countries, has begun various initiatives to tighten up international tax rules.The Trump administration passed a tax reform at the end of 2017 to bring US multinational groups’ profits to date – around $2.6 trillion – into the US tax net.New US taxes include GILTI (global intangible low taxed income). US companies subject to GILTI should see US federal income tax rates range from 10.5% to 13.125%. US immigrants with an Israeli company should check out GILTI with a US CPA, if they haven’t already.
E-commerceNon-US e-commerce players also face a few tax challenges. In June 2018, the US Supreme Court in the Wayfair case allowed US states to impose sales tax – typically 5%-10% – on out-of-state businesses with no physical presence in that state, just an “economic nexus.”In the US, 45 out of 50 states have their own sales tax rules and rates, and “economic nexus” typically means sales above a certain level ($100,000 in many cases) and/or sales above a certain number (200 transactions in many cases). But there are over 20,000 different cities and areas each with their own rate of sales tax.THESE US sales tax rules and rates apply to e-commerce businesses around the world (including Israel) which sell products to customers in the US, not just US businesses. And online marketplaces are required in many states to help them pay the tax.In the EU, e-commerce businesses from outside the EU (e.g. Israel) must contend with VAT at rates ranging usually from 15% to 25% on electronic services supplied to EU consumers (B2C).In 2021, this VAT charge will be widened to cover most services.If you don’t want to register in 27 EU countries, you can register in a “one stop shop,” but you may not recover VAT on your EU expenses that way.Many other countries are tightening up their VAT or GST (goods and service tax) rules. And some have introduced a “Google tax,” aka “digital services tax,” on larger digital groups; typically 2%-6% if global revenues exceed certain levels.Countries with a digital services tax include the UK, India, Austria, Italy and Turkey. France postponed its digital services tax by a year until December 2020 to avert the threat of heavy US customs duties on French wine.As for the UK, it finally did Brexit, but still has remnants of EU VAT law, a digital services tax, a diverted profits tax and other tax rules.The OECD initiatives aim to tighten up income taxation for e-commerce operators if they use warehouses, subsidiary companies or “commissionaires” who typically give ground support for transactions done on the cloud. But countries need to enact such changes or sign up to a complex multilateral tax treaty (MLI) of the OECD. Further OECD proposals for allocating profit to the country where customers or users reside are still under negotiation between the OECD and the US.Israel has begun checking international operations in a number of ways.CommentsE-commerce businesses should note that the international tax landscape is changing and monitor developments. They should check out automated reporting services. Some are better than others. Most focus on sales tax/VAT, few cope with income tax or digital services tax.A looming risk for the unwary is multiple taxation on e-commerce. So detailed planning of your e-commerce structure is recommended.As always, consult experienced tax 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. leon@h2cat.com
