The world of online shopping is mesmerising not just for consumers, but also for e-tailers. The world is your market and you can entice customers with free shipping for purchases above a certain value or from qualifying locations. What’s more, your customers get to skip having to pay value-added tax (VAT) (also GST or sales tax depending on the country you’re in) altogether or as long as the purchase is kept below a mandated threshold.
But all this could change. On 5 October 2015, the Organisation for Economic Co-operation and Development (OECD) in its report called on governments around the world to step up efforts to collect tax revenue from cross-border e-commerce transactions that they’re currently missing out on.
It is easy to see why governments should be concerned. In a study by Bigcommerce, global e-commerce amounted to US$1.5 trillion in 2014 and is predicted to hit US$2 trillion in 2015. As the digital economy reach staggering new heights, governments around the world will be keen to tap on e-commerce transactions for tax revenue
What is going to happen?
Governments could require all or at least some e-tailers to charge VAT on the transactions and report the amount to them. When the VAT is passed on to customers, it makes online purchases more expensive than they currently are for consumers who are enjoying tax-free purchases now.
When your e-sales attract VAT, you lose some of your price advantage over local brick-and-mortar retailers who will regain some competitiveness. However for small businesses that rely heavily on tax-free imports via online to make their own supplies to customers, there may be pressure to increase prices when cost of import climbs.
No specific tax rules
As the OECD has not developed specific tax rules for the digital economy, governments around the world will each have to come up with their own set of rules on how e-commerce transactions are to be taxed.
But things may get a little messy when different governments make up their own rules. For goods and services that pass through different states/countries, there’s a risk of double taxation when two tax jurisdictions cannot agree on who has the right to tax. When this happens, you and your customers suffer.
Until VAT laws globally align themselves to the digital economy, big business players may even band together to resist tax changes taking place haphazardly in separate economies especially when tax is deemed to be levied unfairly.
If you sell to many different markets and all of them require you to charge VAT, complying with each country’s regime might be like being asked to sign up to multiple databases and then having to follow the new rules in each of them. But governments won’t have it easy either when we take into account the size of the global e-market today and the number of e-tailers they have to link up with.
Even when we discount the difficulty of communicating with foreign tax jurisdictions that may be thousands of miles away, we lack understanding of foreign incorporation rules and tax laws. When new rules emerge, you’ll need to tune to each country’s laws and tweak your accounting software and reports to make sure they comply.
The wheels are already turning. At the moment, it seems that Australia is planning to ask the world’s e-tailers to charge and report GST to its tax authority. The state of Karnataka in India is also proposing a levy on e-commerce transactions. Many other countries and economic zones such as Indonesia, South Korea and the European Union are also thinking about changes.
E-tailers will have to see how the rules are rolled out over time. If you’re asked to charge VAT next time, be sure to take note of the implementation timeline set by the government and consider the implications on your compliance needs. For now, it’s a time for e-tailers to mull over how to regain competitiveness when the VAT rules come into place in the future.