As the digital world grows larger in popularity and demand, the distance between country borders seems to be growing smaller.
Now that we have the ability to purchase, stream and connect instantly through different countries means that we also need to consider the implications on the tax revenue for those international businesses.
The Digital Services Tax (DST) targets international businesses that provide digital services to international consumers but where their profits have so far only been taxed in their country of incorporation.
However, now, if you are providing a digital service into another country from the comforts of your own home you may potentially be subject to future DST.
This means, that so far you may have only considered taxes in your country of incorporation and not worried about the taxes of the countries your consumers are living in.
But now with the current international tax trend, it seems that you’ll definitely need to start thinking about the taxes in the countries your digital services are being used in. As the digital world becomes bigger the international tax rules become more complicated.
In this article, I will explore how the DST will hopefully lead to clarity and consistency for digital businesses owners, location independent businesses, and digital service providers around the world.
# Tax Jurisdictions and Location
The DST was introduced because local jurisdictions believe that digital companies should be paying taxes in the jurisdictions that they are marketing to.
A widespread trend happening across countries is that governments want to charge tax based on the location of the purchaser of the digital product or service.
You might be kicking back in Australia or Germany thinking you’re okay paying taxes locally, but actually, you do need to consider the rules of the other jurisdictions you are selling to.
The good news for digital nomads is that these taxes are mainly aimed at the US internet giants and major digital service providers such as Facebook, Amazon, Apple, and Netflix – which profit from local consumers without a physical presence.
Even though this is the main target Proponents of digital taxation often argue that digital value creation should take into account the value contributed by users of social media platforms or e-commerce websites because the data provided by user habits are then translated into targeted advertisements or other customized services.
So, in short, you are not completely off the hook for future developments but as of right now digital nomads and small online businesses owners are able to stay out of hunting range.
# DST Change and Debates
Unfortunately, since the major digital companies are multinational businesses, the digital tax discussion has led to the need for an international agreement on rules that better regulate between countries to avoid double taxation yet meet the individual needs of each country.
Conversations on an international tax platform are still being discussed and no final agreements have been made as of yet. Political debates have focused on the differences between taxing physical business operations and virtual operations.
One thing’s for sure, if you are a digital-based business, the rules about digital tax worldwide are constantly changing and yes-they do affect you and you should be aware of them.
INTERNATIONAL CONVERSATIONS AND AGREEMENTS
# Multilateral Agreements for International Agreeance
To further progress with an internationally accepted DST all countries must come together and agree.
Multilateral agreements can be used as a way to gain certainty for taxpayers through a mutually agreed platform accepted by all different countries involved.
Without a multilateral agreement, individual country policies are likely to intersect or contradict one another, resulting in double taxation.
Over the last few years, concerns have been raised that the existing international tax system does not properly capture the new digitalization of the economy.
Under current international tax rules, multinationals generally pay corporate income tax where production occurs rather than where consumers or, specifically for the digital sector, users are located.
However, some argue that through the digital economy, businesses directly or non-directly derive income from users abroad, but, without a physical presence, are not subject to corporate income tax in that foreign country.
# OECD and International Negotiations
To address these concerns, the Organisation for Economic Co-operation and Development (OECD) has been hosting negotiations with more than 130 countries to adopt the international tax system.
The OECD/G20 Inclusive Framework on BEPS on the Two-Pillar Approach to Address the Tax Challenges Arising from the Digitalisation of the Economy affirmed the commitment to addressing the concerns.
The current proposal would require multinational businesses to pay some of their income taxes where their consumers or users are located.
According to the OECD’s statement report in January 2020, an agreement was expected by the end of 2020. Unfortunately, the current world circumstances have not been ideal for keeping on time with the expected dates.
# Timeline and Development
The Business and Industry Advisory Committee (BIAC) has reiterated its support for the OECD to find an agreement on the digital economy by the end of 2020.
Unfortunately, the Paris-based organisation has already been forced to push back its initial July deadline to October.
The OECD is working on the technical aspects of its October report offering a reasonable solution’ for the business community that can help finalise negotiations.
The other factor that is important to consider would be the role of the United States government as the Trump administration just withdrew from talks due to the upcoming elections and the current state of the Covid-19 Pandemic.
While the 2020 timeline is still in place to develop the framework solution, the threat of trade wars continues to grow.
European leaders are increasingly impatient about taxing digital platforms such as Amazon to support an EU-wide recovery package after the pandemic. This has caused a lot of tension on the tax bill
While a final agreement is unlikely in 2020 given changes in the political agenda and international discussions, the technical details and longer timeframe will likely lead to a stronger proposal in October.
This could be the basis of the long-awaited final agreement, even if it is signed in 2021.
The digital economy has shown strength and momentum during the global pandemic and further proves the importance of coming to agreeance on an international level.
While countries are awaiting answers, most have already begun introducing/ implementing a DST of their own.
As of June 22, Austria, France, Hungary, Italy, Poland, Turkey, and the United Kingdom have implemented a DST. Belgium, the Czech Republic, Slovakia, and Spain have published proposals to enact a DST, and Latvia, Norway, and Slovenia have either officially announced or shown intentions to implement such a tax.
Although these DSTs are generally considered to be interim measures until an agreement is reached at the OECD level, it is unclear whether all of them will be repealed at that point.
WHAT SHOULD DIGITAL NOMADS EXPECT NOW?
# Digital Businesses
If you are not an internet giant then as of now, the DST does not apply to you. This may change in the future but for now, you can focus on the other tax systems that are more relevant to your business.
One of the key concerns for governments across the world relates to ensuring businesses pay their fair share of tax – including the digital world.
There is a possibility that Value-added Tax (VAT) and Goods and Services Tax (GST) rates will apply to your business. VAT and GST have been around for decades and include digital businesses.
Your digital services could be through tangible or intangible goods, physical services (such as connecting service providers to clients) or even your streaming platform.
Value-Added Tax (VAT) is important for any international entrepreneur to consider when dealing with sales.
VAT is a consumption tax that applies to all goods and services, whether physical or digital. That means, every time a customer purchases a good or service in the EU, they pay VAT on the spot.
The business of sale collects the VAT from the customer and pays some or all of it to the government. In this way, you can see yourself as a kind of tax middleman between the government and the consumer.
It’s not your money paying for the VAT, you’re just collecting and submitting the customer’s money to the government.
It is important to be charging the VAT to your customers because the government will still be expecting that money whether it comes from your pocket or theirs.
Unfortunately, it becomes more complicated since the countries you will be paying the VAT to all have different rates (including the 28 EU member states).
The dance around different VAT rates is due to the fact that the consumer is the one paying so it should be at the rate of their country – not the country of the seller or of the company incorporation.
This also helps even the playing field for local businesses when their consumers are purchasing from cheaper international locations instead.
# VAT exemptions
Though VAT has so far sounded like bad news for the international business owner, there is still good news on the way.
You only need to charge a business VAT for business-to-customer (B2C) transactions, not when you are dealing with Business to Business sales (B2B).
You also do not need to charge VAT on personal services if you are sitting outside of the EU. This includes popular remote businesses such as consulting companies.
This tax is dominantly for the sale of products including those of the digital world. Files, pictures, online resources and other forms of digital products though intangible, are still included in a VAT sale product.
To fall under the exemptions of VAT, ensure you are carefully considering who your consumer is and whether the sale is a personal service or a physical (tangible or intangible) product.
# Following the M.O.S.S System
A Mini One Stop Shop (M.O.S.S) is a system that makes it easier for companies to sell digital products and services in other EU countries. M.O.S.S is an optional service that untangles the VAT rules and rates of the different countries, so it is all on one platform for businesses that are E.U. members or non-members selling cross border to non-taxable consumers.
The M.O.S.S system means you do not need to register with tax authorities in every EU country you sell to, instead, you can register for VAT, file VAT returns and make payments in one single place.
You must apply the rules of the M.O.S.S scheme to your customers in all EU countries that you supply to. without M.O.S.S., the businesses would be required to register in each Member State in which they supply internationally.
M.O.S.S is a little bit of light at the end of an intimidating tunnel for international entrepreneurs.
# International VAT movement
You will need to ensure you are following the rates for more than just the EU countries.
In 2020 alone, Singapore introduced a VAT rate of 7% to foreign suppliers of digital services, Uganda introduces 18% VAT on all online transactions, Indonesia introduces 10% VAT on all online transactions, and Mexico imposed 16% VAT on the 1st of June 2020.
Similar to any area of tax, there are constantly changes and developments to keep up with as a business, regardless of size.
With the digital world expanding, border jumping becomes easier and the intersecting tax world consequently becomes more complicated.
Ensure your company moves with the changing waves of the digital tax world so you always stay ahead of the current and out of dangerous water.
Even though the DST is currently only in place in a few countries around the world and it is targeted specifically towards internet giants such as Facebook, Google, Amazon etc.
It is important for Digital Nomads and Online Entrepreneurs to be aware of the existence of the DST.
Especially during a time when governments are starting to look for new and creative ways to raise revenue, it is important to keep in mind that there might be a potential future risk in place that the DST will trigger down to small businesses.
In any case, the main principle of the DST is that international businesses should be paying taxes not only in their country of incorporation but also in the country where their consumers are based.
This principle is already applied to small business owners these days around the world through VAT, GST, sales and consumption taxes and has been extended within the last few years to include digital services and products.
Therefore, it is vital that Digital Nomads and Online Entrepreneurs understand the application of sales and consumption taxes on their digital services and products.
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NOTICE: The content of this article is not to be considered as a legal opinion or tax advice. Wanderers Wealth does not hold itself out as a legal or tax advisor. If you want to receive a legal opinion or tax advice on the matter in this article please contact us directly and we will refer you to a legal practitioner.