International E-commerce Tax Landscape
The international landscape of e-commerce taxation is evolving rapidly. Governments globally are striving to unearth hidden treasures in the form of taxes from the internet cloud, driven by the United States, European Union, and the Organisation for Economic Co-operation and Development (OECD). The United Nations aims to enhance this effort even further.
The significant shift lies in the taxation scope. Traditionally, businesses were not expected to pay tax in a country where they didn’t have a physical presence. However, with the new wave of e-commerce tax reforms, suppliers could find themselves liable for multiple taxes, including value-added tax (VAT), income tax, and digital services tax (DST), in countries where their customers or users are based.
Understanding Specific Tax Types
US Sales Tax
The US Supreme Court, in 2018, enabled states to collect sales tax from out-of-state suppliers. As a result, almost all states now impose these taxes, with rates typically between 5% and 15%. The rules, however, vary among states, leading to approximately 20,000 different sales-tax rates across the country. Furthermore, online platforms often find themselves acting as reluctant tax collectors.
VAT/GST
European Union countries impose VAT on business-to-consumer (B2C) supplies, with rates typically reaching up to 25%. Businesses can opt to register for VAT in one EU country using a one-stop-shop mechanism, but this could mean forfeiting input VAT on their expenses. Many countries with VAT or goods and services tax (GST) are following the EU’s lead.
OECD Recommendations
The OECD has provided recommendations to about 140 countries on imposing income tax on e-commerce. The OECD Multilateral Instrument (MLI), essentially a global treaty, updates bilateral tax treaties concerning various aspects, including warehouses and companies with foreign sales subsidiaries.
Digital Services Tax (DST)
DST is essentially a secondary sales tax or VAT, with rates generally ranging between 2% and 7.5%. Countries like the UK, France, Spain, Turkey, and India have already enacted DST. The OECD hopes that DST will eventually be replaced by its proposed Pillar 1 mechanism.
Israel’s Position
For Israeli online sellers, these international tax developments are crucial. The Israeli government has indicated potential reforms in Israel’s international tax rules, reflecting these global changes.
A tax circular released in 2016 (4/2016) posits that a “significant digital presence” can be considered a taxable fixed place of business (permanent establishment, PE) for Israeli income-tax purposes. However, the circular’s enforcement has been minimal, as its interpretation remains controversial.
On the VAT side, foreign suppliers must register and appoint an Israeli fiscal representative if any part of their business is conducted in Israel. The Israeli banks are required to withhold up to 25% income tax on most outbound payments, with certain exceptions and special rules applicable.
Actions to Consider for E-Commerce Companies
Given these impending tax challenges, e-commerce businesses should urgently consider the following steps:
- Automated Reporting: Implement automated systems to facilitate accurate and timely tax reporting.
- Business Nexus Review: Conduct thorough reviews of your business connections to identify potential tax liabilities.
- Comprehensive Structural Planning: Develop a comprehensive business structure plan that considers the various tax implications.
- Double Tax Avoidance: Employ strategies to avoid double taxation.
- Evaluating it all: Continuously evaluate your tax strategy in line with evolving international tax regulations.
- Further Implementation Points: Identify and address further points of implementation for a successful e-commerce tax strategy.
Israeli VAT Guidelines
The Israeli VAT regulations require foreign suppliers to register and appoint a local fiscal representative if any part of their business is conducted in Israel, including supplying services to Israeli residents directly or via an online platform. This requirement also extends to B2B supplies of digital products like electronic books.
In such cases, Israeli banks have been instructed to withhold 17% VAT from payments to foreign suppliers, replacing the traditional reverse-charge (self-billing) approach. This new process involves issuing what is known as “other documents,” which serve as substitute tax invoices. The Israeli banks are also obliged to withhold up to 25% income tax on most outbound payments, although exceptions and special rules can sometimes be invoked, such as a $250,000 per year de minimis exception.
Compliance and Risk Management
These new rules represent a significant change in the way e-commerce is taxed, introducing potential challenges for companies operating in this space. The risk of double taxation and other complications loom large. It is essential for businesses to prepare and comply to avoid criminal sanctions and reputational damage.
Proactive planning and strategy development can help businesses adapt to these changes and even thrive. Ensuring proper legal advice, adequate reporting systems, and a thorough understanding of new tax obligations are key to managing these risks.
The Promise of International Expansion
While these new tax rules present challenges, they also open up opportunities for international expansion. Companies that successfully navigate the new tax landscape can gain access to markets worldwide, potentially unlocking significant growth.
By understanding and complying with the tax regulations in different jurisdictions, companies can minimize their tax liabilities and maximize their profits. This could allow businesses to invest more in their core business, fostering innovation and competitiveness in the global market.
Conclusion
The impending reform of Israel’s international tax rules, following the global trend, signifies a paradigm shift in the taxation of e-commerce. While the changes present challenges, they also offer opportunities for businesses that can adapt and navigate the new tax landscape effectively. By taking appropriate actions like automated reporting, business nexus review, comprehensive structural planning, and double tax avoidance, e-commerce companies can safeguard their interests and pave the way for successful international expansion.