Not all online market participants are aware that their activities are subject not only to direct taxation at the place of company registration (income tax), but also to indirect taxation. In particular, online transactions are subject to: value added tax (VAT), sales tax (Sales tax) and goods and services tax (GST).
By the early 2010s, the Internet expansion, international logistics development and cloud technologies growth led to the economy “skew”, when a traditional store with a counter and a seller loses to an online supplier from another continent, only due to the fact that the latter does not pay VAT.
Indirect taxation regime requires constant monitoring of the outlet companies legislation and opportune submission of reports. Failure to pay taxes can lead to unscheduled audits, websites blocking, significant fines and damage to the company reputation
Specifics of online business taxation
Since 2015, in the EU (in accordance with the Directives 2008/8/EC and 2017/2455), and in subsequent years in most other jurisdictions (USA, RF, Canada, India, Australia, Japan), the legal regime has been adopted in which the indirect taxes are applied and reported at the place of goods and services sale. At the same time, in B2C transactions, the place of sale is the client’s location.
Therefore, to the taxation at the place of sale are subject:
- Software (both on physical medium and in the form of subscription).
- Other goods and services that are provided (purchased) as a part of online business.
The seller (the supplier) is vested by the following obligations:
- Determining the jurisdiction of each consumer.
- Applying the required VAT rate, Sales tax or GST, depending on the consumer’s jurisdiction.
- Reporting in each jurisdiction and
- Payment of tax in each separate jurisdiction.
VigoLex provides services in the field of online business taxation:
- Tax planning and accounting for the international business risks in the aspect of the indirect taxes application.
- Companies registration with foreign tax authorities: EU Mini One Stop Shop, US Streamlined Sales Tax Registration System and separate jurisdictions.
- Assistance in applying tax rates.
- Facilitating the implementation of API tax aggregators.
- Providing accounting services specific to cross-border B2C sales.
- Submission of tax reports.
In most cases, companies learn about the existence of indirect taxes already after the fact – during a tax audit or when additional taxes are charged and sanctions are imposed, which, of course, does not exempt them from liability. Therefore, VigoLex recommends studying this issue in advance and entrusting tax optimization to professionals.