The global digital economy offers significant opportunities for companies to grow revenue and gain market share. But with that comes intense competition, and a need to move quickly and confidently to stay ahead of the curve. The challenge is that “digital confidence” is often shaken by ongoing international deliberations and inconsistent rules for new, digital economy taxation around the world.
Governments want to safeguard their tax revenues, but at the same time, they want to promote international trade. Finding tax rules that meet these needs is a balancing act for governments, and individual countries are currently taking different approaches to apply consumption taxes to remote sales of goods and software as a service (SaaS) for business to business (B2B) and business to consumer (B2C) transactions.
The sheer volume, pace and complexity of these tax changes can be very overwhelming. That’s why it’s important for companies to be ready to address the global tax implications of how their goods are sold or their services are provided, and how to connect with customers in an increasingly borderless, digital economy.
Understand changes to indirect tax
Value-added taxes (VAT) and other sales taxes are becoming a bigger part of the cross-border tax picture. And it’s important to note that VAT often does not apply to profits, but to gross revenue transactions – an unwelcome surprise if not anticipated.
In response to the challenges the digital economy places on existing indirect tax rules, many governments are introducing new laws, changing where VAT/GST applies in B2C and B2B transactions, and who is responsible for charging the tax.
For example, a growing number of countries are looking at alternatives to the physical presence model of taxation and are introducing specific VAT/GST tax rules to SaaS provided by non-residents. Countries that have recently introduced VAT/GST rules in this area or that have announced plans to do so include the EU Member States, Japan, Norway, South Africa, South Korea and Australia. In the US, individual taxing jurisdictions are also taking action on the digital economy and are introducing sales tax to SaaS providers depending on whether it’s a B2C or B2B transaction.
The need for speed
Governments are not providing taxpayers with much advanced notice before tax changes come into force. As a result, it is difficult for companies to stay abreast of the changes.
To keep up, companies need to frequently monitor corporate and indirect tax developments in the countries in which they do business and where their customers are located. They also need to be able to adapt quickly and consider the impact on their businesses including their systems, contracts, pricing, invoicing and customer interface.
Companies who have a collaborative, enterprise-wide approach that combines tax with law, operations, technology and transactions will be best prepared. Taking a short-sighted or silo approach in a digital economy may create gaps in a company’s digital strategy that could prove costly.
For more information, view EY’s Digital Tax site.
Darrell Bontes, CPA, CA is a Business and International Tax Partner with EY in Ottawa. Darrell has 20 years of tax experience, and specializes in advising Canadian companies that are expanding globally and foreign companies that are expanding into Canada. He regularly advises companies on the tax-effective structuring of mergers and acquisitions, divestitures, and the setup of foreign operations.
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