The first modern tablet computers hit the market only five years ago. This is the same year that the most recent EU VAT/GST Directive was published, and yet technology has changed dramatically since.
In 2010, we could not have imagined the level of technology ingrained in everyday life today. In five years, it is likely to be a very different world from the one we’re in today.
Yet tax laws, systems, business models and sectors are designed with a degree of longevity — laws made today are expected to remain in place for the foreseeable future.
“More and more, different businesses will find themselves impacted by the digital changes for VAT/GST and caught in the overseas local tax net.“
But with technology changing apace, the “foreseeable future” will become shorter and shorter. What will that mean for businesses trying to forecast, budget, and set strategies and policies?
Changes to reputational risk
A multinational business trading in more than 100 countries needs a way to effectively do business in them all while remaining compliant with the tax and legal provisions.
As businesses move quickly into new territories and activities, indirect taxes may not be at the top of their agenda.
Other considerations come into play. Is the new activity feasible, profitable and logistically possible? Is it within company policy? Is it compliant?
For a multinational trying to keep its head above water, the threat of reputational risk is an additional unnecessary complication.
With social networking and other rapid peer-to-peer information sharing, consumer activism can do a lot of damage before a business has a chance to react.
Changes to business models
How companies operate is changing in the digital world as they develop new digital products and use new means to sell traditional products.
The cloud enables enterprises to transform and innovate faster than ever before.
Big data is creating more agile organizations and new business models, driving operational efficiencies, and opening up new revenue streams.
Increasing demand for customization and the introduction of new digital products have changed the nature of supplies.
Digital is no longer the preserve of technology businesses: transformative digital technologies are also redefining other industries, including:
Financial services: Innovations including mobile money, cashless payment mechanisms and crowdfunding are all changing the regulatory market. Peer-to-peer (P2P) and consumer-to-consumer (C2C) business models are proliferating rapidly.
Automotive: Developments include “smart cars” with applications (apps) to enhance the in-car experience; diagnostic apps to improve performance, safety or fuel efficiency; driverless cars; the “digital dealership”; and changes in car ownership models.
Health care: Digital is transforming health care with smart pills to individualize and improve treatment of patients, diagnostic software being used in hospitals and by patients at home, and the proliferation of health and fitness apps and accessories.
Fashion and retail: The surge in e-tailing is breaking down international borders so that fashion and retail businesses increasingly have to stay flexible and global to stay competitive. The sharing of knowledge via social networks has made customers more demanding. Businesses are having to create new products with faster production cycles to satisfy consumers who may view physical products as more disposable or replaceable or may want greater choice or individualization.
Hospitality: P2P models and direct online booking by travelers have changed the nature of the hotel sector overnight and resulted in an explosion in the C2C market.
These developments are only a few examples of how digitalization is transforming our economy and creating a wealth of opportunities. In all sectors, all businesses should now consider themselves to be “digital” and should pinpoint their digital footprint and their digital strategy.
The downside of all this change is that businesses often face operational challenges when they try to compete with the more agile innovators in their sector.
Businesses also face broader governance considerations about their strategies for how and where they do business (e.g., regulations on the use of geo-blockers that prevent customer web access to certain markets or apply differential pricing in the EU Single Market).
Changes in indirect taxation
From an indirect tax perspective, one of the main challenges for governments is effectively collecting VAT/GST on cross-border digital supplies.
Tax legislation has not evolved sufficiently to address the taxation of certain digital supplies, and the law often predates the technologies.
Countries are beginning to adopt new tax laws or dramatically change how they interpret existing laws.
In the EU, major changes became effective on 1 January 2015 in the EU VAT/GST system for e-services, telecommunications and broadcasting services supplied to private consumers.
Under the new rules, taxation takes place in the country of “consumption,” not in the country of “supply.”
Many non-EU countries are introducing similar regimes, so non-established businesses are having to register and report VAT/GST locally.
There is a wider international tax dimension.
Amid growing concern about multinational companies using “tax loopholes” to artificially reduce taxable income or shift profits to low-tax jurisdictions, the Organisation for Economic Co-operation and Development (OECD) published a 15-point action plan addressing base erosion and profit shifting (BEPS) in July 2013.
The BEPS package is designed to be implemented through changes in domestic law and practices, and through treaty provisions, with negotiations for a multilateral instrument under way and expected to be finalized in 2016.
Only BEPS Action 1 specifically refers to VAT/GST in the context of effective tax collection with respect to the cross-border supply of digital goods and services, concluding that the digital economy cannot be ring-fenced as it is increasingly becoming the economy itself.
The impact of so much change
Ten years ago, one significant change in VAT/GST legislation per year was considered a great deal of change.
Any changes in long-standing taxation principles were widely reported in the media, advance warning was provided and detailed information was released early in the process.
Businesses had lots of time to consider and prepare for the impact. Nowadays, there may be multiple changes every month.
The media attention has waned, and tax authorities are often giving less notice of new rules. So it is plausible that a head of tax in a large multinational business might be unaware of a tax change impacting that business.
Now businesses may need to consider monitoring the rules in all countries where they have no direct or indirect physical presence (given that digital services can generally be performed remotely) but where they may have customers (which, given the nature of the internet, they may not even be aware of).
Before implementing a change, companies must work through a number of practical considerations, including:
- What will the criteria be for determining key data such as the customer location?
- Will intermediaries be held liable for any debts of a principal?
- What will the requirements be for issues such as local representatives, record retention and audits?
- Will there be any wider legal considerations, such as the interaction with consumer protection laws, data privacy and cybersecurity?
Implications for businesses
Increasingly, businesses should focus on managing their tax risks, and tax administrations are demanding that they do so. In the UK, the Senior Accounting Officer (SAO) monitors that businesses put in place appropriate processes and controls. The Netherlands and Singapore have introduced similar regimes.
Given the potential volume of indirect tax changes happening around the world, digital businesses should introduce a governance framework that takes a methodical approach to reducing the risk posed by VAT/GST changes.
This framework should consider:
- Performing impact assessments to understand the financial/risk implications
- Working with governments to highlight the practical challenges and agree on what are reasonable efforts to comply with local rules
- Making decisions on whether to proceed with business activities impacted by VAT/GST rules
- Considering processes and controls
The world is changing fast. The digital economy is everywhere, and it is transforming our lives. Regardless of a business’s size, sector or location, it must keep up just to stay in the game. More and more, different businesses will find themselves impacted by the digital changes for VAT/GST and caught in the overseas local tax net.
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