2.7 eBusiness Tax Issues

Companies are affected by a multitude of tax issues, but online businesses commonly need advice in two areas: corporation tax and sales tax (or VAT in European companies). Sources are listed below, but companies will also need expert opinion from time to time, which, if not cheap, avoids being stung later with fines and court fees. Local tax offices can also help, at least in clarifying a company's tax obligations as the state regards them.

Sales tax and VAT are generally written into the shopping cart, which may need to be amended for changes in rates or unusual situations. {16} {17}

Corporation Tax

Countries like the British Virgin Islands offer an offshore status that provides a very advantageous tax situation. Should you register your ecommerce business offshore? That's perfectly possible, but you won't escape USA (or European) tax liability unless your whole business is transferred abroad. You will still fall under 'US residence jurisdiction' if your company retains an office, property, employee in the USA, or even a traveling representative who is resident for extended periods in the USA. You could even find yourself facing double taxation, levied in the 'tax haven' and in the USA. Tax experts may give you varying advice, but for an unbiased opinion on the US scene it's essential to consult one residing in the USA, as it's a criminal offense to help a company or individual evade US tax.

Needless to say, you are even less likely to win your court battle with the revenue authorities if you simply rent an offshore server to host your website. Or if you act as US middleman in goods and services traded between Asian countries. US companies and individuals pay US tax on their earnings worldwide, subject to certain allowances and reciprocal tax arrangements. Finally, of course, whatever you do, you must keep proper records, or Uncle Sam will estimate a tax liability for you.

Other countries have a similar residence jurisdiction, incidentally. Subject to any double tax treaty, a company is charged UK tax: {13}

1. On the worldwide income of a company incorporated in the UK, and
2. On the income arising in the UK of any company not tax-resident in the UK.

A company incorporated outside the UK may also be UK tax-resident if it is 'centrally managed and controlled' from the UK. HM Revenue & Customs takes the view that neither a website nor a server of itself signifies a permanent establishment, but other OECD Member States see matters differently.

Sales Tax

Sales tax applies in 45 US states, and is imposed on the buyer and collected by the seller when 'nexus' or sufficient contact exists between the locations of buyer and seller. The Internet has complicated matters enormously, as a seller in one state may purchase through a website hosted in a second state from a seller located in a third state an item of merchandise that is warehoused in a fourth state. Who pays the sales tax, and to which state? It was to avoid multiple sales taxes, and prevent states levying extra taxes to compensate for lost revenue, that Congress introduced ITFA, or Internet Tax Freedom Act. First passed in 1988, the Act has now been renewed. The key words are extra or multiple taxes. Existing sales taxes still very much apply, but ecommerce can't be burdened with new taxes. The situation is broadly as follows:

1. Buyer and seller located in the same state: seller collects the sale tax for the buyer and remits to the state.
2. Buyer and seller in different states where the seller has a presence (office, warehouse, employee, or representative) in the buyer's state: seller again collects sales tax on behalf of the buyer and remits to the buyer's state.
3. Buyer and seller in different states where the seller does not have a presence in the buyer's state: buyer has the responsibility of paying sales tax to his state.

Value Added Tax

European countries have their own nuisance tax: VAT or value added tax. Rates and terms of application are still not 'harmonized' across the EU countries (i.e. made the same), but companies do not need to register for VAT unless their turnover exceeds a certain figure. Nonetheless, to receive reimbursement for the VAT paid on behalf of customers, companies must submit their VAT claims at the end of the month, paying the VAT collected in the current month less the VAT collected and paid the previous month. Matters become much more complicated when selling into and out of the European Union, and the Internet adds difficulties of its own. The situation is commonly represented as:

1. Sale to non-EU country and goods are zero-rated: import tax but not VAT is payable.
2. Sale to non-EU country and goods are not zero-rated: customers are responsible for paying import tax and the VAT of their own country.
3. Sale to EU country and goods are not zero-rated: no VAT or import is payable if certain requirements are met. Otherwise seller should impose VAT.

In fact the situation is a little more complicated, but can be broadly summarized under three headings.

Sale of Physical Goods to Business or Private Consumers

Internet sale does not alter basic VAT regulations. Physical goods are deemed to be made in the place from where they are dispatched. Thus UK-manufactured goods sent to a EU member state would have VAT paid at the UK level unless the customer is VAT registered, when they would be zero rated if certain conditions were complied with, notably obtaining the VAT number. VAT is also payable if the business level of sales to private customers in that member state has exceeded the distance selling threshold, when the UK business must register for VAT in that member state and account for VAT on the sales there.

Sale of Intangible Goods or Services to Businesses

Intangible goods are treated as services, and for VAT purposes these services are deemed to be supplied where the customer is located. Intangible goods include supply of websites, web hosting, distance maintenance of programs and equipment, software supply and updating, supply of images, text, information, database contents, music, films, games, broadcasts of a political, cultural, artistic, sporting, scientific, educational or entertainment nature, distance teaching, online auction services and Internet service packages. If the supplier and customer belong in the same EU member state, the supplier accounts for the VAT. If they belong to different states, a 'reverse charge' procedure operates, i.e. the customer pays VAT at the local rate. The reverse charge procedure also applies to sales from outside the EU: an American supplier for example would expect a French business to pay VAT.

Overriding these provisions is a 'use and enjoyment' provision, which stipulates that:

1. If the services are largely used and enjoyed outside the EU, then no VAT is payable, but
2. If the services are largely used and enjoyed inside the EU, then VAT is payable by the EU customer.

Supply of Electronic Services to Private Customers

In general, supplies to private customers are treated as made where the supplier is located. If, however, the customer is located inside the EU but the supplier is not, then the supplying business will need to account for VAT. Thus a UK customer will be subject to UK VAT if the supplier is located in the UK or outside the EU. If the supplier is located in another EU member state, however, VAT will be paid by the supplier in that other Member State.

Use and enjoyment provisions do not apply to private customers. VAT would be paid by an American company supplying to a private UK individual, for example.

From 1 January 2015 the rules will change so that:

1. The place of supply will be the place where the customer is based.
2. UK suppliers will account for VAT in the UK for supplies to private customers in other member states. For specific answers companies will need to work diligently through the sites below, and not be too misled by the simplifications inherent in storefront programs.

Withholding Tax

Many international companies operate through foreign subsidiaries, which establishes a legal barrier between the US company its foreign operations. The parent company is less likely to be subject to foreign governmental regulation, foreign taxation, contractual obligations and debts incurred by the foreign operations. Withholding tax is still a possibility, however, the subsidiary being required to withhold and pay over to the local government a percentage of the royalties as income tax, usually 10-15% but sometimes as much as 30%. Happily, reciprocal US tax agreements with many countries have removed or diluted this double taxation, but there remain countries (Taiwan, Singapore, Korea, China, etc.) outside these agreements where the only recourse is expert local tax advice. {18}

Questions

1. What are the three areas of tax most affecting ecommerce?
2. How are state taxes handled in ecommerce? Give some examples of company compliance and noncompliance with the regulations.
3. What are the general provisions of Value Added Tax as it applies to European ecommerce?
4. Your (American) company has started selling educational films into the European Union. What VAT would it expect to pay? What steps should it take to ensure compliance with the regulations?
5. What tax and other advantages could be enjoyed by a. a UK subsidiary and b. a Korean subsidiary of an American corporation?

Sources and Further Reading

1. Accountants World. Information on accountancy, tax issues and accountancy services. Database search of articles.
2. Business Link. Advice for UK companies on general business matters.
3. eBusiness Forum. Online Economist Intelligence Unit, with a wealth of information on worldwide issues.
4. International Tax Sites. Very extensive directory of tax and accounting sites worldwide.
5. HM Customs and Excise. Advice on UK VAT requirements.
6. Offshore Ecommerce. Very detailed information on the taxation and regulations applying to offshore ecommerce.
7. Offshore Press. Introductory but balanced articles on ecommerce taxation issues. Several reports and manuals available.
8. Small Business Tax and Management. Articles and resources for the small and the medium-sized business.
9. Tax News. News and extensive articles on offshore tax legislation, with a special section on ecommerce.
10. Tax Reports. Tax analysts with information and in-depth reports on US and international tax matters.
11. Vernon K Jacobs. Sensible article on dangers of free tax advice, plus useful articles and resources on tax generally (i.e. not specifically ecommerce-orientated).
12. VAT on electronic services. European Commission. Regulations currently in force. Also see FAQs.
13. Taxation of e-commerce. Out-Law.Com. Outline of tax regulations that affect UK businesses.
14. Taxation of Offshore E-commerce — European Union VAT and E-commerce. Offshore-E-Com. Short history, plus links to individual countries.
15. Practical Financial Management by Colin Barrow. Kogan Page. April 2011.
16. Oracle E-Business Suite 12 Financials Cookbook by Yemi Onigbode. Packt Publishing. August 2011. Chapter 8.
17. PHP 5 e-commerce Development by Michael Peacock. Packt Publishing. January 2010.
18. The IT/Digital Legal Companion: A Comprehensive Business Guide to Software, Internet, and IP Law Includes Contract and Web Forms by Gene K. Landy and Amy J. Mastrobattista. Syngress. June 2008.