Online Business and Taxes: Here’s How It Works

After the G20 summit, which took place at the end of June 2019, its participants reached a consensus that it was time for large Internet companies to pay taxes in full. The countries agreed to introduce a digital tax in 2020, which, in particular, will affect leading brands, like Apple, Google, Facebook, and Amazon. Moreover, the EU expressed readiness to introduce it to the European countries separately if other G20 members will not be able to implement the tax. The process has already been launched in France and Italy.

How Will This Tax System Work?

The terms digital economy and digitalization have long entered the vocabularies of many people. The level and scale of digital development became the reasons why this industry is attracting more and more international attention. Regulation of e-commerce, new rules for observing consumer rights, protection of personal data, and cybersecurity — all these aspects became and still remain significant components of governmental policy. The same way as taxes are no less important for the world’s leading governments too.

Nowadays, developed countries are looking into how the so-called geographically mobile businesses work. Internet giants such as Facebook, Google, and Amazon have long declared their profits in low-tax states, regardless of the actual location of the company. Wherever you are, you can order a perfect and inexpensive essay here:

The European Commission is paying attention to the countries that had provided benefits to multinational companies. In particular, Ireland adopted tax regulations and set an extremely low rate (0.005%) for Apple. A bit later, this rate was increased, but now Apple intends to challenge the decision in the European Court of Justice. The Apple top managers assure they comply with both US and Irish tax legislation and pay the principal tax in the USA, where the goods are produced and where most of the additional value is formed.

E-commerce finds its customers around the world. In this case, taxes are usually paid where the company is registered as a taxpayer. Very often, these are jurisdictions with low tax rates. Even if those tariffs are not the lowest, sales and income taxes are not paid to the country where the company actually sells its goods, products, or services.

It is especially true for highly digitalized businesses. Google, Netflix, Uber, and can serve as examples. Their services are in demand around the world. The current rules for profit taxation involve binding to the physical presence of the business in the relevant legal state. This presence is defined by the degree of involvement of corporate assets, as well as the added value in a particular country.

What Changes Are in the Works?

Organization for Economic Cooperation and Development (OECD) is working to unify approaches to taxing the digital economy. International cooperation has already given results. The measures of deoffshorization with the use of tax planning tools made the schemes for evading paying percentages economically unjustified.

Currently, OECD is dealing with an equally vital global problem — taxation of online activity. This organization presented a draft concept to the Heads and Ministers of Finance of G20, which is aimed at unifying approaches to taxation of trading on the Internet. The main parameters and structure of the proposal have been approved. It is assumed that the formal implementation of procedures for joining the project will begin at the end of 2020.

Recently, France and Germany came up with an initiative to oblige online sellers to pay taxes, not in the countries of registration, but where such companies receive payments. Mandatory registration of the value-added taxpayers for foreign e-commerce already exists in these two countries. Italy also introduced a web tax of 3% at the legislative level for each online purchase. OECD offers to go further and tax profits from Internet sales not by the principle of the physical presence of the seller, but according to the place of purchasing.

Risks Associated with the New Rules

Obviously, the most powerful economies want to receive taxes from online activities that take place in their territories. According to the analytical portal Statista, the share of e-commerce sales last year amounted to more than 15% ($3.1 trillion) compared to the total volume of the world trade. The biggest challenges in applying the new taxation concept are:

  • An excessive administrative burden on the online business;
  • Difficulties in implementing in the absence of a taxpayer in the relevant jurisdiction;
  • The need to simultaneously change the existing tax legislation of a country and international treaties to avoid double taxation.

The consensus of the G20 countries regarding the offered method for the taxation depending on the location of customers will result in more developed countries dictating their rules. In turn, these conditions will put the Internet business in a tight fiscal framework.

In this matter, the United States might take the third option, fiercely guarding their interests and budget. An economic conflict with European countries seems to be inevitable. Tax rates might be increased, taking into account the intensifying trade war. As a result, this will put American companies that work in the European markets in tricky conditions.

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