As digital commerce continues to become an overall bigger piece of the global economy, Withum can help you navigate the complex tax issues that from it. Many countries have proposed legislation that would impose a Digital Service Tax (DST) on digital commerce within their jurisdiction, with VAT and indirect taxes also applying at much lower thresholds. As the taxation of the digital economy landscape continues to develop, both in the U.S. and abroad, analyzing these applicable taxes now is becoming increasingly important.
Timeline of U.S. Cross-Border Taxation and Information Reporting
Information reporting for controlled foreign corporations, and U.S. anti-deferral regime (subpart F) instituted under the Internal Revenue Code.
Bank Secrecy Act requires information reporting for foreign bank accounts.
Passive Foreign Investment Corporation rules enacted to further combat anti-deferral.
Foreign Account Tax Compliance Act enacted to combat tax evasion through use of foreign bank accounts.
OECD BEPS Action 1 report released, but no consensus reached.
U.S. tax reform enacted, and Global Intangible Low-Taxed Income regime fundamentally changes the way U.S. shareholders of controlled foreign corporations are taxed.
Global consensus on taxation of large multinational digital service companies (Pillar One), and minimum tax rate (Pillar Two).
U.S. Cross-Border Taxation and Information Reporting
Recent Trends in Digital Economy Taxation
As of October 2021, over 135 countries and jurisdictions have joined a new two-pillar plan to reform international tax rules and ensure that multinational enterprises pay a fair share of tax wherever they operate
Pillar One – International Tax Reform
Pillar Two – International Tax Reform
- Pillar One serves to ensure a fairer distribution of profits and taxing rights among countries where large multinational companies, including technology companies, generate revenue. Pillar One will operate to reallocate some amount of income (so-called “Amount A”) to markets where such companies have business activities and earn profits, regardless of whether firms have a physical presence there.
- Pillar One will also:
- Establish a fixed rate of return for marketing and distribution activities (so-called “Amount B”) – thereby standardizing the rate of return for these services.
- Remove digital services taxes and existing unilateral measures.
- Pillar One will also:
- Pillar One will require local legislation in each participating country to effectuate implementation, which is targeted to be complete by the end of 2023.
- Pillar Two introduces a global minimum corporate tax rate of 15% to large multinational companies. Pillar Two will operate to charge a top-up tax to the ultimate parent company in its home jurisdiction where its subsidiary is not subject to an effective tax rate of at least 15% (the so-called “Global Anti-Base Erosion” or “GLoBE” rules).
- The top-up tax would apply to, and be allocated among, group companies if the ultimate parent company is not subject to the income inclusion rule in its home jurisdiction.
- Effective tax rate will be calculated based on a definition of “covered taxes” and the tax base which covered taxes will be compared against will be financial accounting income with certain adjustments for timing differences.
- Pillar Two also contains a “subject to tax rule” that would apply a 9% tax to “covered payments” between “connected persons”.
Digital Service Taxes
Many countries have imposed a unilateral tax on digital advertising on large multinational companies. While Pillar One mitigates the implementation of future digital service taxes, those currently in place are still effective, and indirect taxes (e.g., value added tax, general service tax, etc.) are an entirely distinct matter.
- Austria: 5% tax
- France: 3% tax
- Italy: 3% tax
- Spain: 3% tax
- UK: 2% tax
The countries that joined the OECD’s two pillar program have agreed that current digital service taxes can stay in place until Pillar One is implemented, but companies subject to such digital services taxes may receive a credit against future tax liabilities assessed against Amount A (the so-called “Unilateral Measures Compromise”).
- U.S. will remove putative trade actions taken under Section 301 of Trade Act
Indirect taxes of digital services
- Many countries apply VAT/GST to business-to-consumer sale of digital services
- Sales thresholds are much lower than unilateral income taxes
- VAT rate is higher than income tax
How Can We Help?
- Withum can review your global footprint and determine permanent establishment exposure.
- Withum can review your market sales information and determine whether your global tax filing obligations are being met.
- Withum can review your service supply chain and recommend restructuring to increase tax efficiency and mitigate tax audit risks.
- Our extensive HLB International network can help you fulfill EU and Asia indirect tax compliance obligations.
For more information or to discuss your business needs, contact Withum’s Tax Services Team.
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