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Global Trading Changes, Ecommerce & Tax

12/05/2021

In previous blog posts, we have covered the impacts of the new VAT rules for UK businesses in relation to cross border trading, post-Brexit. Global trading is rapidly changing due to innovations businesses have had to implement to respond to the COVID-19 pandemic – and the lockdown measures set by governments around the world.

Going digital

Many businesses had already digitised before COVID-19 – but the need to be online increased significantly when the pandemic started. For many businesses, the pandemic sped up in-house digitalisation programs – with many moving towards e-commerce and away from traditional brick and mortar trading.

This is evidenced by some statistics produced by the OECD which estimates that the global e-commerce business sales for 2021 will reach USD 4.5tn with 25% of these e-commerce sales being for cross-border sales. This is a substantial increase for global e-commerce business sales as compared to 2020 and it is considered that global e-commerce business sales for 2022 will be higher still.

We are all seeing the changes in the UK to the high street retail sector, sadly at present, it is mainly shops and hospitality establishments that are closed. Other countries have already made adaptions to their unwanted high street retail premises e.g., in the USA they have converted shopping malls to warehouses and inner-city distribution centres to support their expanding e-commerce businesses.

There is no one solution that suits all to completing the transformation to e-commerce and it should not be forgotten that current e-commerce retail sales still only represent around 14% of the total global retail sales. This share of the global retails sales market will increase year on year, but the expectation is that such annual growth in global e-commerce retail sales will be at around 2%. So, there are still plenty of retail sales to had by the bricks & mortar retailers. It is just that the so-called high-street retailer will need to be flexible in their business strategy and embrace digitalisation to encourage customers to use their retail stores e.g. click and collect.

The UK’s e-commerce transformation is being slowed somewhat by the combined adverse impacts of Brexit and COVID-19! Also, the Government’s wish to have the UK as a low tax and low regulated jurisdiction – as some say ‘Singapore on Thames’- is proving a difficult objective to achieve and, therefore, may have to be dropped!

Global trading changes mean global taxation changes

Due to COVID-19, governments throughout the World have had to concentrate on introducing tax measures and financial support so that businesses, particularly SMEs, had a chance to survive and recover from the required COVID-19 trading restrictions. Now that the vaccination programmes are beginning to have the desired effect Governments are now turning to ways of recovering their tax revenues.

In the past, such tax increases have been at country level but now thanks to the rise of e-commerce it is becoming apparent that one country’s tax rise could be another country’s tax break! The current UK Government has in the past ‘trumpeted’ a no tax rise policy but then came along COVID-19! As the recent UK Budget showed the UK tax rises have been kicked down the road for companies with the current relatively low Corporation Tax rate of 19% to rise as from 1 April 2023 when a company’s total taxable profits exceed £50,000 with a full rate 25% for companies with total taxable profits of over £250,000. The UK tax payable by individuals will also increase but not by increases to tax rates but by freezing until 5 April 2026 the levels of previously Consumer Price Indexed linked taxable income thresholds and personal allowances.

Governments around the world are realising that the previous methods of setting their company tax rates and providing company tax incentives do not readily fit the current and growing e-commerce global trading where location of taxable profits can be manipulated by the large multinational enterprises (MNEs). This ability by MNEs to reduce their tax burden is also to the detriment of small to medium enterprises (SMEs) who do not have that international trading structure.

Governments are therefore looking at ways to solve the problem of maintaining their tax revenues from MNEs and incentivising SMEs to maintain their trades and sustain their profitability. The UK introduced from 1 April 2020 a 2% flat rate digital services tax (DST) chargeable on UK source revenues created by large MNEs, such as search engines, social media services and online marketplaces, wherever their headquarters are in the World. The flat rate 2% UK DST does increase the UK tax revenues, but it is of little help to UK SMEs as the 2% DST is in the main passed to and paid by SMEs that use platforms such as Amazon for selling their products.

If you have any questions about the UK DST, contact the Digital Services Tax team by email: dst.mailbox@hmrc.gov.uk
Global taxation

Going forward it is important that the trading countries of the World agree to company taxation rates on a global basis. The new Biden administration in the USA has recognised this by recently putting a plan to the OECD that companies should pay their taxes in the countries where revenues are earned and not where they lodge profits. Also, that there should be a minimum company tax rate for all countries. Thus, the Biden Plan would make MNEs pay their fair share of tax on global trading and eliminate company tax havens! However, this is still only a suggested plan but hopefully the start of something worthwhile in the future taxation of global trading.

The continuing vaccination programmes, including annual booster jabs, as supported by successful national trace and test systems will certainly help countries to return to sustainable international trading with, of course, the continuing and necessary COVID-19 secure arrangements in place for all businesses. However, this international trading will not be achieved without agreed global solutions on e-commerce taxation. Watch this space!

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