TMC Tax Focus | A shifting international tax landscape
Published on 12th Apr 2021
Over the last few years there have been a raft of changes in the tax rules for companies that are rich in intellectual property or carrying on digital business. With further reform on its way, is your international business prepared?
Companies in the Tech, Media & Communications (TMC) sector traditionally derive a large part of their value from intellectual property (IP) and data, which can give rise to particular tax issues. Increased digitalisation means that IP has become more complex, generating substantial profits in its own right and it is often developed and used globally. The activities of a technology company also mean that the businesses can undertake substantial trade in a country without creating a taxable presence - a permanent establishment (PE) - there.
Tax laws have always had anti-avoidance rules intended to counter aggressive practices. For example, the institution of controlled foreign company rules in many countries have led, broadly speaking, to the profits of a subsidiary carrying out passive activities (such as holding IP in an offshore country) being taxed on the parent. Royalty withholding taxes have also historically stopped companies in many countries from easily stripping out profits to tax havens.
Nevertheless, critics argue that certain global corporates can avoid paying 'their fair share' under the current tax system. Significant pressure has been exerted to change the rules both at an international level and at a local level – the net effect of which has been some radical changes to how certain companies are taxed. This in turn has changed how those companies are structured.
In a special five-part series we will look at some of the major changes that have taken place in recent years that will be relevant to multinational businesses in the TMC sector. We will be looking at both international measures and national regimes, focussing on the UK, Spain and the Netherlands.
In the first part (below) we look at recent and forthcoming VAT changes, in the second part we consider tax incentives afforded to TMC companies in the form of research and development tax credits and the patent box. The third part looks at the debate around profit attribution for tax purposes to digital business, in particular rules around transfer pricing, permanent establishments and digital services taxes. The fourth part in the series looks at anti-avoidance rules and transparency. In the last part in the series we look at the practical issues that arise from the evolving international tax landscape, in particular the need for companies to be able to explain and evidence the rationale behind any transactions which have significant tax consequences.
While multilateral initiatives and new digital services taxes (which we discuss later in this series) attract many of the headlines, businesses need to be aware of changes to local rules that can have an immediate effect, such as VAT. Over the past few years, there have been major changes in how entities pay VAT, which can have a particular impact on TMC businesses.
In the EU (and the UK post-Brexit), supplies of broadcasting, technology and electronically supplied services (BTE) are now treated as supplied where received. When supplies are made to consumers, the supplier has to pay VAT in each relevant location in which it sells. It can do this through a single pan-EU VAT registration known as the "mini one stop shop", although UK sales fall outside that regime from 31 December 2020 (when the Brexit transitional period ended), meaning that a separate UK VAT registration will be required for those suppliers.
New rules for online sales of goods which further enhance this destination principle apply in the UK from 1 January 2021 and are due to apply in the EU from 1 July 2021. As these rules created a significant compliance burden for small companies, they only apply where cross-border sales exceed €10,000. In September 2020, the EU Commission published explanatory notes on the new rules which include practical examples on how to apply the rules if you are a supplier or an electronic interface (e.g. marketplace, platform) involved in e-commerce transactions.
A further simplification rule was agreed on 18 February 2020 which will apply from 2025 to allow intra-EU supplies to be exempt from local VAT where the local registration thresholds have not been exceeded in the destination country and where the business's annual turnover in the EU is less than €100,000.
There have also been VAT changes specifically to target enforcement and compliance against digital platforms. For example:
- VAT registration numbers: in the UK, digital platforms have an obligation to take "reasonable steps" to check that sellers' VAT registration numbers are valid, that the VAT registration number is displayed on the website and the displayed number is valid.
- Joint and several liability: digital platforms could have joint and several liability to pay UK VAT on a transaction where either:
- for a non UK seller, it knows or should have known that the seller should be registered for UK VAT and was not, or
- for a UK or overseas seller, HMRC has provided the operator with a notice that the seller is not meeting its VAT obligations
- Imports and overseas sellers of goods: from 1 January 2021 in the UK (with similar rules applying across the EU from 1 July 2021):
- online marketplaces involved in facilitating the sale of goods imported with a value of £135 or less will be deemed to make the sale and liable to account for the VAT (whether the seller is UK or non-UK established) unless the consignment is a business to business sale and the customer has given their UK VAT registration number.
- online market places facilitating sales by non-UK sellers, where the goods are in the UK at the time of sale, must account for VAT on the sale regardless of the value of the goods unless the goods are for a business customer who gives them their UK VAT registration number.
- VAT obligations for electronically supplied services (or broadcasting/telecoms services): Where there is a supply of electronically supplied services, broadcasting or telecommunication services, there is a rebuttable presumption that an online market place is deemed to be acting as an undisclosed agent for VAT purposes, so effectively treated as buying and reselling such services. Although this presumption can be rebutted, this would involve the platform not authorising the charge or delivery and not setting the terms and conditions. This effectively means that in most circumstances the platform must account for VAT as if it were the seller for supplies made to UK consumers (and will be similarly treated in the EU).
Osborne Clarke comment
The combined effect of these changes has been an increase in both the complexity and amount of VAT that businesses operating online are liable for. Although this is mitigated by the above thresholds, these thresholds are not that high, such that many smaller businesses need to think on a pan European and even global basis when it comes to VAT and sales taxes which inevitably increase compliance costs.
The tax landscape for TMC companies can be difficult to navigate. The rules for VAT, are becoming more complex as countries seek to tie sales to the destination, rather than the location from which the services are provided. Increased digitalisation also bringing its own challenges.
This is an area in which Osborne Clarke has a deep heritage, acting for both the leading players and the disruptors who have developed game-changing technologies and innovative business models, from complex platforms through to content delivery and data management.
Our international tax team can help you understand the complex tax issues inherent in the TMC sector, provide solutions and assist growth. We would be very happy to discuss any of these issues, provide more detailed guidance and examine how they might impact your business.