From Joe Biden’s war on profit-shifting to the UK’s proposed 2% online sales levy, tax hikes seem unavoidable for even the biggest players in ecommerce.
The levy is designed to level the playing field for physical retailers, which have suffered disproportionately during the pandemic, while recovering some of the hundreds of billions spent by the government on tackling the crisis. More details about it were expected in March’s budget, but an announcement has been delayed until the autumn.
Etailers in the UK are already grappling with the digital services tax (DST) and changes to the VAT rules, not to mention the effects of Brexit. They are also uncertain about how their sales will be affected once consumers return to the high street in greater numbers. Unsurprisingly, few are keen to accept any further costs.
“Every UK retailer that has a direct-to-customer ecommerce operation would be hit massively by an online sales levy,” predicts James Watts, CFO of OnBuy.com. “Higher taxation wouldn’t affect the major players in the market or even help the high street, but it would harm the growth of so many independent retailers that have depended on online sales for their survival over the past 18 months.”
What tax changes do ecommerce brands need to know about?
DSTs are already in force in eight European countries – the UK, Spain, France, Italy Austria, Hungary, Poland and Turkey – and six more nations are known to be considering the measure, according to KPMG. The UK introduced its DST in April 2020. Set at 2%, this applies only to search engines, social networks and online marketplaces with annual worldwide revenues exceeding £500m, of which £25m is derived from users in the UK.
This tax is clearly designed to target the sector’s biggest players, but Amazon intends to pass the cost on to its sellers, for instance, while Google has said that its advertisers will shoulder the extra burden.
Separately, the EU is considering the introduction of its own digital levy. It’s expected to reveal more details about this imminently.
Meanwhile, the Organisation for Economic Co-operation and Development (OECD) has been hosting talks with more than 130 countries with the aim of reforming the international tax system.
Heather Self, corporate tax partner at accountant Blick Rothenberg, explains: “There is a widespread perception that big digital companies don’t pay their fair share of tax. A long-running project at the OECD is addressing this, but the issue is hideously complex and the deadline has slipped to October 2021. It is focused on the largest multinationals, so it wouldn’t have much, if any, direct impact on smaller players.”
Despite this, there are several other developments in tax policy that smaller etailers need to monitor.
For instance, the UK introduced new VAT rules on 1 January this year for ecommerce imports worth up to £135. The EU will follow suit on 1 July for items worth up to €150 (£130). The aim is to ensure that sellers account for VAT, so that competition is not distorted by online sales escaping the tax while physical sales do not.
In addition, corporate tax increases are on the horizon. The UK government will be increasing the corporation tax rate from 19% to 25% in April 2023.
In April this year, Joe Biden announced plans to raise the US corporate tax rate from 21% to 28%, although he has since suggested that he might accept a compromise of 25%. He also called for the introduction of a global minimum corporate tax rate (21%) as a measure that would prevent multinationals from shifting their profits to the lowest-tax jurisdictions they can find.
How are ecommerce retailers preparing for the tax changes?
Melissa Snover, founder and CEO of online vitamin brand Nourished, is already calculating the extent to which the introduction of an online sales levy in the UK and a corporate tax hike in the US could affect her business.
“We want to keep the UK our home. There are lots of reasons why we like it here,” she says. “We have 12 patents, so we qualify for Patent Box relief, which means we pay only 10% corporation tax on profits resulting from those patents.”
There are other schemes that UK-based firms can use to reduce their tax burden. These include R&D tax credits and an all-new super deduction that cuts companies’ tax bills by 25p for every pound they invest in new equipment. Firms could also take on more debt, using interest payments to reduce their exposure to corporation tax. Meanwhile, the owners of smaller companies could increase their salaries, rather than receive dividends, to reduce their firms’ taxable profits.
“A 2% online sales levy wouldn’t be too much of a problem for us. We wouldn’t pass that on to the customer,” says Snover, but she is keeping a close eye on Biden’s policies in case they disrupt her plans to expand Nourished into the US.
“We’re looking at having a factory in Colorado, which has a corporate tax rate of only about 4.6%. But then we’d get hit with the federal rate on top of that,” she says. “If we ended up having to pay more tax for making products in America, we’d seek ways to make savings – through automation and improved consignment transport, for instance.”
Tony Bailey, sales director at wellington etailer Evercreatures, doubts that many online traders in the UK would be willing to absorb the full cost of a new sales levy. “Are UK businesses prepared to swallow the potential loss? I don’t think so,” he says. “It would inevitably lead to an increase in retail prices, thus passing the expense on to the consumer.”
Bailey adds: “Smaller businesses may not be set up to account for the introduction of an online sales tax. VAT is pretty standard in accounting packages, but these firms may require new IT infrastructure and accounting procedures to handle a DST or sales tax.”
Given that they’re still awaiting detailed proposals on the UK sales levy and the EU-wide DST, while Biden’s plans also remain in the balance, etailers can do little more than scenario planning in preparation for the changes to come. But one thing is clear at this stage: they must brace themselves for higher taxes and an increased regulatory compliance burden. If their accountants and lawyers aren’t already on speed dial, they surely will be shortly.