Exploration of Digital Sales Taxation

In the ever-evolving world of e-commerce, it's crucial for businesses to grasp the key tax considerations when engaging in cross-border transactions with the United Kingdom. This article outlines some essential aspects to help companies navigate the UK's tax landscape.

Place of Supply for Goods and Services

For supplies of physical goods, they are deemed to be made at the location where the goods are situated when they are dispatched. However, for digitised products and electronically supplied services, the place of supply has changed since 1 January 2015. The place where the customer is normally resident will be the member state where VAT on the digital services supply is due.

VAT for Cross-Border Supplies of Digital Services

There is no registration threshold for cross-border supplies of digital services, and VAT is charged at the rate due in the consumer's country. A reverse charge procedure operates for supplies of digitised products to customers outside the UK.

Tax Residency and Profits

In the UK, taxes are imposed on the worldwide income of any person tax resident in the UK, or on income arising in the UK of any person not tax resident in the UK. A company incorporated outside the UK may also be UK tax resident if it is "centrally managed and controlled" from the UK, subject to double taxation treaty tie-breaker provisions.

Even where a company is not tax resident in the UK, it may be subject to UK tax on its profits which arise in the UK. The UK has an extensive network of double taxation treaties with other jurisdictions to prevent a taxpayer from being taxed in more than one jurisdiction upon the same profits or gains.

Royalties and Withholding Tax

Royalties are subject to a different tax regime from that applicable to other business profits in many jurisdictions, including the UK. Royalty payments may be subject to withholding tax, and full or partial relief from withholding tax is given by double tax treaties provided relevant claims are made.

E-Trade Profits and Taxation

The UK will have limited taxing powers in practice unless the activities in the UK constitute a branch or agency through which the e-trade profits are earned. Under the Mini One Stop Shop (MOSS) system, businesses supplying electronic services can register electronically in the member state of their choice.

Tax Reforms and E-commerce

Major changes in the management of online taxes in the UK in recent years have primarily been driven by government initiatives rather than specific private companies. The UK government and its tax authority (HM Revenue & Customs) have introduced significant digital tax reforms such as Making Tax Digital (MTD) to modernize tax administration.

The OECD's Recommendations

The OECD has recommended changes to the international tax system due to concerns about the avoidance of tax by multinationals. These recommendations aim to ensure that multinationals pay a fair share of tax in the countries where they operate and generate profits.

Considering Local Taxes

When UK-based businesses conduct e-trade with overseas customers, they need to consider whether their activities will bring them within the scope of local taxes. E-commerce presents a challenge for tax administrations due to its multi-jurisdictional nature and potential anonymity of parties.

Treatment of Digitised Products

Digitised products are treated as a supply of services and not goods. This distinction is significant when determining the applicable tax rates and regulations.

HMRC has produced a useful flowchart as to when the new rules apply for supplies of electronic services. This guide outlines key UK tax considerations for a company conducting electronic business in the UK. It's essential to seek professional advice when navigating the complexities of international tax law.