The explosion of e-commerce in the last 15 years has made it easier than ever to manage the logistics of doing business in multiple countries. The global reach it creates, though, has spawned a litany of tax questions. You need to determine which jurisdictions have the authority to tax you and your business activity and what taxes apply. Your physical location and your end-customer locations can impact what you pay to whom, but other factors might also apply. Managing this process is critical to your continued e-commerce operations.
Where to Tax Income
The issue of the jurisdiction to tax e-commerce is a complicated one, which many countries have yet to resolve. In 2016, the Israeli tax authority laid down guidelines on taxation for companies involved in e-commerce business in Israel. A company will owe taxes to Israel for e-commerce income if it either has a physical presence or a significant economic / digital presence in Israel. Thus, even if you do not have a physical presence within Israel, Israeli tax liability may still be triggered on account of various non-physical factors, which usually are not common in determining tax liability.
Value-Added Tax for E-Commerce
Value-added tax (VAT) presents its own concerns. Do you pay this tax to the location where the customer is located, or where you have your base or a physical presence? Part of this depends on what you are selling. In the EU, for example, payment of VAT on physical goods goes to the seller’s location. Electronic services, on the other hand, are charged VAT where the end consumer is located.
In Israel, Section 60 of the VAT Act requires foreign companies that have business or activities in Israel to register a representative in the country within 30 days of beginning to operate in Israel. This registration helps ensure that sales completed in Israel allow for identification and collection of VAT liability. Here, too, the guidelines issued by the Israeli tax authority allow for creating VAT liability solely on the basis of a significant economic presence in Israel.
How to Collect Taxes on E-Commerce
Your business can collect these taxes much more effectively by building multinational tax rates into its e-commerce platform. Applications that identify recipients by IP address or other indicators of the customers’ locations can connect to current VAT tables to identify what to charge. Similarly, income taxes can be calculated by sorting where sales occur and where the economic impact falls.