Change and the order of change is one of nature’s constants. Everything moves and as the quote goes ‘No man ever steps in the same river twice’. When Heraclitus of Ephesus uttered those words, which became the essence of his influence on philosophy, he certainly wasn’t talking about e-commerce. Nevertheless, Heraclitus’s views on the source of all things, coined two and a half thousand years ago, remains valid. And lately it may be even more timely than ever before.
Every year, the rate at which the world changes accelerates, and business doesn’t lag behind, it often even sets the pace for this change. Against this backdrop, new forms of business are increasingly coming face-to-face with administrative and tax realities that are rigid and resistant to change.
This was the case for one of our clients. In this article, we demonstrate a situation that we will increasingly have to deal with in real life.
The classic definition of trade includes terms such as goods, price or seller. They are quite obvious. In addition to that, we also use warehouse, interaction with customers, presentation of goods for purchase, transport of goods if the customer decides not to collect them in person, purchase of goods from the manufacturer or independent production.
The above-mentioned elements form the basis on which tax regulation was created to levy taxes on commerce. But what happens if one of those elements is missing?
Today the popularity of e-commerce grows daily, and in pandemic times it has also stepped into more traditional businesses, such as restaurants.
E-commerce means that contact with customers, presentation of goods, purchase of goods and marketing have all moved into the virtual sphere of the internet. As a result, there no longer is a physical location from which to sell, no place to display goods, no sales representatives/assistants… We have however retained warehouses and means of delivery to the customer (typically through an external transport company arranged by the seller).
Now imagine a situation where none of it is available. That is, the seller sells goods that they do not store or send to customers. On top of that, the products are manufactured on their behalf by an external company, most often located in the Far East and those goods are sold to customers in the United States for example. Technological advances and access to most places in the world (without travel) – 100% online – makes trading in this manner possible. Some of the owners of those marketplaces (sales platforms) grow their offers, in addition to offering sales through their website, they also provide warehouse space, as well packing services, transport, etc.
In this context, trade and in particular international trade, has gained a whole new meaning, which has created new challenges. One of those is the necessity to face tax rules that do not necessarily keep up with actual practical changes.
Not many things are certain in life, but undoubtedly taxes are one of them. Although, it has become more obvious in recent times that they do not follow the changes of our dynamic economic reality.
Imagine trading in the traditional sense. An entrepreneur based in Poland buys products in Poland and then sells them also in Poland. For tax purposes, this type of activity does not create major problems: generally speaking tax is levied on the margin. Things get somewhat complicated if we add a crossborder element to this. For example, the entrepreneur either buys abroad, or sells abroad, or even both. In this case, tax will also be levied on the margin, but the following question arises: Where?
From an international law perspective, taxation may take place in either the state of residence of the seller or the customer. In this context, it is necessary to determine (among other things) whether the seller has a branch in another country. Here we are reviewing a situation where an entrepreneur generates income in another country and should therefore pay tax there. The likelihood of the seller being taxed there increases with the levels of activity and presence in said country. In such cases, sales income will be taxed in the country of sale. It is well worth analysing and understanding those variables before expanding a business.
Collision with (tax) reality and outcome
The problem becomes more unpredictable in the case of online trading, where the only assets involved in the activity are in fact financial resources. The entrepreneur, based in Poland, can sell products in the United States without having major presence in that country. They can operate only on the basis of a suitable agreement with an internet giant such as Amazon which will provide logistical and sales administration support. The entrepreneur may not even carry out complex activities in Poland. Sometimes all that is needed is an office and a handful of people to run it. Let’s also assume that the goods are imported from China and never even arrive in Poland.
If that’s the case the situation will be different. Tax will only be levied in the seller’s country of residence. But be careful! Some countries (the USA for example) may, under internal rules (because the sale takes place in the US and only to US customers), assume that the proceeds of this sale should be taxed with them, on top of the taxes levied in the country of residence. That is because there is no foreign company branch and therefore no grounds to determine that no tax should be payable in Poland.
As a result, the seller will have to pay tax both in Poland and overseas (in this case the USA). There will be no way to offset them against each other. This situation arises because there is no protection from double taxation in such cases, it is however available in the event a company has of foreign branch. Is there a way to mitigate this type of risk? Yes of course, as long as advance plans are in place for such activities and the company has appropriate agreements in place with other countries, such as the USA.In e-commerce it is very important to analyse planned activities from a far broader perspective than in the case of standard trading methods. And as usual, it is worth conducting this analysis before taking any action, this will make planning much more straightforward and open up a much wider range of possibilities.