We know that most small- and medium-size retail operations don’t have either the budget or the structure to hire specialists for all aspects of running a business. Instead, the owner or partners either become specialists in all areas by education themselves — or by making mistakes that can potentially cost a lot.
Since COVID-19, the increase in online retailers that ship worldwide has been exponential, which is good for business. But how does one deal with all the different tax rules in different countries where the product is shipped to, and where profit is generated from those sales?
Entrepreneurs must keep their eyes wide open for new developments in rules and laws worldwide and adapt their business to the changes.
Up until now, the “globalization” of tax rules hasn’t hit the retail business hard. As a general rule, if you are shipping to a different country, the costs of shipping and local delivery, importation and customs taxes fall on the customer.
However, this is changing. The Organization for Economic Cooperation and Development plans to institute a new program called PILLAR 2, which would tax companies’ profits based on the origin of the revenue. I will explain that later.
What is the Organization for Economic Cooperation and Development? The OECD is an international organization that “works to build better policies for better lives,” mainly by coordinating economic and tax rules among nations to promote trade, development and growth. The organization is based in Paris and was founded mostly by European countries. However, currently OECD has around 40 members and PILLAR 2 has the signatures of more than 140 countries worldwide in support of the project.
What is the purpose of the PILLAR 2 project? The idea is to reform international taxation rules in keeping with today’s digitalized and globalized world economy, and ensure that multinational enterprises pay their fair share of taxes wherever they operate and generate profits. OECD hopes to implement these new rules by 2023.
How does PILLAR 2 intend to make global taxation fair? The first step is to establish a minimum corporate income tax rate in all countries that sign on to the project. The rate is not defined yet, but seems likely to range somewhere between 10% and 15%.
Let´s say that you ship your products from the U.S. to Bermuda. Bermuda is a tax haven, so you don’t pay any taxes on the shipment of your products to Bermuda nor corporate taxes in Bermuda on the profits you generate from there. Upon receiving the item, your customer in Bermuda won’t pay any taxes either. You still pay your U.S. corporate income taxes on your global profit, including the profit you made in Bermuda, at a rate of 21%. But the corporate income tax paid goes to the U.S. Treasury, not to Bermuda. PILLAR 2 aims to change how corporate income is taxed everywhere, or at least in those 140-plus members’ jurisdictions that have signed and agreed to the new regime.
Following the example above, let’s imagine now that the PILLAR 2 project is implemented, and you are shipping from the U.S. to Bermuda, and that both the U.S. and Bermuda have signed the PILLAR 2 project agreement. The shipping part doesn’t change much, unless Bermuda’s government decides also to implement customs/importation taxes as part of local tax reform. What does change is how the corporate income taxes are assessed and paid. Under PILLAR 2, the profit generated by your business in Bermuda will be excluded from the profit you have made elsewhere, and will be taxed in Bermuda, with the payment going to the Bermudian Treasury.
Continuing with the example, let’s say that Bermuda currently has a 0% corporate income tax rate which jumps to 15% when PILLAR 2 is implemented. For an online retailer based in the U.S. and currently taxed at the rate of 21%, this is going to be an advantage.
The point here is to demonstrate how business is going to change for online retailers that ship worldwide. Business owners will have to understand not only their local tax rules, but also the tax rules in the countries they do business with. The outcomes will vary, so small- and medium-sized online retailers will have to start to pay more attention to these changes and developments in order to be able to make a tax plan in advance, enjoy the possible advantages and try to avoid the disadvantages.
If you are interested, OECD provides on its website periodic reports on the development of the PILLAR 2 project, including the updated list of the jurisdictions that have signed on to the project and that will implement changes locally to comply with PILLAR 2.
Building a business is not easy. Technical and legal details and nuances can create problems, or help you thrive in a global business. Entrepreneurs must keep their eyes wide open for new developments in rules and laws worldwide and adapt their business to the changes. Continual research and networking is a good way to avoid costly mistakes.
Gabriela Rocha is the CEO of sex toys and lingerie online retailer, Stuffgoodies.
