The advent of global taxation

Global Tax - What you need to know

As digital services and global marketplaces continue to transform the economy, tax policies around the world are racing to keep up. In 2024, we’ve seen a surge in new tax compliance obligations, rate adjustments, and innovations in tax collection systems, signaling that the era of “set-it-and-forget-it” tax compliance is over. Businesses operating in the digital economy must stay ahead of these trends to navigate the increasingly complex global tax landscape.

Taxes, taxes everywhere

Over 100 countries now impose tax collection obligations on foreign companies providing digital services to local customers.

The Philippines, for instance, recently approved a 12% VAT on digital services sold to local consumers, effective for companies earning over 3 million PHP annually.
These measures reflect a broader global trend.

For businesses, this means ensuring compliance across multiple jurisdictions where definitions of taxable services and thresholds vary widely.

The US Sales Tax Evolution

In the United States, the digital economy has upended traditional sales tax frameworks, originally designed for tangible goods.

Unfortunately for us small business owners, states like Vermont now tax remotely accessed software, while California has extended sales taxes to digital advertising and data extraction services.

Other states, including Illinois, Massachusetts, and New York, are exploring similar expansions.

Increasing responsibilities

Marketplace operators are becoming central to tax compliance worldwide.
In Switzerland, starting January 2025, platforms facilitating goods sales will assume VAT responsibilities, even for imported goods. Similarly, New Zealand’s new rules require digital platforms to collect GST on services like ridesharing and short-term rentals.

The EU’s “VAT in the Digital Age” (ViDA) reform will further streamline compliance by mandating platforms to collect VAT for certain services, such as short-term accommodations. ViDA also expands the One-Stop Shop (OSS) system, simplifying VAT registrations for businesses operating across multiple EU countries.

Tax Rate Adjustments - A cure it all?

Adjusting VAT rates has become a common tool for addressing economic challenges. In 2024, Estonia, Singapore, and Switzerland raised their standard VAT rates, while Finland increased its rate to 25.5%, now second only to Hungary in the EU. The US has seen over 500 local sales tax changes in 2024, with states like Nebraska introducing legislation to raise rates further.

Simultaneously, new EU rules starting in 2025 will give member states more flexibility to apply reduced VAT rates to align with priorities such as combating climate change and promoting digitalization. For businesses, this opens up opportunities to benefit from lower rates on previously taxed services like internet access and live streaming.

Introducing Real-Time Compliance

Traditional tax filing is giving way to real-time compliance systems, particularly in Latin America and the EU (lol).
Mandatory electronic invoicing (e-invoicing) has become a cornerstone of this approach, allowing governments to collect tax data in near real-time while curbing tax evasion.
This adoption was accelerated in the pandemic period.

The EU plans to make e-invoicing the standard for cross-border transactions by 2030, requiring businesses to issue invoices in a standardized digital format. While this streamlines compliance, it also demands significant investment in technology and processes from businesses.

What about Merchants of Record?

Merchants of Record (MoRs) like LemonSqueezy and Paddle play a pivotal role in the evolving landscape of global tax compliance for digital services. As the legal sellers in transactions, MoRs assume comprehensive responsibilities, including payment processing, tax calculation, collection, remittance, and adherence to international regulations.

MoRs manage the complexities of global tax laws by calculating, collecting, and remitting taxes such as VAT, sales tax, and digital service taxes on behalf of their clients.

For startups or businesses with low transaction volumes, the costs associated with outsourcing to an MoR might outweigh the benefits. These businesses often handle compliance in-house or use simpler tax tools.

Businesses with limited markets or simple product offerings might not need the full suite of MoR services. For example, selling digital goods in a single country with straightforward tax laws is manageable without an MoR.

Conclusion

Businesses navigating the global digital economy must not only adapt to evolving tax laws but also leverage these changes to streamline operations and improve compliance. In an era where governments are modernizing their tax systems, staying ahead of these shifts - and more importantly understanding if they apply to you - is critical.