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posted 4 weeks ago
In today’s globalised marketplace, understanding international tax law compliance in an international economy has become a crucial concern for businesses. Fortunately, the complexity of cross-border tax laws creates an opportunity for lawyers, as global traders strive to remain tax compliant.
Tax compliance means adhering to tax laws and regulations by accurately reporting income, expenses and other financial information to the relevant authorities. It entails timely filing of tax returns and paying Caesar’s dues. Tax compliance is crucial for businesses and individuals to avoid legal consequences and penalties.
However, being tax compliant requires staying informed about tax laws and regulations, which are often changing. This article explores how international tax laws and regulations are evolving, what global traders need to know and the role of lawyers in helping ensure that clients remain tax compliant in a global economy.
Cross-border tax services include financial transactions involving various countries and their respective tax laws and regulations. The exchange of services, goods and money is crucial to crossing international borders. Such exchanges take place among governments, businesses and individuals and are facilitated by cross-border legal services accounting firms worldwide.
In cross-border trade, services and goods are bought from overseas businesses. It entails the transfer of funds across borders, as well as significant investments in foreign stocks and bonds. Along with complying with national laws, one must consider the fees, restrictions and tax implications involved while carrying out overseas transactions.
Businesses that operate across borders should be ready to face legal challenges that involve complying with varying regulations. However, with the right knowledge and sound legal representation, you will be able to easily surpass these challenges.
The first thing that businesses operating overseas and their legal teams need to be mindful of while conducting international trade is the tax implications. In addition to considering the tax laws and regulations of differing countries, one must be familiar with tax treaties between the governments involved.
While conducting global trade, you should be ready to navigate regulatory scrutiny. In some cases, you might have to deal with such complexities as where one regulator approves the transaction, but another opposes it.
Another challenge is determining the relevant governing legislation applicable to the transaction. Parties involved in cross-border tax transactions need to be careful when choosing the applicable governing legislation.
The decision made by the contracting parties will determine how smoothly the transaction process is carried out. Therefore, these parties must understand the legal environment and circumstances when making this decision.
When working with the right cross-border tax lawyer or consultancy firm, you can develop tax solutions that will align with your global expansion strategy and goals. The right solution makes achieving your business’s financial objectives much easier.
However, you need to work with a seasoned legal team with the requisite experience and expertise in cross-border tax planning to achieve this. Here are the primary benefits of cross-border tax planning for tax law compliance in a global economy.
If your business has a footprint in multiple countries, you are most likely dealing with a plethora of complex laws, rules and regulations. This challenge requires dedicated compliance management, including regulations pertaining to cross-border tax advisory.
If you are aware of and comply with all applicable regulations, the chances of legal tax disputes are drastically reduced. However, the regulatory requirements set out by one country may vary significantly from those framed by another country.
International tax compliance standards go beyond accurate recordkeeping and reporting, often entailing several other legalities. If your team is not well aware of these regulatory requirements, you will face a myriad of legal issues.
This highlights the importance of hiring a lawyer or law firm experienced in international tax compliance for effective cross-border tax planning.
After identifying potential tax liabilities, the next step should be devising effective strategies to address them. Cross-border tax planning allows you to manage risk better by working with accounting and law firms to solve international tax issues.
Additionally, international tax law compliance planning allows your business to increase profits by optimising operations and channelising supply networks to save regulatory compliance costs in differing jurisdictions.
As cross-border e-commerce creates new opportunities for businesses to achieve their global expansion goals, the trend has also brought about numerous tax complexities. According to Stripe, more than 100 countries have already obliged foreign companies to register and collect local taxes.
While these tax obligations traditionally apply to digital services, many countries are now expanding them to remote services like legal, consulting and accounting, and to low-value goods. For instance, in 2023, Singapore began requiring foreign businesses to charge and remit GST on consumer sales of non-digital services and low-value goods.
In Malaysia, tax collection regulations on imported low-value goods came into force in January 2023, while Norway started imposing tax collection obligations on non-resident businesses offering remote services to local consumers.
The world has witnessed a rise in the global platform economy in recent years, with digital platforms connecting sellers and buyers seamlessly. However, this trend has created a fresh set of challenges related to indirect tax systems worldwide revolving around three key domains, namely:
In response to the growth of the global platform economy, many countries, including New Zealand, Switzerland and Japan, are planning to expand tax collection obligations for international platform operators.
Another trend entails augmenting reporting obligations for platform operators. Reporting obligations serve as an innovative means for tax authorities to scrutinise whether platform sellers are accurately reporting their earnings and fulfilling their tax obligations.
For instance, the European Union requires platform operators to disclose the address of all properties listed for rent. Similarly, the UK recently enacted rules mandating UK digital platforms to collect and report annual income information from sellers using their platforms for tangible goods sales, transport services, personal services and rental of immovable property.
The EU has also taken steps to address tax challenges that come with the platform economy, including the following reforms: Customs Union Reform and VAT in the Digital Age (ViDA). These reforms aim to broaden the scope of tax collection obligations to include digital platforms operating within the passenger transport and short-term accommodation rental sectors.
In addition, the EU intends to entrust e-commerce platforms with the responsibility of collecting VAT on goods sold within the region, irrespective of the supplier’s location or the purchaser’s status.
Another aspect of these reforms is the establishment of a strong customs regime where platforms facilitating e-commerce transactions will be required to manage customs formalities and payment obligations to eliminate the current €150 threshold. It will also need the use of the Import One-Stop Shop (IOSS) for all platform operators in the EU to streamline the process of declaring and remitting VAT on cross-border sales of goods imported from non-EU countries.
States with a sales tax in the US have also enacted digital marketplace facilitator laws. Although marketplace facilitator laws are new, it can be challenging for operators to determine their obligations because there is no standard definition for “marketplace facilitator,” with differing definitions across state tax laws.
Additionally, many states still do not offer guidance on marketplace facilitator rules in the sharing economy, including ride-sharing services, short-term rental platforms and food delivery services.
Anyone who has completed an indirect tax return understands how challenging tax law compliance in a global economy can be. In the US, one of the reasons why tax compliance is so complex is due to home rule states, such as Arizona, Alabama, Louisiana, Colorado and Alaska, which allow individual home rule cities to administer sales taxes and define tax bases.
This means city authorities can define tax rules and require sellers to complete additional registration. The impact is that businesses operating in these states have to file multiple returns in one state.
However, some states are taking steps to simplify tax compliance for sellers. For instance, Colorado has a Sales and Use Tax Simplification Task Force tasked with studying the components of a simplified sales tax system and the advantages it would bring for sellers.
Tax law compliance simplification efforts are also underway globally. In line with the ViDA reform package, the EU has introduced a single VAT registration location. This initiative aims to reduce the instances where EU companies must register in a member state lacking a physical presence. The intention is to:
Another significant development in cross-border tax law compliance simplification is the progress made on Brazil’s indirect tax reforms. The country’s Chamber of Deputies approved a historic tax reform aimed at simplifying an indirect tax system characterised by multiple layers of taxes levied at different government levels, leading to overlaps. If enacted, the proposed changes will be implemented gradually starting in 2026.
Real-time tax compliance is a rapidly emerging trend that entails the immediate data transmission to tax authorities as soon as the transaction occurs. This approach is in contrast to periodic reporting and remittance.
The shift towards real-time tax compliance began in Latin America, but it’s now gaining traction worldwide. Many countries have already adopted this model, and more are in the process of doing the same.
One common form of real-time tax compliance is the implementation of electronic invoicing, which means that businesses are required to issue invoices in a structured, machine-readable format and report the data to tax authorities. In the EU, e-invoicing is only mandatory in Italy. However, other EU members are following Italy’s lead and planning to make e-invoicing mandatory in the near future.
High inflation is one of the most prevalent issues in the global economy. To counteract this trend, many countries are turning to indirect taxes. Some countries have introduced temporary VAT reductions primarily targeted at essential items, such as food and energy. However, lowering VAT rates is just one of the strategies countries use to combat inflation and budgetary problems.
In the US, some states are managing inflation by reducing sales tax rates. In July 2024, South Dakota lowered the state sales tax rate from 4.5% to 4.2%, and New Mexico lowered the state portion of the gross tax from 5.125% to 4.875%.
Moreover, states often change which products are taxed throughout the year. For instance, Texas recently updated its tax code to eliminate the sales tax on family-care items like nappies, baby bottles and menstrual products.
The landscape of tax law compliance in the global economy is continuously evolving, with economic shifts and technological advancements driving changes in tax policies. The digital economy, for instance, poses unique challenges to conventional tax policies, compelling countries and international regulatory organisations to develop new rules for taxing digital services and goods.
Adapting to these trends requires businesses and law firms to remain agile and forward-thinking. Monitoring developments in international tax laws, as well as continuous education and training, help companies anticipate shifts and adjust their tax strategies accordingly.
The future of tax law compliance in a global economy will likely entail more cooperation between countries to close loopholes and ensure fair taxation of cross-border businesses, making an advanced understanding of international tax laws important. By staying informed, implementing effective compliance and risk management techniques, as well as leveraging tax planning opportunities, businesses can achieve long-term success in their global operations.
Further Reading:
International Business Law: Key Considerations for Expanding Globally
Author
Kevin Gikonyo is a Kenyan lawyer with a Bachelor of Laws degree from the University of Nairobi School of Law.
Kevin serves as a legal journalist at Global Law Experts, where he delivers insightful and analytical reporting on emerging global legal trends and developments.
posted 3 days ago
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