Every two years, the World Trade Organization (WTO) convenes a ministerial meeting, and its 13th installment – Thirteenth WTO Ministerial Conference (MC13) commenced on the 26th of February in Abu Dhabi, United Arab Emirates.

With its dispute-resolution mechanism in disarray, the WTO faced an opportunity to demonstrate its ability to facilitate negotiated agreements. At stake, among various other issues, lay the future of a moratorium on tariffs on digital trade.

This moratorium essentially prohibits member states from imposing customs duties on electronic transmissions such as software, e-books, music, and other digital products.

Since its inception in 1998, the WTO e-commerce moratorium has been renewed every two years, serving as a cornerstone of the digital economy. It has facilitated the growth of cross-border digital trade, enabling businesses to reach global markets with greater ease and efficiency.

However, although the moratorium was renewed yet again in 2024, there is an expectation of a fiercer negotiation when the time for renewal comes in 2026. At least 3 major developing countries expressed their dissatisfaction with the moratorium.

Let’s delve into the challenges.

Challenges to renewal

With the 13th Ministerial Conference (MC13) having just taken place, the future of the e-commerce moratorium had become a timely and contentious topic of discussion. MC13 held the potential to shape the trajectory of international trade policies and the digital transformation of trade for years to come, making the fate of the moratorium a pressing concern for WTO members worldwide.

Despite its longstanding presence, the renewal of the e-commerce moratorium faced challenges from certain quarters. Two developing countries, in particular, express concerns about the perceived imbalance in the current digital trade landscape. In most cases, when member states are signaling to oppose the moratorium it’s usually a bluff in order to get concessions in other areas. But things looked rather dire this time around.

Let’s look at which countries opposed the moratorium and why:

India

According to Bloomberg, during the WTO’s 12th Ministerial Conference in 2022 in Geneva, India had adopted the same stance as now and propagated for an end to the digital trade tariffs moratorium along with several other South Asian countries like Sri Lanka, Pakistan etc. However, after a discussion between USTR and Indian Trade Minister Piyush Goyal, India took a swift u-turn and agreed to an extension of the moratorium.

The 2024 moratorium followed the same trajectory. Piyush Goyal made a strong case against the e-commerce moratorium, alleging that it refrains from imposing customs duties, favored big tech companies and undermined the prospects of competitors in developing countries.

However, on the final day of MC-13, India took yet another U-Turn. Goyal said he agreed to the renewal of the moratorium upon the request of the UAE trade minister, Dr Thani bin Ahmed Al Zeoudi, who is also the chair of the ministerial conference. “He is a friend, and out of friendship, I agreed,” Goyal told reporters.

Indonesia

The evolution of the digital economy has brought forth new challenges and complexities that were not envisaged when the moratorium was first introduced. Issues such as data privacy, cybersecurity, and intellectual property rights now occupy center stage, prompting calls for a comprehensive reevaluation of existing trade rules. Indonesia argued that renewing the moratorium without addressing these concerns would be premature and may exacerbate existing regulatory gaps.

“Indonesia also believes that governments need to be free to impose tariffs in response to rapid change in the digital world,” said Askolani, director general of customs and excise at the country’s Ministry of Finance.

According to the WTO, the potential tariff loss to developing countries is around $10 billion, further emphasizing the significant economic implications at stake in the debate surrounding the e-commerce moratorium.

Indonesia was one of India’s staunchest allies in opposition against WTO negotiations. However, they were completely unaware of India’s decision to drop the opposition to the e-commerce moratorium. It continued to oppose the moratorium till the final hours of the meeting, before eventually relenting under pressure as well.

Potential implications of WTO’s tariff moratorium expiration

Over the years the moratorium has its fair share of advocates and critics both. While some believe that it’s essential to have the moratorium in place, others think that it disproportionately benefits tech giants from advanced economies, exacerbating existing inequalities. However, allowing the e-commerce moratorium to expire could have profound implications for the digital trade landscape.

One immediate consequence would be the imposition of tariffs on digital trade transactions, including the downloading of digital content on streaming services and other cross-border digital services. Such tariffs could lead to increased costs for consumers, stifling demand and hindering the growth of the digital economy.

The expiration of the moratorium could trigger a wave of regulatory fragmentation as countries rush to implement their own rules and tariffs on digital trade.

This fragmentation could create barriers to entry for small and medium-sized enterprises (SMEs), limiting their ability to compete globally. It could also escalate trade tensions between major trading partners, further complicating efforts to reach consensus on international trade agreements.

It could also create a climate where startups and small businesses struggle to navigate a patchwork of regulations and tariffs, diverting resources away from innovation and growth. Higher costs associated with tariffs on digital trade transactions may deter investment in new technologies and limit the ability of entrepreneurs to compete globally. This could particularly affect industries such as fintech, artificial intelligence, and digital healthcare, where cross-border collaboration and market access are crucial for advancement.

Alternative options for revenue through existing domestic consumption taxes

Exploring other options for revenue through existing domestic consumption taxes could provide a viable alternative to imposing tariffs on digital trade transactions. Governments could consider leveraging value-added taxes (VAT) or sales taxes on digital goods and services consumed domestically, thereby generating revenue while avoiding potential disruptions to cross-border trade.

By adapting existing tax frameworks to encompass digital transactions, authorities can ensure a level playing field for both domestic and international businesses operating in the digital space.

This approach not only offers a means to capture revenue from the growing digital economy but also aligns with efforts to modernize tax systems in response to changing consumption patterns. Moreover, focusing on domestic consumption taxes allows governments to address revenue needs without impeding the free flow of digital trade across borders, thereby supporting continued innovation and economic growth in the digital era.

The future of digital trade in a post-moratorium era

The renewal of the WTO e-commerce moratorium presents a critical juncture for the future of digital trade. With MC13 having just taken place, WTO members must navigate competing interests and forge a path forward that promotes inclusivity, innovation, and sustainable growth in the digital economy.

A proposal to make the moratorium permanent was also put forth in MC13 but was met with severe opposition and it is expected that things will be rockier in 2026 when MC14 is expected to be held in Cameroon. The decisions made in the next two years will not only shape the future of e-commerce but will also have far-reaching implications for global trade and economic development.

It is essential to strike a balance between fostering digital trade openness and addressing regulatory concerns to ensure that all nations can benefit from the opportunities presented by the digital economy. Efforts to promote transparency, interoperability, and fair competition will be essential in creating an environment conducive to sustainable digital trade growth.

The post After tariff moratorium extended, is more permanent policy needed to keep digital trade open? appeared first on Trade Ready.

The Border Adjustment Tax (BAT) is currently a hypothetical plan that has been presented by President Trump and the Republican Party (GOP). While there is growing speculation and uncertainty around this topic, here is what is known thus far, along with some tips for importers to curtail the BAT.

What would the BAT mean for trade?

The BAT would tax goods that are made overseas and shipped to the United States (imports), but would not tax goods that are produced in the United States (U.S.) and sold domestically or internationally (exports).  This would change how foreign and domestic companies calculate the corporate taxes they pay on profits.

As explained by The Economist, “for tax purposes, ‘profits’ would be domestic sales minus domestic costs.” The “border adjustability is all part of a plan to create a destination-based cash flow tax,” Forbes added, which would change the current corporate income tax. The destination-based cash flow tax would cause the tax rate to be lowered to 20% from the current average rate of 39%.

As a result, businesses would be able to write off their capital investments in the year those investments were purchased. They will also no longer have to pay taxes to the IRS for profits they earn overseas, and will no longer have the ability to “deduct interest as a business expense;” the Tax Foundation explained.

Based on an economic theory perspective, import taxes and export taxes would cancel each other out, therefore creating two potential avenues where BAT would not affect trade. Either the dollar might appreciate just enough that imports and exports end up costing the same as they did before the tax; or American prices and wages would rise enough to undo the competitive advantage that border-adjustment confers.

However, if the economy does not adjust to the BAT, importers would end up paying a lot more taxes in comparison to exporters, which could cause an unprecedented surge in inflation.

To prevent a negative impact on the economy, the Federal Reserve would have to provide a way to raise the value of the dollar to ensure taxes on imports and subsidies on exports would offset each other.

Is the BAT a VAT?

Some economists have compared BAT to a Value Added Tax (VAT), which is used in the European Union. In general, they consider the VAT a “broadly based consumption tax assessed on the value added to goods and services.” The Wall Street Journal added that “Businesses along the chain [of production] collect the tax and send it to the government. …it is the consumer who pays the tax, because the final price of the goods and services [consumers] buy reflect all of the taxes that have been charged up that point.”

Some economists consider the BAT, in its current state, to be very similar to the VAT in regards to retail markets, affecting the consumers who purchase personal commodities. For example, apparel stores relying heavily on imported inventory would face a tax bill that can be 3-5 times larger than their actual profits. While economists are not certain what the long-term effects will be, they do predict that in the short term there could be a 15-20% increase in prices on many household items. This could force many middle class consumers to purchase fewer goods.

Does the BAT violate GATT or GATS?

Other economists and members of the World Trade Organization (WTO) believe BAT could violate Article III of the General Agreement on Tariffs and Trade (GATT).

The broad and fundamental purpose of Article III is to avoid protectionism in the application of internal tax and regulatory measures. More specifically, the purpose of Article III, ‘is to ensure that internal measures not be applied to imported or domestic products so as to afford protection to domestic production.’

For the BAT to comply with GATT, any current or future U.S. tax measures “must be levied on imported products at a rate or amount no higher than the rate/amount levied on domestically produced ‘like’ products; and must provide a border adjustment on exports that is no greater than the amount of tax actually levied or owed on those goods.”

Currently, the GOP’s potential plan is in contravention of GATT, as it would give tax deductions for domestically produced goods, while at the same time denying deductions for those same goods that would be imported.

Another issue that could arise within the WTO is whether the BAT would violate the General Agreement on Trade in Services (GATS). The question would then arise, as suggested by PIIE, as to whether the denying a business deduction for an imported service amounts to less favorable treatment than that given to the same service purchased from a domestic supplier. If BAT does create treatment that is less favorable to imported services than to domestic services, then the BAT would also be in violation of GATS.

While there is much uncertainty, speculation of a future BAT will continue to grow. Until the Trump Administration and GOP present a comprehensive plan with congressional approval, one thing is certain: importers have to begin planning now.

The post New trade taxes may be coming – here’s how you could be affected appeared first on Trade Ready.

As the service export industry evolves, businesses face many unique challenges to deliver them.  Some of these issues may look familiar to those with experience in exporting commodities, while others are tax considerations and compliance provisions that relate directly to the service exports industry.

In previous articles, we’ve talked about the different ways service exports can be delivered.  In this article, we’ll look at what you need to consider when sending employees to represent your company by delivering services remotely to foreign locations.  These services vary widely and might be provided in a number of different ways. The commonality among them is that an idea is created that has value and is shared across national boundaries.

In today’s world, this sharing could occur in any of the following ways:

• Sending documents or ideas via email
• Through the cloud (sharing files on Drop or DropBox, for example)
• Sending hard copies (paper or USBs) of designs and ideas via express mail
• By fax
• Sharing ideas or providing solutions by telephone (landline, cellular, or VOIP)
• By “remoting” into another computer or IT system using a software program (think of the IT person in the Philippines who takes control of your desktop to troubleshoot a problem)

Are there any risks associated with these exports?

The technology and processes to accurately track all of these mostly virtual activities do not yet widely exist.  Remote service exporters should note, however, that governments worldwide are aware of these growing activities, and are actively working on ways to track and tax them more effectively.  There are certainly ways you might get tripped up, so you should be cognizant of the risks and address them appropriately.

The three primary types of compliance risks to consider when providing services:

(1) Export compliance

(2) Taxes

(3) Data privacy concerns in the case of remote access

Let’s look at each of these in more detail.

1. Export compliance still applies to remotely-provided services

Transmissions of concepts, drawings, ideas, and information are still deemed to be exports under the laws of Canada and the U.S.

If encrypted technology is used to remote into a foreign system, you should check to make sure it is not subject to licensing requirements.

In addition, the destination country will need to be checked against country restrictions.  The customer should also be checked against any list of denied parties or other known bad actors.

Sometimes, while executing a project remotely, assistance may be needed from a local firm.  In this case, your company must have a process for ensuring this company and its principals are also screened.

Key recommendations: 

• If the services are related to any kind of product sale, make sure you consider all the necessary related services BEFORE you sell the product to a particular country. Do this so that you can consider any export issues related to the services as part of the product sale – don’t just evaluate the “exportability” of the product alone.
• If you provide only services, remember that you are still exporting. Before you agree to provide services, ensure that you have checked all the relevant export compliance issues (e.g., verify that the customer is not on any denied party or other bad actor list, make sure that the country where the service is being delivered does not have restrictions; make sure the contract paperwork does not contain anti-boycott language; investigate “red flags,” etc.)
• Be sure to check any licensing requirements software on encrypted software used to “remote” into foreign computer systems.

2. Consider the tax risks

The tax risks primarily relate to income tax or value-added tax (VAT).  Let’s look at each in a little more detail.

Income tax/permanent establishment (PE) risk

This risk arises when a company located in one country starts doing things that trigger corporate income tax in a foreign country.  Governments everywhere will try to tax productive activities whenever they can. 

Certain “de minimis” activities are allowed (usually spelled out by a tax treaty between the two countries), but once that threshold is crossed, local authorities will attempt to assess income tax on the local activities.

Unfortunately, there is no agreed-upon set of principles among countries for remote or virtual services. In fact, there is considerable disagreement about their treatment.  This is an area where the tax laws have lagged significantly behind the reality of how many services are delivered today across borders.

The reality is that companies providing only export services to a country (with no other types of economic activities occurring there) are probably at a low risk of triggering any local income tax obligations.  Generally, among the 38 members of the Organization for Economic Cooperation and Development (OECD), providing less than 181 days’ worth of services remotely will not create income tax risk.

However, companies that provide services but also do other activities in that country, such as sending employees there to provide onsite services, operating a warehouse, or having a sales agent there have a significantly greater risk profile.

These companies need to have a system to track all their various activities in each country.  Companies that fail to track all of these activities are at a much greater risk of falling into the PE trap. Make sure you obtain good international tax advice if you conduct business in a foreign country beyond the remote provision of services.

Value-added tax, or VAT

VAT may be assessed on the transaction because the service export is deemed to occur in the foreign country.   For example, Singapore has clearly taken the position that all services provided via the internet should include local VAT tax.  There are new EU VAT rules applicable to services that will come into effect in January of 2017, and several other countries have introduced similar legislation.

These laws will mean that companies providing certain services to foreign countries will be obligated to add local VAT to their invoices.  This will be a true added cost of the service, since many foreign companies will be unable to offset this cost, or will find it inconvenient to recover it (in countries where it can be recovered).

As noted previously, most governments’ ability to actually track these virtual services remains limited. However, there is a huge difference between not collecting VAT because the local law is unclear versus not collecting VAT that is legally obligated in the hopes of not getting caught.

Exporters providing virtual services in particular will want to closely monitor developments around this topic, as it is evolving rapidly.

3. Get to know data privacy laws

Remoting into foreign computers, whether to troubleshoot and fix software bugs, to share raw data, or to conduct “white hat hacking,” is becoming increasingly common.

Anytime someone from one country has access behind the firewall of another country’s system, there are not only data security issues, but also data privacy considerations.

In much of the world, personal data is protected, and the type of data protected is quite broad.  For example, in the EU, it is against the law for a company in the U.S. to have access to any personal data residing on a server in Europe – including office telephone numbers, employment history, or dietary needs – without adequate data protection programs in place.

If your company is providing services where this could occur, become familiar with any applicable data privacy laws, and design an appropriate compliance program.

Key recommendations:

• Involve your tax team early in the planning process. If you don’t have an in-house tax resource, help educate your finance team so that they understand the importance of getting good external international tax planning advice.
• Become familiar with the various country laws assessing VAT on services, and monitor developments closely.
• Consider data privacy regulations when “remoting” into foreign computers

The service export industry is growing rapidly around the world, and things aren’t getting any simpler for those involved.  Although difficult to systematically check today, rest assured countries around the world are working aggressively to better track and monitor many types of remotely-provided services that increasingly cross borders.

The post Why you need to worry about compliance issues even when providing export services remotely appeared first on Trade Ready.

Business has gone global. That’s hardly news anymore. But for the first time in history, the world marketplace is open all day, every day, unrestricted by distance, technological barriers or country of origin. But as with any business venture, entering the arena of global trade and investment presents both opportunities and challenges. The solution? … do your homework … be prepared.

Doing business in the EU– four basic questions

This of course applies to many areas of international trade and investment, one of which is becoming familiar with a region’s taxation regulations. A somewhat simple solution that relates to the European Union (EU) can be summarized in four basic questions:

1.  Do you need to set up a branch office or a separate legal entity in Europe when importing/selling there?
   Answer: No, this is not required but at the same time it also could be beneficial.
2. Does importing and distributing in Europe result in a corporate income tax liability in a European country?
   Answer: Again, this is not necessarily the case and we’ll look at this further later on.
3. Can a Canadian company import/customs-clear products into Europe?
   Answer: The simple answer is yes.
4. And finally, will Value Added Tax (VAT) be due/payable when importing into the EU?
   Answer: Not always, but it can in certain situations.

The European Union and trade legislation 

The European Union (EU) has 27 independent Member States. An important part of the EU legislation is in the form of “Directives”, which means that the Member States have to create their own national legislation, for example relating to VAT. Customs and trade legislation (including duty rates and quota regimes) are managed through EU Regulations, which are directly applicable and binding in the Member States. Corporate income tax is mainly regulated by the countries themselves.

Main customs principles in the EU

From a customs duty perspective, it makes no difference whether goods are imported via the Netherlands, Belgium or any other EU country. However, interpreting customs legislation can differ between countries. But after clearing customs in one EU country, you can distribute your goods to other EU locations without any customs interference, which is known as “free circulation within the EU”. So, in general, it is recommended to centralize import and customs compliance, and to seek out expert advice to ensure compliance.

Business Services Value Chains (BSVCs)

Certain countries, such as Belgium and the Netherlands have sophisticated “Business Services Value Chains”. BSVCs aren’t about doing business, but rather about setting up and operating a business. They are aimed at simplifying and facilitating goods imports and taxation. Key components of BSVCs are air, land and seaports, logistics hubs, legal, accounting and employment advisory services, government services and available labour pools.

Approach of the Member States’ customs authorities

Apart from the legislation, the attitude and focus of local customs and other authorities are also key for companies.

As well, all EU Member States apply the same classification legislation and duty rates. However, the interpretation of these rates can sometimes differ. For example, there are high customs duty-rates in the food and fish industry.

A further issue deals with supply chain security and Authorized Economic Operator (AEO) status. Without AEO certification, customs simplifications are not possible.

Basically there are three types of AEOs:

1. customs simplifications;
2. security and safety;
3. and a combination of the two, customs simplifications/security and safety.

EU VAT – VAT at import

In most countries, the VAT at import becomes due when goods are declared for importation at customs. You can reclaim this VAT-at-import payment, but the actual refund can take several months. However, various EU Member States have implemented regimes to avoid the VAT import payment. Avoiding these payments is a very important selling tool to attract international business.

VAT onward distribution and export

After customs clearance, no VAT is due when goods are sold and shipped to another EU Member State or a non-EU destination (the VAT zero rate applies). When a foreign company sells goods to a company within the country of customs clearance, in some countries, no VAT should be charged. There are also no VAT charges when selling to non-EU destinations.

In sum, the onward sale/distribution of goods from the country of customs clearance does not normally have to result in VAT payments.

Conclusions and ideas

When doing business in Europe, tax, trade, customs and VAT are key topics both from a planning and potential risk point of view. It is important to ensure compliance, as non-compliance could result in assessments, fines and criminal sanctions. Finally, to lower the tax, customs duty and VAT burden, careful planning and some (limited) investments are recommended.

Do you think that you will seek out expert advice when it comes to taxation, customs, VAT regulations and practices in the EU? Do you have anything to add to the above?

The post How taxation, customs and VAT regulations in the EU can impact your export business appeared first on Trade Ready.