E-commerce is fundamentally reshaping the nature of global supply chains and the geography of increasingly online penetration especially inside developing countries and particularly mobile-first. Most emerging markets have enough domestic market to rely on. This evolution, which has catalysed previously unseen levels of growth, also comes more under the spotlight of regulatory scrutiny, namely from taxation and tariffs.
Global e-commerce revenue this year projected to hit $4.32 trillion, reflecting rapid industry growth. But, along with the rapid growth of these platforms, have also arisen novel regulatory challenges, as online marketplaces have become the primary conduits for accessing the market. Not surprisingly, China, the Home to powerhouses like Alibaba. com, Pinduoduo, and JD. com has been a vital engine in driving behind this global business parasite taking in the e-commerce behemoths inward it:
Many industries are now revisiting US operating models in light of a 20% US tax on goods imported from China, and a 25% tax on goods imported from Mexico, an emerging destination for many companies reorganizing their supply chain.
Study Your Cross-Border Trade and Transfer Pricing
E-commerce facilitates significant cross-border trade by linking manufacturers all over the world directly to local consumers. This has led to the globalization of supply chains and the modification of transfer pricing frameworks to navigate complex logistics, tariffs, and international contracting and tax codes.
In a price-sensitive environment, companies are improving their competitive offerings and lowering costs through localised, diversified sourcing; and global supply chain strategies that not only drive cost-effectiveness and resiliency, but also tax and supply chain policy effectiveness.
Cross-border supply chains must adapt to regional differences in preferences, regulations, and customer expectations and reconcile transfer pricing models between centralised efficiency and localised responsiveness.
Where to Begin with Employees Changing Tax Issues
A multitude of new tax challenges for e-commerce supply chains are being created, especially in the cross-border tax regulatory environment that is rapidly evolving and appears to be developing and uncertain.
Changes to low-value goods are often exempt from import taxes—and trade tariffs are compelling the localisation of supply chains. While technology has helped build the cross-border e-commerce distribution channel, the cost of these regulatory changes means companies have implemented local entities and functions for procurement, warehousing and logistics.
These are global trends that began with retreat from de minimis rules, expanded trade tariffs. For example, the US has imposed 20% tariffs on imported Chinese made goods, and intends to remove the de minimus exclusion for these articles. Vietnam also removed de minimis duty exemptions.
Companies involved in e-commerce can now set up local-for-local transfer pricing models to significantly reduce additional taxes and adjust the price for the local market. Further, localisation can also play a role in reducing logistics costs and foreign exchange risks.
As de minimis rules tighten and tariffs rise, the rational for local-for-local gets stronger and stronger, challenging the centralised provision hub model. E-commerce companies are also decentralising their functions and risks to serve local products.
Central sourcing and pricing benefits, rooted in markets for such suppliers as China, remain order of the day, but companies are already developing hybrid transfer pricing arrangements that can satisfy the shifting commercial and tax landscape—both central sourcing and local-for local. These models aim to maintain the benefits of central sourcing, while meeting local consumer preferences and increasing product mobility.
Transfer pricing models best fit when strategic supply chain choices such as low-cost sourcing, title transfer of good in transit, and efficient warehousing are performed at a high level.
Reforming international taxation and its effects
But e-commerce in particular is highly sensitive to Pillar One of the OECD/G20 global tax project and the uncertainty that would surround it — namely, the manner in which its principles would interact with digital services taxes of dozens of countries.
This is a real headache for business, with the local compliance obligations potentially involving new Pillar 1 or digital services tax compliance unless these taxes are excluded from the local level under a comprehensive international agreement.
Being a reform of global taxation, Pillar One introduces the notion of reallocating taxing rights to reconciling a portion of profits from a jurisdiction based on where the taxable entity is located to the jurisdiction where the revenues were earned (revenue-generating jurisdictions), which may have implications with respect to the shareable of tax liabilities and global effective tax rates.
E-commerce and IT businesses are also challenged by Pillar Two, especially businesses with significant business models based upon intangible assets like software platforms, algorithms, and brand names. While early Pillar Two disputes and outcomes will be important to watch.
Minimum taxes and substance based carve-outs will also affect the tax efficiencies of existing commissionaires and low (substance) distribution entities.
Reconsidering Tax Incentives, Looking to the Future
On tax incentives, still ambiguous, as observers believe tax regulators will reallocate programs to value-add local economic substance.
With an e-commerce landscape that continues to evolve, businesses will need to remain nimble and to adapt their strategy in order to navigate this new trade landscape, – one where there is a complex interplay between tax regulations, tariffs and changing consumer-demand. Businesses need to keep track of regulatory updates and structure their supply chain and transfer pricing frameworks accordingly for being competitive and compliant.
