< The beta blog | May 19, 2014
Retail and tax challenges in the digital age
The retail experience is undergoing rapid transformation. First it was online shopping, then multichannel and now total retail – a focus on the customer to provide a smooth shopping experience however they buy, supported by internal systems and processes which can communicate and act accordingly. Retail has grown up and tax authorities are growing increasingly interested in where they make their money.
The convergence of channels, typical in our increasingly globalised world that the digital age has hastened, highlights the need to understand and balance a number of factors. At a broader level, we’re seeing the importance of balancing commercial developments with tax laws and practice. Currently, retail businesses are taxed on a channel by channel basis – to look at a converged channel means re-examining the whole supply and value chain for tax purposes. If you spend to improve your flagship bricks and mortar stores in certain locations, and your on-line sales benefit as a result, how are the locally-incurred costs allocated to the income generated? If you want to make it easy for a customer to buy goods through one channel and return it through another, how are the VAT implications, and any warranty obligations, dealt with? If shop assistants in one territory use tablets to order online when the goods and sale are not in that territory, is there a risk that this creates a taxable presence where the goods are located (permanent establishment risk)?
At a more detailed level, within the sphere of tax, the digital world requires a different level of focus and increased complexity and attention. For retailers operating outside the EU, for example, it’s important to understand and manage the interaction between transfer pricing and customs duties. Where retailers need to move stock more nimbly to satisfy international demand, making sure they secure maximum sales at full price, the tax impact of every cross-border movement will have to be dealt with.
Retailers will be thinking through how to balance the increasing commercial complexity, additional systems requirements and associated tax risk. Changes in the way digital companies are taxed are on the way and retailers will want to know, understand and manage their risk areas, for example through considering advance pricing agreements with tax authorities, procedures for flagging potential permanent establishments, and reviewing VAT and customs procedures.