Tax Administration of Online Marketplaces

Rise of e-Commerce and Its Challenges for the Tax Administration

The development of the Internet has changed the principles of retail trade. The share of e-commerce in the world in 2022 increased by 9.7% to 19.7%^[1]. Online commerce itself is transforming. Small e-stores are being replaced by giant marketplaces. Taobao, Tmall, Amazon, and other E-Commerce goliaths combine offers from hundreds of thousands of suppliers for millions of clients, coordinating worldwide shipping and warehousing.

In recent years, the online business has gained a new lease on life and double-digit growth numbers. Marketplaces have exploded on the back of the pandemic and the development of the agency business model.

In the early days, online stores bought goods from suppliers, stored them in warehouses, and sold them to customers themselves, i.e., they transferred the standard business model to the Internet. Marketplace as an agent gives suppliers a place in the online storefront, which is popular with millions of customers, and provides payments and logistics, including shipping and returns. This model shifts the risk and cost of procurement to the warehouse to suppliers, multiplies the offer to buyers, and increases sales.

The marketplace generates income from the agent’s commission and service fees for suppliers. The buyer pays the marketplace the price of a product or service. From this amount, the marketplace deducts commissions, refunds, fines, fees for additional services, etc. The remaining balance is transferred to the supplier’s account. This model has made it possible to attract new merchants who have learned to search for, purchase, and sell popular products at an attractive price, even considering the fees to the marketplace.

This business model brings new challenges to tax authorities because of the following reasons:

1. Global marketplaces and their suppliers often sell in the country without tax registration as non-resident taxpayers.
2. Non-residents’ income and expenses are unknown to local tax authorities.
3. Local tax authorities want to tax the marketplace and its suppliers in their country.

The marketplace knows the country of sale from the buyer’s shipping address. Also, the marketplace knows the amount of commission and income of the supplier and, therefore, sees the taxable base in the country.

It can act as a tax agent for suppliers if the tax will be calculated based on the revenue and will not consider suppliers’ expenses. With this background, we draw the following conclusions and suggestions for creating an optimal tax administration system for local tax authorities regarding international marketplaces.

Fiscal Receipts in the Country of Sale

With each retail transaction, the marketplace issues a fiscal receipt to the buyer with automatic transmission to the local tax authority. Marketplaces cannot deliberately or mistakenly conceal income from local tax authorities. The format and informational content of the fiscal receipt must comply with the local tax standards.

Tax authorities reward customers to verify receipts and report non-issuing receipts. Not presenting a fiscal receipt should have profound consequences for the marketplace.

The marketplace should report to the local tax authorities the amount of commission and gross revenues of suppliers and show their tax residency status. A simple method presumes that the tax administration calculates suppliers’ taxes based on the revenue from fiscal receipts.

Application of Simple Taxes

Complex taxes, such as VAT, profit, or cost accounting, are not suitable for such cases. The tax authorities are happy to apply them, but cannot audit the accounts of non-resident companies and entrepreneurs.

Therefore, it is better to use the sales or turnover tax, for which the tax base will be the gross revenue. Then the tax authorities will have information to form the tax base and calculate the tax.

Marketplace as a Tax Agent or Return-Free Tax Regime

Marketplace as a tax agent calculates by itself, or with the help of tax authorities, the amount of tax for the period and pays it for itself and for suppliers from sales in the country. It is also reasonable for tax authorities to tax marketplace revenues without diving into settlements of marketplaces with their suppliers. This turnover tax should bear a reasonable rate. Then the tax authorities don’t need the information about the marketplace commissions.

Tax authorities can also calculate the tax themselves. Then the marketplace does not file a tax return and pays the tax administration’s bill. The tax for the supplier is considered by the marketplace in mutual settlements with suppliers, and suppliers put the tax into the price of the goods for their buyers.

Proposal for Tax Administration of Marketplaces for EAEU Countries

As an example, below we will explore the idea of the tax administration of marketplaces for the EAEU countries. One of the largest local marketplaces, Wildberries, operates in 17 countries in the region. Sales in 2022 amounted to 22.6 billion U.S. dollars^[2]. The volume of sales in individual countries is unknown. We propose the following model for the tax administration of marketplaces.

1. Fiscalization of retail sales applies solutions that are already in use by retailers and tax authorities. Cash registers must issue a fiscal receipt with the details of the supplier—principal, and details of buyer.
2. The delivery address or/and phone number identify the buyer in the country.
3. When payment is made, the marketplace sends a receipt to the buyer at the e-mail address specified during registration.
4. The state motivates the buyer to demand a fiscal receipt at the expense of the unconditional tax deduction program for fiscal receipts, which marketplaces passed on to the tax authorities. Since the receipt contains the buyer’s requisites, the information will automatically go into the receipt storage and the deduction will be generated automatically.
5. Tax period for Marketplace is one calendar month. The tax rate of e.g., 2% applies to its sales, not commission. Supplier’s tax is to be included in the 2% or to be an additional 1% to the marketplace tax rate.
6. Tax administrations calculate taxes based on the collected fiscal receipts. Marketplace pays 2% for itself and 1% as a tax agent for the supplier.
7. The tax authority submits the tax calculation to the marketplace, which verifies the correctness and agrees or disputes the tax authority’s accrual. If it agrees, the marketplace pays the tax by the due date. Marketplace withholds taxes paid on behalf of suppliers in their further settlements.

[1] Worldwide Ecommerce Forecast Update 2022. Insider Intelligence. URL: https://www.insiderintelligence.com/content/worldwide-ecommerce-forecast-update-2022

[2] Wildberries posts 98% surge in gross merchandise value for 2022 to over $22 bln. ARKA. URL: https://arka.am/en/news/business/wildberries_posts_98_surge_in_gross_merchandise_value_for_2022_to_over_22_bln/