It’s everywhere- get ready for FinTech. Fintech is going to take your job. Really? Indirect Tax? Does that even have anything to do with FinTech?
The common definition of FinTech is that it refers to a range of financial technologies that enable consumers to access financial services over their mobile phones or the internet. While these technologies have been around for quite a while, its only fairly recently that they are being broadly accepted to the extent that we are seeing a paradigm shift in how financial services are provided.
The technology/app is the financial intermediary of the service. Human intervention is limited to setting up the original parameters and any ongoing modifications to the terms and the app itself over time. Unlike using a telecommunication device to file an application online, the app or business does not have to be located in the jurisdiction of the customer.
FinTech can encompass a wide range of financial services. Many aspects of Banking and Finance are moving to a fully digital platform—from digital payments, investing, fraud detection. New financial technology products are being introduced so quickly and offer increased automation, accessibility and cost savings.
In Canada, probably the most common fintech products are used for:
- Money transfers/payments
- Savings and investments
- Purchasing Insurance
- Financial planning
What does this mean from an indirect tax perspective? Indirect Taxes and, in particular sales and/or value added taxes, are transaction based taxes.
Well, if I’m honest, I don’t think it really means anything. However, as more people are looking to online payments whether purchasing products or services, or accessing data, the question is whether tax will apply to a transaction. If so, whose? GST? HST? US State and Local Tax? German VAT?
FinTech, and many other technologies have opened the world to business and consumers alike. But that also means that the potential for transactions to be subject to tax in countries other than the one that a business actually resides.
Further, there is a major move towards digitizing tax compliance and expertise. There is pressure for Big Data Analytics concepts in all areas of business, including the tax function.
Without an understanding of what is important in this FinTech world, there will be a tendency for IT to run away with the tax function, at best and, at worst, ignore it altogether.
There is specific data that should be captured in order to address indirect taxes. The premise of the VAT is on sales or “supplies made” of goods or services. The issue is one of characterization of the supplies—is the supply being made a property or a service? Is it an Intangible? For FINTECH intermediaries, the question of a service vs. and intangible product may be viewed as interchangeable. Is it a right to use the app? Is it a service or intangible property supplied through an app?
The answer is often nuanced and complicated. However, as the determination of tax is dependent upon first understanding the type of sale being made, the answer is important.
From an indirect tax perspective, the same questions that have applied since the introduction of sales and value added taxes continue to apply today in our increasingly tech-savvy world.
What is being provided?
The characterization of supplies as property or services is fundamental to the application of the GST/HST. Characterization affects the determination of the place where a supply is considered to be made, the tax rate that applies, the timing of liability for tax and how the tax is to be collected. In Canada, digitized products are considered to be either intangible personal property or services.
Where is the product or service provided?
In general, the GST/HST applies at a rate of 7% GST or 15% HST on the sale of most goods and services that are provided in Canada. The legislation includes place of supply rules to determine whether, first, a supply of a good or service is made in Canada and then, whether it is made in an HST province. For example, if a good is provided to a customer in Alberta, GST would apply at a rate of 5%. If the same good is shipped to a customer in Ontario, the HST would apply at a rate of 13%. The rules for determining whether the good is provided in Alberta or Ontario is based on where the good is shipped. However, if the customer were purchasing data, the “place of supply” is dependent on where the data is made available and where it may be used. The rules are further complicated when services are being provided.
Who is received the good or services?
Even though a sale of a good or service is made in Canada, a business may not be required to collect the tax if the sale is made to a non-resident person. However, each country as specific rules in that regard.
Is Registration to Collect the Tax Required?
Every person, other than a small supplier, who carries on business in Canada and sells goods and services in Canada that would be considered taxable, is required to register for GST/HST purposes and to charge GST/HST on its taxable sales in Canada. A non-resident person who has a permanent establishment in Canada (which could include a server) is treated as a resident of Canada, and is subject to the same GST/HST obligations as a domestic supplier in respect of activities carried on through that permanent establishment (i.e. server).
The answers to these questions will continue to drive how indirect taxes are considered in a business in the digitally transformed world as well as they do today. Once the questions have been answered, technological streamlining is great…but the initial work cannot be programmed away and so this writer will no longer be carried away by all the fuss.