An emerging issue in international education: Taxing online students

July 13, 2020
  • Advocacy
  • International
  • International Admissions
  • International Education
  • Study Abroad

According to IIE’s Open Doors report, the United States hosts over one million international students at our higher education institutions, where they live and learn alongside their peers and contribute intellectually and culturally to our campuses and our communities. International students also support the U.S. economy, adding nearly $41 billion to our economy.

Over the past several years, due to political and social issues in the U.S. and around the globe, these educational exchanges are at risk. The impact of the COVID-19 pandemic is not yet known, but will certainly exacerbate the challenges we face in the global student mobility marketplace. 

As challenges increase to maintain international student in-person enrollment, some institutions have begun to explore another market -- the international online student.  A student who enrolls online but remains in their home country doesn’t require a visa. They might choose to start online and then later in their program choose to apply for an F1 student visa and move to on campus enrollment.

The cost to live at home and enroll online would presumably be lower for the student, and later obtaining a visa to attend in-person to a university where you are already successfully enrolled might be easier. This seems like a natural new market for exploration for  colleges and universities wishing to increase global engagement in the classroom and maintain or grow enrollments during a time when the traditional US college-attending population is decreasing. 

However, a trend is emerging across countries: the exploration or implementation of a digital services tax. In this tax model, governments seek to charge tax based on the location of the purchaser of the product -- and increasingly that product includes online education and educational testing products. This means that institutions may find themselves subject to foreign government taxes on the tuition dollars paid by their residents.  

India and Mexico offer early case examples of a tax for online education. As of April 2020, India broadened the scope of its pre-existing digital service tax to include a 2% tax on education-related services. The U.S. Commercial Service in Mumbai will present a free webinar on Wednesday, July 15 at 10:00 pm EDT,  "Impact of Equalization Levy on U.S. Online Education in India," informing on India's adoption of a 2% Digital Services Tax and its impact on US higher education institutions and testing organizations.

Under Mexico's 2020 tax reform, certain digital services are subject to taxes when a foreign company provides these services to a Mexican resident. The new law, which went into effect on July 1, 2020, applies to services that are "provided through applications or in digital form through the internet or other network, as long as payment is collected for the services." Distance learning and testing is specifically mentioned in the regulation. 

In response, the United States Trade Representative (USTR) began an investigation last month into digital services taxes that have been adopted or are being considered by a number of US trading partners. The investigations are conducted under Section 301 of the 1974 Trade Act. This provision gives the USTR broad authority to investigate and respond to a foreign country's action which may be unfair or discriminatory and negatively affect U.S. Commerce. Education is a major US export, and must be protected.

A Federal Register notice providing details of the investigations as well as information on how members of the public can provide their views through written submissions has been issued. If you enroll international students in your online programs, or are exploring an expansion of this market, your institution may want to contribute to the investigation.

In the meantime, institutions enrolling students residing outside the US in their online courses would be wise to consult their attorneys to ensure that they remain compliant with international law.