Historically, if a company supplied services from one country into a foreign jurisdiction, there would be no foreign VAT implications. However, with the advent of the digital world, more and more companies are beginning to offer their services via the internet/digitally.
This new form of “Digital Service” has had the effect of transferring millions of dollars into foreign jurisdictions, with the respective local tax offices receiving none of their local consumption tax.
In order to get their share of these foreign sales, tax offices around the world have started applying a consumption tax (VAT/GST) on the supply of Digital Services – by non-resident companies – to their local citizens.
This means that these Non-Resident Digital Service Businesses are now required to comply with international indirect tax regulations.
While each country has its own punitive measures, if your business does not actively seek 100% VAT compliance in the foreign countries (or simply ignores foreign VAT laws), the following may arise:
- Fines and penalties with interest accruing.
- Decrease valuations of business wishing to sell.
- Reduce business’s ability to raise financing.
- Increase the likelihood of hidden liabilities.
- Tarnished brand reputation.
- Potential criminal implications.