“If you visit Amazon, we are expecting Amazon to add VAT charge to whatever transaction you are paying for.”
On the surface, that’s a simple enough statement. But once we unpack it, we discover just how much the internet has changed the economy. It also demonstrates how tax authorities around the world are scrambling to keep up.
Whose VAT is it, anyway?
First, let’s think about what Amazon does. Amazon sells its own private label brands, but it’s mainly known as a platform for selling other businesses’ goods. So if Amazon is adding VAT to a transaction, in many cases, that’s someone else’s transaction. More precisely, Amazon is the intermediary through which the sale takes place. So why doesn’t the seller apply VAT itself?
It’s a good question and one tax regulators have been asking themselves. Many authorities have concluded that shifting the responsibility for charging VAT to the online marketplace (e.g. Amazon or eBay) has a number of benefits, such as reducing the likelihood of VAT evasion. (This is already the case in the EU and in the UK.)
However, if you sell through an online marketplace, that doesn’t mean you can forget about VAT. On the contrary, if you are not VAT registered, and cannot provide a valid VAT number, there’s a good chance platforms like Amazon won’t let you sell through them in the first place.
Global economy, global rules
Now it’s time to reveal the source of that quote. Those words were spoken by Zainab Ahmed, Nigeria’s finance minister. That may surprise some people, because we know that Amazon has global reach, but its headquarters are not located in Nigeria. So how does Nigeria’s finance minister decide how overseas companies pay VAT?
Well, as we’ve discussed above, e-commerce is international by nature. And that means that governments are increasingly concerned about creating a level playing field for local retailers and overseas suppliers.
But things get even more interesting when we note that Ahmed was actually discussing the tech giant in the context of digital services. In line with global trends, Nigeria is imposing VAT on digital services provided by overseas businesses.
It should surprise no one that more countries are developing digital services VAT rules. After all, electronic services have an even lower barrier to entry into new markets than tangible goods. There’s no shipping, logistics or customs to worry about. All that matters is that your customers have a reasonable internet connection, wherever they are in the world.
As a result, foreign service providers potentially have a competitive advantage, because they weren’t required to charge VAT on their services. That’s rapidly changing, all over the world.
When is a digital service not a digital service?
Except there’s a complication. ‘Digital services’ can mean many things, from gaming, to apps, to streaming to online yoga classes and beyond. And different countries can have different definitions of an applicable digital service.
For example, online teaching may be considered a digital service in one country but be exempt from digital services VAT somewhere else.
So if you’re selling services online, you need to be aware of the basic principles of global digital services VAT. But that’s not enough. You also need to know exactly what your VAT obligations are wherever you have customers. And that varies according to local regulations.
Global digital services VAT compliance, simplified
How on earth am I supposed to keep track of every VAT rule in every country? Good question. And the simple answer is that you’re not. If you’re not a multinational corporation with a specialised global tax team, there’s no way you can reasonably stay ahead of the constantly changing VAT rules in every jurisdiction. But there are specialists who can manage these questions for you, so you can focus on driving new business, without the risk of penalties, audits and criminal charges.