The increasing taxation of the digital economy
In the last decade, the importance, and prevalence of the digital economy has increased at an incredible pace, with new advancements being found on a regular basis. Coupled with this is the ever expanding geographical reach of digital supplies, something which has not been lost on many national tax authorities who now view such supplies as a key revenue source both now, and in future.
A key source of tax revenue in this sector is derived from the implementation of VAT/GST on supplies made from non-established suppliers. As many sets of VAT legislation were enacted in the 1990’s or before, these simply did not contain any provision for taxing digital supplies made by non-local businesses, and accordingly many tax authorities are now levying VAT/GST on digital supplies made by overseas suppliers.
In 2003, the EU implemented the VoeS system which obligated non-EU established suppliers who made digital supplies to EU based consumers to register for VAT within the EU, either through a single EU member state on a one stop shop basis, or in each member state in which customers were located. EU suppliers simply levied VAT at the applicable rate in their member state of establishment.
Effective from January 2015, B2C supplies of digital supplies (specifically broadcasting, telecoms, and e-services) made by EU suppliers to EU consumers became taxable in the location of the customer. The VoeS scheme was removed and a similar mini one-stop shop implemented for both EU and non-EU suppliers. Alternatively, VAT registrations could be obtained in each state in which customers are located.
In the years preceding this, and the years following, many non-EU countries have implemented legislation which makes B2C digital supplies provided to local consumers by non-established suppliers taxable in the country, and providing a VAT registration obligation. One such early adopter was Norway, who introduced the rule in 2010, and many other countries such as Japan, New Zealand, Australia, South Africa, Russia, and Turkey have followed suit. Additional countries continue to implement such rules on a regular basis and it is crucial for providers to keep up to date with the legislation in the territories in which they have customers. Indeed, it has very recently been announced that such supplies to consumers in Quebec will become subject to Quebec Sales Tax (supplies to consumers in other Canadian provinces are unaffected).
Whilst the principle of taxing these supplies is in itself reasonably straightforward, there are complications and nuances within legislation which can make getting the treatment correct complex. Such complications are shown below:
1-Classification of supplies
Each set of national legislation outlines the exact nature of supplies which fall within the rules, and these can differ significantly. Businesses must verify carefully whether their supplies are subject to VAT/GST in the customer location.
2- Responsibility for charging VAT/GST
Legislation sets out who is responsible for registration. Where the supply is made direct from business to consumer this is straightforward, however where content is provided via a platform or marketplace, it will often be the responsibility of the platform/marketplace operator.
Inclusion of B2B supplies
Whilst the vast majority of countries only apply the rules to B2C supplies, some also require suppliers to account for VAT on B2B supplies, for example South Africa (and Russia from 2019).
Businesses must also be aware of whether any threshold exists. Many countries require registration from the commencement of supplies, whereas others provide threshold whereby registration is not an obligation until this is breached.
Where businesses have reviewed their operations and determine that VAT registration obligations exist, the mechanism must then be considered. Many countries will allow simplified, VAT/GST only registrations (rather than creating an establishment and registering for all taxes) made directly by the overseas business, whereas others require a local tax representative to be appointed.
Singapore has recently announced that they will implement legislation in 2020, and looking at the current trend it appears that further countries will follow, particularly as the ever-changing digital economy grows in size.
Now is the time for providers of digital services to review their operations to ensure compliance, and avoid issues with tax authorities, and potential penalties at a future date.