The landscape of digital services (or e-services) VAT is constantly changing. While tax authorities around the world scramble to create legislation and processes to monitor VAT for these intangible supplies, companies are either unaware of the changes or simply can’t keep up. However, the need to understand these laws has never been more important. Addressing your international tax obligations early will help you avoid colossal pay-outs later on (à la Uber).
The need to register for VAT will be based on the below answers:
- Are your services considered digital services by the country in question?
- Are you selling to businesses or private individuals?
- Have you crossed the country-specific revenue threshold? (If applicable)
- Do any special exemptions apply?
In most cases, if your services are defined as digital for VAT purpose, you will need to register any most countries where you sell these digital products B2C.
What is Digital Services VAT?
Digital services VAT refers to the treatment of global taxes owed on the international sale of digital/e- services (e.g. apps; games; video; software etc.). From tech start-ups to multinationals, many businesses are unaware of the VAT implications and responsibilities they must register for VAT in most of the countries they sell into.
Why it’s so Important for your Business to Get a Handle on Digital Taxation Now
The consequences of a lack of knowledge in this area, or purposely avoiding these tax obligations, has the potential for penalties further down the line. For example, a business could grow to become a middleweight champion in its field only to be smacked down by retrospective tax penalties which are now a major blow to a company’s bottom line. Avoiding digital service VAT penalties early in your business growth is critical.
When is a Foreign VAT Registration Not Required?
The below circumstances illustrate situations when a foreign VAT registration may not be required:
MOSS, which stands for “Mini One Stop Shop”, is a system put in place by the EU Council, which allows for businesses selling into many European countries to only register once, instead of having to register in multiple EU member states (there are 28 of them!). This significantly reduces the EU VAT reporting requirements for digital service businesses.
If a digital service is sold from a supplier to a foreign business customer (B2B), then the reverse charge mechanism will apply, and the onus will fall on foreign customer to report the VAT in their own country.
For the reverse charge mechanism to apply, these digital service suppliers are required to receive the foreign customer’s VAT number. If the customer cannot provide this VAT number, the sale will not be deemed B2B, and the supplier will need to register for VAT in the customer’s country. Therefore, the reverse charge mechanism is not available on supplies to foreign, non-registered consumers (companies below VAT threshold or individuals).
However, if your company sells both B2B and B2C digital services, then you would be required to register for VAT in your customers’ countries.
Additionally, there are a few countries (e.g. Russia, Malaysia and South Africa) who have not implemented the reverse charge mechanism at all. Therefore, B2B suppliers are required to register for VAT if selling to these countries.
If you supply digital services through an e-marketplace (platform), such as the app stores or alternative online store, then it is up to the platform to register, withhold and pay over the VAT on your behalf.
For example – if you’re selling an app, or in-app purchases, Apple and Google will take care of your international VAT obligations. However, it should be noted, that the app stores do not conduct this service in all countries! For example, if apps are sold in Japan, Canada or South America, depending on the app store, it will still be required to ensure your own compliance.
In addition to this, if your business is selling services through a website, as well as through the app store (e.g. Airbnb, Udemy etc.), the e-marketplace will take no account for the website sales, and therefore, international VAT registration and compliance will be necessary.