VAT and GST: Key Insights for Global Digital Services Providers

An increasing number of countries worldwide, including most recently Brazil, China, and the Philippines, are introducing or modifying their existing value added tax (VAT) and goods and services tax (GST) rules to tax the provision of certain digital services (also referred to as electronic services) supplied by companies who are not resident in their country.

The rules around GST on digital services vary widely, making it essential to assess each market individually. In this article, Marie Milon, Senior Manager, VAT Consulting at Ryan, provides some key points to consider when determining if a supply of digital services is taxable in another jurisdiction and if local registration, reporting, and payment of tax is required. 

VAT on Digital Services: Navigating Jurisdictional Differences and Compliance Risk

Whilst the existing rules worldwide are normally aimed at taxing business-to-consumer (B2C) sales, as opposed to business-to-business (B2B) sales, there are countries that also tax B2B suppliers, such as Kenya for instance. Russia and South Africa, where B2B suppliers were historically taxed, have recently changed their rules so that non-residents who only provide B2B digital services are no longer required to register. Whilst some countries, notably in South America, have set up a system whereby the tax is withheld by the local customer when the supplier is a non-resident, in most countries that have such rules, non-resident suppliers are required to register for VAT/GST purposes locally and to collect and remit the tax to the local tax authority.

This means that many companies selling digital services internationally are likely to have to charge foreign VAT on their B2C supplies in many different jurisdictions, even without having any local presence, and will have a liability to register for VAT/GST in those countries. For example, a company based in the U.S. providing streaming services to customers in the UK may be required to charge VAT on digital services from the U.S. to the UK, even without a physical presence. The reality is that many companies selling digital services are still unaware of their obligations, and they do not understand the inherent risks of not being compliant with the local rules. At the same time, some tax authorities are starting to reach out to foreign businesses directly to enquire as to whether they should be registered (such as the Indian tax authority), and we are also seeing certain tax authorities sharing information on businesses that are registered in their countries (for example, the Kenyan and Tanzanian tax authorities). Therefore, companies increasing their global sales risk not being compliant with local rules because of their complexity and the differences between jurisdictions, which may have serious financial consequences. Moreover, the longer the rules have been in place in each country, the higher the amount of the tax liability and any penalties and interest may be. Some tax authorities may be less inclined to grant any remission of penalties where a company has taken no action for many years. Ultimately, there may also be more serious commercial implications, as some countries can block access to a non-resident business’ services as result of noncompliance with their local VAT/GST rules.

Is VAT or GST Registration Required?

Determining the Customer’s Location

With the ever-increasing digitalisation of the economy, the rules that initially applied VAT/GST based on the location of the service provider have been modified to apply the tax of the country where the customer is located, resulting in tax being paid where the services were used or consumed. Therefore, a key first step in determining global VAT/GST liability on international sales is to correctly identify the country in which the customers are located.

Some jurisdictions, such as the European Union and Australia, provide clear guidelines on how to determine the location of a customer, and therefore, this is something that should be checked on a country-by-country basis. In most countries however, commonly admitted evidence to determine customer location includes the customer’s billing address, their Internet Protocol (IP) address, and the country of the credit card or other means of payment used. It may also be required or recommended to obtain several non-contradictory pieces of evidence to prove the customer location.

B2B vs. B2C Sales and Customer’s Status

The concept of B2C and B2B may slightly vary from country to country. For instance, in Japan, the “provision of B2B electronic services” concept is not determined simply by the status of the customer but rather by the nature of the services in question, as well as the terms and conditions relating to the provision of those services. For instance, if a service can equally be purchased by a consumer as well a business, then it may not meet the definition of a B2B electronic service as it is not restricted to business consumers only.

Generally, in most countries where there is an obligation to tax digital services supplied to local consumers, the liability for a foreign business to register and charge local VAT/GST will mainly arise only on B2C sales. Providers of digital services selling B2C internationally may therefore have a liability to register and collect foreign local tax in many countries. Non-resident providers of B2B digital services are generally not required to register and account for VAT and/or GST on the supplies made locally. Instead, the obligations are shifted to the resident business customer through a reverse-charge (self-assessment) mechanism. For companies selling exclusively B2B, it is recommended to verify in which countries there may be a liability to register also on account of B2B sales (e.g., some provinces in Canada, Indonesia, Kenya, and Mexico). For companies selling both B2C and B2B, it should be kept in mind that in some countries, once a business registers on account of its B2C sales, it also becomes liable to collect tax on its B2B sales (e.g., South Africa and Switzerland). Furthermore, for all businesses selling B2B, it is important to have in mind that they should be able to demonstrate that their customers are businesses, which generally can be satisfied by collecting the local tax identification number of the customer; however, it also may be necessary to collect additional evidence of a customer’s status in certain countries, e.g., their certificate of registration or confirmation from the customer that they are registered for VAT/GST specifically and that they will apply the reverse charge mechanism. Therefore, a supplier of digital services not collecting any business tax identification number of its customers is exposed to a risk in all countries, even if only B2C sales are normally taxed.

Digital Services Concept and Scope of the Rules

Generally speaking, digital services covered by the regulations are those defined as fully automated services that are dependent on the internet and require minimal human intervention, for example, the supply of digital content such as e-books, movies, TV shows, music, online newspapers, online learning, supplies of games, apps, software, cloud services, webhosting, online advertising, and GST on digital marketing services. However, the terms used to define digital services, as well as the exact type of services and products covered, vary a lot from one jurisdiction to another. For instance, Australia and Canada have a broad definition of digital services and products as they have adopted a very generic description of such supplies, whereas India extended the initial scope of its legislation by removing the terms “essentially automated” and “involving minimal human intervention” to capture more electronic services in its GST net. Conversely, other countries have adopted a narrower approach and have specified services in their regulations that fall within the scope of the tax (e.g., South Korea). It is therefore important to check the exact scope of the legislation in each country of interest.

Potential VAT/GST Registration Thresholds

Suppliers of digital services need to work out their turnover per country. Many countries (e.g., Australia, Japan, Singapore, and South Africa) have set up a threshold of sales turnover above which a supplier is required to register and, hence, to charge local VAT/GST. However, the registration thresholds sometimes only apply to service providers established in the country, not to foreign suppliers.

Monitor the Evolution of the Rules

As already indicated, the scope of the regulations in relation to VAT/GST is in constant evolution, and it is therefore essential to regularly review the applicable rules. Also, when a business is considering a past retrospective liability in a country based on the VAT determination analysis, it is necessary to check how the scope of the rules may have changed over time, as well as the applicable VAT/GST rates.

How Ryan Can Help Your Business

At Ryan, we help businesses understand their VAT/GST exposure on digital services provided globally. With just one point of contact, our international VAT consulting team can review your historic sales data and identify any liabilities that the business may have to register and pay VAT/GST in different countries.

This insight allows you to plan ahead and make any necessary provisions for tax, penalties, or interest. By taking a proactive approach, your business may be able to reduce, or even avoid, penalties, as many tax authorities offer more favourable treatment when a business comes forward voluntarily. We can also help you take advantage of any available voluntary disclosure programs or tax amnesties to minimise the risk of penalties.

Beyond identifying your liabilities, our international VAT compliance team can support you with registration and ongoing compliance across all relevant countries – again, through a single point of contact. If you would like to learn more or arrange an initial call to explore how we can help, please complete the contact form below.