The expansion of the Value Added Tax (VAT) and Goods and Services Tax (GST) indirect tax to include business to consumer (B2C) sales of digital services is one of the most important new revenues for many countries.
What are the electronically supplied services?
E-services that a company supplies electronically can be:
- Supplies of images or text, such as photos, screensavers, e-books and other digitized documents (e.g., PDF files)
- Supplies of music, films and games, including games of chance and gambling games, and programs on demand
- Online magazines
- Website supply or web hosting services
- Distance maintenance of programs and equipment
- Supplies of software and software updates
- Advertising space on a website
Place of supply – general VAT rule with reference to the provision of services
The general place of supply rule for business to business (B2B) supplies of services is that VAT is due where the customer is established.
A business is always established where it has its main place of business (i.e. headquarters) and this is referred to as its ‘business establishment’.
The general place of supply rule for B2C supplies of services is that VAT is due where the supplier is established.
Most services fall under the general rule set out above. However, there are certain services that don’t (referred to as ‘exceptions’) which usually results in the supply being subject to local VAT.
Exceptions: Implications in case of cross-border digital services
The place of supply of cross-border digital services is the location of the non-business consumer. This is determined by where that person usually lives.
To simplify the rules for some supplies of digital services the supplier can make a presumption about the place where the supply is to be taxed.
If the supplies carried out by your company are treated as supply of digital services to a non-business consumer (i.e. B2C supplies) then the place of supply will be where the customer resides.
This customer’s location information could be based on:
- Billing address of the consumer
- Internet Protocol address of the device used by the consumer (GeoIP)
- Consumer’s bank details (i.e. payment method country)
Does my company have to register for VAT purposes abroad?
Generally, the application of this rule would require the seller (i.e. your company) to register in all EU Member States where your clients are established, irrespective of the sales value performed.
From 1 July 2021 the European Union introduced the One-Stop Shop (OSS), replacing existing distance-selling rules in the Member States.
The previous thresholds for distance sales of goods within the EU have been abolished and replaced by a new EU-wide threshold of €10,000. Below this threshold, supplies of TBE (telecommunications, broadcasting and electronic) services and distance sales of goods within the EU may remain subject to VAT in the Member State where the taxable person is established.
What about supply of digital services outside the EU?
The number of jurisdictions implementing a full VAT/GST liability regime for the taxation of cross-border services and intangibles is consistently growing and it represents the possibility to significantly increase sales.
Key elements to consider
- New markets: 99 countries have implemented VAT or GST on non-resident providers of digital services to their consumers
- Low start-up costs in jurisdictions where there are fewer/less complex country-specific reporting obligations (e.g. quarterly returns where the amount of information to be reported is relatively straightforward)
- Additional check of the place of supply rules
- Tax rates
- Compliance reporting
- Banking or technological limitations
- In case of non-compliance:
- Criminal penalties for tax evasion might apply
- Temporary interruption of the business activity of your website.
Speak to our team if you have any questions about compliance with requirements for the supply of digital services abroad.