Supply of Digital Services Abroad: What to Consider

Luca Clivati
September 20, 2022

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

Pros

  • 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)

Cons

  • 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.

Take Action

Speak to our team if you have any questions about compliance with requirements for the supply of digital services abroad.

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

Luca Clivati

Luca joined Sovos in 2022 and is a senior manager of the consulting team within Compliance Services. He holds a Master’s degree in International Economics and has 13+ years of experience on cross-border transactions and international VAT and GST. Luca specializes in tax consulting advisory focusing on indirect taxes, diagnosis, solution, development and implementation of clients’ tax requirements, VAT compliance and tax due diligences within the EU and in jurisdictions outside of it (mostly Norway, Switzerland, New Zealand, Australia and Singapore).
Share This Post

EMEA VAT & Fiscal Reporting
January 25, 2023
Understanding VAT Between European Countries

All European countries charge VAT on goods and services. VAT is a consumption tax added during each production stage of goods or services. Although VAT is near-universal according to the EU VAT Directive, VAT rates within the EU do differ. This is because the EU VAT Directive allows Member States to choose whether to implement […]

North America ShipCompliant
January 24, 2023
Top Takeaways: 2023 Direct-to-Consumer Wine Shipping Report

Sovos ShipCompliant recently released the 2023 Direct-to-Consumer (DtC) Wine Shipping Report with our partner, Wines Vines Analytics. This look-back at 2022 is the most comprehensive, complete and exclusive collection of data and insights on the state of the channel. While 2022 saw the first-ever decline in either—let alone both—value and volume of shipments, the DtC […]

North America Unclaimed Property
January 17, 2023
How to Avoid 6 Common Unclaimed Property Myths

Unclaimed property is often misunderstood. Despite their best intentions, we find that many companies operate under factually inaccurate assumptions that could put their business at risk. We’ve outlined some of the top myths and misconceptions around unclaimed property to help you stay compliant. Unclaimed property reporting is optional Filing unclaimed property is not an option. […]

North America ShipCompliant
January 11, 2023
Supreme Court Denies Cert on Retailer DtC Shipping – What Does That Mean?

On Monday, January 9, the U.S. Supreme Court rejected a petition to hear an appeal of B-21 v. Bauer, a case revolving around the issue of interstate direct-to-consumer (DtC) shipping by alcohol retailers. B-21 stemmed from a challenge to a North Carolina law that allows in-state retailers to ship wine through third-party carriers to North […]

EMEA VAT & Fiscal Reporting
January 10, 2023
An Introduction to EU VAT

Nearly every major economy has a form of VAT. That’s 165 countries, each with its own compliance and reporting rules. The main exception is the United States. VAT is by far the most significant indirect tax for nearly all the world’s countries. Globally VAT contributes more than 30% of all government revenue. Levying VAT is […]