Digital services providers have global VAT and GST obligations

24 May 2023| CATEGORIES: e-Commerce, VAT, VAT registration| TAGS: digital services, e-commerce, ESS, GST, VAT

The trend for businesses to provide services digitally or online has accelerated significantly in recent years, particularly following the COVID pandemic.

The Value Added Tax (VAT) and Goods and Sales Tax (GST) compliance obligations of businesses providing digital or electronically supplied services (ESS) are increasing. There is a growing trend around the world for tax authorities in countries that operate VAT/GST systems to require foreign suppliers that provide ESS to consumer customers in their country to register for and charge local VAT/GST on these supplies, i.e. the VAT/GST is due in the country of consumption or destination.

Businesses providing ESS to consumers should assess their global VAT/GST obligations at the earliest opportunity in order to avoid incurring any penalties and interest arising from non-compliance.

What is an ESS?

The definition of an ESS varies between jurisdictions, however they are generally considered to be services which are automatically delivered over the internet, or an electronic network, where there’s minimal or no human intervention.

In practice, this can be either:

• where the sale of the digital content is entirely automatic, for example, a consumer clicks the ‘Buy Now’ button on a website and either:
  • the content downloads onto the consumer’s device, or
  • the consumer receives an automated email containing the content
• where the sale of the digital content is essentially automatic, and the small amount of manual process involved doesn’t change the nature of the supply from an e-service.

Some common examples of ESS include:

• online downloads of music, games, apps, images etc
• streaming of music, films
• subscriptions to online newspapers, magazines, information services
• provisions of web hosting services
• provisions of remote online software services, e.g. access, maintenance, support
• cloud services
• online gambling

There are differences between countries as to what falls within the scope of ESS for the purposes of taxing at the place of consumption. When looking at the rules applying in a particular country it is important to check whether the specific type of ESS being provided is included within any published list of services either explicitly included or excluded from the scope of the VAT/GST legislation.

The consequences of an overseas VAT/GST registration

Once VAT/GST registered a foreign supplier is required to comply with local rules concerning:

• submission of VAT/GST returns
• payment of VAT/GST
• invoicing requirements
• record keeping requirements

For businesses making worldwide ESS supplies this can amount to an enormous additional administrative and compliance burden.

Simplification measures

Many tax authorities have tried to simplify the registration and return process for foreign businesses caught by these rules by operating online portals through which compliance obligations can be met.

For example, the EU has implemented a simplification measure known as the One Stop Shop (OSS).  Using the OSS enables suppliers to meet their EU wide VAT obligations by filing a single VAT return and making one VAT payment.  This avoids the need for to register for VAT separately in every EU member state where they make digital supplies to consumers.

ESS sold via Digital Platforms and Marketplaces

In many countries when ESS are supplied to consumers through an internet portal, gateway or marketplace, it is the platform operator that is considered to be making the supply to the consumer.

In these circumstances it is typically the platform operator that is responsible for accounting for the VAT on the supply to the end consumer, though this may depend on the terms of the contract between the business supplying the ESS and the platform operator.

Monitoring new developments

This is a rapidly developing area of international tax law.  In addition to new countries introducing this type of legislation, some countries with existing rules are now making modifications to ensure more foreign suppliers fall within the scope of the rules.

For example, India has recently announced plans to remove the minimal human intervention threshold.  Also, the EU is due to change the rules relating to live online education and make these services taxable in the country of consumption.

Please get in touch if you require any further information on ESS rules or require assistance assessing the characterisation of your services and your liability to register internationally for VAT and GST.  We also provide international VAT and GST registration and compliance services.