Special thanks to Richard Barrett for today’s blog contribution! Clients often ask us if we also do VAT/GST consulting, and we tell them that the 50 U.S. states are plenty for us to handle. But we are happy to refer Richard and the Vatglobal team to our clients with international transactions.
Smartphone apps, music streaming services, e-books, anti-virus software. You would be hard pressed to find too many people who had not made a purchase of one of these items recently, or indeed anything which was delivered to them digitally, and often at the press of a button.
In the last decade, the importance, and prevalence of the digital economy has increased at an incredible pace, with new advancements being found on an ever more regular basis. Coupled with this is the ever expanding geographical reach of digital supplies, something which has not been lost on many national tax authorities who now view such supplies as a key revenue source both now, and in the future.
A key source of tax revenue in this sector is derived from the implementation of VAT/GST on supplies made from non-established suppliers (in addition to local suppliers). As many acts of VAT legislation were enacted in the 1990’s or before, these simply did not contain any provision for taxing digital supplies made by non-local businesses, and accordingly many tax authorities are now levying VAT/GST on digital supplies made by overseas suppliers where the services are being consumed locally.
In 2003, the European Union (“EU”) implemented the VoeS system which obligated non-EU established suppliers who made digital supplies to EU based consumers to register for VAT within the EU, either through a single EU member state on a one stop shop basis, or in each member state in which customers were located. Of course, this implementation had a direct effect on US established suppliers of digital services. EU suppliers simply levied VAT at the applicable rate in their member state of establishment.
Effective from January 2015, B2C suppliers of digital supplies (specifically broadcasting, telecoms, and e-services) made by EU suppliers to EU consumers became taxable in the location of the customer. The VoeS scheme was removed and a similar mini one-stop shop implemented for both EU (Union scheme) and non-EU suppliers (Non-union scheme). Alternatively, VAT registrations could be obtained by the supplier in each of the 28 member states in which customers are located. Where non-EU businesses use the non-union scheme, they may choose their member state of registration (most US businesses opt to register in English speaking countries).
In the years preceding this, and the years following, an increasing number of non-EU countries have implemented legislation which makes B2C digital supplies provided to local consumers by non-established suppliers taxable in the country, and providing a VAT registration obligation. One such early adopter was Norway, who introduced the rule in 2010, and many other countries such as Japan, New Zealand, Australia, South Africa, Russia, and Turkey have followed suit. The list of countries continues to grow on a regular basis, with Costa Rica being the latest to introduce plans to tax these supplies.
Additional countries will implement such rules on a regular basis (for example Singapore, whose rules are effective from January 2020) and it is crucial for providers to keep up to date with the legislation in the territories in which they have customers. Indeed, supplies to consumers in Quebec are subject to Quebec Sales Tax, however supplies to consumers located in other Canadian provinces are currently unaffected. Of course that position could change in time and so it is important for suppliers in the sector to be aware of the ever changing tax landscape, together with the intricacies of what new legislation covers.
Traditionally, many non-EU jurisdictions have not necessarily had the concept of non-resident VAT/GST registrations, often only providing VAT/GST numbers where local entities or establishments have been created-a process often leading to additional direct tax obligations. However, perhaps as a result of reduced compliance, many jurisdictions have introduced simplified registration mechanisms and portals for suppliers of digital services, ensuring standalone VAT registration, together with no barriers to remote filing. Indeed, for the most part all filings and payments are submitted digitally, which makes sense given the nature of the businesses involved!
One final note particularly relevant for US businesses is that other jurisdictions do not necessarily have the same concept of nexus, be it physical or economic, and so reporting obligations often arise from the first sale, and businesses should prepare accordingly.
Whilst the overarching principle of taxing these supplies is in itself reasonably straightforward in tax terms, there are many complications and nuances within legislation which can make getting the treatment correct complex. Such complications are shown below:
1-Classification of supplies
Each set of national legislation outlines the exact nature of supplies which fall within the rules, and these can differ significantly. Businesses must verify carefully whether their supplies are subject to VAT/GST in the customer location.
2- Responsibility for charging VAT/GST
Legislation sets out who is responsible for registration. Where the supply is made direct from business to consumer this is straightforward, however where content is provided via a platform or marketplace, it will often be the responsibility of the platform/marketplace operator.
Inclusion of B2B supplies
Whilst the vast majority of countries only apply the rules to B2C supplies, some also require suppliers to account for VAT on B2B supplies, for example South Africa (and Russia from 2019).
3-Thresholds
Businesses must also be aware of whether any threshold exists. Many countries require registration from the commencement of supplies, whereas others provide threshold whereby registration is not an obligation until this is breached.
Where businesses have reviewed their operations and determine that VAT registration obligations exist, the mechanism must then be considered. Many countries will allow simplified, VAT/GST only registrations (rather than creating an establishment and registering for all taxes) made directly by the overseas business, whereas others require a local tax representative to be appointed.
Now is the time for providers of digital services to review their operations to ensure compliance, and avoid issues with tax authorities, and potential penalties at a future date.
Example 1
ABC inc. established in California, make supplies of anti-virus software via their company website. Sales may be made on a B2B or B2C basis to customers located in the EU. Customers pay electronically for the purchase, and download the software directly from ABC’s website.
This supply would be captured by the EU’s VAT rules, and where B2C supplies are made, VAT would be due at the rate applicable in the country in which the recipient is based. ABC would need to register for the MOSS scheme and file quarterly returns, or they can choose to register in each individual EU country in which their customers are established.
B2B sales would bring no VAT obligations for ABC, as the business customer would account for VAT.
Example 2
XYZ Inc. are a Florida established entity who make educational supplies to students located in the EU. Supplies consist of live tutorials with a US based tutor, as well as downloadable PDF’s for additional reading for students. All supplies are made on a B2C basis.
It is likely that the live tutorial element of the supply would not be subject to EU VAT as there is a larger degree of human intervention in the supply, however the downloadable PDF’s would be captured by the supply.
XYZ would need to undertake further analysis to understand if one element of the supply is predominant, or whether the supply must be apportioned and taxed accordingly. In this instance, the terms and conditions applicable to the supply may require thorough review.
About Richard and VATGlobal
Richard Barrett is the head of consulting at London based VAT specialist, VATGlobal. Richard is a UK qualified Chartered Tax Advisor (CTA) (VAT specialism) and has in excess of 12 years commercial experience working in indirect taxes at ‘Big Four’ accounting firms, middle tier accounting firms, and boutique international VAT firms. He combines a comprehensive knowledge of the EU VAT legislation with a pragmatic and commercial approach to his duties, and this is culture that has filtered down to the rest of his consulting team.
Richard and his team provide businesses of all sizes and across varying sectors (including US multinationals) with tailored VAT advice and reporting to enable full compliance with international legislation, whilst being structured in the most VAT efficient way. In addition, Richard works with clients to provide correspondence with tax authorities, in-house training, VAT healthchecks, and identification of VAT cost-saving opportunities.
Richard Barrett CTA ATT, is the Head of Consulting at London based firm Vatglobal.
