The growth and challenges of digital sales taxes globally

Written by John McCarthy, CEO of Taxamo

LESS than two years on since the application of VAT on digital goods and services at the location of consumption in the EU, its impact is being felt in many different ways.

Companies being audited who sell digital goods and services to consumers in the EU are uncovering non-compliance, and compounding this problem for digital merchants is the fact that more countries globally are moving to adopt this type of digital sales tax.

The EU introduced VAT rules on sales of digital goods and services, based on the OECD BEPS principles (Base Erosion and Profit Shifting), in January 2015.  This move was to ensure businesses in the 28 member states were no longer at a competitive disadvantage versus non-resident companies who had not been charging VAT on digital goods and services supplied to EU consumers, or who were setting up in low tax jurisdictions such as Luxembourg.

These digital sales encompass an ever-growing range of goods and services from downloading and streaming of music, video and e-books, to supplies of software, to online education and training, and the ever-popular app among many others.

In this fast growing world of digital business, driven in its innovation by start-ups and new technology of the minute, VAT or GST compliance isn’t necessarily at the top of the business plan. The EU estimates that a quarter of a million digital goods and services businesses are operating in the region but a relatively small number of these are compliant with its VAT requirements, but many believe the industry is far bigger than this, so a far bigger compliance issue exists.

Not surprisingly, since the start of the year we have seen a growing trend of enquiries fuelled by annual audits uncovering non-compliance of digital businesses.  This highlights a key role accountants and auditors can perform in helping this rapidly growing industry, with so many digital businesses being just start-ups of maybe two or three tech designers and developers, but often with very little knowledge of tax rules, there is often a knowledge gap.

What we are also seeing an increase in is the demand for compliance coming from a recognition within the finance function of more established digital businesses that accounting standards demand that provision needs to be made for unpaid indirect taxes within accounts. As it turns out it is often cheaper to collect and pay digital taxes rather than maintain a provision for unpaid taxes on the balance sheet.

Impact of Brexit on digital taxation

We are also seeing a surge in interest in the likely impact of Brexit on EU digital taxation. We will see what HMRC’s approach to digital sales tax will be, but it’s highly unlikely the UK will forgo a growing revenue stream for the Exchequer. UK digital businesses are at least faced with the possible loss of their intra-(EU) community trading status subject to what Brexit negotiations secure, and a potential impact on B2B sales losing the zero VAT rating and being treated as imports to the EU and subject to VAT.

Non-EU companies who’ve selected the UK as their reporting base for EU VAT compliance and reporting through MOSS, may also in time need to select another EU member state to register when the UK leaves the EU in the future, however as with so many areas affected by Brexit, it is still unclear what the final impact will be.

It is not just in the EU that developments are taking place regarding the taxation of digital goods and services. Norway, Switzerland, Iceland, South Africa, Japan and South Korea already have regulations in place mirroring the EU’s tax treatment of digital goods and services.  Just before the UK referendum in June, the last legislative act of the Australian parliament, before its dissolution for the July general election, was the passing of its own GST on digital supplies.  This tax will come into effect on 1 July 2017. Its neighbour, New Zealand, beats it, implementing GST on digital service sales on 1 October this year.

Following New Zealand, Russia looks set to be next to introduce a digital sales tax on 1 January 2017, with discussions on the introduction of such a tax being had in India, Israel, Philippines, Singapore, Thailand, Turkey and Uruguay among others.

What is clear is that the trend for basing the taxation of digital goods and services on the location of the consumer is set to continue and grow globally. This affects all digital businesses no matter where they are based. Digital businesses and their advisers need to ensure:

  • They stay in front of problem to remain compliant
  • Avoid fines and penalties
  • Have an adaptable system in place which can evolve to the changing requirements easily without impacting customers.


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