Global value added tax for electronically supplied services
Know your global obligations to collect and report accurately
If you provide services through the Internet then chances are you have value-added tax (VAT) collection and filing obligations in a number of countries around the world. Not every type of service is caught by this obligation, in broad terms anything that can be delivered through the Internet with minimal human intervention, such as highly automated services, is likely subject to VAT collection and filing is required.
Typical services subject to VAT are:
- Email and Internet services
- Music downloads and streaming
- Video downloads and streaming
- Online gaming
- Software downloads
- Access to trading platforms
- Access to databases
- Subscription to digital content and online communities
- Internet-based communication services
This list is by no means comprehensive: many other services not listed above are subject to VAT collection and filing obligations. If in doubt, ask your VAT advisor for clarification.
So what does it mean?
Around the world, tax authorities and governments have taken a stance against nonresident suppliers of these services accessing the customers in the local market without having to collect and remit VAT, which domestic service providers have to do. It is considered anti-competitive. This rule effectively requires nonresident suppliers to register for VAT locally and collect and remit the relevant amounts to ensure an even playing field and to preserve the tax base.
Not all customers need to be charged VAT. Customers that have the ability to self assess VAT do not need to be charged by the nonresident supplier as they will report the relevant amounts on their own VAT returns, much like a use tax.
However, customers that are not able to self assess, principally because they are not VAT registered, are the ones to which VAT should be charged. In the main this means private individuals, but some organizations and businesses that are not VAT registered will also be affected.
Obtaining the relevant information to verify the status of a customer is one of the more challenging aspects of meeting your VAT collection and filing obligations so please speak to your VAT adviser to understand your options.
Which countries have implemented this requirement?
The list is continually growing, but at present it includes all European Union member states and about 15 additional countries including Australia, South Africa, Japan, India, Russia, South Korea, Switzerland, Norway, Mexico, New Zealand and the Bahamas.
Why should you act?
It is fair to say that foreign tax authorities have limited powers to enforce compliance on nonresident companies, but it is still the right thing to do. It is also worth noting that if the business has a requirement to raise capital or expects to be acquired or go public, then any foreign tax liabilities will affect the business value and the ability to raise funds.
Germany looks to software for aid in efforts to locate foreign business failing to pay VAT on certain electronic sales prior to 2015.
A recent opinion by the Advocate General (AG) for the European Court of Justice (ECJ) opens the door for pharmaceutical companies to potentially claw back previously charged value added tax (VAT).