If you provide services through the internet, then chances are you have a value-added tax (VAT) collection and filing obligations in a number of countries around the world. In broad terms, anything that can be delivered through the internet with minimal human intervention is likely subject to VAT collection—and filing is required. Such services may include everything from email and internet services to subscriptions to digital content and online communities.
Why it matters
Around the world, tax authorities and governments are taking a stance against nonresident suppliers of these services, requiring them to collect and remit VAT, as domestic service providers already do.
This rule effectively requires non-resident suppliers to register for VAT locally and collect and remit the relevant amounts to ensure a level playing field and to preserve the tax base. The list of countries collecting VAT for electronically supplied services continues to grow, and as of the end of 2018 includes nearly 50 countries.
Who is charged
Not all customers need to be charged VAT. Customers who have the ability to self-assess VAT do not need to be charged by nonresident suppliers as they self-report the relevant amounts on their own VAT returns, much like a use tax.
However, customers who are not able to self-assess, principally because they are not VAT registered, are the ones to which VAT should be charged. This means private individuals, but some organizations and businesses that are not VAT registered may also be affected.
Obtaining the relevant information to verify the status of a customer is one of the more challenging aspects of meeting VAT collection and filing obligations.
Why companies should comply
It is fair to say that foreign tax authorities have limited powers to enforce compliance on nonresident companies. However, if the business has a requirement to raise capital, or expects to be acquired or is going public, then any foreign tax liabilities will affect the business valuation and the ability to raise funds. Management executives should minimize this risk and do what they can to understand their company’s obligations.
