United States

Introduction to the digital services VAT guide

Businesses that provide services through the internet (also known as digital services, electronic services or e-services) may be unaware that they are taking on an increasing global value-added tax (VAT) compliance burden. This guide provides details regarding:

  • Which countries now seek to tax e-services supplied by nonresident companies
  • What constitutes a digital service
  • What companies might need to consider as they assess their own global VAT compliance obligations

Authorities seeking to tax digital services want to ensure that tax is collected at the point of consumption, but also that nonresident businesses do not have a competitive advantage over domestic ones. For the most part, domestic businesses charge, collect and remit VAT on their local services, covering the costs of the tax by adding an extra cost to their services. Nonresident businesses that do not account for a VAT charge are clearly at a pricing advantage over their domestic competition.

Increasing scrutiny by jurisdictions

As of early 2018, there are approximately 40 countries around the world that have introduced an indirect tax on digital services in one form or another. Given there are already over 150 countries that have implemented a VAT type system, it is anticipated that the number of countries seeking to tax e-services supplied by nonresident suppliers will continue to grow. Therefore, any business affected will need to monitor the situation to ensure they stay compliant.

There has also been debate regarding what recourse global tax authorities have to enforce their domestic rules on nonresident businesses. Unless there are mutual assistance agreements that allow one tax authority to request assistance from, tax authorities have limited options to enforce compliance and are reliant on the behavior of businesses to comply with all tax rules that are in effect.

However, noncompliance could have a number of consequences outside of the limited enforcement action that a tax authority has at its disposal. The company’s image, its ability to raise financing, the valuation of the business should the owners seek to sell and the possibility of financial statement liabilities could all be affected by noncompliance.

Tax authorities (notably Australia and Germany) are increasingly using technology to identify businesses that have failed to comply with the rules and are making direct approaches to companies to encourage full compliance―and not just for the current year. Companies that have not complied are also exposed to potential penalties. Generally, the most effective way to mitigate a potential penalty is to disclose the compliance failure and bring the account up to date.

Comprehensive guidelines

This guide was developed with the help of RSM International member firms in countries around the world. The local knowledge and insights provided by the professionals at these firms have given the guide a level of detail regarding VAT compliance in their jurisdictions that globally active companies should find invaluable.

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table of contents

Introduction to the digital services VAT guide

A detailed guide to compliance with countries seeking to tax digital services supplied by nonresident suppliers.

Applying VAT to electronically supplied services

Key points to consider when determining how electronically supplied services should be accounted for with regard to VAT rules globally.

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