Making sense of digital services taxes
International sales are integral to the success of many software businesses. To achieve global growth, companies must comply with new and changing digital services tax requirements.
One of the main challenges facing digital services providers is keeping up with which countries require foreign businesses to register for value-added tax (VAT) or goods and services tax (GST) and charge, collect, and remit the tax on sales of digital services to consumers. More than 100 jurisdictions globally impose tax obligations on nonresident vendors of digital services and products (aka, a digital tax or digital services tax).
Where are imported digital services and digital products subject to GST?
GST is a broad consumption tax. If you sell electronic or digital goods or services into Australia, Canada, India, New Zealand, or Singapore, you may be subject to goods and services taxes in these countries.
GST registration requirements for digital services tax vary by country. For example:
Australia GST applies to sales made by businesses outside Australia to Australian consumers who purchase a variety of digital products and digital services, including online dating services, website design or publishing services, and webinars or distance learning courses. For digital services tax purposes, a nonresident vendor must register for GST in Australia if “carrying on a business or enterprise” and their GST turnover from sales into Australia equals or exceeds AUD$75,000.
New Zealand GST applies to apps, electronic learning (including webinars); legal, accounting, insurance, or consultancy services; software; and subscriptions to online journals. Inland Revenue explains, “Overseas businesses that supply remote services need to register for GST when their total supplies of goods and services to New Zealand consumers either were NZD$60,000 or more in the last 12 months, or will exceed NZD$60,000 or more in the next 12 months.
Singapore GST applies to gaming services, online software and storage, and streaming media. Starting January 1, 2023, GST will apply to all remote services, including downloadable digital content, software programs, and subscription-based media, purchased by consumers in Singapore from GST-registered overseas service providers. Where digital services tax is concerned, overseas digital service providers are required to register if they have an annual global turnover of more than SGD$1 million and sell more than SGD$100,000 worth of digital services to customers in Singapore in a 12-month period.
Canada began taxing cross-border sales of certain digital products and services on July 1, 2021: Nonresident vendors whose annual sales of qualifying taxable goods in Canada exceed CAD$30,000 must register for Canada GST and HST (harmonized sales tax). Resident and nonresident distribution platform operators whose qualifying sales into Canada exceed the threshold are also liable for the tax. Additional local tax requirements apply in some provinces. This blog post provides more details.
Where are imported digital services and digital products subject to VAT?
VAT is a broad consumption tax applied to goods and services whenever value is added. Approximately 170 countries, including all European countries, have a value-added tax, and a growing number of them tax nonresident sales of digital goods or services. In the European Union, standard rates for digital services tax range from 17% to 27%, depending on the country.
As with GST, VAT requirements vary by country. Each jurisdiction defines e-services for VAT purposes in its own way. For example, Japan’s VAT (known as Consumption Tax) doesn’t apply to voice and data telephony services but does apply to cloud-based services, ebooks, online gaming, and services that post online ads.
Some countries have a VAT registration threshold for nonresident vendors of digital goods and services. For example, Switzerland’s digital tax applies to cross-border sales of a variety of broadcast and electronic products, including data and images; downloads or streamed films, games, and music; mobile phone and data services; online gambling, and web hosting. Currently, nonresident service providers must register if their annual worldwide sales exceed CHF100,000.
That said, it’s becoming more common for countries to have no digital services tax threshold for nonresident providers. The European Union and United Kingdom have eliminated the threshold for nonresident sellers, and there’s no threshold in South Korea, Turkey, or Uruguay.
Learn more about this issue in The demise of the floppy disk and what it means for international tax compliance.
What is digital services tax?
GST or VAT on digital services is not the same as digital services tax.
Digital services tax, or DST, is a tax on select gross revenues of large digital companies like Amazon, Facebook, and Google. DST isn’t an income tax, an online sales tax, or a VAT.
DSTs emerged in 2018 after the European Commission determined existing international corporate tax rules weren’t “fit for the realities of the modern global economy” or digital age. The commission came up with a two-pronged plan to tax digital business activities in a “fair and growth-friendly way”:
- Tax profits generated in a country even if a company doesn’t have a physical presence there (similar to economic nexus laws in the United States)
- Tax certain digital activities, including but not limited to data usage, digital advertising, software as a service (SaaS), and streaming services
Approximately 15 of the 38 member countries in the Organisation for Economic Co-operation and Development (OECD) have a DST. All provide an exception for businesses with revenues (worldwide and country-specific) beneath a certain threshold, though specific requirements vary by country.
For example, France imposes a 3% digital services tax on companies with at least €750 million in global revenues and at least €25 million in French revenue. The DST applies to digital services, file sharing, online content, online retailers, online selling platforms (intermediaries), and search engines.
Are DSTs here to stay?
DSTs are generally considered to be a stopgap — an imperfect way for countries to tax revenue slipping through dated tax policy gaps. According to a report issued by the State Tax Research Institute, DSTs will eventually be discarded as member states switch to economic nexus and market-based sourcing rules.
In fact, in October 2021, 136 countries representing more than 90% of global GDP agreed to an OECD global minimum tax plan that will subject approximately 100 of the world’s largest and most profitable multinational enterprises to a minimum tax of 15% in 2023. The plan requires the repeal of national digital services taxes.
Austria, France, Italy, Spain, and the United Kingdom will enforce existing DSTs until the first phase (Pillar One) of the global minimum tax plan takes effect. Businesses subject to these DSTs may be eligible for a tax credit against future tax liabilities.
Tax automation can simplify tax compliance for software and SaaS businesses.
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