One thing’s for sure if you’re a digital-based business: The rules about taxation worldwide are constantly changing and yes, they do affect you.
A widespread trend happening across countries is that governments want to charge tax based on the location of the purchaser of the product. You might be kicking back in Spain thinking you’re ok if you’re paying taxes locally, but you do in fact need to consider the rules of other jurisdictions.
Sounds a bit complicated when you consider the ease with which we can do business digitally across borders, doesn’t it? Let’s check out a few of the latest updates and proposed future changes.
The countries in this section are a few examples of those who have made changes recently to how they charge and administer taxes. Check these out to see how you may be affected:
We’ve written at some length previously about what digital sellers need to know about EU VAT. It’s worth a quick refresher though, just to make sure you’ve got the key points. These rules have been in place since 1st January, 2015:
- Digital businesses who sell to European consumers must apply, collect, and remit VAT against all customer invoices.
- If you sell to VAT-registered businesses, they are exempt under a reverse-charge scheme, but you must have their VAT registration details.
- There is no “EU” VAT rate. The rate you need to charge is the rate of the country in which your customer resides. This means you need to be set up to apply the correct VAT rate to the right country.
- If collecting and paying out VAT to each individual jurisdiction sounds like a headache, you can get set up with a MOSS (mini one-stop shop) to administer your VAT returns and distribute what you have collected.
You can view information and requirements, including links for rules specific to member states, straight from the European Commission here.
If you’re not already aware of Norwegian VAT requirements, you’re actually already a few years behind! Norway is one of the original countries to introduce rules around taxation of the digital economy, with laws going into effect back in July 2011.
VOES (or VAT on E Services) is where you need to be looking to ensure you are compliant with their rules.
The key points are that business to consumer (B2C) transactions for e-services from non-established suppliers to Norwegian consumers are required to charge VAT. The annual threshold to collect this tax is NOK 50,000.
With regard to B2B services, they operate a similar scheme to the EU, where VAT is accounted for by the purchaser under a reverse-charge mechanism.
South Africa introduced their VAT rules for electronic suppliers on 1st July, 2014. They do have a lower-limit however, below which VAT is not required to be charged or registered for. That is ZAR 50,000 (or around €2,900).
Unlike other countries, South Africa does not make a distinction between B2C and B2B sales – all are subject to their 14% VAT charge.
Pretty much any kind of digital service you can think of is in-scope for their electronic VAT rules. Check out the list below, taken from a Tax Insights article:
In the final regulation at the end of March 2014, electronic services are defined as:
- Educational services (educational services only qualify as e-services if supplied by a person that is not regulated by an educational authority in the foreign country)
- Games and games of chance
- Internet-based auction services
- The supply of e-books, audio visual content, still images and music
- Subscription services to any blog, journal, magazine, newspaper, games, internet-based auction services, periodical, publication, social networking service, webcast, webinar, web site, web application and web series
Another point to note is that the South African VAT act is not limited to South African residents. Therefore, your digital business based out of any other country could well be on the hook for VAT there if you meet the thresholds.
The Japanese tax, known as “consumption tax”, was introduced and made pertinent to digital business owners on 1st October, 2015. The annual threshold for this tax is JPY 10 million.
Here’s what you need to know:
- The consumption tax rate is 8%.
- It is to be charged on all B2C ecommerce transactions delivered by foreign businesses to Japanese consumers. (Japanese businesses were already paying this and the idea is to level the playing field).
- Foreign companies must register and designate a tax agent for themselves in Japan.
- B2B transactions apply a “reverse charge” mechanism like other countries, where the recipient deals with the tax, not the seller.
Like other countries, the definitions of which electronic products and services are included in JCT (Japan Consumption Tax) are fairly broad. Digital services such as ebooks and courses do count under this law. You can check out an English version of their policy changes here though.
Other countries are planning on implementing similar tax laws to those above. Here are a few you should be aware of as a digital business owner:
Australia is planning on implementing laws for taxation on digital transactions, hoping to widen their tax base by doing so. Like others, Australia is also concerned with ensuring businesses based in their own country aren’t disadvantaged by those who were able to offer goods without paying the taxes digitally.
Known colloquially as “Netflix Tax”, Australia plans on bringing in a 10% GST (goods and services tax) from 1st July, 2017. While we haven’t yet seen details on how it will be administered and who exactly needs to register for GST, you can find their Explanatory Memorandum here.
Across the Tasman Sea from Australia, New Zealand is introducing new laws to tax digital transactions from 1st October, 2016.
The GST rate of 15% will apply to all sales of NZD$60,000 or more across a 12 month period. Businesses who reach this level will be required to register for GST.
Digital sellers who provide their services to New Zealand-based consumers must also collect two non-conflicting pieces of evidence proving the customer location (for example: billing address, IPN location, bank details or country code of phone number). This is very similar to EU requirements.
There doesn’t appear to be any distinction made between B2B and B2C customers. Here’s what Revenue Minister Todd McClay had to say:
“GST should apply to all consumption that occurs in New Zealand. This is what makes our GST system fair, efficient and simple.
To reduce compliance costs, offshore suppliers will not be required to return GST on supplies to New Zealand-registered businesses, nor will they be required to provide tax invoices.”
Canada is a “watch this space” for introducing taxes on digital goods. It became an election issue in late 2015, but there do not appear to have been further developments since.
It is however, still an issue that is being pushed by many, even as a way to fund the creation of more domestic content. If they go the way of their fellow Commonwealth nations we can expect to see taxes coming in the future.
Russia is planning on implementing VAT on digitally-supplied services from 1st January, 2017. They will reportedly follow much the same model as the EU for applying the law.
The rate will likely be 18% across the board and will require foreign businesses to register and report, much like what currently happens in the EU. We are still awaiting details as to how the taxes will be administered and reported.
A Note For Digital Business Owners
One of the biggest killers of conversion rates at the shopping cart can be costs that pop up out of the blue, whether those are shipping costs or added taxes. If you’re concerned about these taxes affecting your conversions, one of the best ways to tackle it is simple – don’t surprise people.
Consider whether you need to account for VAT in the pricing of your goods in the first place, or whether you let it be known prominently on your website that tax will be charged at checkout. (For example, by saying that the price is $9.99 + sales taxes at checkout). The idea is that by letting people know beforehand, hopefully their first instinct isn’t to click away from the checkout when they see taxes added.
As a digital business owner, you really do need to recognize and understand where foreign taxation rules might apply to your business.
While it’s unclear what the consequences of non-compliance might look like in each country, in general, tax departments don’t muck around. Just as an example, New Zealand consumers can now be automatically fined up to $25,000 for using VPNs to try and hide their true location to avoid GST. What might the penalty then be for businesses who don’t file taxes?
For most of these, the best source to ensure you don’t get into any trouble is going to be a qualified accountant or agent within that country. Quaderno specializes in these tax issues – contact us to ensure you’re compliant!