*Note: This article has been updated in July 2017.
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?
These countries 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.
The Swiss Federal Tax Authority (FTA) introduced their VAT rules for the supply of services from non-resident companies to Swiss residents on 1st January 2010.
It means that if a non-resident company supplies digital products or services to a Swiss consumer must collect and remit VAT to the Swiss Federal Tax Authority.
The VAT is the standard Swiss rate of 8% and their threshold is CHF 100.000.
Please note that currently their threshold is based on the sales to Swiss consumers but from January 2018, the method of calculating of their threshold will be updated. The new method will be based on total global sales of the business rather than based just on the sales to Swiss consumers.
Therefore, any business who sells more than CHF 100.000 in digital products globally will have to charge, collect and remit VAT on their Swiss sales.
Anyway, for further information has a look to the Swiss Federal Tax Authority (FTA).
The Icelandic Government introduced the VAT rules for electronic suppliers on 1st November 2011.
Here’s what you need to know:
- The standard VAT rate of 24% applies to all sales related to electronic services except e-books, which are taxed at the reduced VAT of 11%.
- Foreign companies must register with the tax authorities via a local tax agent.
- The VAT registration threshold is 2.000.000 ISK in any twelve-month consecutive period and not a calendar year.
It means that those foreign companies, which sell digital services to consumers from Iceland and their sales exceed the threshold of 2.000.000 ISK, are required to register for VAT in Iceland. If these foreign companies sell to VAT-registered businesses, the registration is not required and can account for the VAT as part of the input tax.
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, website, 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 e-commerce 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.
Albania introduced their VAT rules for digital business on 1st January 2015.
The standard VAT in Albania is 20% and there is no registration threshold. It means that non-resident businesses, who make a single sale to Albanians consumers, have to collect and register for VAT in Albania by a local tax agent for it.
Like other countries, there are no registration obligations for supplies made to VAT-registered customers in Albania so they have to self-charge VAT (i.e. reverse-charge mechanism), however, Albania has not introduced any online tool to automatically verify the VAT status of the customer online in real-time so it is very difficult for foreign companies to confirm that their customers are B2B or B2C.
South Korea has one of the most technologically advanced and internet-savvy populations in the world, with nearly 90% of people owning a smartphone. It’s no surprise, then, that they were early adopts of cross-border digital sales taxes. Here are the key points:
- The VAT is the standard SK rate of 10%.
- Just like the EU, there is no registration threshold – this tax applies as soon as you make a sale from outside of South Korea to someone inside South Korea, no matter the value.
- To get started, register as a “Simplified Business Operator”. Then you can file your VAT returns via Hometax.
- You will pay your returns on a quarterly basis into a VAT bank account operated by Woori Bank (a.k.a. The Korean National Tax Service).
- Just to make life a little more difficult (kidding, South Korea, we’re sure you have your reasons!) all returns must be made in Korean Won. Be sure to factor the exchange rate into your calculations!
Again, this a broadly-applied tax. Err on the side of caution.
New Zealand introduced new laws to tax digital transactions as of 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.”
On 1st December 2016, India’s Central Board of Excise and Customs (CBEC) released an official circular identifying and explaining the new tax for services provided online/electronically.
Here’s what you need to know:
- The tax shall be deposited with the Central Government by the 6th day of the following month in which service was provided.
- Service provider would charge total tax of 15%,
- There is NO sales threshold. It means that every foreign digital business, who makes a single sale to an Indian consumer, need to register for GST in India.
- If the service provider does not have a physical presence in India, then you can appoint an authorized person/agent to comply with the service tax laws and remit tax to the Government. It will take you 2 weeks to appoint a tax agent so in order to hit the settlement time, you will need to do this within the next two weeks.
- As other countries, you have to collect two pieces of evidence providing the customer location.
Anyway, for further information has a look at this article about Indian taxes.
Russia introduced new laws to tax digital transactions as of 1st January 2017.
The VAT rate of 18% applies to all sales. There’s no registration threshold. Therefore all foreign businesses that sell digital products to Russia-based consumers must collect VAT and report to Russian tax authorities. VAT returns will be monthly, and come due by the 25th of the month following the quarter end.
Sellers 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.
From 1st April 2017, Serbia is to require non-resident providers of electronic services to consumers to VAT register and charge local VAT.
Some factors that must be considered:
- The VAT rate is 20%.
- Under the new VAT rules in Serbia, digital businesses are required to register for VAT, via a tax agent.
- Just like the EU, there is no registration threshold. This means that as soon as digital businesses make a digital sale to a Serbian consumer, they have to apply taxes and to settle VAT with the Serbian tax authority.
- If a foreign entity does not register for VAT; the fine for legal entity is up to 2,000,000 dinars and the fine for an individual is up to 150,000 dinars.
As a precondition for VAT registration, the foreign business should:
- Possess a Serbian Tax Identification Number (TIN).
- Determine the bank account that will be used for VAT purposes.
With respect to the bank account, the foreign business can:
- Open a non-resident bank account with a Serbian bank; or
- Use a bank account of the VAT proxy.
Note that it is not possible to pay Serbian tax liabilities from abroad.
Anyway, for further information has a look to the Tax Administration of Republic of Serbia site.
From 1st May 2017, Taiwan will levy 5% VAT on digital services provided to consumers by foreign business.
The rules mean foreign businesses supplying digital services will have to register for VAT in Taiwan, file VAT returns, and pay VAT to the Taiwan Taxation Administration.
Some factors that must be considered:
- Non-resident providers must register with the tax authorities directly or via a local tax agent.
- Providers will not be required to produce invoices until 2019.
- The VAT registration threshold will be NTD480,000.
- Returns will be bi-monthly.
Anyway, for further information has a look to the Taiwan Taxation Administration site.
Recently, Australia has confirmed that it will delay the imposition of 10% GST on sales of low value goods to its consumers by non-resident e-Commerce companies until July 2018.
However, the delay doesn’t apply to the new requirement for foreign providers of B2C e-Services, who have to charge 10% GST from 1 July 2017.
- digital products such as streaming or downloading of movies, music, apps, games and e-books
- services such as architectural or legal services.
If you meet the registration turnover threshold of A$75,000 and make these supplies, you will be required to register for GST.
Anyway, for further information has a look to the Australian Taxation Office (ATO) site.
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:
Bangladesh was interested in the implementation of the Value Added Tax and Supplementary Duty Act, 2012 from July 2017.
The proposed VAT reform consisted of all foreign digital business, who had Bangladeshi customers, will have to be registered with the tax authorities and collect a 15% VAT on their digital sales.
However, the Bangladesh government has confirmed that there is a delay in the implementation of these rules until maybe the next elections, in 2019.
Anyway, for further information has a look to the National Board of Revenue of Bangladesh
From January 2018, Belarus will begin to levy 20% VAT on digital services provided to Belarusian consumers by foreign companies.
The move follows similar plans by Russia and it is likely that non-resident providers must register with the tax authorities via a local tax agent.
The Thai government is reviewing to change their existing VAT legislation.
They are interested in levying 5% VAT of all e-commerce goods and services transactions from resident and non-resident providers. At the same time, they are considering to eliminate the existing annual threshold of THB 1,500.
It is likely that these foreign companies, who operate a local site and receive payments in baht or transfers money from Thailand, will be treated as having a permanent establishment in Thailand and be subjected to corporate income tax.
The Chinese tax authority is working on reforming of its VAT system and they continue investigating how to tax the digital economy.
At least for now, China postpones the full implementation of the new VAT regime for products purchased by consumers in the online marketplaces.
In May 2016, the Malaysian Ministry of Finance (MOF) stated that it was looking to tax online businesses from 2017.
However, Malaysia doesn’t have confirmed the final rules for taxation of digital services supplied by foreign companies to domestic residents yet. We will have to pay attention to the new rules in a short-term future.
Since early 2016, Israel has been working on the proposals to levy 16% VAT on supplies of digital services to Israeli consumers by foreign companies.
Currently, the Israeli parliament continues reviewing this proposal and it is only a matter of time to know the new rules for digital transactions for non-resident companies in Israel.
Currently, Singapore doesn´t collect any VAT for digital transactions but the Singaporean government has already confirmed that it is considering to levy 7% VAT on goods and electronic services provided to consumers by non-resident companies.
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.
To learn more about it, you can read the article about Sales Tax 101 for Canadian Startups.
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 today to ensure you’re compliant!
*At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or accountant.