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 okay paying taxes locally, but in fact you do need to consider the rules of other jurisdictions.
Sounds a bit complicated when you consider the ease and speed with which we do digital business across borders, doesn’t it?
Regions with new digital tax laws
- European Union
- New Zealand
- Saudi Arabia
- South Africa
- South Korea
- United Arab Emirates
- United States
Regions planning to add digital tax
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Regions with new digital tax laws
These countries have made changes to how they charge and administer taxes. Check these out to see how you may be affected:
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.
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 have a look at the Australian Taxation Office (ATO) site.
Bahrain is a member of the Gulf Cooperation Council (GCC) and has implemented the group’s policy on digital VAT for foreign sellers.
The VAT rate for digital products is 5% with no registration threshold. Businesses selling B2C must register for VAT within 30 days of their first taxable sale in Bahrain. Businesses selling only B2B do not have to register, though, since Bahrain buyers will handle VAT themselves through the reverse-charge mechanism.
Read more on the National Bureau for Taxation (NBT), Bahrain’s tax agency.
Belarus levies 20% VAT on digital goods and services sold to consumers in the country.
There’s no sales threshold, so every foreign business is expected to register for VAT, then collect and remit taxes according to the local guidelines. Business owners can register for VAT themselves, or elect to hire a local tax agent. Some of the registration materials must be translated into Russian, so hiring a tax representative could be helpful!
For more information, check out the Belarus Ministry of Taxes and Duties website.
We’ve written at length 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.
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 22.5% 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.
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.
India classifies all digital products under a different, and very long, name: Online Information Database Access and Retrieval services. (Or OIDAR.)
All products are services are subject to an 18% GST, and there’s no threshold for tax registration. That means that if you’re selling to customers in India, you must register for Indian GST and charge 18% tax when necessary.
When is it necessary? When you’re selling to an individual, or B2C. Otherwise, all B2B transactions are covered by the reverse, so long as the buyer provides a registered tax number.
For further information, have a look at this article about Indian taxes.
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.”
If you’re not already aware of Norwegian VAT requirements, you’re actually a few years behind! Norway is one of the original countries to introduce tax rules on the digital economy, with laws going into effect back in July 2011.
VOES (or VAT on E-Services) is where you need to look to ensure you’re compliant with their rules.
The Norwegian VAT rate is 25%.
For B2C transactions, businesses must register for Norwegian VAT if their annual sales in the country exceed the tax threshold of 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.
Any digital service suppliers located outside of Québec (either elsewhere in Canada or abroad) will have to register, collect, and remit Québec Sales Tax (QST), if their annual sales exceed the CAD $30,000 threshold. The QST rate is 9.975%.
Read more on Revenue Québec, Quebec’s tax agency.
Russia introduced new laws to tax digital transactions as of 1st January 2017.
The VAT rate of 20% 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.
Saudi Arabia is a member of the Gulf Cooperation Council (GCC) and has implemented the group’s policy on digital VAT from foreign sellers.
The VAT rate for digital products is 5% with no registration threshold. Foreign businesses must register for VAT in Saudi Arabia.
Read more on the General Authority for Zakat and Tax (GAZT).
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.
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 1000,000.
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.
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.
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. The VAT is the standard Swiss rate of 7.7% and their threshold is CHF 100.000 on global income.
From January 2018, the registration threshold is based on total global sales of the business rather than based just on the sales to Swiss consumers. (This does not apply to companies who sell in only in Switzerland and no other countries.) Therefore, any business who sells their digital products internationally and whose sales are more than CHF 100.000 will have to register for, collect and remit VAT on their Swiss sales.
For more information, take a look at the Swiss Federal Tax Authority (FTA).
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.
Since 1 January 2018, Turkey requires foreign businesses, who provide digital goods inside the country, to pay attention to VAT laws. Turkey’s digital tax policies depend on whether the sale is to a private consumer or to a VAT-registered Turkish business.
If selling to a VAT-registered business in Turkey, then the foreign business does not need to charge VAT. The buyer will handle all Turkish VAT through the reverse-charge mechanism.
If selling to Turkish consumers, then the foreign business must:
- Register for VAT in Turkey. There is no sales registration threshold. It’s possible to register directly as a business owner, online through MERSIS, the commercial registry.
- Charge 18% VAT on digital goods and services sold to Turkish consumers.
- File VAT returns every month. Filings are due on the 24th of the following month, and payments are due the 28th.
To learn more, visit the website of Turkey’s Revenue Administration.
United Arab Emirates
Like Saudi Arabia, the UAE has also adopted the GCC’s Unified VAT Agreement about digital taxes on foreign sellers. Here are the basics:
The VAT rate for digital products is 5% with no registration threshold. Foreign businesses must register for VAT. To do so, first create an e-Services account with the Federal Tax Agency, and then complete the VAT registration form. The UAE have also provided a full guide to VAT registration in English.
The US is undergoing a widespread change in tax policy when it comes to digital products and online businesses.
Some states do charge sales tax on SaaS and digital products. For an up-to-date list of these states, please read US Sales Taxes for Digital Products.
Thanks to a Supreme Court ruling that allows state governments to tax out-of-state sellers, individual states across America are adopting a new digital tax law called economic nexus. The policies generally look like this:*
Retailers with annual sales exceeding $100,000 or with more than 200 separate transactions in the state must register, collect, and pay sales taxes there. Annual sales amounts include both B2B and B2C transactions. Remote sellers that stay under this “minimum presence” threshold don’t have to worry about taxes!
*However, some states might design their own threshold amounts. Please check with each state where you think you might have nexus!
States who already have the new law in place, or are in the process of adopting it, include: Washington, Wyoming, Wisconsin, Vermont, Texas, Tennessee, South Dakota, Pennsylvania, North Dakota, North Carolina, New York, Mississippi, Maine, Louisiana, Kentucky, Iowa, Indiana, Illinois, Hawaii, Georgia, Connecticut, California, and Alabama.
Check out our Guide to US Economic Nexus for more information.
Regions planning to add digital tax
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
Canada is a country to watch! Digital taxes became an election issue in late 2015, but no federal legislation has been passed yet.
However, Quebec has ventured out on its own and implemented a VAT tax on non-resident suppliers of digital services. Read about it above, or check out Revenu Québec.
To learn more about Canadian sales tax, check out this article: Sales Tax 101 for Canadian Startups.
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.
Colombia is close to approving a 18% VAT on digital services from foreign suppliers. There would be no tax registration threshold, and B2B transactions would use the reverse-charge mechanism.
The law was intended to go into effect in July 2018 but remains under review. We’ll update this post when the VAT is enacted!
Gulf Cooperation Council
Not all of the Gulf Cooperation Council’s six member states have implemented the Unified VAT Agreement, which decided that foreign sellers of digital products must begin charging 5% VAT once they pass an annual sales threshold.
Saudia Arabia, Bahrain, and the United Arab Emirates have VAT in full effect, and you can read about it above. Here’s the current status of the other member states:
Kuwait is obliged to implement VAT by the end of 2018.
Oman plans to implement VAT in 2019.
Qatar has not announced a date yet.
We will keep updating as the GCC members implement their versions of the VAT digital tax policy.
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.
In May 2016, the Malaysian Ministry of Finance (MOF) stated that it was looking to tax online businesses from 2017.
However, Malaysia hasn’t confirmed the final rules for taxation of digital services supplied by foreign companies to domestic residents yet. We’ll have to pay attention to the new rules in the short-term future.
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.
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.
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!