The Difference Between Digital Services Tax and VAT on Digital Services
If you’re the Financial Director or CFO of a multinational tech conglomerate then this article may seem quite rudimental to you. You may also be suffering from DST fatigue thanks to the barrage of digital services tax news clogging your news feed. Who’s going to win? France or America? Will Americans ever drink champagne again? You may also raise your hands in the air and ask who wouldn’t know the difference between DST and digital services VAT.
But, if you are the owner of a small tech company, a tech entrepreneur who provides a digital service to people around the world or a one-man e-tailer, then it is critical you know the difference between Digital Service Tax and VAT on Digital Services. The one has nothing to do with your business and the other is absolutely critical to understand.
Digital Services Tax: What’s All the Fuss About?
The news will have you believe that Digital Service Tax (“DST”) is loosely linked to imported champagne from France. But how did it get there? How did French Digital Service Tax result in US Tariffs that threaten to put small US companies out of business? Or how did it lead to the certain misery it will cause French Amazon e-tailers’ due to fee increases? To answer these questions, we need to go back to the elementary basics of digital service tax and we’ll circle back to the wine wars later.
Over the past 3 years, tax authorities have cast their attention to the murky world of digital services in an effort to increase country revenue and avoid exploitation of lenient rules set up once upon a time in a non-digital world.
Tax authorities across Europe – France being public enemy number one, however others such as Austria, Belgium, Czech Republic, Italy, Poland, Slovenia, Spain, Turkey and the United Kingdom have followed suit – want digital companies who earn over a certain amount of revenue (in the region of €750 million globally, or over €20 million in the specific country) to pay a small levy in the form of DST on that revenue. While the proposed DST rate sits at 3%, even this menial single-digit percentage is an eye-watering clawback for giant, digital multinational companies such as Amazon, Apple, Google and Facebook – 4 companies that stand to be most affected. That’s what the fuss is about. These MNC’s feel that they are being discriminated against and that the tax proposal is “unreasonable” and are fighting tooth and nail not to pay the levy. And they’ve got the resources to fight it. This brings us to the current wine wars.
In an effort to halt the levy proposed by France’s tax authorities, Trump threatened to put tariffs of up to 100% on the $2.4 billion of french cheese, champagne, wine and other exports. Furthermore, Amazon threatened to increase fees for the 10,000 French e-tailers selling goods into America. Trump also called for the OECD to put a leash on the few EU countries that went speeding off to create their own DST policies and come up with a unilateral policy for all international players (it begs the question, is it only international policy when the USA agrees with it?)
As it stands, France and the USA are racing to reach a compromise. The USA’s willingness to compromise could be off the back of the many complaints from small US import businesses in the handbags, cookware, porcelain, champagne and cheese industries who feel that their businesses could be completely bankrupted by the situation.
The OECD is currently scrambling to implement some kind of unilateral policy for DST but will have to get all EU member states to agree. Some may say it’s too little too late as several EU countries have banded together to implement a DST policy anyway, with or without the OECD.
We’ll all have to watch this space.
Why Digital Services Tax Doesn’t Affect Your Business
DST will only be affecting a very small percentage of the market, mostly affecting giant global multinationals, hence their feeling of discrimination. Your digital business would only have to be concerned if it meets the below criteria.
- Total annual worldwide revenues of €750 million ($868 million)
- Total EU revenues of €50 million ($58 million)
What is VAT on Digital Services
Digital services VAT refers to the treatment of VAT within the digital services industry. This covers how a seller of digital services should account for the VAT when selling goods globally while being non-resident in countries where the sale takes place. Tech startups and those within the e-commerce space, are often unaware of the VAT implications and responsibilities they have to register for VAT in most of the countries they sell into.
Consequently, this is putting those businesses at risk of payout penalties further down the line. Once the business is a midweight champion in its field, the penalty can be a substantial blow to a company’s bottom line. Avoiding digital services VAT penalties early in your business growth is critical and that’s why you need to care about it more than DST. It may not be in the daily headlines, but checking to see if your digital business is complying with international legislation should be at the top of your daily to do list.
Should Your Business Be Accounting for Digital Services VAT in the EU?
You’ll have to take a cold hard look at where your customer base is across Europe and if you have a large clientele in Europe then you will definitely have to consider a VAT registration and filing process in order to stay compliant. To be more precise (we’re going to get technical now so stay with us), it is the supplier’s responsibility to determine the correct Member State of supply (i.e. where the customer belongs or, where appropriate, where the service is used and enjoyed by the customer). There are particular rules to be applied for determining where a customer is treated as belonging for VAT purposes and accordingly where the VAT must be accounted for. EU Regulation 1042/2013 provides for particular presumptions and scenarios which a supplier must adhere to in determining where a supply takes place. Obviously, consumers move around and may be receiving the service far from home, for example on a mobile device, and there need to be rules to enable suppliers to know where to account for the VAT, if it is otherwise uncertain.
The main rules are as follows:
- When services are provided at a location such as an internet café, Wi-Fi hotspot or similar, the presumption is that the customer belongs at that location (and so that is where the place of supply is determined). If the location is on board a ship, aircraft or train travelling within the EU, the country of departure is deemed to be the country where the supply takes place.
- Where services are supplied via a residential fixed landline, the place of supply shall be wherever the fixed landline is installed.
- Where services are supplied through a mobile network against subsequent collection of payment, the place of supply shall be wherever the mobile country code of the SIM card is.
- Where services are supplied needing a fixed viewing card, the place of supply shall be the place to which the viewing card is sent.
You can read more about the intricacies of digital services VAT here.
VAT Registration & Compliance for Digital Businesses
There is good news. Despite this article delving into some pretty complex policies, you do not have to be an expert in this field. In fact, you don’t have to have any knowledge of digital services VAT to run your business. You can outsource the entire registration and compliance process to a company who understands the complexities of over 60 countries’ local VAT policies. vatglobal assists thousands of companies worldwide with vat registration and compliance services and are experts within the digital services VAT arena.
While we oblige you to grab your popcorn and indulge in the DST saga that unfolds, witnessing global giants squirm in the face of French stubbornness (although in this case it really is a matter of David meets David), the case of Digital Services VAT should be a much heavier concern for your business and one that should not be overlooked in case you face penalties down the line. And I really wouldn’t want to be non-compliant in France these days. Just the thought drives me to drink… champagne.