Global VAT & GST on Digital Services: Complete Guide
Key Takeaways
- In over 110 countries, foreign digital service providers must register for VAT/GST, collect the appropriate amount of tax, and remit it to tax authorities. This number is growing.
- These rules exist for B2C supplies mostly, however, about 25 countries extended these obligations to B2B as well.
- The direction the tax world is heading is reshaping the digital economy and requiring providers to comply with diverse tax regulations. Businesses must navigate different tax regimes, rates, rules, and reporting requirements across multiple countries.
- Many countries are introducing marketplace rules, shifting the responsibility of VAT/GST collection and reporting to marketplaces.
- Navigating VAT/GST complexities in digital services demands sophisticated solutions to manage compliance effectively and efficiently.
Check our Digital Services Global Taxation Summary
Download this guide to access a full overview of countries imposing indirect taxes on cross-border sales of digital services, including registration thresholds and marketplace rules.
Check it nowWhat are Indirect Taxes?
VAT (Value Added Tax) and GST (Goods and Services Tax) are indirect taxes applied to the consumption of goods and services, including digital services, rather than on income or profits. These taxes are typically collected by an intermediary (such as a retailer) from the consumer at the point of sale and then remitted to the government. The final consumer ultimately bears the cost, as the purchase price includes the tax.
Value Added Tax
VAT is the most commonly used consumption tax, and more than 170 countries have implemented it worldwide. A significant exception is the US, where a single-stage consumption tax, sales and use tax, is applicable. VAT is levied at each stage of the production and distribution process based on the value added at each stage. The essence of this multi-stage tax is that businesses are allowed to reclaim VAT on their purchases, which makes final customers the ones who pay the VAT, but also gives governments a chance to collect a smaller amount of tax at each step and to get a consistent and predictable flow of income.
Goods and Services Tax
GST is a comprehensive tax on the manufacture, sale, and consumption of goods and services at a national level, typically subsuming multiple indirect taxes. While it is basically the same as VAT, it is mainly implemented in countries with federal structures, like Canada, India, and Australia. Input tax credits are also reclaimable under this regime.
VAT on Digital Services vs. Digital Services Tax
It is crucial to mention that even though both taxes are applied to the digital economy, Digital Services Tax (DST) and VAT on Digital Services are two different things. As mentioned above, VAT (or GST) on digital services is a consumption tax, ensuring that all sales to end consumers within a jurisdiction are taxed appropriately, regardless of whether the provider is domestic or foreign.
DST is a tax explicitly targeting the revenues of large multinational digital companies that operate across borders. It aims to ensure these companies pay a fair share of taxes in the countries where they generate significant revenue, even if they do not have a physical presence there. Far fewer countries have introduced DST, although Canada just implemented DST in 2024 and made the revenue of the largest digital service providers taxable. DST is calculated based on the revenues generated from specific digital activities within a jurisdiction rather than on the value of individual transactions. Also, the tax is paid by the digital service providers themselves, not directly passed on to consumers.
What are Digital Services Taxes?
VAT/GST on digital services is widely implemented to ensure tax fairness and generate revenue from the growing digital economy. Businesses providing cross-border digital services must navigate these VAT regulations to ensure compliance and avoid penalties.
Origin vs. Destination
Historically, companies providing services from one country to another did not face foreign VAT obligations. Transactions were simply taxable where the supplier was established. This was straightforward when services were delivered through physical shops, brick-and-mortar businesses, or traditional methods. However, with the rise of the digital age, an increasing number of businesses are delivering their services online or digitally.
The rise of digital services has resulted in vast sums of money flowing into foreign jurisdictions without the local tax offices receiving their share of consumption tax. Moreover, this created a significant competitive disadvantage for local businesses compared to foreign ones. To capture their portion of tax revenue on cross-border sales and create a level playing field, tax offices worldwide have begun imposing consumption taxes on digital services provided by non-resident companies to local consumers. This indicated the shift from the origin to destination principle, which justified different jurisdictions' taxing digital services.
As of January 1, 2015, within the EU, telecommunications, broadcasting, and electronically supplied services provided by EU suppliers to private individuals and non-business customers are taxed in the Member State where the customer is located. Previously, the tax was based on the supplier’s location.
In the past decade, the destination principle and the VAT on digital services hand in hand, conquered the world. As of today, over 110 countries have implemented such rules, with more expected to follow (confirm the exact countries in our Global digital services taxation summary).
What do we consider Digital Services?
The definition of what constitutes ‘digital services’ varies across different jurisdictions.
The EU defines Electronically Supplied Services (ESS) as services delivered over the internet or an electronic network, the nature of which renders their supply essentially automated, involving minimal human intervention, and impossible to ensure in the absence of information technology.
Typically, telecommunication services, broadcasting services, digital content delivery, such as downloadable music and films, e-books, online games and software applications, subscription-based services, streaming services, online advertising, cloud services, e-learning; webinars and software as a service (SaaS) belong to digital services. The EU provided a detailed list of the services that are typically considered ESS, which helps businesses to categorize their own services.
The definition of digital services should be evaluated country-by-country, as some countries follow a different approach. For example, while SaaS is classified as a digital service in most countries, Mexico has not included it in its definition.
As you will see in Section V below, countries are increasingly broadening their definitions of digital services.
Countries that impose VAT/GST on Digital Services
The table below reflects standard VAT rates for digital services. Certain digital services, such as e-books, may be eligible for reduced rates depending on local tax regulations.
Key Pain Points of Handling VAT on Digital Services
Managing VAT on digital services across various jurisdictions is a complex process that presents multiple challenges, and there is no global/international best practice. Here is a step-by-step list of the critical pain points global service providers face.
How to Determine the Place of Supply of Digital Services
More than 110 jurisdictions apply VAT or GST to cross-border digital services (confirm the exact jurisdictions in our Global digital services taxation summary). Companies must first categorize their services according to the local legal requirements and then determine whether their services are taxable in the given jurisdiction.
Determining the consumer’s location or place of consumption is crucial for applying the correct VAT rules.
Under the harmonized EU VAT rules, since 1 January 2015, telecommunications, broadcasting, and electronically supplied services are always taxed in the country where the customer belongs.
B2B transactions
If the customer is a taxable person (a business with a valid VAT number—B2B), the general rule is that electronically supplied services are taxed at the place where the customer is established or where it has fixed premises that receive the service. In this case, the customer will account for the VAT using the reverse charge mechanism.
B2C transactions
If the customer is a non-taxable person (private individual or a business that does not communicate its valid VAT number—B2C), the customer’s location can be determined based on the country where the private individual has its permanent address or usually lives.
To determine the customer’s location, the VAT Implementing Regulation allows some presumptions.
As regards B2C supplies, there are two different types of presumptions:
- The most commonly used presumption is a general presumption, which helps to identify the customer's location based on two items of non-contradictory evidence. This presumption is only applicable when specific presumptions are not possible to use. The EU does not provide an exhaustive list of the pieces of evidence, but the customer's billing address, the Internet Protocol (IP) address of the device used by the customer, bank details (e.g., the location of the bank where the payment is made), mobile country code of the SIM card used by the customer, or other commercially relevant information could all serve as one.
- As mentioned above, there are specific presumptions as well. For example, when services are delivered to a customer via mobile networks, it is assumed that the customer is located in the country corresponding to the mobile country code of the SIM card being used to access these services.
Based on the collected evidence, the consumer is presumed to be located in the country indicated by the evidence. VAT should be charged at this country's rate.
If three pieces of consistent evidence (as outlined earlier) demonstrate that the customer's location differs from what is presumed, the supplier can challenge that presumption. However, suppliers are not required to do so. Even if contradictory evidence exists, suppliers may choose to rely on the presumption to determine the customer’s location. Tax authorities can only challenge presumptions if there are signs of misuse or abuse by the supplier.
Small Business Exception
Small EU businesses with total cross-border sales of electronically supplied services under €10,000 can apply their home country’s VAT rate until they exceed the threshold and only need one piece of evidence to determine the customer's location. This exception simplifies compliance for smaller businesses.
After Brexit, the UK introduced its own rules, but the place of supply for digital services remained the consumer’s location.
Navigating the intricate VAT rules for electronically supplied services, especially with varying thresholds and evidence requirements, can be challenging—but Fonoa’s tax engine seamlessly manages this complexity, ensuring accurate and compliant tax calculations across transactions.
B2B vs. B2C Digital Services Transactions Under VAT & GST Rules
The responsibility for charging VAT can differ depending on whether the client is a private or business customer. In B2B relations, companies might be subject to the reverse charge mechanism, shifting the tax liability to the recipient. However, it is important to note that over 20 countries, including Malaysia, South Africa, and Serbia, also require registration for B2B transactions (confirm all countries in our Global digital services taxation summary). Adding to the complexity, these rules are not static; countries can periodically alter their regulations. For instance, South Africa is currently considering implementing a reverse charge mechanism for B2B transactions.
Registration Thresholds for VAT and GST on Digital Services
Depending on their consumers’ location, businesses may need to register for VAT in multiple jurisdictions.
Each country has specific thresholds and criteria for VAT registration, which can vary widely and may include sales thresholds, types of services provided, and client base.
Some countries have a zero VAT registration threshold, which means that even one supply to one private individual might raise a VAT registration obligation. Albania, Laos, Saudi Arabia, Türkiye, and the United Arab Emirates are just a few countries that apply digital service rules but have zero VAT registration thresholds. It's important to note that having one business customer can also be sufficient to trigger a VAT registration requirement if the given country applies digital service rules to B2B relations too. Azerbaijan, Serbia, and Costa Rica are good examples; their digital service rules apply to both B2C and B2B transactions, and the registration threshold is zero in all three countries.
Australia (AUD 75,000), Cambodia (KHR 250,000,000), Egypt (EGP 500,000), and Uganda (UGX 150,000,000) are among the countries that apply a value-based registration threshold.
Under the EU’s B2C ESS rules, until the total sales value across all EU member states reaches EUR 10,000 (including distance sales of goods), the EU-based seller can charge VAT of its country of establishment. Once the level of sales exceeds the threshold, the seller should register for VAT in each relevant EU country, or it can choose to account for the VAT under the EU’s One Stop Shop (OSS) regime. The OSS scheme simplifies VAT compliance for businesses by allowing them to register, report, and pay VAT for multiple EU member states through a single online portal in one member state. Note that non-EU businesses have an obligation to register for VAT in the EU as of their first sales, as zero threshold applies to them.
The threshold amounts and calculation periods might also vary. Some countries summarize the transaction value per calendar year, others monitor a 3-6-12-month period, and others combine these criteria.
If you want to learn more about which countries are applying VAT on digital services and on thresholds, we recommend our Global digital services taxation summary.
Registration and Compliance Costs
For financial planning, businesses must understand the economic implications of VAT registration in different jurisdictions, including administrative costs, the potential need for local representation, and the costs of indirect tax compliance.
Determining the Correct VAT Rate
Like tax rules, VAT rates differ from jurisdiction to jurisdiction. Normally, foreign digital service providers are required to charge VAT at the rate applicable in the consumer’s country. For example, digital services are taxed at 20% in Austria, 21% in Belgium and Spain, 27% in Hungary, and 25% in Sweden. Usually, standard rates apply, but there can also be reduced rates for certain digital goods, like e-books. In the UK, foreign businesses supplying digital services to UK consumers must register for UK VAT and charge 20% of VAT on their supplies. Implementing a tax engine takes away the complexity of managing different VAT rates.
Monitoring Constantly Evolving Tax Changes
Tax regulations and rates can change frequently, requiring continuous monitoring and updating of systems and processes to remain compliant. Monitoring changes in VAT laws, registration thresholds, and compliance requirements across different countries is time-consuming and burdensome. Not to mention that the in-house tax team cannot focus on more strategic issues and tax planning. The tax rates and rules of Fonoa’s tax engine are maintained by a dedicated team, which means no maintenance for your internal teams.
Locally Compliant Invoicing and Reporting
One of the main reasons behind the introduction of VAT on digital services was increasing local tax revenues. Governments do their best to improve their tax collection. At this point, not just businesses use tax technology, but tax authorities also rely on it to enhance efficiency and close tax gaps (the digital compliance revolution). Each jurisdiction may have specific invoicing requirements, including transaction details, customer information, and special references. Filing VAT returns on time and ensuring timely tax payments is also crucial for international businesses. Fonoa’s invoicing and reporting solutions allow you to automatically generate tax-compliant invoices across all your markets, as well as credit notes, third-party billing, and self-billing invoices.
Non-Compliance with Global VAT & GST Laws on Digital Services
Non-compliance can lead to significant consequences, like financial penalties, legal issues, and damage to the company's reputation. Tax authorities are even entitled to suspend the business operations of non-compliant digital service providers, including blocking their services in some jurisdictions. Ensuring accurate and timely compliance mitigates these risks.
In Belgium, for instance, the Tax Authority can levy EUR 1,000 per non-filed VAT return and EUR 100 per VAT return filed late. In addition, for late VAT payment, the fine is equal to twice the tax due plus a late payment interest of 0.8% per month.
The Tax Frontier: Emerging Trends in Global VAT & GST on Digital Services
Implying VAT on cross-border digital services
VAT’s popularity in digital services is still growing. Only in 2024 the Democratic Republic of Congo, Morocco, Zambia, Senegal, the Philippines, North Macedonia, and Peru have introduced/are introducing digital service rules for non-resident suppliers of digital services.
Sri Lanka has already drafted legislation imposing VAT on electronic services for non-resident providers. Although the approval process is still pending, introducing VAT on digital services is ‘not an if’ but ‘a when’ question.
In 2024, Bolivia also relaunched its plan to extend VAT obligations to non-resident providers of digital services, as did Botswana, which is also planning to introduce similar obligations.
Expanding Application of the Destination Principle to Services Beyond Traditional Electronically Supplied Services
Another noteworthy trend is the application of the destination principle to services, which were not always considered ESS.
Live virtual events have often been taxed differently from pre-recorded events due to the “minimal human intervention” concept. However, the EU has changed its place of taxation rules for live virtual events as of January 1, 2025. Currently, VAT does not need to be charged in the customer country, but from the beginning of 2025, suppliers will need to charge VAT based on where the customer resides. Countries move towards this trend by following different approaches.
Newer non-resident regimes like Australia, New Zealand, and Canada have already aligned the VAT treatment of live virtual events. Other regimes, such as Singapore and India, have changed the definition to cover all imported services provided to consumers.
These changes were made to address the growing importance of digital and virtual services in the economy, ensure that the GST system effectively captures revenue from these new forms of service delivery, and remove possible double taxation.
Emerging Marketplace Rules
With the rise of the digital economy, an increasing number of countries are introducing marketplace facilitator rules (or deemed reseller rules). These rules place the responsibility of VAT/GST collection and reporting on the marketplace itself, requiring marketplaces to register, validate tax numbers, and manage tax liabilities in the countries where they operate. From the tax authorities’ perspective, it is also way easier to monitor the tax reporting of one marketplace than thousands of individual sellers.
However, for sales in countries without such marketplace liability laws, companies may still need to register and report VAT/GST if they surpass the local registration thresholds, ensuring compliance globally.
VAT/GST on digital services is a global trend where various jurisdictions require businesses to charge VAT/GST on digital services provided to consumers within their borders. Navigating VAT and GST compliance presents significant challenges, including determining taxability, registration, and adhering to varying local laws. Despite the complexities, the increasing adoption of these rules highlights a global move towards equitable tax practices in the digital age. Managing these complex rules is nearly impossible without substantial internal tax and IT resources, making tax automation essential for overcoming these challenges.
Keep Up With Global VAT & GST on Digital Services With Fonoa
Fonoa is a global tax automation and compliance solution provider that helps companies automate their tax processes in a digital, borderless economy.
We sit at the crossroads of tax and technology – and have specialists on both sides of this fence. Our ability to communicate complex concepts simply and clearly enabled us to build industry-leading products.
Fonoa’s single solution provides global coverage, and unrivaled flexibility to customize tax logic and content to your business needs in real time. Our Tax Engine covers 190+ countries and their regions globally with “out of the box” content for a wide range of services as well as marketplace rules, with the ability to add any custom logic quickly and simply. As additional features, global currency conversion, threshold monitoring, and indirect tax withholding are also available.
Talk to us and learn how Fonoa can help your business automate global tax compliance.
