The Global Trend to Tax Digital Services

There is a fair amount of confusion in the United States over how to tax digital goods and services. Individual states tend to approach the subject in differing ways: some exempt all sales of digital goods and services, others tax certain digital goods and services, such e-books and downloaded music. Many aren’t quite sure what to do and let state departments of revenue deal with situations as they arise.

A similar confusion reigns in much of the world. However, that is gradually changing as countries rise to the challenge of figuring out how to tax these intangibles – particularly when they are sold by foreign businesses.

On January 1, 2015, for example, the European Union changed VAT sourcing rules for cross-border sales of digital services. Under the new policy, all EU businesses supplying digital services to private consumers (B2C) in the single market zone must charge VAT based on the location of the EU consumer. In other words, EU sellers now must calculate and collect multiple rates of value added tax. Prior to 2015, EU sellers based VAT on the location of the supplier – the location of the consumer was irrelevant.

Read on for a snapshot of where several other nations stand with respect to taxing electronic goods and services.

Australia

The Australian Federal Government has recently confirmed that foreign sellers of digital goods and services will collect and remit the General Sales Tax (GST) beginning July 1, 2015. Highlights of the newly released budget include “Closing the GST Loophole: Consumers buying digital goods and services from overseas will have to pay GST on their purchases. This includes e-books, games, movies, music, consultancy and legal services and more.”

What has become known in Australia as the ‘Netflix Tax’ will apply to digital goods sold by foreign businesses such as Amazon, Google, Netflix and Steam. In his statement on levelling the playing field for GST, Treasurer Joe Hockey said, “It is plainly unfair that a supplier of digital products in Australia has to charge GST and an off-shore supplier does not.” He said that these companies are “agreeable” to change. “They actually don’t pay [the tax]. It’s a tax collected and they remit it back to the country where that occurs.” He expects the tax will generate more than $350 million during its first four years.

India

The Lok Sabha recently approved a Constitutional Amendment Bill, which seeks to create a Goods and Services Tax (GST). If created, a GST could ultimately be applied to supplies of digital goods and services.

Japan                                                                                                       

Beginning October 1, 2015, the Japan Consumption Tax (JCT) will apply to “cross border supplies of electronic commerce by foreign businesses, such as the provision of digital books, music and advertisements, in order to ensure competitive equality between domestic and foreign businesses.”

Foreign businesses providing B2C electronic commerce to Japanese residents are advised to notify Japanese customers “that they shall account for VAT under the reverse charge mechanism.” Additional information is available through the Minister of Finance Japan; see also here.

Korea

Korea is planning impose VAT on sales of electronic services, effective July 1, 2015. Electronic applications, books, electronic documents, films, games, music and software sold on foreign open markets with off-shore servers will be subject to a 10% value added tax.

The Korea Times quoted a spokeswoman for Google Korea as saying the following: “[W]e believe that international forums like the OECD (Organisation for Economic Co-operation and Development) are precisely the places to decide tax rules for multinational businesses because everyone would benefit from a simpler and more transparent tax system.” She also “stressed that Google complies with the tax laws in every country where it operates, including Korea.”

South Africa

Since July 2014, South Africa subjects to VAT foreign supplies of the following electronic services:

• E-books
• Gaming (electronic, Internet, Interactive)
• Online auctions
• Online learning
• Subscriptions or micro payments for social networking sites, Apps, journals, webinars, etc.

The trend: tax a growing number of electronic goods and services.

Simplify global transaction tax management by implementing an automated solution. Learn more.

Photo credit