Mastering VAT on Digital Products: 2024's Essential Tax Law Changes

Learn about 2024 VAT/Sale Tax changes for digital products with Irina Cherkashina, Tax and Finance Manager at 1D3 DIGITECH LIMITED. This article provides vital updates and tips for businesses to stay compliant and successful in the digital market — essential reading for navigating the evolving tax world.

Defining Digital Products and Services

Before we dive into tax specifics, let's define digital goods and services. Digital goods are products delivered and used in an electronic format without any physical form. This category extends beyond video games to include e-books, music, movies, software, digital images, and online courses.

Video games are a prominent example, available as mobile apps, online multiplayer games, or downloadable content. Other digital goods like e-books and music provide entertainment and education, while software and online courses offer practical applications and learning opportunities.

Examples of digital services include online streaming platforms, cloud computing services, software-as-a-service (SaaS), digital advertising, e-learning courses, and online consulting. The taxation of these, particularly in terms of VAT and sales tax, requires careful attention due to their intangible nature.

What's New for 2024?

Numerous governments implement new tax mechanisms yearly to tax companies providing digital services effectively. The year 2024 has been no exception. Over 100 countries have recently obliged foreign digital goods sellers to apply value-added tax (VAT) or sales tax.

For instance, VAT is applied to all digital goods and services sales within the European Union. This means if you're in the UAE and sell downloadable content or offer software as a Service (SaaS) in the EU, you need to charge VAT according to the rates in the customer's country.

Tax Rate Updates  

Every year brings a variety of adjustments and modifications in tax rates across different countries, reflecting changes in economic policies and financial strategies implemented by governments.

Starting January 1, 2024, the following countries had raised their VAT rates:

• Estonia: from 20% to 22%;
• Luxembourg from 16% to 17%;
• Switzerland and Liechtenstein: from 7.7% to 8.1%;
• Singapore: from 8% to 9%.

Thailand plans to increase its VAT rate from 7% to 10% starting October 1, 2024. On the other hand, Tajikistan has done the opposite, lowering its Sales Tax rate from 15% to 14%.

Keeping track of changing tax rates is relatively simple. The more significant challenge is staying updated on the growing number of countries requiring foreign digital goods and services sellers to register as VAT payers. This task is complicated because laws are only sometimes available in English, updated promptly, or take effect mid-year. Consequently, entering a new market demands a thorough understanding of local tax rules, including reporting and payment procedures.

Changes in B2C Tax Laws Across Different Regions

Macedonia

Starting January 1, 2024, Macedonia introduced an 18% VAT on digital services for businesses registered outside the country. With no registration threshold, companies must register as VAT payers, file reports, and pay the tax to the Macedonian government from the first transaction. This gets even more complicated as non-residents must appoint a local fiscal representative for VAT registration and reporting.

Israel

On the other hand, Israel has decided not to charge VAT on foreign companies selling digital goods and services to Israeli consumers. This idea was first proposed in 2016 and has been brought up yearly during budget discussions. So, Israel might introduce VAT on digital goods next year.

Philippines, Zambia

Zambia and the Philippines have also introduced VAT for foreign companies offering digital goods and services. The tax will be 12% in the Philippines and 16% in Zambia. But, as has been seen quite often, these changes might take time to happen and could be delayed.

Ireland

Changes in taxation may also apply to specific digital goods types. For example, in Ireland, starting from January 1, 2024, electronic books are taxed at a 0% rate. This decision aligns the taxation of e-books with that of their paper counterparts, ensuring equal tax treatment for both formats.

USA

As for the USA, it's essential to monitor changes in Sales Tax legislation in each state, as this tax doesn't exist at the federal level, and states set their own regulations.

In 2023, Louisiana and South Dakota removed their 200 transaction limit for sales tax. Foreign digital merchants only need to look at a 100,000 USD sales threshold. It's also crucial to define the Nexus - a connection between a business and state or local government that triggers the requirement to collect and remit sales tax. The threshold for economic nexus varies by state and can be based on either gross sales, retail sales, or taxable transactions.

Additionally, states can change their tax requirements for different types of digital services. For instance, Michigan now taxes cloud computing as pre-written software if it includes a downloadable component.

Home-rule states, like Alabama, Alaska, Arizona, Colorado, and Louisiana, let cities and counties handle their own sales taxes and set their rates. Businesses must register in these local jurisdictions and file multiple tax reports in a single state. Alaska doesn't have a state-wide sales tax, but you need to know which specific counties tax your digital product or a game and act accordingly.

Reporting Cross-Border Sales To The EU Tax Authorities

Starting January 1, 2024, a significant update in the EU's VAT laws is that payment institutions must now report all cross-border sales to the tax authorities.

European payment service providers are required to collect, process, generate, transmit, and store a specific set of payment information and report it to tax authorities, following the rules set out in Council Directive 2020/284, Council Regulation 2020/283, and the EU Commission Regulation 2022/1504.

This step is part of a larger effort to fight online fraud worldwide. A central system for payment information, called CESOP, has been set up to do this better. EU countries will use it to share and store the payment data they gather.

‍Data Collection for VAT Compliance in Cross-Border Transactions

European payment service providers (PSPs) in the EU need to report the following details about cross-border transactions involving an EU payer:

1. The BIC/ID of the reporting payment service provider.
2. Recipient information (name, VAT taxpayer number, account ID, address, and BIC/ID of their payment service provider).
3. Transaction details (date/time, amount, currency, and transaction identifier).
4. EU member country codes.
5. Payer's location.

The information is gathered to identify the B2C payment recipient who should pay VAT and prevent VAT fraud in cross-border e-commerce transactions. Payment service providers must keep the relevant information for at least three years. The reporting period for this data is one quarter, and the submission deadline is the last day of the month following the reporting period.

‍Determining Record-Keeping Responsibility for Cross-Border Payments

The reporting mentioned above will be mandatory for European PSPs that provide payment services in the EU. This includes:

• European licensed banks
• European branches of banks outside the EU
• E-money institutions
• Payment institutions issuing credit/debit cards
• Services providing acquiring, payment processing
• Platforms offering payment services
• Member State post office giro institutions authorized under national law to provide payment services.

The rules in the Directive don't apply to payment service providers that aren't covered by the EU's 2015/2366 Directive. So, if a payment recipient's service provider isn't in an EU member state, the service provider for the payer has to handle the record-keeping and reporting for cross-border payments.

To keep record-keeping and reporting obligations reasonable, if both the payment recipient's and payer's service providers are located in an EU member state, only the payment recipient's service providers should keep records. For these obligations, a payment service provider is considered to be in an EU member state if their Business Identifier Code (BIC) or unique business identifier is associated with that EU member state.

To clarify, when a payment originates from an EU resident to a recipient in another EU country, the institution of the payment recipient will handle the reporting. However, if an EU resident makes a payment to a recipient in a non-EU country, the responsibility for reporting the payment falls upon the payer's payment institution.

Transaction Threshold

When a PSP processes more than 25 cross-border payments to the same recipient within a reporting period (a calendar quarter), it is responsible for submitting a report on these transactions to the relevant tax authority. The threshold of 25 transactions is relatively low, so sellers offering their digital services to EU users must ensure they comply with the VAT payment requirements in European countries.

Partnering With A Merchant of Record to Stay Compliant

In the constantly changing world of tax laws, businesses providing digital services can find it challenging to stay compliant with VAT and sales tax regulations. Non-compliance can lead to fines and legal issues.

However, there's a solution that simplifies this process. Merchant of Record (MoR) services specialize in handling global tax compliance, relieving businesses from the burden of tracking, reporting, and paying taxes themselves. By partnering with an MoR, businesses can navigate digital taxation effortlessly, ensuring they meet all requirements and maintain peace of mind while thriving in the digital economy