Historically, governments throughout the world either taxed income generated by companies operating in the country or taxed companies based on their fiscal residence.
This worked sufficiently well for traditional brick-and-mortar businesses, but with the increasing digitalization of the economy over the last decades, governments are struggling to collect taxes on digital services provided by global companies, and are looking for new approaches to solve this challenge.
What is the digital service tax?
On the indirect tax side (consumption tax), many governments throughout the world have already introduced or are introducing consumption taxes—like VAT or GST—that specifically target digital services provided to their residents by foreign companies. In these instances, the end consumer is taxed (hence the term “indirect tax”). Most of the time there are no registration thresholds for foreign businesses, so it’s good to frequently check where your customers are located, to register on time, and avoid surprises later on.
Some countries already introduced the digital service tax
However, in addition to these indirect tax initiatives, governments in more and more countries have introduced (or plan to introduce) a digital service tax (DST). DST’s aim is to tax either the income or turnover on digital services that foreign companies provide, that are “connected” to the specific country. In most cases, the connection is the users’ location.
Countries that have implemented digital service taxes have also introduced revenue thresholds that dictate whether a company is subject to them, as to not overwhelm smaller companies with compliance obligations. Typically, a global revenue threshold of around EUR 750 million applies.
The applicable rates vary between 1.5-8% depending on the country and apply to the revenue/turnover generated by selling services to residents in the country.
What are digital services?
In the context of the digital services tax, the definition of digital services differs per country. Broadly speaking, online advertising, marketplaces, social media, search engines, selling user data, and online (audio/video) content are potentially within its scope.
We've got you covered
If you are a fast-growing digital business, you may at some point be confronted with digital service taxes. It’s a good idea to plan ahead and understand any potential liabilities you will face when doing business cross-borders.
Reach out to us, and our team will be happy to give you more information on what rules and regulations apply to your business in each country, and how you can use technology to monitor the state of your tax obligations automatically.