With the exponential growth of the digital services industry, VAT compliance is becoming very complicated within this sector. Many business owners within this tech-driven marketplace are unaware of the risks of being non-compliant.
Over the past four years, 57 countries out of the 150 countries with existing VAT regimes have implemented VAT legislation around digital services. This is an exceptionally fast uptake rate. And more countries are to follow.
What is digital services VAT?
Digital services VAT refers to the treatment of global taxes owed on the international sale of digital/e-services (e.g. apps, games, video, software, etc.). From tech startups to multinationals, many businesses are unaware of the VAT implications and responsibilities they have to register for VAT in most of the countries they sell into.
What are the consequences for non-compliance?
A lack of knowledge in the area of digital services VAT has consequences and the potential for penalties further down the line. To illustrate, a business could grow to become a middleweight champion in its field only to be smacked down by retrospective tax penalties which are now a major blow to a company’s bottom line. Avoiding digital service VAT penalties early in your business growth is critical.
Furthermore, VAT authorities with current digital service VAT laws in place, are using their own technology to ensure non-resident businesses comply with their laws. For example, Germany’s and Australia’s VAT authorities are developing technology that identifies non-compliant businesses and are approaching those companies directly.
There is a lot of debate around how much control a foreign tax office can hold over your non-resident business. What kind of penalties can Spain really hold over your American business? The answer depends on the relationship your local VAT authority has with the foreign VAT authority. For the most part, as it stands, tax offices are reliant on your own business’s ethical and moral compass to comply with their VAT laws.
While each country has its own punitive measures, if your business does not actively seek 100% VAT compliance in the foreign countries (or simply ignores foreign VAT laws), the following may arise:
- Fines and penalties with interest accruing
- Decrease valuations of business wishing to sell
- Reduce business’s ability to raise financing
- Increase the likelihood of hidden liabilities
- Tarnished brand reputation
- Potential criminal implications
As business becomes more global and the rules constantly change, the VAT challenges grow more complex for in-house tax teams within SME’s as well as enterprise businesses who are growing their global footprint.