International digital tax laws: Taxamo solution goes global

Wed Sep 30, 2015

international digital tax laws

As eCommerce has grown in popularity with consumers so too have international digital tax laws with legislators. It is for this reason that the Taxamo service continues to expand.

By the end of 2015 36 countries had introduced new ‘place of supply’ tax rules on digital service sales or ‘digital downloads’.

Japan became the 36th country to do so on October 1, 2015. Already 49 multinational digital service companies have registered for Japan’s new consumption tax. These new consumption-based Japanese tax rules apply to cross-border digital services provided by overseas businesses to the domestic Japanese marketplace.

As support compliance with Japan’s new consumption tax rules and as of January 2016 we have added support for Norway’s VAT on eServices (VOES) system. In Q4 2015 we added support for South African VAT. With so many tax jurisdictions planning new digital tax rules we have to keep evolving so our merchants can remain compliant across the world. There’s more to come too, as new jurisdictions introduce such rules we will support compliance there.

As a result the Taxamo solution now supports EU VAT compliance in the 28 EU Member States, Japanese Consumption Tax (JCT), South African VAT, Norway VOES, and U.S. Sales & Use Tax. All via one simple integration.

As stated, Taxamo will support additional regions in-line with international digital taxation regulations. Peering into the future three tax jurisdictions, New Zealand (October 2016), Russia (January 2017) and Australia (July 2017) , have already revealed plans to change their taxation laws and target digital services via a new goods and services tax (GST).

The key thread running through these new digital tax laws is that the place of supply is now critical. These consumption-based taxes are taking their lead from the OECD.

Check out our infographic (right) for a timeline of significant events around the international introduction of consumption-based digital taxes. It shows that these international digital tax laws have been in germination since the OECD hosted a meeting in Ottawa back in 1998.

International digital tax laws: the reasoning

Tax authorities are eyeing digital downloads because of the rapid growth of this industry. The tax laws lead to new revenue streams for governments anxious to shore up their tax base. Norway, one of the pioneers of such taxation, introduced its value-added tax on eServices (VOES) scheme in July 2011. It has since recouped €283.5m, as of August 2015.

Via the new European Union (EU) laws introduced in January 2015, the UK estimates that it will recoup £1.2bn between 2015 and 2018. Ireland – a much smaller market to the UK – has estimated that it will receive a VAT receipt boost of €600m between 2015 and 2019. Irish Revenue has broken this revenue down as follows: €100m in 2015 and 2016; a further €125m in 2017 and 2018, and €150m in 2019.

Australia has revealed plans to introduce a 10% goods and services tax (GST) on digital downloads from July 2017. In its analysis the Australian Government estimates a tax return of AUD$3.2 billion over a decade.

With such revenue potential for global tax authorities, the rapid evolution of international digital tax law models is not set to stop with Japan. As stated, Australia has already announced plans to introduce similar rules in 2017. Their Antipodean neighbours, New Zealand, have also revealed a similar digital GST blueprint with a potential tax recoup of NZD$180 million per year.

From the Russian tax authority’s point of view one of the key drivers behind the planned introduction of the proposed new law is the potential revenue at stake. It is quite significant.

Foreign digital services companies’ income from Russian consumers of digital services was RUB 240bn (€3.25bn USD$3.53bn) in 2014, and is estimated to be RUB 300bn (€3.85bn USD$4.24bn) in 2015.

As traditional tax bases begin to erode tax authorities across the globe are recalibrating their tax collection systems to include new types of services. There has been a domino effect of tax authorities adopting approaches similar to the Russia digital VAT and this trend is not likely to change in the coming years.

It doesn’t end there: China, Singapore, Turkey, Israel, Brazil, and India have all discussed plans to introduce similar taxation rules. In short: the taxation of digital services is here to stay.

All this means that international digital service merchants need certainty in relation to their tax liability and compliance worldwide.

A robustly road-tested solution

That’s where Taxamo comes in, providing this certainty with a trusted solution already robustly road-tested in the EU.

Our solution was designed around the 2015 EU VAT on the cross-border supply of digital services, and it has been a roaring success in this region.

From our experience we know that the market for digital services is truly global. This means that any international digital tax laws changed – by any country – have a significant impact on digital service merchants right around the world.

We know digital tax compliance is an international problem, that is why Taxamo provides the international solution.

Digital service merchants need certainty

From our experience of the 2015 EU VAT rules roll-out we have a deep knowledge of digital merchants’ requirements when it comes to certainty and trust.

Taxamo’s real-time solution is based on a 4-step digital tax calculation:

  • Detects customer location: Determines customer location from available evidence.

  • Identifies international tax laws that apply: Monitors international digital tax law changes and updates compliance requirements without changing merchant integration

  • Gathers additional location evidence: Based on applicable tax regulations, further customer data may be needed as part of checkout.

  • Applies the accurate tax rate: Manages tax rate tables across multiple tax regions

Digital service merchants can integrate their website with the Taxamo service via numerous avenues: using Taxamo’s RESTful API; client libraries; Taxamo’s javascript; payment gateways, or third-party plugins for the most popular shopping carts.

Note: Taxamo content is created for guidance only, please consult your local tax advisor.

Contact us to find out more about our solution