The surge of digital services: VAT compliance needs extra care

May 4, 2020

With the Coronavirus outbreak forcing countries around the globe to quarantine their citizens at home, people are naturally turning to digital entertainment to pass the time or online platforms to facilitate work from home. Tech companies have started to note that this has led to a significant rise in the usage of certain online services. But with new users popping up in various countries and purchasing specific services, businesses now have to be extra wary of global VAT compliance as many countries tax digital goods sold to their citizens.

Online gaming on the rise

As usual outdoor entertainment and casual leisure activities as restaurants, bars, shopping malls are closed for the duration of the quarantine, online gaming platforms are noting an increase in active gamers. The popular gaming platform Steam is reporting that over a weekend in Mid-March, about 20 million users, a record number of players and viewers, connected to the platform at the same time to enjoy games.

Digital conferencing surge

During quarantine, those businesses that can have chosen to continue operating from home, meaning that digital conferencing and chat apps are experiencing a surge of users. Such programs as Microsoft Teams, Zoom, Google Hangouts, and Cisco’s WebEx are becoming the go-to software for internal communication among the workers and higher-ups.

As these platforms are finding their place in foreign countries, the companies should be aware of specific VAT compliance rules for different regions regarding digital content. For example, Cisco is reporting a 22x increase in users of their WebEx platform after the lunar year celebrations in China. Zoom is dropping its 40-minute call time limit to allow users to talk for as long as they need it. Microsoft is also experiencing a 500 % user increase in China. China has specific digital content tax regulations; thus, these companies have to closely follow the sales and pay their dues.

Following this trend, the number of users will rocket in other countries that are entering or are already in quarantine. This means that businesses selling these types of digital services will have to act in accordance with VAT compliance, properly follow the distance selling thresholds, and register for VAT when it is exceeded.

The need for innovative e-learning platforms

While e-learning platforms have no documented surge of users yet, a substantial increase is expected as schools are shifting to online learning. This also applies to people who are looking to use their time to learn new skills and crafts. If online learning platforms gain a substantial audience, it can drastically change the education industry opening the market for new, inventive software.

VAT compliance implications

With Norway being one of the first countries to introduce VAT compliance rules regarding digital content back in 2001, more and more countries are implementing VAT levies on digital goods. This mainly applies to services that are provided to citizens by non-resident businesses and the goal is to generate more revenue for the country.

While such online platforms for gaming, conferencing, and learning are benefiting from the surge of users, businesses that sell these services must remain attentive when it comes to tax. Generally, it’s advised to monitor the sales in foreign countries and when necessary, apply for VAT as this will save them from possible penalties in the long run.

Proper global VAT compliance makes sure that businesses operate according to each country’s rules and pay the taxes when they are due. If you have any queries about digital content VAT rules or international tax, contact our consultants.