What is Digital Services VAT

There are several regulations across the world specifically created for the taxation of digital services. These are usually simplified schemes with the aim of creating a level playing field between local and foreign providers and to ensure governments collect taxes on digital consumption.

But what are digital services?

A digital service or product is an intangible good or service delivered over the internet or an electronic network, with the supply being essentially automated. These services encompass a broad range of offerings, including but not limited to downloadable content, software, streaming services, online subscriptions, and cloud-based tools, all of which rely on information technology for their provision.

Let’s break it down with examples. Imagine you are a sole proprietor and your business is focused on yoga products and services. Let’s say you have the following situations:

• You have recorded videos and created a course which you sell as downloadable content on your website. All classes are pre-recorded, and you have no live interaction with the customer.

This course is classified as a digital product/service and is subject to VAT (or GST) on digital services. 

• On the same website, you might sell yoga mats and ship them to your customers across the EU.

The yoga mats are physical goods and cannot be classified as digital services, so they are subject to the usual VAT regulations in the EU.

• To your more engaged customers, you also offer 1-on-1 live online classes.

This may be a digitally provided service, but for tax collection purposes, in many countries, it cannot be classified as a digital service/product as it’s not downloadable, nor automated, and involves you as a business providing a human service to your customer, so it may also be subject to usual VAT regulations in the EU.

The applicable tax rates will vary based on where you are selling your digital products, and you may need to register in multiple countries. Different countries have different requirements for registrations and understanding where you need to get registered and pay tax is key for your business activities. Keep in mind that being tax compliant builds trust with your customers and foreign governments, which is crucial for business growth. 

Taxually is here to help you keep up to date with all your tax obligations, from registrations to filings. Have any questions on digital services VAT/GST? Feel free to contact us anytime and our team of specialists will be happy to assist you!