This first proposition has several dimensions. First, we observe the evolving definitions of digital services which are progressively expanding the scope of what is taxed under a VAT. Second, we look at changing business models which are also bringing more transactions and activities into the 'digital services' VAT net.
The evolution from 'digital services' to 'remote services'
In the initial phase of implementation, tax authorities introduced measures designed to tax 'digital services'.15 The concept of what was included (or not) in the scope of 'digital services' varied from jurisdiction to jurisdiction. However, with the relatively early adoption in 2006 in the European Union (EU) of the 'electronically supplied services' definition, the EU requirements have tended to influence policy formulation elsewhere as well. The key features of those original measures were:
- Digital services were those delivered with “no or minimal human intervention” and which “were not possible without the use of information technology”;16
- Digital services included downloadable digital content and software, subscription-based streaming and other media content, web hosting, cloud storage, pre-packaged distance teaching and virtual classrooms (when there was no or minimal human intervention);17
- There were exclusions covering the mere digital transmission or delivery of traditional services; for example, when a lawyer, financial advisor or accountant carries out their work 'offline' but then delivers it 'online'; 18
- Exclusions existed to differentiate the supply of an online booking service from the underlying good or service being supplied, such as a restaurant service, event ticket, car hire, accommodation booking or the like; and 19
- Exclusions existed for telecommunications services and advertising services within the jurisdiction, as these were subject to specific place of supply rules. 20
Three key developments have since occurred which have resulted in a substantial redrawing of the boundaries of those digital services subject to VAT.
First, the distinction between 'digital services' and 'non-digital services' has become substantially more difficult due to technological and product developments. Several examples illustrate the blurring of lines:
- Virtual 'events' have burgeoned due in no small part to the COVID-19 pandemic. This resulted in a substantial transformation of many traditional events, such as concerts and sporting events, to becoming accessible 'virtually';
- Digital gaming transactions (including in the metaverse), have proliferated. While it may be difficult for those in a different generation to relate to, apparently there is use and enjoyment gained from purchasing virtual products in the metaverse for a real fee. As discussed later, the recent German Federal Tax Court decision in the BFH Case 21 highlights the problems that both judges and policymakers seem to have in grappling with these new products; and
- Online training courses have also accelerated throughout the pandemic, and while substantial human intervention may occur in developing the course, the relevant test for digital services taxation focuses on the extent of human intervention during the “consumption” of the course itself. For example, questions have arisen as to whether the availability of a chat or help functionality may be sufficient to exclude an otherwise pre-recorded course from being a digital service.
Second, several countries have sought to re-draw the boundaries between digital services and 'non-digital services', or perhaps worse still, they have created definitions that are exceedingly broad without proper consideration of all activities that may be included. For example, Cambodia’s VAT defines a 'digital service' as including all 'services performed online';22 Vietnam’s VAT seeks to tax 'digital-based business activities';23 and even South Africa expanded its previous 2014 definition to include all “electronic services” from 2019 onward. 24 Over the past few years, the EU itself has been debating the need for further updates to its place of supply rules so as to ensure live streaming is taxable based on the location of the consumer, largely to address the uncertainties created by the Court of Justice of the European Union (ECJ) Geelen25 decision, culminating in changing the place of supply rules for live streamed events and related transactions effective from 2025 so that such events will be clearly taxable where the consumer is located. 26
Third, and perhaps most importantly, countries such as Australia and New Zealand (and soon Singapore) have decided that the whole concept of 'digital services' should not be the cornerstone for taxing non-residents and instead have shifted to taxing 'remote services'. The concept of 'remote services' essentially ensures that supplies of 'anything' from overseas to resident consumers in the jurisdiction falls within the scope of a VAT. Australia accomplished this through legislation treating the supply of “services, rights or digital products to an Australian consumer”27 as being within scope of its GST. In Singapore, “all B2C supplies of imported remote services, whether digital or non-digital, will be taxed by way of the extended overseas vendor registration regime” with effect from 1 January 2023.28 Norway is seemingly going down the same path, with the Norwegian Ministry of Finance proposing amendments to tax all purchases of remotely deliverable services to consumers located in Norway.29
Under this new formulation in which 'any' remote service provided cross-border B2C is potentially taxed, the only real safeguards from literally taxing everything are de minimis registration thresholds, coupled with (often very traditional) preferences in the form of exemptions and zero rating. Here lies the conundrum. On the one hand, taxing “any” remote service which results in final consumption by households is consistent with the “overarching principle” of a VAT, 30 but doing so in a way which adheres to sound tax policy principles of neutrality, efficiency, consistency, simplicity, effectiveness and fairness,31 is where the real challenge lies.
An increasingly important issue, which this scope creep reveals, is the need to identify whether the relevant consideration being paid by the consumer is “for” the remote service. In other words, when a bundle of rights is purchased, practically identifying whether the consumer is paying 'for' the remote service, or 'for' a traditional service being delivered remotely, has become more complex. Consider, for example, the million or even billion dollar investments being made through online banking services and through online trading platforms. It is not difficult to foresee the day when consumers are regarded as paying for the technology access and usage (i.e., the digital service), and not the underlying (traditional) banking or trading service. The rise of 'digital banks' and trading-only platforms is a clear example and is a theme explored in Proposition 3. Closer to home, tax compliance services offered through online platforms will also start to raise similar considerations in the near future as technology improves.
While not necessarily advocating for any particular outcome here, we predict that the Australian/Singaporean/Norwegian model will be increasingly used by other countries going forward for the simple reason that it will future-proof the indirect tax system against further technological advancement. It also removes many of the fine distinctions which exist under measures such as the “electronically supplied services” rules used across the EU. The result, based on the current trajectory, is that 'anything' will be taxed under a VAT when supplied to a resident consumer in the jurisdiction, subject to meeting the de minimis thresholds. For those jurisdictions with either low or no de minimis thresholds in place, the circumstances are created in which taxpayer compliance costs are likely to outweigh the tax revenues being collected.
The logical consequence of this is not only that (virtually) everything will be taxed under a VAT, but that the compliance footprint of affected suppliers will be immeasurably expanded. In short, the VAT measures for taxing the digital economy will grow from being a 'fringe' or 'minor' component of a country’s indirect taxing regime, into a substantial, material and, in due course, perhaps even dominant component.
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15 The generic term “digital services” is used here, though countries and regions will tend to use different labels for it, including “electronically supplied services.”
16 The position adopted by the European Union in Directive 2006/112/EC, which has subsequently been adopted by other countries too – see for example IRAS e-Tax Guide “GST: Taxing imported services by way of an overseas vendor registration regime”, 3rd Edition, Inland Revenue Authority of Singapore, 16 December 2021.
17 See e.g., European Commission, Explanatory notes on the place of supply of TBE services.
18 See the non-exhaustive list of services covered and not covered by the definition of ‘electronically supplied services’ in Article 7 of the VAT Implementing Regulation.
19 Ibid (n15).
20 Ibid (n15).
21 BFH, V R 38/19 (19 November 2021).
22 Sub-Decree no. 65 SD.Prk (8 April 2021).
23 Guidance—Circular 80/2021/TT-BTC.
24 See LAPD-VAT-G16-VAT-FAQs-Supplies-of-electronic-services.pdf (sars.gov.za).
25 ECJ, Geelen, Case C-568/17 (8 May 2019). The Geelen case dealt with live interactive webcam performers and an interesting question arising from this case is the impracticality of imposing VAT registration and compliance costs on individual performers broadcasting to customers in countries which have no minimum VAT registration thresholds.
26 These changes were included in Council Directive (EU) 2022/542 introducing reforms to currently applicable value added tax (VAT) rates, which was adopted on 5 April 5 2022.
27 Section 9-25(5)(d) of the A New Tax System (Goods and Services Tax) Act 1999, which applies in Australia.
28 See Inland Revenue Authority of Singapore, “GST on Imported Services.”
29 Orbitax, Norway Consulting on Amendments to VAT Act Regarding Cross-Border Trade of Services from Businesses to Consumers (11 April 2022).
30 Paragraphs 1.2 to 1.4 of the OECD VAT/GST Guidelines.
31 Being the Ottawa Taxation Framework Conditions.