The digital age has brought with it new challenges for tax authorities around the world. One of these challenges is how to tax digital goods (Broadcasting Services, E-Services, Telecommunication Services), which can be distributed across borders without a physical presence in a country. In the European Union (EU), the Value-Added Tax (VAT) system has been adapted to address this issue and ensure that digital goods are subject to the same tax rules as physical goods.

The VAT on digital goods ensures that digital companies pay their fair share of taxes in the countries where they operate.

What is VAT on digital services?

VAT on digital goods is a tax levied on the sale of digital goods or services based on the location of the consumer rather than the location of the seller. This means that if a company based outside the EU sells a digital good or service to an EU-based consumer, it must charge VAT based on the rate applicable in the EU country where the consumer is located.

Same principle applies to EU companies as well. It’s worth mentioning that the digital goods are usually taxed with standard VAT rate in the country where the consumer is based, with some common exemptions like e-books, eNewspapers etc.

Why was VAT on digital goods introduced?

The VAT on digital goods was introduced in 2015 to address the issue of tax avoidance by digital companies. Prior to the introduction of the tax, many digital companies used complex tax structures to shift profits to countries with lower tax rates, leading to lower tax revenues for countries where they had a significant presence. The VAT on digital goods ensures that digital companies pay their fair share of taxes in the countries where their clients are, and not where they are incorporated.

Impact of VAT on digital goods

The VAT on digital goods has had a significant impact on digital companies operating in the EU. Companies that are based outside the EU now need to register for VAT in each EU country where they have customers or can use non-union scheme OSS (previously known as MOSS) to simplify their VAT compliance in the EU.

Conclusion

In conclusion, the VAT on digital goods in the EU is an important development in the taxation of digital commerce. It ensures that digital companies pay their fair share of taxes in the countries where their customers are and helps to level the playing field between digital and traditional businesses.

While there are challenges and concerns, the VAT on digital goods is an important step towards a more comprehensive and effective system of international taxation for digital companies.

The EU's efforts to address the issue of tax avoidance by digital companies through the VAT on digital goods also show that it is committed to ensuring that companies contribute to the economies of the countries in which their customers are based rather than “tax havens”.