“African governments now want to tax your Netflix and Chill.” It’s a dramatic headline that does an excellent job of capturing customers’ moods when their favorite streaming service raises its price. The title comes from a Quartz Africa story about the rapid adoption of Digital Services VAT across Africa.
And it’s true. From Ivory Coast to Nigeria, to Kenya and South Africa, authorities are imposing VAT on non-resident providers of electronic services. Of course, the trend is hardly limited to Africa. Each year, more countries adopt the so-called Netflix Tax: VAT on streaming services and other online supplies.
But there’s another way to look at it. Yes, for many consumers, services like Netflix or Hulu, not to mention their favorite music streaming platforms, might suddenly get more expensive.
Making the Digital Economy Competitive
But consumers might feel better about the increase (or at least more resigned to it) once they appreciate the reasoning behind the global move towards digital services VAT.
It’s not just that digital VAT is an important new source of tax revenue for countries (though it certainly is that). In imposing VAT on non-resident suppliers of electronic services, policymakers also aim to create a more level playing field for local and foreign companies.
After all, if a local business exceeds the VAT threshold in the country it is based, it must register for VAT. And that means charging VAT on all taxable supplies. And those supplies may happen to be gaming or streaming, data storage, or cloud computing.
If only local companies have to charge VAT on their online services, nonresident businesses are arguably at an unfair advantage.
When are Online Businesses Required to Register for VAT?
Now, if you provide services to customers over the internet, this explanation may (or may not) sound quite reasonable. But what does it mean in practice?
Most basically, if you have customers around the world, there’s a good chance you are obliged to register for VAT in one or more foreign countries. If you fail to register when obliged, there could be dire.
But things get trickier when we recognize that each country has different VAT thresholds. And they get even tougher when we appreciate that the very definition of an electronic service varies in each country. For example, online teaching may be subject to digital services VAT in one jurisdiction but not another.
No wonder when it comes to digital services and e-commerce VAT compliance, businesses are starting to recognize that less is more. When you operate globally, you need a single point of contact to manage all your VAT obligations, ensuring you are always 100% VAT compliant even as the regulations change.