VAT on International Digital Services

Selling digital services across borders has never been easier. This increased global reach, however, brings with it VAT challenges that sellers must be aware of.

In this article we outline the key considerations for businesses operating in this digital economy and the measures they must take to be compliant.

In 2025, we carried out research exploring the supply of digital services around the world and whether this creates a VAT registration requirement. The simple answer from our research is ‘Yes – there is an obligation to register for and charge VAT in many countries around the world’.

What services are affected?

For the purposes of our research, we reviewed the rules relating to ‘Digital Services’. The exact definition may differ per country but these are generally understood to mean the following:

• The supply of digitised products such as software, e-publications, apps etc.
• Services provided over the internet including website hosting.
• Provision of databases.
• Services automatically generated through electronic means (without human intervention).
• Downloads or streaming of music, films, games etc via the internet.

The typical supplier which might be affected by these rules may be one that provides:

• Software-as-a-Service (SaaS).
• Streaming and other online subscription services.
• E-learning and online education platforms.

What is the issue?

Many countries across the world have introduced some form of consumption tax, more commonly referred to as Goods and Services Tax (GST) or Value Added Tax (VAT) or similar. Typically, this is a transaction tax levied on the price of the goods or services at the point of consumption. The rules as to whether something is taxed can be complicated. For example, for supplies of goods, the VAT position usually follows where the goods move from and to. But the position for services and, perhaps more importantly for digital services, is more nuianced.

It is a common misconception that VAT is not due on services to foreign recipients. For a UK company, it may be the case that no UK VAT is due, but VAT may be due in the recipient’s country – where the service is effectively used and enjoyed.

Recognising that there is a potential revenue loss, many countries have introduced new rules and a requirement to register for and charge VAT on the supply of certain services which are deemed to be received or consumed in their country. For many, these rules apply only to B2C transactions, but there has been an increase in the number of countries which have also introduced new VAT registration rules for B2B transactions.

Enforcing VAT registration can be difficult and, anecdotally, many businesses do not comply with foreign rules. It has lead to tax authorities exploring and introducing alternatives such as:

• Transferring the liability to register to an online marketplace where it is deemed to be supplying the service;
• Adopting a withholding tax regime; and
• Requiring the payment service providers (eg, credit card companies) to deduct the VAT from the payment to the merchant and remit this VAT to the tax authorities.

In some ways, these can be better for the suppliers as they remove the requirement to register for VAT and deal with the administration costs of being registered. But VAT is still due and prices may have to be adjusted to reflect this.

What does this mean?

In theory, where a non-established business supplies relevant services to a country it may be required to register for and charge local VAT. There will be a cost in doing this. Failure to do so could result in assessments for unpaid tax and potential penalties. These vary across the countries. It could also lead to local restrictions, potentially preventing a business trading in a jurisdiction.

Which countries are affected?

The short answer is that most countries are affected by VAT rules on digital services, however the rules mainly affect business to consumer supplies (B2C). The majority of countries do not require VAT registration for business to business supplies (B2B).

What action should a business take?

A business supplying digital services on a B2C basis around the world is likely to be required to be registered for VAT in many locations. Whilst the administration costs of this may be high, failure to comply can be costly.

A business needs to consider its obligations in the first instance and, we would suggest, as soon as possible, in order that any exposure is limited. There will likely be a need to obtain support in terms of local country advice and accounting and filing assistance. Suppliers should also perhaps consider whether there are alternative commercial solutions to minimise compliance costs.

How we can help

We are a member of the Kreston Global network, with advisory and compliance specialists in over 120 countries. We are well placed to assist you on all VAT matters, providing specific local advice and implementing compliance obligations cost effectively. For more information, please get in touch.