Understanding digital sales tax might be complicated, and the complexities begin with the terminology. First of all, the commonly used term digital sales tax might refer to Sales Tax (VAT/GST/CT) applied to products and services sold online or to Digital Services Tax, which is a tax on gross revenues that multinational companies generate from various digital services. This publication addresses common questions about Sales Tax (VAT/GST/CT) specifically. 

Second, Sales Tax names also differ from country to country. For instance, it is called Value Added Tax in the UK and the EU, Sales Tax in the US, Consumption Tax in Japan, and there are a few more naming variations worldwide. The essence, however, remains the same. The governments want to be sure that companies selling digital goods and services (such as video games) pay taxes in the countries where their customers live. While we focus on video games, other digital goods and services are treated the same way from the tax perspective, so you may apply the provided answers to industries like software, e-books, video streaming and more. 

Do I have to pay digital sales tax on my sales in other countries?

If you are selling a digital product such as a videogame, a monthly subscription, or an in-game item to someone in a country where Sales Tax (VAT/GST/CT) is applicable, you must collect and pay that tax to the state budget. Those countries currently include the EU, North America, Japan, Australia, and more, with the number constantly expanding. Moreover, each jurisdiction has its own tax reporting and payment procedures, with some countries requiring to hire local tax representatives and opening company branches. 

Along with Sales Tax (VAT/GST/CT), some countries may impose additional taxes on the activities of nonresident digital service providers. For example, Kenya introduced the taxation of digital services from both a Sales Tax and Income Tax perspective, effective January 2021. The Digital Service Tax (DST) regulations state that a nonresident without a Permanent Establishment in Kenya must register and account for DST in Kenya. The applicable rate is 1.5% of gross income (from digital services) earned from Kenya.

Thus, besides resolving the issue of Sales Tax (VAT/GST/CT) registration, timely reporting and payment, the game developer/publisher has to determine whether these additional taxes apply to its business activities.

Do I need to register as a taxpayer in the countries where my products are sold?

Putting it shortly: yes, in most cases. As of today, more than 100 jurisdictions have made it mandatory for foreign companies selling digital goods to pay VAT or Sales Tax. 

This means that before you start selling in any country, you must understand a few nuances of the local tax system. Those include: 

• Are the goods and services you plan to sell subject to Sales Tax (VAT/GST/CT) in the given country?
• Is there a Sales Tax (VAT/GST/CT) registration threshold?
• Can you do business as a non-resident, or must you register a local branch?
• Are you required to appoint a local tax representative?
• What are the reporting periods?
• Is it possible to file reports electronically?
• Do local authorities accept payments from foreign banks?

Answering these questions will provide a solid foundation. However, given that each tax jurisdiction has its own rules and nuances, we advise a deeper investigation to avoid fines and other potential penalties.

Why should I pay Sales Tax when many large enterprises and competitors do not?

Certainly, not all digital businesses comply with Sales Tax (VAT/GST/CT) regulations where required. This non-compliance can stem from a lack of knowledge about the tax laws of a particular country or from a desire to evade taxes and make more profit.

Some companies delay their registration, keeping an eye on competitors who are also slow to comply, especially if they have operated without any tax obligations for years before the law was introduced.

Additionally, organizing tax registration and implementing a tax accounting system involves significant financial investments, which can also slow down the process. However, every company must remember that tax authorities' interaction with businesses in almost any country follows a certain order: 

Sales Tax (VAT/GST/CT) laws on B2C sales were introduced 3-5 years ago in most countries. Tax authorities already have sufficient experience in controlling and supervising law enforcement. So, we can expect the imposition of fines and other sanctions on companies violating the law shortly. 

• Inform about planned legislative changes
• Implement the law
• Monitor compliance 
• Penalize violators

It is important to understand that once your competitor is fined for non-compliance, you cannot instantly comply with the law and meet all requirements. By then, you might be the next one penalized.

What are the penalties for failing to comply with EU VAT regulations, and what could be the consequences if non-compliance is discovered over the past ten years?

Fines, penalties, and interest charges differ across the European Union since each member state has its own set of punitive measures based on the nature of the violation and its national laws. Sanctions can be grouped into various categories:

• Late (voluntary) VAT registration occurs when a company registers itself but does so later than legally required.
• Failing to register is applicable when tax authorities discover a company is selling within a country without VAT registration.
• Incomplete or incorrect VAT declarations.
• Failing to comply with invoicing obligations.
• Non-payment or late payment of VAT.

Businesses must comply with the specific VAT regulations of each EU country to sidestep these penalties. While the full list of sanctions and penalties for every member state can be found on the European Commission website, let's briefly examine the penalties in Slovenia as an illustration.

• Failure to register and late registration: A penalty ranging between EUR 2,000 and EUR 125,000
• Incomplete and incorrect VAT returns: A penalty ranging between EUR 1,200 and EUR 41,000
• Non-compliance with invoicing and accounting obligations: A penalty ranging between EUR 1,200 and EUR 41,000
• Non-payment and late payment of VAT: A penalty ranging between EUR 2,000 and EUR 125,000
• Non-submission and late submission of VAT returns: A penalty ranging between EUR 2,000 and EUR 125,000 

The most well-known example of a country penalizing a videogame publisher for not paying Sales Tax (or Commercial Tax in that specific case) actually happened outside the EU — in Japan. Epic Games' local subsidiary was ordered to pay back taxes and penalties totalling about 3.5 billion yen ($23 million) for failing to pay Consumption Tax over three years.

How do I know my company won’t be listed as non-compliant with Sales Tax laws when distributing digital goods globally?

When you sign a contract with a merchant of record like 1D3 DIGITECH, we become the final seller of your digital goods and services from the legal perspective and thus bear full responsibility for digital sales tax collection, reporting and payments worldwide. 

This means you are safe from ever falling into non-compliance lists, as we handle tax collection, reporting, payments and communication with local authorities if necessary.  

Does your company offer consulting on tax-related issues and business structuring?

Business structuring means setting up different parts of a business as separate legal units, each with a specific job like owning assets, managing production, or selling products/services. Typically, this type of work is done by legal and accounting firms. On the other hand, our company provides advice on handling digital sales tax across multiple jurisdictions. 

How can I effectively manage tax remittance as a business serving commercial and physical customers?

Sales to individual consumers and corporate entities are subject to distinct VAT regulations. Our advanced tax calculation software is designed to accurately compute taxes, considering the unique VAT requirements applicable to both B2C and B2B sales across various jurisdictions.

Should I add VAT to the price of my digital services or it can be included?

You can either add VAT to the listed price of your digital services or include it within the price on your website or mobile game. It is essential to clearly display the VAT charged to the end user, ensuring transparency regarding the tax applied.