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Video-on-demand streaming services and value added tax
A rapidly evolving legislative environment requires a new level of attention—and action
Video-on-demand and online streaming services are growing exponentially. As providers expand sales across a global audience, they may encounter a complex and evolving indirect tax landscape. We outline the tax challenges and the business considerations of selling electronic content internationally.
Video-on-demand streaming services and value added tax: A rapidly evolving legislative environment requires a new level of attention—and action
Video-on-demand (“VoD”) and other online streaming services are growing exponentially. A 2015 report from Juniper Research projected that on-demand services could see their global subscriber base nearly quadruple from 92 million subscribers in 2014 to over 333 million in 2019 . Historically, consumers have only been able to download content through platforms and intermediaries. Now, though, VoD providers are moving to sell content directly to consumers—capitalizing on strong brands built through high-profile TV series, many of which are produced in-house.
Commercially, this makes sense. While intermediaries have been—and still are—an important route to market, their commissions and margins can be significant. However, as VoD providers expand sales across multiple jurisdictions to reach a global audience, they face a complex and evolving indirect tax landscape—one that requires a healthy dose of caution. This article provides an overview of the tax challenges involved, as well as some considerations for doing business in this environment.
1 “OTT – A Threat Networks Can’t Shake Off”, Juniper Research, 2015
2 As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.
Understanding the tax landscape
The Organization for Economic Co-operation and Development (“OECD”) looks to local tax authorities to collect tax on services, including those provided digitally such as video streaming and on-demand services, at the place of consumption—in short, where consumers purchase and view the content. The OECD first established this intention in Action 1 of its base erosion and profit shifting (“BEPS”) initiative, which focused on taxation challenges of the digital economy. More recently, the OECD released international VAT/GST guidelines that offer more detail on this point.
The OECD’s actions have had a significant impact. Prior to the September 2014 release of the OECD’s paper, “Addressing the Tax Challenges of the Digital Economy,” only a handful of countries sought to tax nonresident providers of electronic services—and most of those failed to implement legislation effectively. As a result, US multinationals had no requirement to register and account for VAT/sales tax on content supplied to private consumers outside of Switzerland, Norway, Iceland, South Africa, and the 28 European Union member states. Even within the European Union, there were no penalties prior to January 1, 2015, for failure to register.
Today, many more countries are looking to bring nonresident businesses within the scope of their local indirect tax regimes. A key challenge is that each of these countries seeks to tax suppliers in a slightly different way. For example:
- South Africa requires companies to account for VAT on sales to both businesses and consumers.
- Japan, in contrast, only requires payment of Japanese Consumption Tax on business-to-consumer sales; however, it defines “consumer” not by the nature of the recipient but by whether or not the service supplied is contractually designated for business purposes. If it is, no tax is due even when the purchaser of the service is not a “business” customer.
- The European Union member states have no threshold below which businesses can avoid the requirement to register. In Switzerland, however, the threshold is 100,000 CHF (approximately $100,000).
This lack of uniformity requires businesses to confirm the exact requirements, including what is within and outside of the scope of the tax net, on a country-by-country basis.
In practice, tax authorities rely heavily on self-policing by affected businesses and on voluntary registration to pay tax. While many businesses historically have taken the position that they are outside the reach of a European or African tax authority, the risks of not registering today can be significant. And this is not just a matter of potential penalties and interest. In an environment that shines the spotlight on businesses’ tax affairs and where the general public expects compliance, failure to register in a jurisdiction that requires it could produce lasting reputational damage. Furthermore, the European Union has confirmed that it intends to invest additional resources to identify suppliers that have failed to register.
Implications for VoD providers
Beyond sales through intermediaries, most VoD providers are unlikely to make many business-to-business transactions; thus, the question of whether your sales are within or outside the scope of a tax regime such as that in Japan is likely of limited relevance. While sales may fall below the registration threshold in certain countries, where there is no such threshold and where the jurisdiction has introduced local legislation to tax these electronic services, expect to be within the country’s local tax net if your business has customers there. This is the case whether or not you have a presence in that country.
Being in the tax purview of countries from Australia to Albania can have considerable implications, many of which fall outside the traditional tax department remit.
|Keeping up with evolving registration requirements||While it is imperative to stay abreast of changes in countries where registrations are already required (and in place), it is equally important to understand 1) where future registration may be required and 2) how to ensure compliance by the date from which rule changes are introduced. This can be particularly challenging given the short timeframes within which some countries have sought to introduce legislative change.||How will you keep up to date as new jurisdictions introduce registration requirements?|
|Pricing||The rates of tax payable can be as high as 27 percent (in Hungary). Outside of the United States, prices are almost always presented to consumers as being “tax inclusive”; therefore, the impact on subscription pricing is a vital consideration.||How, if at all, will you update pricing to account for tax on sales? And how will you communicate that change to your customers?|
|Customer Interactions||Businesses must have sufficient information to
demonstrate the country(s) in which their customers are located and, thus, where they must account for tax. In order to obtain this information, it may be necessary to ask customers for additional information and to develop a practical strategy for managing these interactions.
|What customer information do you currently have, and is this information sufficient evidence (in the event of audit) of your customers’ locations? If not, how will you obtain any additional required information?|
|Business structuring and contractual considerations||Some businesses have incorporated local entities in countries where they would otherwise be required to register as a nonresident, while others have set up regional contracting entities that are responsible for sales to customers in a given region. A VoD provider that operates through a number of intermediaries may have differing VAT accounting responsibilities that are dictated by the contractual position between the parties and the country into which it is supplying services.||Through which entity or entities should you sell, and in what capacity will you deliver services (e.g., as an agent or principal for VAT purposes)? How can contracts be structured to protect the business in the event of VAT increases or the introduction of a VAT regime?|
|Compliance / IT / Systems||Given the local nuances in legislation and the differences in tax rates, compliance can be challenging—particularly for organizations with unsophisticated accounting systems or tax engines.
In addition, configuring ERP and other systems correctly to manage these changes will be important to ensure that VAT is being accounted for and reported correctly. In some instances, developing technology and testing this can take considerable time.
|How will you handle the volume of returns required and the local language requirements in many jurisdictions? Additionally, how will you make sure your systems are set up correctly and
that these systems pull through the data and information necessary to prepare and submit indirect tax returns? What information and lead-in time will your IT function need to do this?
|Resourcing||While the tax returns may not be overly complex (in many cases), registration for indirect taxes can result in often-lengthy audits and tax authority challenges— straining existing professionals and resources.||Who within your organization will be responsible for managing compliance requirements?|
What should you do next?
First and foremost, recognize that the growing attention to this area by local tax authorities, the increasing pace of legislative change, and the ever-increasing expectations and debate around tax and morality requires attention—and action. In today’s environment, doing nothing could be costly.
Next, consider the nature of the services you are supplying and work with your tax adviser to determine whether these could fall within the scope of taxation described above and, thus, require you to register and account for local value added tax. While this article focuses on VoD providers, the issues described above potentially apply to suppliers of all types of digital content—from software providers and app developers to those delivering remote online learning or providing access to online databases of information.
Finally, take the steps necessary to understand the location(s) of your customers and the volume of sales in those jurisdictions. This will be critical to understanding your global indirect tax footprint and profile. Depending on your business, this may be relatively easy, or it could be quite difficult. But without this information, it will be difficult to make decisions about where and how to manage your organization’s tax position. In some cases, you may be required to report retrospective liabilities. In others, you may be able to make a sound case for managing the position prospectively. Either way, up-to-date information about your customers and sales will be critical to effective compliance and proactive tax management.