VAT on cross-border B2B digital services

Which countries do not apply VAT reverse charge on B2B cross-border electronic, broadcast and telecoms services

Over 120 countries have VAT obligations on digital services when supplied by non-residents to consumers.  For B2B cross-border transactions, most countries shift the VAT obligations to the business customer via the reverse charge mechanism so avoiding the need for the provider to obtain a foreign VAT registration. As with general B2B services VAT rules.

But a small number have opted to also tax B2B transactions, and not allow for the obligations to shift to the resident business customer. This in out of step of OECD VAT standards on digital services which recommends the use of the reverse charge.

South Africa B2B VAT digital services rules are under consultation, and the reverse charge is expected to the implemented from 1 April 2025.

B2B digital services no reverse charge

VAT rules for B2B VAT on digital services with reverse charge

When a non-resident provider of digital services sells to a VAT-registered business (B2B), the VAT treatment differs from business-to-consumer (B2C) transactions. Below is an outline of how VAT registration and treatment typically work for B2B transactions involving non-resident providers of digital services:

• Place of Supply Rules (Reverse Charge Mechanism):

  • General Rule: In most countries, B2B transactions involving digital services fall under the “reverse charge” mechanism. This means that when a non-resident provider sells digital services to a VAT-registered business in another country, the responsibility for accounting for VAT shifts to the customer (the business receiving the services).
  •  No VAT Collection by Supplier: The non-resident supplier does not charge or collect VAT. Instead, the business customer self-assesses and reports the VAT in their own VAT return under the reverse charge mechanism.

• VAT Registration for Non-Resident Suppliers:

  •   No Mandatory VAT Registration: Non-resident digital service providers generally do not need to register for VAT in the customer’s country if all their sales are B2B and the reverse charge applies. Since the VAT liability is shifted to the business customer, the supplier is relieved from the obligation to register solely for B2B transactions.
  •  Voluntary Registration: Some non-resident providers may choose to register for VAT in the customer’s country if they have a mixed portfolio of B2B and B2C transactions, or if local rules require registration for other specific reasons (e.g., having a physical presence).

• Reverse Charge Process:

  •   Customer’s Responsibility**: The VAT-registered business receiving the digital services calculates the VAT on the transaction using the applicable VAT rate in their country. They declare the VAT both as input tax (which they can usually reclaim, subject to normal rules) and as output tax on their VAT return.
  •  No Local VAT Charged by Supplier: Since the reverse charge applies, the non-resident supplier issues an invoice without charging VAT. The invoice typically includes a note indicating that the reverse charge applies and that the VAT is to be accounted for by the customer.

• Invoice Requirements:

  •  VAT Compliance on Invoices: In B2B transactions, the invoice should clearly state that the reverse charge mechanism applies. It may include the customer’s VAT number to confirm that the customer is a VAT-registered business, and a reference to the relevant legislation or regulation that triggers the reverse charge (e.g., “Reverse charge: Article 196 of the EU VAT Directive”).
  • No VAT Number Requirement for Supplier: Since the non-resident supplier is not charging VAT, they typically do not need a VAT number in the customer’s country. However, the supplier’s local VAT number (if applicable) may still appear on the invoice.

• VAT Rates:

  • No Rate Applied by Supplier: In B2B transactions where the reverse charge applies, the non-resident supplier does not apply any VAT rate. The customer applies the appropriate VAT rate based on their local tax laws when accounting for the VAT under the reverse charge mechanism.

• VAT Compliance and Reporting for the Customer:

  • Self-Assessment by the Customer: The customer must report the VAT in their VAT return, calculating the tax as if they had purchased the services domestically. This ensures that the local tax authority receives VAT on the service consumed within its jurisdiction.
  • Reclaim of Input VAT: If the VAT-registered business customer is entitled to deduct input tax, they can often reclaim the VAT paid via the reverse charge mechanism in the same VAT return, making the transaction effectively VAT-neutral.

• Examples by Jurisdiction:

  • European Union (EU): Intra-EU digital service transactions between VAT-registered businesses typically fall under the reverse charge mechanism. For example, if a US-based digital service provider sells cloud services to a VAT-registered business in Germany, the German business self-assesses and reports the VAT. The supplier does not register for VAT in Germany.
  • United Kingdom (UK): Post-Brexit, the UK also applies the reverse charge mechanism for non-resident suppliers providing digital services to UK VAT-registered businesses. The UK business accounts for VAT on the service in its VAT return.
  • Australia: The reverse charge applies to imported digital services for GST-registered businesses. Non-resident providers do not collect GST if they are selling to Australian businesses, and the business self-assesses the tax.
  • Canada: Canadian VAT-registered businesses (GST/HST registrants) are typically required to self-assess the GST/HST under the reverse charge mechanism for digital services purchased from non-resident suppliers. Canada implements 5% GST at the federal level and then most provinces impose their Harmonised Sales Tax or Provincial Sales Tax too.
  • The US: sales tax are levied at the state level – 45 states and Washington DC operate a sales tax. There are many variations on the rules and definitions of eligible taxes.

• Enforcement and Penalties:

  • Customer’s Liability: Since the reverse charge mechanism shifts VAT responsibility to the business customer, the burden of compliance is on the customer, not the non-resident supplier. Penalties and interest may apply if the customer fails to properly account for the VAT on the services received.

Summary of B2B digital services VAT

For B2B transactions involving non-resident providers of digital services, the reverse charge mechanism typically applies. This relieves the non-resident supplier from the need to register for VAT in the customer’s country, as the VAT-registered business customer is responsible for reporting and paying VAT. The supplier issues VAT-free invoices, and the customer self-assesses the VAT under local rules.