During the last months stories about taxation arguments between the EU and US have been hitting the headlines. While tariffs on steel and aluminium are unlikely to impact merchants selling digital content, it is nevertheless a good time to cover the topic from an angle relevant to digital service providers operating in international environments.
Most digital service providers start out with a simple approach to payments. Either they choose a credit card processing company to work with or the payments and distribution are delegated to a platform (apps hosted on the App Store or Google Play).
This approach is the simplest, as everything related to taxation is managed by the partner who acts as the Merchant of Record. As companies grow, they have more resources to expand their payment capabilities and optimize things on their own which means that usually the payment processing company becomes an Agent (technical provider) and the Merchant of Record is the digital provider themselves.
If you’re a company going through that transition, here’s what you should keep in mind:
- Always do your own research: Taxation is different in each country and depends also on the country that you are located in (e.g. some countries have tax treaties), as well as the payment methods used and content sold; when entering a new market it makes sense to review what to expect with a tax consultant or contact the local authorities; PwC’s overview also provides a good starting point
- Different countries, different taxes: Beside the standard value-added tax (VAT) that applies in almost all countries (at different rates), service providers also need to keep an eye out on business, sales, digital and telecommunication, excise and withholding taxes. While most taxes impact the service provider, some countries can also have consumption taxes in place which impact the price of the service (and how it should be displayed) to the consumer. Service providers selling content in Europe can simplify their lives through a Merchant One-Stop Shop
- Digital content taxation is on the rise: As global companies without local presence dominate the digital entertainment industry, a growing amount of governments are looking to tax the industry, including Russia, India, Argentina, Brazil and Italy
- Local entities simplify taxation: Opening up a local subsidiary involves paperwork and takes time. However, if you have a strong geographic focus on one region, certain countries are suitable for creating a “hub” in the area, creating more favourable tax conditions and also increase the likelihood of companies in the region being able to do business with you. Such countries include Singapore for South-East Asia the United Arab Emirates for the MENA region.
In any case, carrier billing supports both models, whether you want to delegate taxation to partners like Fortumo or handle them on your own. If you are interested in expanding your payments reach through the most widely available alternative payment method globally, get in touch.