Use global, tax local: the dilemma of digital service supplier

Electronic services includes supply of software, cloud services, web hosting, distance learning etc.

“Can you ever think beyond taxation?”, my sister commented while we streamed a movie on an OTT platform. I had just mentioned that we could cause tax problems for the platform owners by using her India subscription in Dubai.

“Will try. But first, let’s go out to watch the new year’s fireworks.” I replied with a smile. And we began discussing the tax issue as we walked towards the JBR beach.

Let’s start with the basics

UAE VAT is applicable on electronic services supplied in the UAE. Electronic services cover the supply of content, movies etc. which are automatically delivered over the internet. The movie streaming services provided by OTT platforms are globally treated as electronic/digital services.

Electronic services is considered as supplied in the UAE to the extent its use and enjoyment is in the UAE. If a movie is watched in the UAE, the streaming services should be treated as used and enjoyed in the UAE to that extent, thereby attracting UAE VAT.

For B2C supplies, the individual subscribers are often not VAT-registered to account for VAT under reverse charge mechanism (RCM). Thus, the VAT obligations should fall on the non-resident platform owners.

Place of contract or payment

“But the subscription was taken through an Indian IP address and the payment was made from our Indian credit card. Why should UAE VAT be applicable?”, she asked.

“UAE VAT law states that the ‘actual’ use and enjoyment will be where the services were used regardless of the place of contract or payment.”, I replied, “Therefore, the ‘actual’ use and enjoyment still needs to be determined. With the current technology, it is not difficult to analyse the various IP addresses/geolocations of the subscriber to determine the actual use.”

Global reach of electronic services

“But the usage can happen across the globe throughout the subscription period. Would the supplier keep paying VAT in different countries?”, she asked the next intriguing question.

“The rules for B2C electronic services are different in each country.”, I replied, “the UAE law uses the expression ‘to the extent’ of the use and enjoyment in the UAE. If the usage is spanned across various countries, the extent of the usage in the UAE would determine the quantum of UAE VAT.”

Interestingly, as per the legal principle upheld by the European Court of Justice (ECJ), payment of VAT/GST on a service in one country (say, India) would not preclude UAE to levy VAT if that service is supplied in the UAE.

“And how can the supplier determine the expected use and enjoyment at the beginning of the subscription?”, came the next question.

“I agree, that is not possible”, I explained, ”but the tax laws generally allow correction of overpaid/underpaid taxes based on subsequent events. The law focuses on the actual, not the expected, use & enjoyment. The suppliers can analyse the actual ‘use & enjoyment’ either on monthly or yearly basis and issue the tax credit notes/invoices accordingly.”

Other nuances

The issue is not peculiar to the OTT platforms. Electronic services includes supply of software, cloud services, web hosting, distance learning etc. over internet. Determining the actual use and enjoyment could be a complex challenge for the service providers. A detailed review of their operational models would help to determine a rational basis to quantify the UAE tax obligations.

“You know”, I continued, “the telecom sector face a far more complex issue of determining use & enjoyment. But more of that some other time.”

“Wishing you a very happy and healthy new year! Will trouble you less this year” I concluded while we watched the spectacular fireworks.

The writer is the managing director of AskPankaj Tax Consultants. For feedback and queries, you may write to info@AskPankaj.com. Views expressed are his own and do not reflect the newspaper’s policy.