Understanding where your digital sales become taxable
For businesses selling software, SaaS, mobile games, digital content and subscription-based services, determining the correct place of supply is often the first step in assessing VAT and GST obligations. Before considering registration thresholds, filing requirements or tax rates, businesses must first identify which jurisdiction has the right to tax a transaction.
This concept is commonly referred to as the place of supply.
What Is Place of Supply?
Place of supply rules determine the jurisdiction in which a transaction is considered to take place for indirect tax purposes. In practice, place of supply rules answer a simple but critical question: Which country has the right to tax this sale? Without determining the correct place of supply, it is impossible to accurately assess indirect tax obligations.
Why Place of Supply Matters for Digital Businesses
Historically, indirect taxation often focused on the location of the supplier. Modern VAT and GST systems increasingly focus on the location of the customer. As a result, a company incorporated in one country may become subject to tax obligations in multiple jurisdictions based solely on where its customers are located. This principle now forms the foundation of most VAT and GST regimes applicable to cross-border B2C digital services.
International Frameworks for Digital Services Taxation
The principle of taxing digital services where consumption occurs has become widely accepted internationally. The OECD provides the global policy foundation, while the European Union has developed one of the most comprehensive frameworks for applying these principles in practice.
OECD Guidelines
Explains why digital services are generally taxed where customers consume them
Provides internationally recognized principles for taxation of cross-border digital services.
Promotes the destination principle, meaning tax should generally arise where consumption occurs.
Widely adopted or referenced by jurisdictions including the UK, Australia, New Zealand, Canada and many others.
Serves as the conceptual foundation of many modern VAT and GST regimes.
EU Framework
Explains how businesses can determine customer location and apply those principles in practice
Established through Council Directive 2006/112/EC and Implementing Regulation (EU) No 282/2011.
Applies the destination principle through specific place-of-supply rules for digital services.
Provides one of the most detailed and widely used frameworks for determining customer location and place of supply.
Establishes customer-location presumptions and evidentiary rules for suppliers.
Determining Customer Location
For digital services, customer location is often the key factor used to determine the place of supply. The European Union provides one of the most detailed frameworks through Articles 24a–24f of Council Implementing Regulation (EU) No 282/2011.
Examples of customer-location evidence include:
- Billing address;
- Shipping address (where available);
- Country of payment card issuance;
- IP address;
- SIM card country code;
- Other commercially relevant customer information.
What If Certain Customer Information Is Not Collected?
Many digital businesses intentionally simplify their checkout process to reduce friction and improve conversion rates. As a result, some suppliers may not collect a complete billing address, shipping address or other customer information traditionally used for tax determination purposes.
The absence of a particular data point does not automatically prevent a business from determining customer location. Where certain information is unavailable, businesses may rely on other available indicators, including: payment card issuing country; IP address; SIM card country code or other.
There is rarely a single methodology that applies to every business model. What is most important is that the chosen approach is:
- Reasonable;
- Consistently applied;
- Properly documented;
- Supported by available evidence.
Tax authorities generally focus less on whether a particular indicator was used and more on whether the business can demonstrate a coherent and defensible process for determining customer location.
Practical Takeaway
Businesses should not assume that the absence of a billing address prevents them from assessing VAT or GST obligations. A documented and consistently applied customer-location methodology, supported by the evidence available within the business's sales and payment systems, is often more important than relying on any single indicator.
Industry Practice: Hierarchy of Customer Location Evidence
Neither the OECD Guidelines nor EU VAT legislation establish a formal hierarchy of customer-location evidence. However, over time, industry practice has evolved around the relative reliability of different indicators.
A commonly adopted order of reliability is:
- Payment card issuing country;
- Billing address;
- Shipping address (where available);
- IP address;
- SIM card country code;
- Other commercial records.
This approach reflects the view that independently verifiable payment and customer information generally provides stronger evidence than technical indicators that can change depending on a customer's location, device or network configuration.
Where multiple indicators point to the same jurisdiction, customer location can usually be determined with a high degree of confidence. Where indicators conflict, businesses should assess the overall weight of the available evidence and apply their methodology consistently across transactions.
Although approaches differ across jurisdictions, many digital businesses adopt a two-indicator standard when determining customer location. This reflects regulatory frameworks in jurisdictions such as the European Union and the United Kingdom, where suppliers of digital services are generally required to retain two non-contradictory pieces of evidence supporting the customer's location. As a result, maintaining multiple independent and consistent sources of evidence has become a widely accepted industry practice, helping businesses support their conclusions, reduce compliance risk and apply a scalable methodology across multiple tax regimes.
Customer Location Scenarios:
Digital Product: SaaS Subscription
Customer: Individual consumer
Indicator
Country
Billing Address
Germany
Card Issuing Country
Germany
IP Address
France
Assessment: Although the IP address points to France, all customer-provided and payment-provider information indicates Germany. A single conflicting technical indicator is generally weaker than multiple consistent commercial indicators. In practice, the customer may be travelling, using a corporate network or connected through a VPN.
Likely Place of Supply: Germany
Digital Product: In-App Purchase
Indicator
Country
Billing Address
France
Card Issuing Country
France
IP Address
Netherlands
Last 18 Months of Login Activity
Netherlands
Customer Account Address
Netherlands
Assessment: The customer originally registered in France but appears to have permanently relocated to the Netherlands. Unlike a temporary travel scenario, multiple independent indicators consistently point to the Netherlands over an extended period. The historical payment information may no longer reflect the customer's usual residence.
Likely Place of Supply: Netherlands
Digital Product: Subscriptions
Indicator
Country
Billing Address
N/A
Card Issuing Country
Canada
IP Address
Canada
Assessment: Many gaming and subscription businesses intentionally simplify checkout and do not collect full billing addresses. Although some piece of evidence is missing, all available indicators point to Canada. The absence of a billing address does not prevent customer-location determination when other reliable evidence exists.
Likely Place of Supply: Canada
Record Retention Requirements
Determining customer location is only part of the compliance process. Businesses should also retain the supporting evidence used to reach their conclusion.
Record-retention requirements vary across jurisdictions. For example, suppliers of digital services within the European Union are generally required to retain customer-location evidence for 10 years, while other jurisdictions may apply shorter retention periods.
As a result, many multinational digital businesses adopt retention policies aligned with the longest applicable requirement to support a consistent global compliance framework.
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