How is the XaaS offering characterized for VAT, GST or sales and use tax? Where solutions are offered under a subscription model involving a tangible element, the solution needs to be characterized: does it concern a supply of goods or services; are distinct supplies offered or is there there one single supply? The outcome of this question will determine the VAT treatment. Furthermore, the bundling/unbundling approach and characterization might also impact other taxes (e.g. withholding tax) or customs implications.

XaaS setups can create tax obligations for companies in countries where the customers are established without a presence of the company itself in country. Firstly, an increasing number of countries are introducing VAT rules specifically designed to tax electronically supplied or digital services. The rules are often aimed at services provided to B2C customers. However, some countries also specifically include B2B or capture some B2B transactions indirectly.

Secondly, the XaaS offering may fall within the scope of use and enjoyment rules and this could impact the VAT treatment of the supply. These rules, applicable in numerous jurisdictions, aim at taxation at the location where a service is effectively “used and/or enjoyed”. These rules are often difficult to interpret and apply.

Thirdly, for sales & use tax in the USA, states are increasingly implementing far-reaching policies capturing businesses and are expanding tax bases, bringing XaaS offerings into scope.

The shift towards XaaS models often entails a new contractual landscape with new – often unchartered – contractual provisions. Early termination compensation, warranty and return policies, pricing arrangements and global agreements are often new to the business, legal and tax teams. As there may be a change in parties’ rights and obligations under the XaaS model compared to the traditional models and / or a price impact, the contractual provisions deserve the necessary attention from a tax point of view.

Export control and sanctions rules aim to protect national security interests and the violation with the rules are therefore treated severely. Export controls and sanctions rules can limit businesses when dealing with certain companies or people, in certain countries or regions or with certain products and technologies. Introducing XaaS may introduce new compliance obligations and complex XaaS models often need well balanced checks to continuously comply with these rules.

XaaS models often consist of physical elements as well, where goods are put at the disposal of customers without being sold. Moving around goods, especially cross borders, can have VAT and customs consequences.

Another question that often arises for new XaaS introductions or expansions, is how to integrate this in the existing operating model. Will we use our existing distribution channels or go direct to our customers? Do we organize XaaS fully centrally? Just a few questions that need to be timely addressed in order to organize the XaaS model and its tax impact in an efficient way.

Companies launching XaaS models often rely on a platform to offer the solution – be it their own platform or an existing third party operated platform. This could trigger the application of platform or marketplace specific rules for VAT and possibly the application of other taxes and obligations.

The XaaS set up and its linked VAT/tax treatment need to be implemented in the companies’ ERP system. For example, new data points may have to be considered for VAT and sales tax, there is a possible multiplication of tax codes, new invoicing requirements may apply, and specific tax point rules.