GST/VAT implications of distance learning in a digital world

COVID-19 dashed the dreams of millions of students who had hoped to study for their degrees at universities at home or abroad. Instead, many have had to stay home and use distance learning to attend their classes. As a result, educational institutions would benefit from carefully considering the commercial and tax implications of a virtual model because they could be in for a real surprise. Particularly on the question of whether virtual learning falls within the Goods and Services Tax/Value Added Tax (GST/VAT) definition of “Electronically Supplied Services” (ESS) and, if it does as can often be the case, this can incur tax obligations for educational institutions in many countries.

Even when there are fewer restrictions to movement in 2021, it is likely that this distant learning model for education will continue to grow so it behoves institutions to understand the detail of the GST/VAT rules.

Compliance in multiple jurisdictions

There has been a rapid growth in countries introducing measures that impose GST/VAT on ESS. In some countries up to 20% of the student fees may be subject to new GST/VAT obligations (the average VAT rate is 11% but it can go up to 20% in the most impacted countries). Another aspect is that there is generally no GST/VAT to claim on associated costs of delivery eg. employee costs. There are, however, ongoing requirements such as complying with the country’s invoicing requirements, managing the filing obligations, keeping sufficiently detailed records, and setting up processes and procedures to deal with the requirements.

Identifying the location of students

The location of students is one of the vital factors that determines for which countries the institution needs to assess its GST/VAT obligations. This can involve practical challenges. For instance, a student’s billing address may differ from where the student takes the online course, and the student’s permanent address may be different from both. The IP address associated with a computer may be the best indicator of the student’s location, but this may be difficult to obtain for privacy reasons and limited technology capability.

Different countries have provided guidelines for establishing the location of the students but these guidelines may not align with other jurisdictions, which raises the potential for double taxation. These are issues that have also been experienced in other countries with ESS rules, for industries such as broadcasting and telecommunications so there is precedent in how to solve these problems, and we have found ways to help our clients around the world. Here are three key areas to keep in mind.

Understanding the the scope of the ESS rules

The definition of an ESS varies from country to country but there are largely two approaches for ESS in relation to distance learning:

• Some countries (e.g. UK) place a heavy emphasis on the amount of human intervention to determine whether a course is an ESS (i.e. ‘live’ lectures and on-hand teacher assistance means a course does not meet the definition of an ESS); whereas
• Other countries (e.g. Spain) place a heavier emphasis on reliance on the internet (i.e. if the course cannot be delivered without the internet it is an ESS).

Australia and New Zealand have a broad definition of ESS and do not differentiate between different types of distance learning (that is, all courses will be in the scope of these provisions). Others, like Germany, take a mixed approach to these definitions and will consider whether the availability of human intervention is compulsory, and how much of the course is readily available online. As such, it is possible to supply the same course in two countries, but one may be considered an ESS and the other a non-ESS supply.

One of the most significant markets for international students is China. On a strict technical interpretation distance learning to a student in China would be subject to Chinese VAT but currently the administrative systems do not allow the registration of non-established businesses so it is hard to know how it would be levied. We wait to see whether this will change.

GST/VAT exemptions

Once the institution has determined that its services are within the scope of the local ESS rules, it is important to consider whether there is a relevant exemption in the student’s country.

For example, India defines exempt education institutions as one of the following: (i) pre-school education and education up to higher secondary school or equivalent; (ii) education as a part of a curriculum for obtaining a qualification recognised by any law for the time being in force; or (iii) education as a part of an approved vocational education course.

Certain jurisdictions, such as the UK, offer a broader exemption for education services to include vocational training if it is provided by an eligible body, which may include non-profit organisations. Countries like Switzerland offer VAT exemptions for all sorts of education services regardless of who provides the service, which may include a non-resident entity.

The ESS rules primarily capture supplies made to consumers and in many jurisdictions business-to-business supplies are out of scope or exempt. However, this is unlikely to be relevant here as students are considered to be consumers.

Double taxation

Institutions also have to look out for the potential for double taxation. For instance, a university may have paid GST/VAT in its home country, Country A, but upon review determined that the tax obligation should have been in Country B. The university may consider whether a refund is available. In some cases refunds will not be available so this will result in double taxation. This can be a tricky area from a systems and tracking perspective.

Concluding comments

Due to the complexity of this area and vast amounts of differing legislation globally, it will be important for institutions offering distance or online learning to seek country specific advice for the countries where their enrolled students take the courses remotely.