One market research1 predicts that the market for AI will expand from USD 372 billion in 2025 to USD 2,407 billion by 2032, at a CAGR of 30.6% during the forecast period. It’s a growing market globally and while technology knows no borders, tax authorities do.
One overlooked issue can quietly snowball into a major compliance problem: VAT on digital services.
Many AI Apps companies don’t realise they may already have VAT obligations in dozens of countries, even without a physical presence. With audits, backdated registrations and penalties on the rise, it’s essential that CEOs and CFOs of AI Apps companies consider: : Where is our VAT exposure?
AI Apps are digital services: Why that matters for tax
If your AI app is simply an app, or includes a SaaS platform, an API or even a chatbot, then you’re offering what tax systems classify as a digital service. That means it could be subject to VAT (or equivalent taxes like GST) or US Sales tax under rules that have rapidly evolved over the last decade.
Tax is due where the service is consumed, not where the provider is based.
This is especially important for B2C sales. In most jurisdictions, the supplier must register and collect VAT from customers when selling to individuals. For B2B, VAT can sometimes be accounted for by the buyer under a reverse charge mechanism, but only if proper conditions are met (such as the buyer being VAT-registered).
Consideration:
If you’re selling to individual users or unregistered small businesses, then you may be triggering VAT obligations in countries that you’re not physically present in.
The global VAT landscape: More than 100 countries and counting
More than 100 jurisdictions now require foreign digital service providers to register for and pay VAT, GST or Sales Tax. This includes the entire EU, UK, Australia, South Korea, South Africa, India, some US States and many others. This trend is only accelerating, particularly in economies where digital services are growing faster than traditional imports. Review where your sales are occurring to see how you are exposed.
Growth regions for AI Apps According to Statista2, the top AI app markets based on user activity and app engagement include:
- United States
- European Union
- India
- Brazil
- United Kingdom
Country deep dive: US, EU, and India
United States
In the US, the complexity comes not from a national regime, but from state-by-state sales tax rules. Each state determines:
- Whether digital services are taxable (eg SaaS is taxable in New York but not in California).
- Whether your company has nexus (a sufficient connection to require registration).
- What the registration thresholds are (typically based on revenue or number of transactions) for out-of-state businesses.
Penalties for non-compliance can be severe, sales tax cannot be “absorbed” retroactively—if you didn’t charge it, then the company has to foot the bill.
We’ve helped clients identify where they had nexus, interpret rules for their AI services and register in the correct states before audits were triggered.
European Union
In the EU, VAT rules for digital services are strict and uniform across all 27 member states:
- There is no registration threshold for non-EU suppliers.
- You must collect VAT based on the customer’s country of residence.
- The One Stop Shop (OSS) scheme allows centralised filing, but:
- It cannot be backdated.
- Late registration means you may have to register and file in all 27 countries.
We’ve seen cases where companies that delayed OSS registration had to make voluntary disclosures in more than 10 countries, paying VAT retroactively along with penalties and interest.
India
India applies GST on digital services supplied by foreign providers. There is no threshold so any sales to Indian consumers creates a GST liability.
India’s enforcement is tightening, with increased recent government scrutiny of overseas platforms. Foreign suppliers must:
- Register under India’s OIDAR (Online Information Database Access and Retrieval) regime
- Collect 18% GST from Indian B2C customers
- File periodic returns—even if no tax is due in a period
Failure to register can complicate financial operations within India, including paying GST, transacting with local banking or working with local platforms.
What is the cost of delay?
As an example, a European-based AI productivity app who scaled quickly reached users in over 40 countries. They assumed VAT was managed by their payment platform – however it wasn’t.
After a user complaint triggered a tax inquiry in France, they discovered:
- They were never properly registered for VAT in the EU.
- OSS wasn’t an option due to the delayed registration.
- They owed €380,000 in VAT across 12 countries, plus late penalties and interest.
Many AI Apps companies only realise the issue when it’s too late to use simplified routes like OSS or voluntary disclosures without consequences.
Where is your VAT exposure?
AI Apps companies are inherently global but tax systems remain territorial.
Selling a digital service from New York to a user in Paris or Mumbai might feel like just another click but it could come with a legal obligation to register, file and remit tax.
As a CEO or CFO, the longer you wait to assess the company’s exposure, the more limited the options become. You risk not just back taxes and penalties but also operational disruption, reputational risk and funding delays (investors routinely ask about tax compliance in due diligence).
So ask yourself:
- Where are my customers based?
- Where is the VAT exposure?
- Is the company covered—or at risk?
Talk to the Tax Desk team today about your VAT compliance exposure.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
