saas-digital-products

What this file is

A sector overlay for SaaS, digital platforms, app developers, marketplaces, and other digital-product businesses.

Section 1 — Revenue recognition (IFRS 15 / ASC 606)

1.1 Five-step model

• Five-step revenue recognition model — 1. Identify the contract with a customer 2. Identify the performance obligations 3. Determine the transaction price 4. Allocate the price to the performance obligations 5. Recognise revenue when each performance obligation is satisfied ([T1])

1.2 Key SaaS issues

Key SaaS issues table

Topic	Treatment
Subscription / SaaS access	Generally one performance obligation, satisfied over time (stand-ready obligation) — straight-line revenue over the term
Implementation services	Distinct (separate PO) only if customer can benefit from the SaaS without them; otherwise combined and recognised over the SaaS term
Right of use license vs hosted service	If the customer has a right to use the underlying software (e.g., download), revenue at point in time; if hosted, recognise over the contract term (stand-ready)
Setup fees / activation fees	Combine with subscription if not distinct; recognise over the customer's expected life
Discounts and ramps	Allocate to all POs proportionately, not just to specific period
Variable consideration	Constrain to amount unlikely to require significant reversal; commonly estimated for usage-based
Customer acquisition costs (commissions)	Capitalise per IFRS 15 ¶91-94 / ASC 340-40; amortise over expected customer life (often longer than contract term)
Hosting agreement under SaaS arrangement (customer-side accounting)	Cloud Computing Arrangement (CCA) — generally expensed as incurred; ASU 2018-15 allows capitalisation of certain implementation costs aligned to ASC 350-40

1.3 Examples of common SaaS issues

[T1] Multi-year contract with discount in year 1: Contract: 3 years; $100k year 1, $150k years 2 and 3. Total $400k.

• Straight-line allocation: $133k/yr recognised
• Year 1 deferred revenue $33k; recognised in years 2/3

[T1] SaaS + implementation services:

• If implementation specific to SaaS and customer can't benefit without it → one PO, recognise both over SaaS contract term
• If implementation could be sold separately and customer can use other vendors → separate POs, implementation recognised on completion

Section 2 — US state sales tax on SaaS (post-Wayfair)

• South Dakota v. Wayfair (2018) — Overturned the physical presence test for sales tax nexus. Economic nexus now applies — typically $100,000 in sales or 200 transactions to the state. ([T1])

2.1 SaaS taxability by state (sample)

SaaS taxability by state (sample)

State	SaaS taxable?	Notes
California	No (generally) — service not tangible personal property	But certain "canned software" downloads taxable
New York	Yes — sales tax on SaaS to NY customers since 2010
Texas	Yes — "data processing service" since 1980s; 20% exemption under §151.351
Florida	No — service, not tangible
Washington	Yes — Retail Sales Tax + B&O Tax
Illinois	Generally no for SaaS but specific products taxable
Pennsylvania	Yes — Sales and Use Tax on "computer services"
Massachusetts	Yes if "prewritten" but no if customer-specific
Ohio	Yes if "electronic information services"
Virginia	No — service
Tennessee	Yes — Telecommunication Sales Tax also applies
Georgia	No — service
North Carolina	Yes — "digital codes" but SaaS itself contested

• Marketplace facilitator laws — Most states require marketplaces (Amazon, Etsy, etc.) to collect on behalf of sellers above thresholds. ([T1])

Section 3 — EU VAT for digital services

3.1 Place of supply

• Article 58 PVD — B2C electronic services: place of supply is where the customer is established / has permanent address / usually resides. B2B electronic services: place of supply is where the customer is established (reverse charge). ([T1] Article 58 PVD)

3.2 OSS (One-Stop-Shop) and IOSS (Import OSS)

• Union OSS — EU established supplier registers in home MS, declares all B2C cross-border EU sales of services + intra-EU B2C distance sales of goods ([T1])
• Non-Union OSS — Non-EU supplier registers in chosen MS for B2C EU electronic services ([T1])
• IOSS — Import OSS for goods ≤ EUR 150 imported into EU ([T1])

3.3 VAT rates by country

Country-specific. For digital services to consumers, the destination MS rate applies. See country VAT skills.

Section 4 — Other major SaaS VAT/GST regimes

4.1 United Kingdom

• UK post-Brexit VAT regime — Post-Brexit, UK applies own VAT regime: Same place-of-supply rules as EU but UK-specific; VAT on Electronic Services (VOES) registration for non-UK suppliers; Standard rate 20% ([T1])

4.2 Australia — GST low-value imported services

• Australia GST low-value imported services — Since 1 July 2017 (digital services) and 1 July 2018 (goods ≤ AUD 1,000): Non-resident suppliers must register and collect 10% GST on supplies to Australian consumers if turnover ≥ AUD 75k; B2B reverse charge ([T1])

4.3 Canada — GST/HST on digital products

• Canada GST/HST on digital products — Since 1 July 2021: Non-resident suppliers register and collect GST/HST on B2C digital services if Canadian sales ≥ CAD 30k; Provincial PST/RST/QST may also apply (BC, MB, QC) ([T1])

4.4 India — OIDAR + Equalisation Levy

• OIDAR (Online Information Database Access or Retrieval) — Services to Indian consumers — non-resident supplier registers and collects GST (18%) ([T1])
• Equalisation Levy 2.0 — 6% on advertising income (the 2% e-commerce levy was repealed 1 August 2024) ([T1])

4.5 Other notable

• New Zealand — 15% GST on remote digital services from non-residents (since 2016)
• Singapore — 9% GST on B2C digital services from non-residents (raised from 7% in 2024)
• Japan — 10% consumption tax on B2C digital services
• South Korea — 10% VAT on B2C digital services
• Mexico — 16% VAT on digital services from non-residents (since 2020)
• Chile — 19% VAT on digital services
• Argentina — 21% VAT plus 8% withholding on digital services

Section 5 — Permanent establishment risk for SaaS

OECD Model Article 5 — physical presence threshold. Pure SaaS without local server typically does not create PE. Risk areas:

• Dependent agents soliciting business

• Customer success / support staff in country

• Co-located servers (Article 5 commentary: server can be a PE if customised, owned, and CIGAs performed there)

• Marketing / sales offices

• BEPS Action 1 / digital PE — OECD Pillar One Amount A would create a new taxing right for "market jurisdictions" — pending ratification. DSTs continue in 25+ countries (see digital-services-tax-matrix.md). ([T1])

Section 6 — IFRS 15 / ASC 606 acquisition cost capitalisation

• Sales commission capitalisation — Sales commissions paid on customer acquisition: - Capitalise if incremental and recoverable (IFRS 15 ¶91-94 / ASC 340-40) - Amortise over the expected customer life (often longer than initial contract — including expected renewals) - Practical expedient: expense if amortisation period < 1 year This typically generates a significant balance sheet asset for high-growth SaaS companies. ([T1])

Section 7 — SaaS-specific KPIs interaction with accounting

[T1] Non-GAAP / management measures:

SaaS-specific KPIs table

Metric	Definition	Accounting interaction
MRR / ARR	Monthly / annual recurring revenue	Often gross; differs from GAAP revenue (which is subscription net of discounts, recognised over time)
Bookings	New contract value signed	Pre-recognition
Deferred revenue	Cash received before service delivered	Balance sheet liability under ASC 606 / IFRS 15
RPO (Remaining Performance Obligations)	Contractually committed future revenue	ASC 606 ¶54 / IFRS 15 ¶120 disclosure
Customer churn / NRR (Net Revenue Retention)	Customer departures and expansions	Drives expected customer life for commission amortisation
CAC (Customer Acquisition Cost)	Total sales+marketing ÷ new customers	Forms basis of LTV/CAC ratio
LTV (Lifetime Value)	Gross margin × expected customer life	Critical for impairment testing

Section 8 — Self-checks

• Revenue recognition timing matches IFRS 15 / ASC 606 — over time for hosted SaaS
• Implementation services tested for distinct PO status
• Setup fees combined or separated per distinct test
• Multi-year contracts allocated for ramps and discounts
• Customer acquisition costs capitalised and amortised per expected customer life
• US state sales tax registration where economic nexus thresholds met
• EU OSS / IOSS registration if cross-border B2C
• Non-EU VAT registration (UK, Australia, Canada, India OIDAR, Singapore, Japan, Korea, Mexico, Chile)
• DST exposure assessed per digital-services-tax-matrix.md
• PE risk assessed for any country with local employees / customer-facing roles
• Deferred revenue reconciled to bookings and contract value
• Output flags every [T2]/[T3] item for reviewer judgement

Section 9 — Disclaimer

SaaS sector taxation involves substantial cross-border complexity. Outputs must be reviewed by credentialed practitioners. The most up-to-date version is at openaccountants.com.

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