Product-as-a-Service Tax: A hybrid business model that is a tax headache

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  Quantumrun Foresight
• November 28, 2022

Insight summary

The rise of companies offering Products-as-a-Service has led to some of the most disruptive changes in business modeling seen during the 2010s and 2020s. And while ever more firms are adopting this model, it is also presenting a unique challenge for tax authorities. The long-term implications of this trend could include a globalized digital tax and businesses looking for loopholes to avoid paying it.

Product-as-a-service tax context

The product-as-a-service (PaaS) business model focuses on keeping customers satisfied and retaining them as clients long term rather than maximizing one-off unit sales. Satisfied customers are the lifeblood of these businesses, motivating PaaS companies to be more customer service-oriented than traditional businesses. 

A more formal definition of PaaS is that it combines physical products and services to fulfill customer needs more efficiently and sustainably. In this business model, the consumer doesn’t acquire the item itself; instead, they will have access to the complete service. Streaming firms like Spotify and Netflix are examples of PaaS, popularizing the subscription business model, where people choose the kinds of products (e.g., movies and music) they want to avail at any given time. 

This shift to an on-demand, product-service hybrid is evident in Deloitte’s 2022 Digital Media Trends survey. The study revealed that the usage of subscription video-on-demand (SVOD) streaming services increased by 7 percent. Additionally, the average user has at least four subscriptions. Streaming music and gaming have likewise expanded. Surprisingly, the only thing that decreased was pay-TV subscribers. As a result of these shifting consumer trends, many state and local governments are trying to make up for lost tax revenues. However, the on-demand business model has led to ambiguities on how digital PaaS should be taxed. 

Disruptive impact

According to Deloitte, the rise of Industry 4.0 or 4IR (The Fourth Industrial Revolution) has led to several questions regarding PaaS taxation. Industry 4.0 uses the Internet of Things (IoT) and Big Data to enable a highly digitized and automated manufacturing system, leading to significant complexities in service-based business models. This development can prove challenging because tax frameworks have yet to adapt to the PaaS model of Industry 4.0, creating uncertainty in regulations. 

However, in March 2018, the European Commission proposed two legislative changes to address some complications with taxes and the digital economy. The first was to change corporate tax rules so that earnings are tracked and taxed where firms interact significantly with users through digital channels. The second option wanted to introduce an indirect tax to collect digital services in which the primary value is derived from user participation.

Regardless, there are more questions than answers to taxing PaaS businesses. For direct taxes, where does the value of the taxes come from? Is it from where the product service is offered or from where it is used? As of 2022, there are no rules about splitting the value so it can be taxed. This confusion could lead to double taxation. 

For indirect taxes, the primary issue is determining the value-added tax (VAT, a consumption tax assessed on the value added in each stage of the production process). Splitting the income between Internet providers and service compensation can lead to big questions about VAT and customs, especially if the service provider doesn’t have a legal presence in their client’s country. These complexities are why Digital Service Taxes (DSTs) are becoming popular to tax multinational tech companies on the profits they earn from collecting data and target advertisements on foreign markets.

Implications of product-as-a-service tax

Wider implications of PaaS tax may include: 

• Governments collaborating to create a global, standardized digital economy tax that specifies how PaaS should be taxed. However, this type of policy can be challenging to implement in different countries.


• Tax professionals and companies becoming more in demand as taxation for PaaS businesses become more complex.


• An increase in double taxation due to unclear VAT and custom policies. These errors may lead to revenue loss for private companies and market expansion slowdown.


• Businesses using loopholes to avoid certain digital taxes, leading to challenges for tax authorities on how to track and penalize them.


• Some countries offering low digital tax rates to PaaS companies, resulting in unique tax havens.


• PaaS companies shifting their operational models to optimize tax efficiency, altering their market strategies and customer engagement approaches.


• Consumers seeing changes in PaaS pricing structures as companies adjust to new tax regulations, impacting affordability and access.

Questions to consider

• How does the PaaS business model affect you if you work for the tax industry?


• How might tax firms prepare for different business disruptions like PaaS?