New EU VAT rules for digital services in 2015
Greg Birdthistle, head of business development at taxamo, outlines the issues ahead of the January 1, 2015, introduction of new rules related to VAT on digital services sold in the EU.
THE EU’s new VAT rules are set to become the template for how all B2C sales – across the globe – are to be taxed. We know this because the EU Expert Group on the Taxation of the Digital Economy has recommended it. They are not alone. The Organisation for Economic Cooperation and Development (OECD) recently held a public consultation on the tax challenges of the digital economy and there is overwhelming recognition that the EU system should be used as a template worldwide. At a VAT seminar held in London on June 2nd HMRC representatives agreed.
Remember, there is a rather serious ‘VAT gap’ in EU finances. A report commissioned by the EU in 2012 shows that €192 billion in VAT went unaccounted for in 2011. The EU is seeking a higher level of compliance and these new VAT rules mark the first step towards achieving that aim.
New rules explained
The key change enshrined in a new VAT directive means that suppliers of broadcasting, telecommunications and electronic services in the EU will have to charge VAT based on the location of the end consumer. Currently VAT is charged based on where the supplier is physically located.
One of the more important measures introduced is the Mini One Stop Shop (or MOSS). MOSS will allow businesses to account for VAT due on their EU supplies via a web portal. This scheme is optional.
Why the need to change the VAT on digital goods?
The EU’s reasoning is to close a loophole in the VAT system. VAT is a consumption tax so the place of consumption should be where the VAT is due, this is what the rule change copper-fastens. The new rules eradicate the competitive advantage of businesses that chose to locate their HQ in a low-tax member state (i.e. Luxembourg). Most major multinational companies involved in the e-commerce industry (Amazon, Apple, eBay) have traditionally set up in the Grand Duchy to avail of their historically low VAT rates. Luxembourg will suffer as a result of these new rules.
It recently estimated a loss of €700m in VAT receipts in 2015. Accordingly, they have raised their VAT rates.
So, what is this mini one stop shop (MOSS)?
From as early as October 1, 2014, a merchant supplying broadcasting, telecommunications or electronic services in the EU has the option of registering with MOSS in one EU member state – typically that will be the country where they are located. This member state will become known as the Member State of Identification (MSI).
VAT returns are made per quarter to their chosen MOSS via a web portal. The tax authority of the MSI will then distribute the VAT to the countries where it is due. MOSS means a business does not have to register with each EU Member State in which they have digital services sales.
All merchants with B2C sales of digital services in the EU come under the umbrella of these new rules, regardless of volume. If a merchant opts against a MOSS registration then they will have to deal with all the individual tax authorities in the EU where they have B2C sales.
How will merchants confirm a consumer’s location?
The burden of proof lies squarely on the shoulders of the digital service supplier. They need to collect two non-conflicting pieces of evidence to prove a customer’s location.
Acceptable pieces of evidence include:
• The customer’s billing address
• IP address: address of the device used by the customer or any other method of geolocation
• Bank details, such as location of a customer’s bank account
• The Mobile Country Code (MCC) which is stored on a mobile phone’s SIM card
• Location of a customer’s fixed landline if used in the purchase of a service
Registrations for MOSS begin on October 1, 2014, and these new rules will come into effect on January 1, 2015. So, there’s still time for merchants to become acquainted with the issues. It’s crucial that they do, as VAT compliance will be key.