Impact of new EU VAT rules on app stores
John McCarthy, CEO of Taxamo, explains the crucial difference between Google Play and Apple’s App Store when it comes to charging VAT.
Impact of new EU VAT rules on app stores
Developers that create paid-for apps for the Google Play store will be among those severely affected by new 2015 EU VAT rules.
Notice that Apple’s App Store is not included in this intro….
In the latter case, this is because developers sell their apps to Apple who act as their agent and, in turn, sell it to customers via their App Store. As a result Apple handles the sale and the subsequent VAT compliance. Companies that develop apps deal with Apple SARL in Luxembourg and never have to worry about applying and charging VAT directly.
Google Play, however, is incorporated differently.
How is Google Play different to Apple’s App Store?
Google Play does not act as agent. In the case of Google Play, the sale of an app is between the developer and the customer. Therefore the developer must charge and apply the VAT. This is relatively straightforward at the moment, as VAT is charged at a single rate based on the location of the business (developer). However, come 1 January 2015, when the new B2C EU VAT rules on sales of digital services come into effect, developers with paid-for app sales in the EU must determine whether their customers are B2B or B2C and determine the location of their customer in the EU. In turn they must charge the correct VAT rate for that country and the e-service being supplied.
Another key aspect of the new legislation is that there is no threshold. A developer who sells one paid-for app through Google Play will have to register and declare for EU VAT.
Google Play has exploded in size since 2012 and is expected to contribute $4.4 billion (€3.3 billion) in revenue in 2014. Indeed Bank of America expects Google Play to add $9 billion (€6.8 billion) in gross sales in 2014 ($1.5 billion – or €1.1 billion – net revenue). Bank of America further expects Google Play revenues to approach Apple’s App Store revenues by 2016 and increase to $19 billion (€14.2 billion) by 2016.
Other players in the Android app store sphere include Aptoide which allows developers to create their own stores. As of August 2014 there were 118,000 stores on Aptoide with 1 billion app downloads.
Will games become more expensive?
That depends on how developers take the hit. Will they absorb the VAT, or will they pass it on to their gaming customers?
Gamers faced with a price hike on games might just say: ‘That’s okay, I’ll just download the game from the Google Play US store’. Not so fast. That won’t work as the tax is charged based on where the customer of the service is based in the EU and will also apply to non-EU companies selling into Europe. This is the key change in how VAT on digital services will be applied from January 1, 2015.
How will companies be held to account?
Companies that sell the digital services will be held to account too as they need to gather two pieces of non-conflicting evidence to prove the location of their end customer and in turn the correct VAT rate. One of the pieces of evidence is the end customer’s IP address. It is in the selling company’s interest to ensure that their customers are providing the correct information. Otherwise, it is they that will face non-compliance penalties.
Of course, others may attempt to use VPNs or non-EU Domain Name System (DNS) codes, and they may well be successful at first. But for how long? Will it be worth it?
These new rules are specifically targeted at compliance with tax rules.
Tax authorities trawling the web
The UK tax authority, HMRC, stated at a June EU VAT conference in London that they will be trawling the internet looking for non-compliant companies.
“While I don’t want to go into the IT that may be available, obviously anyone that wants to supply an eService has to do so over the internet,” said Andrew Webb, senior policy manager at HMRC. “There are web bots – programs and things that can identify suppliers of services on the internet – that can trawl it automatically. We can then approach things on a risk basis, depending on what we find out from those searches.”
All companies supplying digital services in the EU will need to realise that big brother is watching: compliance is key.
About the author
Taxamo say they have developed the only technical solution currently on the market to enable e-service providers to be compliant with new EU VAT rules. They’ve made it as simple and affordable as possible, they don’t want to create another headache after all. Contact them at firstname.lastname@example.org or visit their website to try out their product.
“Google Play does not act as agent.”
Isn’t the fact that Google – in VAT terms – is an agent the challenge? Apple is a Commissionaire (undisclosed agent) which equates to being a VAT principal from an accounting perspective so does handle many of the reporting requirements for both EU and non-EU developers.
Google can act as a principal, but I understand does not in most instances so it is an agent for VAT purposes. It has traditionally always been this way and this has pushed VAT reporting back to the Developer.
The challenges are correctly identified here (along with some others not mentioned – Art 9a being the big one in my mind), but I’m not sure the wording in the article is consistent from a value added tax perspective.
Happy to hear others thoughts