There has been a lot of talk recently about the 2015 EU VAT changes. The first thing to note is that this change only impacts EU-located businesses who supply e-services to private consumers (“B2C supplies”) located in another EU Member State. From 2015, they will have to account for VAT in the country of the customer.
Non-EU suppliers of such services (e.g. US businesses) are not subject to these rules. Since 2003, non-EU businesses who supply e-services have been obliged to register and account for VAT in respect of supplies made to EU private customers. In practice, many businesses may have chosen to ignore these rules. The extension of the rules to EU businesses may result in tax authorities looking at the position of non-EU businesses more closely.
In addition, these changes only affect B2C e-services. The VAT position of e-services supplied to businesses in EU countries (B2B supplies) is not changing and an EU supplier can continue not to charge EU VAT on B2B services supplied to EU businesses in other countries. This is applicable, provided they are able to evidence the fact that the customer is in business. Likewise, the VAT treatment of other services not falling within the e-services definition does not change.
Until 2015, these services had been taxed, where the business supplier is established. For example, Luxembourg has a reduced 3% VAT rate for eBooks, which is why some major suppliers of eBooks located their businesses there. From 2015, suppliers of e-services will be required to charge VAT to where the customer is located.
If your business sells these types of services to private individuals located in other EU Member States, you need to consider what to do to get ready for this significant change. Standard rates of VAT across Europe range from 17% (in Luxembourg from 2015) to 27% (in Hungary).
In order to avoid the requirement of having to register in multiple EU countries, a Mini One Stop Shop (“MOSS”) will be introduced, giving EU suppliers the option of registering in just one Member State. Through this function, they will account for VAT on supplies to EU customers at the rate of VAT applicable in the country of their customers.
What are e-services?
There are three main categories and these are:
- Electronic services – including music downloads, apps, web hosting, distance learning, video on demand, gaming and e-books.
- Telecoms – including fixed and mobile phone, videophone and internet access.
- Broadcasting – including radio or TV programmes transmitted over a network or broadcasts over the internet.
Businesses will need to consider whether their services fall within the scope of e-services.
Besides the changes to VAT rates, there are a number of business implications to consider.
Where is the customer?
If businesses supply e-services, they will need to determine where customers are located for VAT purposes as this will determine which rate of VAT to charge. This can present significant problems where, for example, the billing address of a customer differs from the residence of the customer’s bank or credit card provider. It could also be affected by whether an e-service is ordered from a Wi-Fi hotspot. In order to deal with this, the suggestion is that suppliers use two separate pieces of evidence to identify location.
As a result of different VAT rates, businesses will need to consider their pricing policies as this will impact on margins. For example the amount retained by the supplier on a €10 sale to a German customer would be €8.40 (with a VAT rate of 19%), while it would be €7.87 for a customer in Hungary (with a VAT rate of 27%). Businesses will need to consider whether to absorb the additional VAT rate or adopt differential pricing policies.
Computer systems will need to be configured so they are able to recognise customer locations and determine the correct rate of VAT. This may impact on marketing and customer experience, since customers may need to insert more information when purchasing services. As well as inserting additional VAT rates, issues such as refunds and credit notes also need to be considered.
Businesses may also be required to issue invoices in different currencies and incorporate wording in different languages, although it is hoped that when the final guidance is issued many of these considerations will be covered.
Businesses may need to review agreements and platforms on which services are supplied to determine who is responsible for accounting for VAT and whether they act as agent or principal. Consideration also needs to be given to the data protection rules in each country as more information about customers may be required to be retained.
Businesses are already able to register under the new scheme. Businesses will need to file one quarterly VAT return declaring the VAT due in each member state. This will need to be done online, within 20 days of the quarter-end.
Although filing MOSS returns may be straightforward, affected businesses still need to devote resources to updating existing accounting and billing systems to charge VAT in up to 28 different member states. Records of returns will need to be kept for 10 years.