Beginning January 1, 2015, suppliers of B2C broadcasting, telecommunications and digital/electronic services to customers in the EU will have to apply VAT based on the location of the end customer, unlike the current VAT liability which is based on the location of the company providing the service.
The new VAT changes apply to digital/electronic services which are established based on the following elements:
The implementing regulation further provides examples of e-services, these are:
Physical goods that are ordered online (including distance selling) and then physically delivered cross border to the customers through the conventional delivery methods are not considered digital/electronic services and are subject to a different set of VAT rules.
The new directive is effective beginning January 1, 2015 with no grace period. Businesses can individually register in every EU member state where the business has nontaxable customers. Another option for businesses is to select one EU tax authority through the Mini One-Stop Shop (MOSS), and file quarterly VAT returns for all of their EU sales.
Merchants supplying electronic services to EU customers who fail to register for VAT may incur a late registration penalty. Repeat offenders will face additional fines and possible jail terms.
All 28 EU member states have signed onto the EU VAT Directive with the new rules applicable to any company that has online B2C sales in the EU.
Only B2C online sales are affected by the new rules. Effective January 1, 2015, the rules impose VAT charges based on where the customer resides (e.g. a French customer buying an e-book from a German-based company will pay French VAT). While B2B services are unaffected, records are still required to prove both B2C and B2B transactions.
Under the new VAT rules, merchants will need to provide two non-conflicting points of address proof for each customer, all of which must be archived for at least 10 years from the date of transaction. Examples include:
The rules apply uniformly to everyone with no registration limits for these cross border supplies. For compliance, merchants will be responsible for validating a customer's place of residence. For example, if a business sells €10 worth of digital services to a customer in Germany then that business must pay that VAT in Germany. Typically, businesses can use either the IP address and location of the customer’s computer, or the address of customer’s credit card.
The rules become effective on January 1, 2015, so all supplies must be treated as taking place where the customer is located on that date. A merchant must make a reasonable decision on the customer’s location and does not have the option to charge the rate where the merchant is established.
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Recurly's merchants receive accurate VAT rates using Avalara's calculation engine. Merchants can enable VAT and select the EU countries where they are registered to collect VAT (their VAT nexus). Recurly works directly with Avalara utilizing all invoice information to determine the rate and VAT amounts. This VAT implementation is an in-the-box Avalara integration available to Recurly merchants at no additional cost.