The Business Impact of the New VAT Rules

Preparing for VAT 2015

The European Commission issued European Union (EU) VAT rule changes effective January 1, 2015. This page is a summary of those changes and how ithey affect your business.

The new VAT changes focus on 3 main areas:

  1. Digital/Electronic Services
  2. Proof of location and recordkeeping
  3. VAT registration requirements for all Electronic Services sales

Why the EU Rule Changes?

For digital services, current VAT rules calculate the VAT rate according to where your business is established. For example, a UK-based business supplying digital services to non-VAT registered customers all across the the EU would only apply the UK VAT rate on those sales. The existing rule has created an unlevel playing field in the digital services market. With 28 countries in the EU and VAT rates varying from 15% to 27%, many businesses have an unfair competitive advantage if they are located in a lower rate member state. In addition, businesses outside of the EU who have to apply different customer VAT rates, have established subsidiaries in certain VAT rate member states to take advantage of lower rates.

The new VAT changes that went into effect January 1, 2015 aim to level the playing field by applying VAT based on the customer’s location. Note: Physical goods that are ordered online (including distance selling) and then delivered cross border to the customer through the conventional delivery methods are not considered digital/electronic services and are subject to a different set of VAT rules.

What Your Business Needs to Know

What is Changing?

The new VAT changes focus on 3 main areas:

Digital/Electronic Services Taxed by Customer Location

Proof of Location and Recordkeeping

VAT Registration Requirements for All Electronic Services Sales

Rule 1

Digital / Electronic Services will be taxed
based on the customer's location.

Currently, VAT is assessed based on the location of the business that supplied digital/electronic services and not where the customer is based. In 2010, rules for B2B services were introduced that taxation should be established based on the location of the customer. The new rules beginning in 2015 bring B2C electronic services into line with B2B.

The changes apply to digital/electronic services and apply to telecommunications, broadcasting and electronic services supplied to customers in the EU. These include the following:

  • Download and online games
  • E-books (e.g. Amazon Kindle)
  • Download and streaming music and videos
  • Cloud computing, including software provided as a service ('SaaS')
  • Mobile phone services
  • Internet telephony (e.g. Skype)
  • Streaming television (e.g. Netflix)

The change means that online digital services retailers will have to track where their buyers are, and then charge the appropriate VAT rate of the country of the customer. This VAT has to be paid to the merchant's country through the VAT return.

Rule 2

Two pieces of non-conflicting proof of
customer location must be collected.

Since non-business customers are taking on the rate of their own country for goods in telecommunications, broadcasting and electronic services, merchants will need to collect at least two pieces of location evidence. Examples include:

  • Billing Address
  • Shipping Address
  • IP Address
  • Credit Card BIN

Additionally, transaction details and records need to be archived for at least 10 years.

Rule 3

VAT registration is required for any and all
e-services sales, regardless of volume

Any electronic services sales to an EU customer requires the merchant to be VAT registered in that customer's country. Businesses that are suppliers of telecommunications, broadcasting and electornic services can register through the Mini One-Stop Shop (MOSS) system, which allows them to register with one EU member state and that member state will distribute collected VAT to the other member states.

What are the Implications for Your Business?

Businesses will be impacted in several ways.

Compliance and administration

Record keeping is required for all digital services to be compliant. For example, merchants are required to gather, consolidate and keep specific customer data on file for 10 years from the date of the transaction.

Pricing and margins

The change will affect the VAT charged to the customer, and therefore impact margins throughout the supply chain. Because the new rules apply regardless of profit margins, merchants will need to set the retail price of digital goods and services for the European market accordingly.

IT systems

The changes will affect the way in which VAT is administered, tracked and reported, requiring changes to IT systems and processes.