Top 10 List of VAT

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The Recurly VAT Top 10: VAT 2015 Basics

The new VAT rules are complex with many implications for merchants. We've compiled the Recurly VAT Top 10, an essential VAT checklist for merchants who sell digital/electronic services the EU consumer market.

1

In 2015, the enforcement of VAT on any and all sales of digital services to retail consumers in Europe will begin.

The new VAT rules apply to digital/electronic services. All of these elements constitute a digital / electronic service:

  • Service (i.e. not goods)
  • Delivered via the Internet, or an electronic network
  • Supply is essentially automated, or involves only minimal human intervention
  • It is impossible to ensure in the absence of information technology
2

Digital services are not the same as digital goods. Telecommunications services, broadcasting services and electronic services ordered online (digital/electronic services) are categorized differently from digital goods and services (physical goods) for VAT purposes.

While the new 2015 rules apply VAT for digital services, digital goods have already been subject to VAT since 2003. Physical goods that are ordered online and then physically delivered cross border to the consumer through the conventional delivery methods (e.g. distance selling) are not considered digital services and are subject to a different set of VAT rules.

3

VAT rates in the EU vary, and sellers must consider the impact in regards to setting the retail price of digital goods and services for the European market.

Because the VAT rate can vary between 15­27%, nonresident sellers must account for these variable rates when establishing prices. The VAT is due at the full standard rate irrespective of the profit margin, if any, the seller earns on the transactio.

Margin = Retail Price ­ VAT due ­ cost of goods or services sold

For VAT compliance reasons, sellers should consider automated billing systems to track and source European sales transactions and collect the appropriate VAT.

4

Having complete and thorough knowledge of the supply chain will be more important than ever for merchants in assessing VAT charges.

While identifying what services your business sells to and to whom is important, businesses will need to understand what non­VAT intermediaries within the supply chain exist. Universities, research institutions and charities for example conduct business as non­VAT registered entities. For merchants, this will affect the VAT charged to the consumer and the margins throughout the supply chain and create significant VAT differences depending on where the customer resides.

5

There are no minimum sales transaction or revenue to be exempt from the new VAT registration requirement for nonresident sellers.

VAT registration is required for any and all e-services sales, regardless of volume. Unlike the current VAT regulations, the nonresident seller’s obligation to file VAT returns and pay VAT due arises with the very first Euro the nonresident seller earns on sales of its digital goods and services in the EU consumer market.

6

VAT registration options are available to all sellers of digital services, but they must be made prior to January 1, 2015.

Companies regardless of size have two options for VAT registration:

  1. They can register for, or declare VAT in any or all of the EU countries in which they have sales.
  2. They can register with the Mini One­Stop Shop (MOSS) system.
Option 1

Merchants individually select and register in every EU member state where the business has non­taxable customers. Choosing this option can potentially mean registering with 28 separate tax authorities, each with their own tax system and can present numerous logistical, legal, financial and language obstacles.

Option 2

The company selects one EU tax authority with which to register, and the tax authority will then allocate the relevant VAT to the EU countries in which the company’s sales took place. Companies registering with MOSS are required to file quarterly VAT returns for all of their EU sales.

7

The strategy of establishing sales subsidiaries in low rate jurisdictions used by U.S. businesses is no longer valid.

The "one business, one VAT rate" for digital consumer sales will no longer apply in 2015. Prior to 2015, U.S. businesses could establish a subsidiary in a low VAT jurisdiction (e.g. Luxembourg). The new rule in 2015 changes that rule and taxes the sales of digital services at the VAT rate of the country in which the consumer is located.

8

Merchants will need to maintain, have access, and archive specific customer data for 10 years from the date of the transaction.

Any of the 28 EU member states can request an audit of a company at any time within 10 years after a transaction takes place. Also, remember that merchants selling digital/electronic services to non­business customers (no VAT number) must provide two non­conflicting points of address proof for each customer.

These include:
  • Credit card details
  • Bank details
  • Landline number
  • SIM card country code
  • IP address
9

The EU VAT Directive does not offer a grace period or leniency to merchants who are not ready for January 1, 2015.

The EU Commission has reiterated that merchants must apply the new VAT changes beginning January 1, 2015. Merchants have the sole responsibility to make a reasonable decision to apply and collect VAT or be subject to fines and potential prison time.

10

VAT compliance planning must begin before and continue well after the change in rules.

Because of the complexity of the new VAT rules, small and medium­sized businesses will require more billing automation. Larger enterprises will face their own set of complex issues tied to conducting on a global scale, multiple locations, and staff including more financial reporting and digital commerce regulations.