A poll taken during Taxamo’s 100-day countdown to the EU VAT rules event in London has revealed that digital service merchants are still very much in the dark ahead of the introduction of these new rules.
Some 51% answered ‘don’t know’ to the question: could the new rules impact your profitability in 2015? In a further reinforcement of the doubt among digital service merchants some 46% of the poll respondents answered ‘yes’. Remember, this was a niche event targeted at digital service merchants and business representatives.
From left: Esteban Van Goor, Baker & McKenzie; Andrew Webb, senior indirect taxes policy manager at HMRC, and John McCarthy, CEO of Taxamo, chat during the Taxamo 100-day countdown event in Barclays Accelerator Centre (within Tech City), East London, on Tuesday, September 23, 2014. Photo: Pepe Ronnie
It was an interesting day for us here at Taxamo. It has reinforced our view that merchants require a bespoke solution, but it also revealed that many digital service merchants are still unaware of the new rules, let alone the need to be compliant. This will have to change prior to 1 January 2015. This is the date – set in stone – when the rules for digital service merchants change.
Existing rules require VAT on the B2C cross-border supply of digital services to be applied based on where the supplier is established. Come 1 January 2015 the supplier will have to apply VAT based on where their customers (non-taxable persons) are located.
This leads to a host of requirements such as identifying customer location in the EU; storage of transaction data; audit possibilities, and invoicing issues. All of these topics were covered.
The speakers at our 100-day countdown event – viewed live in person, and online, by over 100 merchants and business representatives – included Andrew Webb, senior indirect taxes policy manager at HMRC; Esteban Van Goor, indirect tax lawyer at Baker & McKenzie, as well as our own CEO John McCarthy.
The slides presented at the 100-day countdown event can be viewed below:
New EU VAT rules for digital service merchants from JP (Taxamo)
Mr Webb made an excellent presentation on the intricacies of the new EU VAT rules on digital services, while also explaining the new Mini One-Stop Shop (MOSS) system. MOSS allows a merchant to register with one EU tax authority for declaring all VAT collected in the EU. It is seen by the EU Commission as a means of easing the administrative burden on merchants in relation to EU VAT registration, so as not to register with each EU member state where that merchant has sales.
The UK’s MOSS portal opens on October 20 – this is due to the fact HMRC have two major digital upgrades each year. This has always been HMRC’s date for opening their MOSS portal, and the EU Commission has known this for two years. Final MOSS portal testing with end-users is currently underway.
Auditing of digital service merchants
On the aforementioned topic of auditing, Mr Webb made a very interesting – and compelling – argument for how the UK will deal with audit requests of a merchant registered with MOSS in the UK. He said:
‘HMRC are well aware of the nightmare scenario where six or seven EU member states may request an audit of one UK merchant.
‘We believe this is unreasonable and unfair so we believe that we have come to an understanding – not in hard legislation – with EU member states. This understanding is based on co-ordination.
‘If, for example, after six months a business registered with MOSS in the UK is the subject of an audit request from say the Spanish tax authorities then HMRC would have to be notified. HMRC would then notify the merchant of this audit request.
‘However, prior to conducting the audit HMRC will notify all of the other EU member states with which this merchant has supplies to consumers.
‘We will ask those EU member states if they have an interest in the audit of this merchant?
‘If they do then we would expect them to explain why. There will obviously have to be justification for this interest and if three other EU member states have similar concerns to those of the Spanish tax authorities then an audit will be arranged and conducted. All four EU member states would then be provided with the results.’
‘If everything was in order then we would not expect a further audit of that business for a reasonable period.’
Of course, this is only HMRC’s stance on this particular aspect of the new rules. There is no clarity on the approach other EU member states will take to definitely change this ruling, all 28 EU member states would have to agree. There is no indication that this will happen and, in fact, the EU Commission is due to publish the different invoicing requirements of each EU tax authority in October.
Similarly, with the requirement to store transaction data for ten years, Mr Webb indicated that it was HMRC’s hope that this could be revisited in the ‘next year or two’. This requirement has been included in the 2015 VAT changes for digital service merchants because it is an existing requirement in Portugal. Again, for the requirement to change officially, agreement would be needed from the Portuguese tax authorities, in addition to all other member states.
When it came to questions on invoicing, Mr Webb again illustrated how disparate the various EU tax systems were – while at the same time ‘hopeful’ that a change may be in the offing:
‘Not all EU member states require invoicing – UK, for example, doesn’t – still hopeful that invoicing requirements will be revisited.’
Mr Webb’s main focus was on how the new rules are business-friendly. They have been created with business in mind and with the aim of creating a level playing field. For too long businesses had been at a disadvantage when ‘competing’ with low-tax jurisdictions in the EU. This was simply ‘not fair’, said Mr Webb.
Esteban Van Goor – an EU VAT expert – made a fantastic presentation on why the new rules have targeted the digital economy.
Mr Van Goor dealt with the practical questions relating to identification of transactions as B2C or B2B; how to determine the location of an end customer; what to do with the data collected, as well as issues affecting agents of a service: PSPs/portal/gateway/aggregator – are they disclosed or undisclosed agents?
Mr Van Goor guided us through the procedures for identifying where customers are located in the EU. Presumptions can be made – he said – based on the customer’s physical location; additional indicators, as well as two points of evidence to determine their exact location. Examples of accepted pieces of evidence include the customer’s IP address; their bank details; credit card billing address, as well as their SIM card country code.
John McCarthy, CEO of Taxamo, outlined the practical issues that digital service merchants now need to factor into in their business models. The rule changes will affect pricing, so merchants will have to decide on dynamic or universal pricing models. The VAT rates of the EU range from 15% in Luxembourg to 27% in Hungary.
Evidence collection will become a serious issue as the new rules require merchants to prove where in the EU their customers are located. Mr McCarthy asked how will merchants capture the necessary information (they need to collect two pieces of non-conflicting evidence). Will they collect it from their payment page? What happens if they cannot collect two pieces of non-conflicting evidence. Will merchants abandon transactions? If so, at what cost to the business?
Feedback from our 100-day countdown event has been encouraging:
Note: Taxamo content is created for guidance only, please consult your local tax advisor for professional advice.