The Digital Single Market strategy launched on May 6 is an attempt to bring order to the chaos that is the digital economy.
It is chaotic for numerous reasons, chief among them being the fact that many digital service providers still do not comply with taxation rules. The problem here is that many of these rules were created before certain digital economy industry segments even existed. Apply – and collecting – tax to cloud computing and online streaming services is a new headache for legislators.
But how do we legislate for something that has yet to be invented? Will we have another Single Digital Market strategy launch in 2025? That’s the challenge for our legislators and this Digital Single Market strategy is an attempt to, at least, do something.
In the EU and beyond there is an issue with large multinationals and the amount (or lack of?) tax that they collect and remit to the relevant tax authorities in the EU. This is an issue that is gracing the front pages of websites and newspapers across the globe, we won’t dwell on them here.
VATMOSS teething problems
There will be teething problems with many elements of the Digital Single Market. We know this given our experience with the introduction of the VAT Mini One Stop Shop (MOSS) system and new rules on how the supply of cross-border digital services are taxed.
The implementation of these new rules – introduced on January 1, 2015 – has been a testing time for European legislators, but also for digital start-ups and digital SMEs.
For this reason, the Commission’s plans for modernising VAT and easing the administrative burden for digital service suppliers is of keen interest to us. Their plan here is four-fold:
- Extending the single electronic registration and payment mechanism to intra-EU and third country online sales of tangible goods to private consumers
This is something that has been flagged before. The 2015 EU VAT rules were always seen as a precursor to eventually expanding their scope from digital services to physical goods. This is now in the pipeline.
- Introducing a common EU-wide simplification measure (VAT threshold) to help small start-up eCommerce businesses
The absence of a threshold has been one of the most controversial elements of the 2015 EU VAT MOSS rules. Many SMEs have been upset by the lack of a threshold prior to VAT kicking in. In the United Kingdom, pre-January 1, 2015, that threshold stood at £81,000. Since then all suppliers of digital services to a consumer within the EU must account for that supply, no matter the amount. If a UK provider supplied a €1 digital download to a German customer then this supply must be accounted for.
Allow for home country controls including a single audit of cross border businesses for VAT purposes
Remove the VAT exemption for the importation of small consignments from suppliers in third countries.
This, remember, is still just the European Commission’s plan – it still needs approval from the European Parliament.
This is the arena where things can fall apart as it features representatives from its 28 Member States – all with differing views on many of the issues raised in the Dingle Single Market strategy.
The VATMOSS regulations, for example, included a requirement for the storage of transaction data for ten years after the date of the transaction. This was included simply because one EU Member State insisted on its inclusion in the legislation.
Global plans for the adoption of similar rules
The EU is not the only jurisdiction grappling with the issues of the burgeoning digital economy. Across the globe there are parliamentary debates about what to do about foreign digital service providers eroding the profit base of domestic providers. This is possible as the foreign providers, by virtue of not being established in a given jurisdiction, are not affected by the same taxation rules.
Australia has given serious consideration to introducing a so-called ‘Netflix tax’. The plan has seemingly taken a backseat for now. Meanwhile, Japan is to introduce a new eCommerce consumption tax on supplies from foreign digital service providers from October 1 this year. Japan has also revealed a registration system for compliance with this new taxation, this registration system opens on July 1.
Digital Single Market strategy
The Digital Single Market strategy has been launched on three pillars, they are:
- Better access for consumers and businesses to digital goods and services across Europe
Only 15 percent of European citizens shop online from another EU country; only 7 percent of small businesses sell across borders; and governments are also failing to adopt digital tools. The Commission estimates that a Digital Single Market would create “hundreds of thousands” of new jobs and boost Europe’s economy by almost $460 million each year.
- Shaping the right environment for digital networks and services to flourish
Strong European data protection rules to boost the digital economy – some 72% of Internet users in Europe still worry that they are being asked for too much personal data online.
- Creating a European Digital Economy and society with growth potential
According to the European Commission’s own fact-sheet accompanying the Digital Single Market launch, their own studies estimate that, by 2020, big data analytics could boost EU economic growth by an additional 1.9%, equalling a GDP increase of €206 billion.
Impact on start-ups
Jean-Claude Juncker stated in the European Commission’s Digital Single Market strategy that: “We will need to have the courage to break down national silos in telecoms regulation, in copyright and data protection legislation, in the management of radio waves and in the application of competition law.”
The phrase a “fair level playing field” has long been bandied about by the European Commission. It is their aim but the implementation the recent VATMOSS system was poor and caught many digital SMEs off guard.
Of course, many of these SMEs do not have access to financial advisors and were reliant on their own accountants/VAT advisors for information. We have often wondered why these professionals were caught off guard.
Note: Taxamo content is created for guidance only, please consult your local tax advisor.