• Taxing the digital economy

Five digital EU VAT myths busted – for your benefit

There have been numerous myths perpetuated about the upcoming digital EU VAT changes - here Taxamo takes a wrecking ball to some.

Nov 19, 2014

A series of myths have been perpetuated since the new EU digital VAT rules were established. It is time these were shattered.

Before we proceed with our myth demolition let’s get one thing straight: these new rules are going to come into effect on January 1, 2015. This date has already been agreed to by all of the 28 EU Member States – it will not be moved, or postponed. These rules are the result of consensus among the 28 EU Member States, they are not the brainchild of any one finance minister.

Some of the commentary, especially within online forums, has simply been corrosive and misleading. This does not benefit the crucial planning and preparation that affected digital service suppliers need to undergo ahead of the 2015 EU VAT rule change. Digital EU VAT

Too many myths are being perpetuated online about the new EU VAT rule change for the B2C supply of digital services across the EU. Photo: thehikingartist.com/Flickr

So, with wrecking ball ready to go, let’s bust some myths:

MYTH 1:Non-EU businesses are beyond the scope of these new EU digital VAT rules

BUSTED: Incorrect. One of key drivers behind the new rules has been to clampdown on the tactic of non-EU businesses not paying their correct share of VAT. Since 2003, non-EU businesses supplying digital services to the EU have operated under the VAT on e-Services scheme (VoES). Compliance with this scheme has been “mixed” to say the least.

As the digital economy has grown the European Commission has realized that they have been missed out on a serious amount of revenue, hence the new rules. It may seem like the Commission are playing catch-up. Perhaps, but it will be worth it in their eyes. A 2011 study”) showed that the ‘VAT Gap’ – receipts due, but uncollected – amounted to €192 billion. The equivalent study in 2012”) calculated the ‘VAT Gap’ at €177 billion.

The European Commission has consistently referred to a “leveling of the playing field” in reference to these new rules. All companies that supply cross-border B2C digital services to customers in the EU are affected.

MYTH 2:My turnover is too small for me to be caught in this digital EU VAT net

BUSTED: Not true. There will be NO threshold in operation when the new rules are introduced on January 1, 2015. All digital services suppliers with cross-border sales to customers in the EU will be caught in this EU VAT net.

If you sell directly to a customer (non-taxable person) within the EU, and outside your ‘home’ jurisdiction i.e. cross-border, then you will have to comply with the terms of these new rules. That means declaring all of the VAT due on your pan-EU supplies. It does not matter how much these supplies amounted to, if it is a cross-border B2C supply then it is within scope of the new rules.

MYTH 3:I can just declare that all my digital service supplies are B2B, how will the tax authorities prove me wrong?

BUSTED: No, you simply cannot do this. The new rules place the onus of proving the location of the consumer squarely on the shoulders of the digital service suppliers.

If no VAT number is provided by the customer then the supply is to be treated as B2C and will come under the scope of the new rules. This is explained in Article 18 (2) of the Explanatory Notes on the new EU VAT rules on the cross-border supply of digital services. Article 18 (2) states:

Unless he has information to the contrary, the supplier may regard a customer established within the Community as a non-taxable person when he can demonstrate that the customer has not communicated his individual VAT identification number to him. However, irrespective of information to the contrary, the supplier of telecommunications, broadcasting or electronically supplied services may regard a customer established within the Community as a non-taxable person as long as that customer has not communicated his individual VAT identification number to him.

The Commission has attempted to be as sensible as possible in drawing up these new rules. The guidance is that if the customer produces a VAT number then the supply is considered to be B2B, and therefore out of the scope of the new rules. If no VAT number is produced then the supply will be considered as B2C and the new EU VAT rules apply.

Remember, digital service suppliers must prove where their end customers (non-taxable persons) are located by collecting two non-conflicting pieces of evidence. If they do not collect these two pieces of evidence then they will not comply with the new rules and will be open to the penalty.

The penalties will be decided based on which EU country loses out on the VAT. For example, if the customer is based in Poland then the resultant penalty can be as high as €3.7 million.

MYTH 4:I will now have to register for VAT in every country where I supply digital services.

BUSTED: Nope. This is the precise reason that the Mini One-Stop Shop (MOSS) system has been created. MOSS allows a VAT-registered business to select one tax authority to declare all the VAT on their EU sales. It eliminates the need to register with multiple tax authorities across the EU. Non-EU businesses can also select a EU tax authority to avail of the MOSS system.

Of course, the Taxamo solution is designed with these new rules in mind. Once a business is registered with MOSS Taxamo’s simple solution will take care of MOSS return reports, audit reports, foreign exchange calculation, VAT calculation, evidence collection, and data storage – all in real-time.

Remember, businesses must be VAT-registered to avail of the MOSS system.

MYTH 5:I can be audited at any time by any EU tax authority

BUSTED: Again, this is not true. The exact process for audits has yet to be determined. However, HMRC’s Andrew Webb – speaking at a recent Taxamo seminar (below) – stated that the co-ordination of audits will be a matter between EU member states.

The preference is for requested audits to be carried out for all interested member states simultaneously. Businesses that supply digital services to customers in the EU must keep a record of these transactions for ten years.

Taxamo content is created for guidance only, please consult your local tax advisor.