What changed in the EU on January 1, 2015?

Since January 1, 2015, suppliers of broadcasting, telecommunications, and electronic services (BTE) to customers in the EU have to account for value-added tax (VAT) based on where their end customer (non-taxable person) resides.

The changes are based on Council Directive 2008/8/EC (the ‘EU VAT Directive’).

In principle these rules already exist for non-EU suppliers, there is no change for these suppliers as since 2003 they have been required to collect VAT on their digital service supplies. The key 2015 change is that EU-based businesses now have the same obligation and must account for VAT on B2C cross-border sales from January 1, 2015. Only B2C sales are affected.

Please visit the European Commission website for more detailed information.

What do the 2015 changes mean for digital service suppliers?

Since January 1, 2015, the application of VAT on B2C sales of digital services in the EU is now based on the location of the customer.

In principle these rules already exist for non-EU suppliers, there is no change for these suppliers as since 2003 they have been required to collect VAT on their digital service supplies.

The key 2015 change is that EU-based businesses now have the same obligation and must account for VAT on B2C cross-border sales from January 1, 2015.

These new rules, however, only apply to sales within Europe and to B2C (non-taxable person) transactions.

All 28 EU member states have signed up to the EU VAT Directive.

The new rules apply to any merchant that has cross-border B2C sales of digital services within the EU.

Are U.S. companies affected by new EU VAT rules?

Yes, the EU VAT rules on the supply of digital services affect all companies (EU and non-EU) that sell to a private individual in the EU.

This sale is known as B2C (business-to-consumer). Only B2C supplies of digital services are affected.

Our blog posts on this topic - here and here - provide more in-depth detail.

What is the definition of a digital service?

It is established that the following elements together form a digital service:

  • A 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

There is also an additional condition, which is not explicitly stated in the EU VAT legislation, but can be extracted from existing EU VAT case-law:

  • Supply is made for consideration (i.e. for payment)

The list of digital service providers affected include, but is not limited to, the following:

  • Digital services and subscriptions
  • Games, gambling games, and e-books
  • Software and software upgrades
  • Websites, hosting, VoIP and content
  • Music, films, images and photographs
  • Access to e-markets
  • Distance teaching

More detail available on the Taxamo blog: Definition of e-services.

I do not trade cross-border, do the rules still apply to me?

While a marketing/sales strategy may be aimed at one member state the very nature of digital services means that potential customers can be based anywhere in the world.

Digital service merchants now need to determine, and prove, where their end customers (non-taxable person) are located or else take action to definitely ensure cross-border sales do not take place.

I'm a small business, how do the new rules affect me?

The same rules apply to all digital service merchants supplying B2C cross-border sales to customers in the EU.

There are no registration limits for these cross-border supplies, and no VAT threshold applies.

For example, if a UK merchant sells €10 worth of digital services to a consumer in Germany then that business must either register with MOSS or register with the German tax authorities to pay that VAT.

How do I prove where my customers are located?

There are two scenarios for collecting evidence so as to locate the end customer (non-taxable person): rebuttable and irrebuttable.

Rebuttable evidence includes:

  • Billing address of the customer
  • Fixed landline (if the service was supplied via the landline)
  • An IP address
  • The mobile phone SIM card country code
  • Other commercially relevant information e.g. loyalty cards

All digital service merchants will need to collect two non-conflicting pieces of evidence verifying the location of their EU customers (non-taxable persons).

The burden of proof is on the merchants’ shoulders.

Irrebuttable evidence includes Broadcasting, Telecommunications & Electronic Services (BTE) supplied to a telephone box or kiosk; WiFi hotspot; internet café; hotel lobby; restaurant, and similar locations.

Will I have to store transaction data?

Yes. The 2015 EU VAT rules state that a merchant must store the transaction details from a cross-border digital service supply for ten years.

Based on these VAT rules, any EU member state can request an audit of a merchant’s files and this stored transaction information may be requested.

Transaction data that merchants must store includes:

  • The member state in which the digital service is supplied
  • Type of digital service supplied
  • Date of the supply of digital service
  • Taxable amount, indicating the currency used
  • Any subsequent increase or reduction of the taxable amount
  • The VAT rate applied
  • Amount of VAT payable indicating the currency used
  • Date and amount of payments received
  • Any payments on account received before the supply of service
  • Where an invoice is issued, the information contained on the invoice
  • The name of the customer, where known to the taxable person
  • Information used to determine the place where the customer is established or has their permanent address or usually resides.
  • These records must be kept for ten years from the end of the year in which the transaction was made, regardless of whether the merchant has stopped using the VAT MOSS scheme or not.

How will a merchant determine the VAT status of a customer?

The rules only affect the B2C cross-border supply of digital services. It will be important to determine if your customer is a non-taxable person or a business.

The European Commission has attempted to make the rules as sensible as is possible. If a VAT registration number (VRN) is supplied then it is assumed to be a B2B transaction and, therefore, that supply is unaffected by these new EU VAT rules.

If the customer does not supply a VRN then the supplier can assume that they are dealing with an ordinary consumer (non-taxable person) and add VAT to the supply.

What options are open to merchants if two pieces of collected evidence conflict?

Digital service suppliers need to collect two pieces of non-conflicting evidence.

If the first two pieces of evidence collected conflict then the onus is on the digital service supplier to collect a third, or more, until the customer’s location is matched on two pieces of evidence.