First and the most important fact: These rules are mandatory for any kind of ebusiness, no matter where it is established or has a nexus: in EU, US, China, India, Australia, Switzerland. As soon as a company provides eservices to a non VAT registered EU customer (regardless whether the customer is a legal or a natural person) it is bound by these rules, regardless whether it has a “physical” presence, server or agent in the EU. The customer’s location is the only thing that matters.
We have already presented some of the upcoming VAT changes to eservices (and also telecom and broadcasting services) previously. Today’s article is prepared especially for those of our readers that wish to receive a short and clear answer to the following question:
What changes with the new VAT rules for eservices?
The most important change happens to ebusinesses located within the EU that are selling their eservices to B2C clients, which are also located in the EU (please note: B2C clients include beside private consumers also various non-VAT registered business, governmental organizations and other legal persons – follow this link for more info on what eservices are and who B2C clients are).
The new VAT rules abolish the distinction between EU and Non-EU companies providing their eservices to EU B2C customers.
Please note that these rules will apply also to supplies of telecom and broadcasting services to EU B2C customers.
“VAT due at the place of the customer” equals “additional VAT registration requirements”
New requirements for EU based ebusiness under the new rules mean that they too will have to register in every EU country where their EU B2C customer are residents and charge VAT at the local VAT rate (this tax obligation is already applicable to non-EU based ebusinesses).
In short: The current differentiation between EU based and non-EU based ebusiness will cease to exist by 2015 (in some cases maybe even earlier – see below).
An optional simplification to the above rule will be the so-called “Mini One Stop Shop” (“MOSS”). This option will enable businesses to register for VAT in a single EU country, electronically submit quarterly VAT returns in that country (they will still have to report VAT due per country of their customers’ residency) and pay their total VAT liability in this country (which will then distribute the payment to other EU countries as declared in the VAT return).
Please note that this is a simplified explanation only – the full rules for the MOSS are of course a bit more complicated. Note also, that MOSS will help only with EU VAT registrations and that local VAT registrations in non-EU countries might still be required (i.e. in Switzerland, Norway, Island, etc.).
More options for international business structuring
This new VAT rules mean for the ebusiness that the local VAT rate or even the location of the seller (i.e. within or outside the EU) will be no longer relevant. Instead of being limited to a setup in an EU country with the lowest VAT rate they can rethink their European business strategy and focus on other important factors when setting up their global or European hub – factors such as:
- Local infrastructure,
- Country’s reputation
- IP and legal protection,
- Friendliness of local authorities,
- Corporate tax rate,
- Availability of skilled workforce…
Effective as of – when…?
Originally the new rules were meant to become effective as of 1 January 2015. However a new draft regulation proposes that whenever the eservices are provided over a longer period (which starts before 1.1.2015 and ends after 1.1.2015) the new rules should apply at the start of this period. This rule (if implemented as proposed) will e.g. affect any ebusiness that offers a subscription type of service. This might be extremely relevant for annual subscriptions/payments, such as:
- Annual software updates
- Annual anti-virus subscription
- Annual online game subscription
- Three year subscriptions to web and domain hosting services
In these cases the new rules (if implemented) will apply at the beginning of the subscription period (if the subscription period ends after 1.1.2015). In practice this means that the new rules might in some specific cases have to be applied as early as 2013 (i.e. as soon as the new Regulation becomes effective).
Know your customer
The new EU VAT rules introduce some additional compliance requirements that will need to be followed by all ebusinesses, no matter where they are established, registered, have a permanent establishment or nexus. Among other things they will have to:
- Identify their customers and distinguish between B2C and B2B customers
- Identify the country of residence of their B2C customers for eservices
- Charge VAT to their customers at the rate valid in the relevant EU country the customers reside in
- Report and ensure payment of VAT to that country
- Identify which B2C customers reside outside the EU and avoid charging EU VAT to them; instead they might be required to register for VAT and account for this VAT in the countries of their non-EU VAT customers (e.g. Norway and Switzerland; actually this obligation already exists)
Why should you suddenly care about VAT?
There are several practical reasons for it. First one is obvious; and so are the rest of them:
- If ignoring the VAT requirements you are essentially committing a tax avoidance
- There is the usual reputation risk
- And probably the most practical reason for most of the ebusinesess out there – the European tax authorities will be able to track and reach the offenders and be motivated to do so
We will discuss the newly found motivation of the European tax authorities to collect VAT on eservices and means they have on their disposal to be effective in their job in a follow-up post. Until then let me leave you with the following thought: