EU: How to define the location of an ebiz customer?

In today’s article we will take a look at information the EU Commission suggests that should be collected and used to determine the location of the customer – buyer of eservices. We will also analyze the practicability of the various proposed location evidences and think about how easy they are obtained in practice.

As you are probably aware, at least as of 2015 every business supplying eservices to non-VAT registered customers in the EU will have to charge VAT in the country where its customer is located. In a number of cases this rule already applies (e.g. if the eservices are supplied by non-EU companies to EU customers or if they are supplied to Swiss, Norwegian, etc… customers).

In our experience any serious business wants to be compliant with the applicable tax legislation – and in the case of eservices the big question is: “How to define the location of my customer?” If this question cannot be answered satisfactorily (i.e. if it is not easy to obtain reliable information on customer’s location or if it is not clear what this information could be) then I see no way how the ebusiness could comply with these VAT requirements.

Lack of clear guidance in the past

So far only a few of the countries have provided useful guidance on how to deal with this issue in practice and what their expectations are in this regard towards ebusinesses. As the tax rules were not harmonized in practice, this raised the risk of double taxation when two or more tax authorities could argue that according to their interpretation of the EU rules, VAT should have been charged in their country (a fictional example: if eservice was purchased by a UK citizen, using a Cyprus credit card, while being on vacation in Malta and using his Irish based email address).

Proposal for the future

Thankfully the EU Commission has in its recent proposal of the amendments of the VAT Implementing Regulation suggested some evidence for the identification of customer location (they have also proposed refutable and irrefutable presumptions – which we have briefly discussed in this article). At first glance they seem to be very reasonable. However, taking a closer look we started to believe that some of them might be quite situational (i.e. not that practical).

Our understanding is that the EU Commission has prepared this list of evidences based on the input it received from the various businesses. The list also represents the best compromise reached between the representatives of various EU countries. As such the requirements are not perfect – and are probably the best we can get at this moment. Luckily the list is open ended – i.e. it ends with a generic statement “other commercially relevant information obtained by the supplier”. Time will show what this means in practice when interpreted by the various local tax authorities.

It is important to note that at least two separate not-contradictory pieces of evidence will be required to determine the location of the customer. It is however not clear how many pieces of evidence will be necessary in case some of them are contradictory – will in practice two out of three be sufficient or will additional evidence be required?

Last but not least it is also important to understand that these rules will be applicable immediately when the amendments to the Regulation become effective (i.e. not only as of 1.1.2015) and that in the meantime they could provide some sort of guideline (i.e. more like a hint than a rule) on how to define the location of the customer.

Evidence for the identification of customer location

Let’s take a closer look at the location evidences as proposed by the EU Commission.

Customer details such as the billing address of the customer

This one is logical – these are the details provided by the customer. They should be usually provided anyway in order for the ebusiness to be able to conclude a valid contract with the customer.

This data is also easily manipulated by the user as the seller 100% relies on user’s input.

Conclusion: Available in most cases, fully dependent on customer’s input.

The Internet Protocol (IP) address of the device used by the customer or any method of geolocation

It is one of the user data that is in principle easy available. Unfortunately the devil hides in technical details, namely in the “IPv4 address exhaustion”. Simplified: there are no more IPv4 addresses available, the majority of software and hardware is not compatible with the new generation of IP addresses (i.e. IPv6) and therefore the previously freely available IPv4 addresses are being resold on open market.

This means that the IP address could “change location” – i.e. when sold from one ISP in one country to another in another country. There are no governmental approved databases of IP addresses and their location. Instead there are several commercial databases available. They are periodically updated – which means that there could be a discrepancy between the real customer’s location and the information stored in the database. Furthermore all databases are not updated at the same time and it is possible that the ebusiness and the relevant tax authorities will be using different databases when checking the location of the IP address.

In addition the IP address is easily changed with the use of a proxy or VPN. While this might not be a problem in most cases, there might be some sectors, where this will occur more commonly (could be online gaming industry; I wonder when will they figure out that by a simple use of a proxy and by changing their billing address to the Bahamas or something similar they can save 20% of their purchase price).

Geolocation might work, but only on mobile phones and only if the user allows this function.

Last but not least – IP and geolocation would work only as long as the customer is using his device in the same country, where he normally lives. If he is travelling, this will no longer work.

Conclusion: easily available, not always reliable, does not help if customer is in a different country than he lives.

Bank details such as the place where the bank account used for payment is and the billing address of the customer held by that bank

This one is tricky. While the big players will have access to this information (as their customers deposit their credit card information in their user accounts – and the bank that issued the card can be discovered based on the credit card number) this will not work for the smaller ebusinesses which rely on independent payment processors to process their payments. If these ebusinesses can get this information from the payment processor: great. If not: well, you understand…

I personally chose very carefully with whom my credit card information is stored.

Conclusion: Might be hard to obtain in practice.

The Mobile Country Code (MCC) of the International Mobile Subscriber Identity (IMSI) stored on the Subscriber Identity Module (SIM) card used by the customer

Works well for companies like Apple and Google which can access this information through their operating system. A standard web based eshop will normally not have access to this information.

Conclusion: Might be hard to obtain in practice.

The location of the residential fixed land line through which the service is supplied to the customer

No idea how this would apply in case of an eservice; probably works for broadcasting and telecommunication services better and in cases where the local Internet provider supplies services directly to his customers.

Conclusion: Useful only in specific circumstances; not that relevant for “normal” eservices.

In relation to a customer who is selling goods via the Internet or similar electronic network, the place where the transport or dispatch of the goods sold by that customer initially begins

Relevant in case of Internet actions and similar platforms.

Conclusion: Useful only in specific circumstances; not applicable to “normal” eservices.

In relation to a customer who is buying goods via the Internet or similar electronic network, the place where the transport or dispatch of the goods bought by that customer finally ends

As above: relevant in case of Internet actions and similar platforms.

Conclusion: Useful only in specific circumstances; not applicable to “normal” eservices.

Registration details of the means of transport hired by the customer, if registration of that means of transport is required at the place where it is used, and other similar information

Probably useful only in a very specific circumstances.

Conclusion: Useful only in specific circumstances; not applicable to “normal” eservices.

Other commercially relevant information obtained by the supplier

Here ebusiness were given a “card blanche” – they will be in theory able to use whatever they find practical and will in practice need to convince all (maybe only most) relevant tax authorities to accept the proposed evidence as reliable.

Our final thoughts (for now)

Our overall conclusion is that in practice it might be quite difficult to obtain two separate non-conflicting evidences pointing to the same location – i.e. country of the customer. Unfortunately the above is the best compromise the EU countries managed to reach up to date and this does not include the expectations of other non-EU European countries and their tax authorities.

Further, the acquisition of all this information might prove a barrier to spontaneous purchases, especially in cases where the customers will not be required to create a permanent user account with the eservice provider. Experiences in ecommerce show that the more questions one asks the more likely it is that the customer will complete an “impulse buy”.

My thought is that the big players probably employ enough in-house tax specialists and have enough funds to deal with this matter (i.e. their main issues are “only”: “How much will it cost us?” and “How long does it take?”). The small and medium business will have to ensure the same level of compliance while having much less assets at their disposal. I am convinced that the big players will be able to solve their issues; how the other will deal with them is another question entirely. I believe that especially start-ups will be hit hard by these rules.

As this is at the moment only a proposal for the new rules, the final text of the amended VAT Regulation might differ. We will keep you updated with the relevant developments and encourage you at the same time to start planning on how to deal with these requirements in the near future.