The 2015 VAT changes produce a number of challenges for merchants selling digital services. The changes herald a fresh start for the EU in terms of how they tax the digital economy but for merchants it is another layer of compliance that they need to meet. Here are some of the issues that merchants must provide.
Location of customer
This is the key change. The existing [2014] EU VAT rules determine VAT based on where he supplier of a digital service is based. For many in this sector (especially non-EU) this means paying the Luxembourg VAT rate on all their EU sales. From January 1, 2015, VAT will have to be charged based on where the end customer (non-taxable person) is located, or usually resides. Part of the 2015 VAT changes dictate that it is the responsibility of the merchant to prove the location of their end customer. More on that later.
B2C or B2B
The 2015 VAT changes only apply to business-to-customer (B2C) sales of digital services in the EU. Merchants will have to establish whether a specific sale is B2C or B2B. Business-to-business sales are not affected.
New MOSS system
The 2015 VAT changes introduce a system called the mini (or MOSS as it has become known). MOSS is an optional VAT declaration system. Via MOSS a merchant will select a member state of identification (MSI) with whom to register all their EU VAT with. In turn, the MSI will distribute the relevant VAT to the EU member states where sales took place. The alternative to MOSS is for merchants to deal with each EU member state individually.
EU or non-EU merchants
The rules apply for EU and non-EU merchants selling digital services in the EU
Once the merchant establishes that a sale is B2C they must apply the correct VAT rate. This is where merchants must be familiar with the various VAT rates of the EU. Remember, standard VAT rates in the EU range from 15% in Luxembourg to 27% in Hungary.
Evidence collection
Merchants must prove where their customers are located and to do that they must collect evidence. As per legislation this evidence can be rebuttable and irrebuttable. The new rules dictate that merchants must collect two pieces of non-conflicting, rebuttable, evidence, including:
- Billing address of the customer
- Fixed landline (if the service was supplied via the landline)
- An IP address, used to identify location of their internet service
- The mobile phone SIM card country code, will identify where they are located
- Other commercially relevant information e.g. loyalty cards
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.
Data storage
The 2015 VAT changes also compel merchants to store transaction data for ten years. The type of data to be stored is not sensitive. Details to be stored include: transaction amount, type of service supplied, VAT amount charged, FX conversions, date of transaction, etc.
Non-compliance penalties
Merchants that do not comply with the 2015 VAT changes will be dealt with according to the laws of whatever EU member state where they are non-compliant.
Penalties are severe and range from €3.7m in Poland to double the amount of tax owed (with no ceiling) in Denmark and Belgium.
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