This guest post is written by John McCarthy, CEO of Taxamo, a service solution for the 2015 EU VAT changes, outlines the EU VAT compliance challenges that await online merchants on January 1, 2015.
An estimated 250,000 EU e-service merchants will be affected by the EU’s new 2015 rules on how VAT should be applied to digital goods and services. When the net is spread beyond the borders of the 28 EU member states that figure quickly rises to an estimate of 500,000 online merchants with B2C sales in the EU. It will be a major issue come the New Year, yet very few merchants know what the changes involve, or how it will affect them.
The key change enshrined in the 2015 EU VAT Directive is that suppliers of broadcasting, telecommunications and electronic services (BTEs) in the EU will have to charge VAT based on the location of their end customer (non-taxable person). This differs from the existing rules where VAT is charged based on the location of the supplier of the service.
What products/services are covered under the new EU VAT rules?
The new rules apply to sales of broadcast, telecommunications and electronic services (e-services) to non-taxable persons (B2C) within the EU. In principle, the following elements together form an ‘electronic service’:
- A service is supplied 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 the service without information technology
The list of e-service providers affected include, but is not limited to the following:
- Digital goods 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
Burden of proof lies with merchants
In order to comply with the new EU VAT Directive, e-service merchants will need to collect two pieces of non-conflicting evidence verifying the location of their EU consumers (non-taxable persons). Such evidence could include:
- Credit card BIN
- 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
- Wifi hotspot location
Business impacted by the EU VAT changes will in principle be required to charge, report and pay local VAT in every Member State in which they have EU B2C customers. To avoid multiple VAT registrations throughout the EU, the so-called Mini One Stop Shop scheme (‘MOSS’) can be used, reducing the administrative burden associated with the changes at hand. The alternative is for business to register in each of the 28 Member States.
Preparation is key
The new EU VAT rules come into effect on January 1, 2015. Merchants selling e-services need to act quickly to ensure that they have systems and processes in place to support the requirements of the new rules. Starting now, e-service merchants need to ensure they are prepared to:
- Identify EU and Non-EU transactions
- Collect & store customer location evidence
- Validate B2B/B2C transactions
- Calculate & apply VAT liability
- Create and submit quarterly VAT returns
- Provide audit files for Tax Authorities
- Securely store data for 10 years, as mandated
About Taxamo. Taxamo provides a real-time solution for compliance with new EU VAT rules. It is a unique end-to-end service that enables e-service merchants to comply with these changes, without impacting the existing customer journey. In line with EU regulations, Taxamo allows for VAT calculation, evidence collection, MOSS returns and audit services. For more information visit www.taxamo.com or follow us on Twitter and LinkedIn.