New VAT rules in the EU: how a digital sea could have become an ocean

Even the Commissioner himself would have a very tough time going through the pile of paperwork on the new digital VAT in Europe. Pierre Moscovici, Member of the EC in charge of Economic and Financial Affairs, Taxation and Customs, in this picture embarked on a visit to Athens where he met with Antonis Samaras, Greek Prime Minister, and other Greek officials. (EC Audiovisual Services, 15/12/2014)

From 1 January 2015, a major change to the European Union VAT rules occurred affecting the digital world, which is destined to be discussed widely for a long time. A new regulation has come into place where VAT on digital products sold in the EU will be chargeable in the place of purchase rather than the place of supply.

What happens is that the advantage for a company to make transactions in the EU-country with the lowest VAT rate for their B2C business in the field of telecommunication, broadcasting or electronic services, will be eliminated from now on. The new regulation has been introduced to basically stop big multinational corporations diverting sales through low-VAT countries such as Luxembourg.

Although all of this sounds like a happy ending for those who think that the big multinational companies are never paying enough, the new VAT regulation is receiving fierce critics from everywhere, especially – and surprisingly, you would probably say – by small firms.

Firstly, this is mainly due to the complexity and wording of the new rules, as many say. The regulation states that the changes will only apply to those supplying digital services. This might be confusing, because actually the rules not only cover digital services like broadcasting and telecoms services but also goods, products such as ebooks, games, images or other downloads. According to the United Kingdom HM Revenue & Customs, goods as images, text, photos, screensavers, e-books and other digitised documents, PDF documents automatically emailed to customers, online courses with downloadable videos are covered by the new rules.

Also, determining the location in which services are supplied, in order to be able to pay the right amount of taxes, might be difficult. This would happen especially with customers using payment channels and services such as PayPal, which is indeed more than popular. In this case there would be just a few info available, maybe only an email address. This would mean that the company will have to get in contact with the customer, ask for more details and complete the payment, with the potential risk of making the sale (much) more difficult.

Moreover, businesses will need to take actions about pricing. If they don’t change their prices in countries where VAT is higher, they’ll have to absorb the additional costs themselves. Considering that VAT rates across the European Union currently vary from 15 per cent to 27 per cent, this could be a challenge.

Many businesses have raised the above and many other concern about the new rules, with some saying it could force them to close. The companies say they have been forced to abandon trading because the rules have proved too complex. Critics say even the smallest businesses may have to hire experienced accountants, forcing many to close. As reported by most of media outlets based in the UK, where the debate is actually much more intense than in other countries of the EU, as always, critics say even the smallest businesses may have to hire accountants and spend hours on paperwork. Entrepreneurs and campaigners say they are going to struggle with the new regulations, and that the administrative burden would be too onerous for small firms.

On the other hand there are a number of options for businesses working out how to comply with the changes. The new VAT rules provides the possibility for the EU service provider to apply for the VAT Mini One Stop Shop scheme. The so-called MOSS scheme has been introduced to allow companies to pay tax locally, which is then passed on to the right country, rather than to register locally with the VAT authorities in each and every country where they do business. This would certainly be a big advantage.

The new rules are potentially a good thing, but the main knot could be that the rules have been implemented with no threshold, meaning that even a small business, with a limited turnover, will still be affected. It might be safe to say that the impact the new rules will have on micro businesses has not been entirely considered.
And also some other consequences for end-consumers. One of the giants of the digital industry, which were due to be hit by the new regulations, have apparently took actions already.

Apple has increased the price of apps for users in Canada and the European Union. According to a report by AppleInsider, a notification sent by the Cupertino, California-based giant to iTunes Connect members last week, prices app prices have increased due to new adjustments in value-added tax (VAT) and exchange rates pegged to the dollar in the EU, Canada and Norway. The change has already hit the EU, where apps now start at €0.99, while the minimum price of an app in the UK’s Apple’s store has risen from £0.69 to £0.79. Other big companies and retailers like Amazon are likely to apply changes in their pricing strategies.

So, although it’s completely true that the new rules will produce a net benefit for the countries’ treasury, and that they will standardise a market in which too many escapes were conceded to big multinational firms, it’s likely that the extra costs will be passed on to consumers and publishers. And that many micro businesses will have to work on tax returns in a time in which the priority should be doing business concisely to recover from the economic crisis.

If you are a small firm of the digital industry and you are still confused about the new VAT rules, the MOSS, and whether or not your business will be affected, here a few links to the European Union’s official web pages showing more about the new legislation, VAT basic rules, taxation and custom union plus a small guide provided by the United Kingdom HM Revenue & Customs.

Good luck…