B2C 2015 VAT changes

April 8: The place-of-supply rules relating to where value added tax (VAT) is both collected and remitted for certain services will be changing within the European Union, effective 1 January 2015.
This change will affect businesses providing:

Telecommunications
Fixed and mobile telephone services
Videophone services
Access over the internet

Broadcasting
Radio and television programmes transmitted over a network
Live broadcasts over the internet

eServices
Downloads of applications
Downloads of games
Web hosting
Distance learning
Downloads of music or films
Downloads of eBooks

The changes will not affect businesses supplying services on a business-to-business (B2B) basis.

From 1 January 2015, the place of supply of electronically supplied services provided by a business established in the EU to a person (other than a business) will change from being the place where the supplier belongs to the place where the customer belongs.

KPMG: Changes to the place of supply rules in 2015

Luxembourg set for bigger losses on 2015 EU electronic VAT rule change

The Luxembourg government has confirmed that it estimates that it will lose €800 million per year when the rules on determining the place of supply of consumer electronic services change on 1 January 2015. This compares to countries like Germany and the UK which will gain over €350m each per annum from the reform as they will be able to tax their consumers for e-books and internet telephony from the likes of Amazon and Skype who are based in Luxembourg.

Luxembourg fills deficit gap left by VAT place of supply change

As a member of the Euro currency, Luxembourg is obliged to stay below the 3% budget deficit target. The country has had a relatively stable ride during the financial crisis, we only a small drop in output.

However, the long-planned change in EU VAT rules on electronic (e-books, streaming films, music, games etc.), broadcasting and telecom services for consumers will mean many have the European headquarters of companies such as Amazon, Skype and Microsoft will no longer charge Luxembourg VAT to their EU customers. Instead, they will charge and remit the local VAT of the consumer’s country.

VAT losses extend

This led to an initially estimated hole in the Luxembourg finances of €700m. This was used as the basis for the rise in Luxembourg VAT rate to 17% on 1 January 2015, first mooted in February. This is expected to raise about €350m. The most recent estimate of €800m losses will now mean the country faces a €450m shortfall, which will most probably have to be met through expenditure cuts. The national debt is currently standing around €11bn, but is forecast to hit €15bn by 2016 if there are no new policies.

The Luxembourg reduced VAT rates of 12% and 6% are scheduled to rise too, to 14% and 8% respectively. There will be no change to the 3% reduced VAT rate.

Explanatory notes to new place of supply rules 2015 published

The new place of supply rules

As of 1 January 2015, telecommunications, broadcasting or electronic services will be taxed in the country where the customer resides or is established, irrespective of whether that customer is a taxable VAT entrepreneur or a non-taxable person and irrespective of where the supplier itself is established. This particularly involves a change for services supplied to non-taxable persons (including consumers) by entrepreneurs established within the EU.

Purpose and status of the explanatory notes

The objective of the explanatory notes to the new place of supply rules is to explain these rules in greater detail. Since the notes are a work in progress they may be adjusted and/or supplemented later on, also after implementation of the new rules. The explanatory notes are not binding, but given that both entrepreneurs and EU Member States have contributed to their preparation, they do provide relevant guidance for application of the rules. This news item obviously provides insufficient space to review the full scope of more than 80 pages of explanatory notes. For this reason, we will only address some remarkable aspects. Of course we would be pleased to provide additional information based on your specific situation. We will soon provide further information in a special webinar (in Dutch) dedicated to this subject.

Telecommunications, broadcasting and electronic services

To determine whether the new rules apply, it is to be established whether services can be qualified as telecommunications, broadcasting or electronic services. The explanatory notes particularly pay attention to the distinction between broadcasting services and electronic services. As of 1 January 2015, this distinction will not be relevant for application of the place of supply rules. However, the VAT rates for these services may differ. In some EU Member States broadcasting services are subject to the reduced rate, while the general rate applies for electronic services. This is not the case in the Netherlands where the current general rate of 21% applies for both services.

Intermediaries

A characteristic feature of electronic services and internet telephone services is that they are often supplied through the intermediary of one or several parties. When these intermediaries are involved in the supply, based on a fiction they are deemed to have purchased the electronic services (or the internet telephone services) from the party that precedes them in the chain and to have supplied these to the party that follows them in the chain. If that following party is the end consumer, the intermediary must pay VAT in the country where the end consumer resides. Involvement with the supply is fairly easily deemed to exist. The explanatory notes give some examples in which no involvement is deemed to exist, i.e.: a payment service provider that only processes the payment and internet providers or mobile operators that only facilitate the supply of content or the collection of a payment through their networks. This presumption can be rebutted if five conditions are met cumulatively. Whether rebuttal is possible and/or desirable will depend on your specific situation. We would be pleased to help you determine what is advisable and possible in your specific situation.

Status of the customer

As indicated above, under the rules applicable as of 1 January 2015 for telecommunications, broadcasting and electronic services it will no longer be relevant whether or not the customer is a taxable person or a non-taxable person. The distinction will then only be relevant to answer the question by whom the VAT is payable if the supplier is not established in the customer's country. If the customer is a taxable person, the VAT is reverse charged to the customer, who will then have to pay VAT in his own country. If the customer is a non-taxable person, the supplier will have to pay the VAT. A supplier can assume his customer to be a non-taxable person if no VAT identification number has been received from the customer. He then charges VAT to the customer, must declare this VAT himself and cannot reverse charge it to the customer. If the customer still provides a VAT identification number afterwards, the supplier must make the required corrections, such as sending a credit note, refunding the VAT to the customer and adjusting his VAT return. After all, the taxable customer cannot deduct the VAT charged by the supplier, as it concerns VAT that was not due by the supplier in the first place (as the reverse-charge mechanism applied). The adjustments only need to be introduced if the customer has provided the supplier with a VAT identification number within a reasonable term.

Localising the customer

Under the new rules the supplier will have to determine where his non-taxable customer resides or is established. To do so, he can use a number of rebuttable presumptions. If those presumptions are not applicable, the supplier must determine the residence or place of establishment of his customer on the basis of two items of non-contradictory evidence. It is up to the supplier to determine which two items of evidence he considers to be most reliable. All commercially relevant information can serve as evidence. A relevant aspect here is that the entrepreneur may rely on the trading history with the respective customer. For regular customers, the entrepreneur does not have to establish where they reside or are established each time. However, the entrepreneur will have to check periodically whether the data still is correct. An electronic or postal address (e.g., a P.O. Box) is not a relevant item of evidence according to the explanatory notes.

Transitional measures

The explanatory notes also provide more clarity about the transitional measures. These are meant to avoid double taxation (in both the country of the supplier and the country of the customer) or non taxation. Under the transitional measures, the moment on which a chargeable event occurs is relevant for answering the question in which country VAT is chargeable. Note that if the chargeable event occurred before 1 January 2015, VAT is chargeable in the country of the supplier (provided the customer is a non-taxable person and the supplier is established within the EU). If the chargeable event occurs on or after 1 January 2015, VAT is chargeable in the country where the customer resides or is established. The moment at which payment is made or an invoice is sent is irrelevant. If an agreed advanced payment applies - i.e., according to the explanatory notes - the moment at which the advanced payment is received is decisive. For example, if 40% is paid in advance before 1 January 2015, VAT is chargeable on that percentage in the country of the supplier. As the service is effectively supplied on or after 1 January 2015 and the remaining 60% is paid, VAT is still chargeable on that 60% in the country where the customer resides. Prepayments are sometimes assumed to be part of a regular commercial pattern, so as not to open the door too wide for tax planning and/or evasion. In the event of a continuous supply the chargeable event occurs at the moment the periods for which a successive payment is made expires. Also in the event of advanced payment for a continuous supply, the moment of the advanced payment is decisive to answer the question in which country VAT is chargeable.

Source: Explanatory notes on EU VAT changes to the place of supply rules for telecommunications, broadcasting and electronic services that enter into force in 2015

Why explanatory notes?

The objective of these explanatory notes is to provide a better understanding of legislation adopted at EU level and in this case principally Council Implementing Regulation (EU) No 1042/2013 of 7 October 2013 amending Implementing Regulation (EU) No 282/2011 as regards the place of supply of services. Published almost nine months before the date on which the new rules for the place of supply of telecommunications, broadcasting and electronic services will start to apply which is 1January 2015, the explanatory notes are expected to allow Member States and businesses to better prepare for and adapt to the upcoming changes in time and this in a more uniform way.

Explanatory notes on the EU VAT changes to the place of supply of telecommunications, broadcasting and electronic services that enter into force in 2015 .