2015 EU VAT changes: update ready to install?

Source: Taxand - Richard Baxter

The way in which electronic, telecoms, and broadcasting services are taxed when supplied internationally within the European Union will change on 1 January 2015. In just over a year’s time, providers of these services will have to pay the VAT collected from each consumer to the member state where that consumer lives. Currently, providers pay the value added tax (VAT) to the member states where they operate their businesses.

This change will not only affect which member state receives the VAT on these services, but also the VAT rate that the consumer will be charged. Today, if you live in the UK and pay to download music, chances are you'll be charged 15% VAT by a Luxembourg company. A UK-based provider of the same service would have to charge you the higher UK VAT rate of 20%.

VAT rates vary widely within the EU. At 15%, Luxembourg has the lowest standard VAT rate of all EU member states. Along with its competitive corporate income tax regime, this has made Luxembourg a popular place to run online businesses. Hungary has the highest standard rate of all member states at 27%, with Denmark, Sweden and Croatia close behind at a 25% standard rate. In an industry where physical borders are inconsequential and barriers to trade fairly low, service providers in low-rate member states have an advantage over domestic suppliers in member states with higher VAT rates. It is this differing treatment that the EU’s new rules will address.

A consuming passion

OECD Indirect Tax guidelines encourage governments to adopt a system that applies VAT to services according to where the consumer lives rather than where the seller has established itself. VAT is, after all, a consumption tax intended to be borne by consumers; businesses are little more than unpaid tax collectors in the process.

So how will things change for EU consumers come 1 January 2015? If you live in the UK and buy a film to download you will be charged 20% VAT, regardless of where the supplier is based. If you live in Hungary that means you’ll pay 27% VAT on a purchase that may have been subject to only 15% VAT in 2014. The change will be even more noticeable if you're accustomed to buying e-books from a seller in Luxembourg, where a special reduced-rate of 3% applies to e-books. Most other countries apply the standard rate on e-books.

That doesn't necessarily mean you should rush to build your e-book collection before 2015. A higher VAT rate does not necessarily lead to higher prices for consumers. We have spoken to several international publishers about the impact of these changes on pricing. The consensus is that services like e-books and music are relatively price-sensitive and therefore prices paid by UK consumers are unlikely to increase right away. After all, if you're a business known for selling music tracks at £0.99 each, you may prefer to reduce your profit margin rather than charge customers £1.03 per track as of 2015.

So will the European Commission succeed in reducing VAT avoidance without causing higher prices for consumers? In the short term they may well succeed, but only time will tell how longer-term prices adjust to higher VAT and compliance costs.

The price of compliance

So what will service providers be obliged to do from 2015 in order to declare VAT in every member state where they serve consumers? The answer largely comes in the form of the EU's Mini One-Stop-Shop or "MOSS" for short.

The MOSS will function similarly to the existing special scheme for non-EU-based electronic service providers, who for several years have had to declare VAT at the rate in each member state where they have non-business customers. Under the MOSS, businesses will file one quarterly VAT return declaring the VAT due in each member state. This will need to be done online, within 20 days of the quarter-end. Separate VAT registrations in each member state will not be necessary, although they remain an option.

However straightforward the logistics of filing MOSS returns may be, affected businesses still need to devote resources to updating existing accounting and billing systems to charge VAT in up to 28 different member states. Alongside this, records will need to be kept for 10 years. There are also contractual issues to be resolved and a heightened need to ensure billing documents match what is advertised to customers.

The next chapter

Uncertainty remains as to how businesses supplying affected services will identify where their customers live, in order to know the appropriate VAT rate to charge. There are several ways of determining where a consumer resides, ranging from recording the consumer’s IP address, using the billing address of their credit card or simply asking them. But all of these methods are imperfect in isolation. In reality, sellers will need to use a variety of tools to minimise the risk of inaccurately establishing where customers live.