The landscape of the European Union eServices marketplace is about to change dramatically courtesy of a change in how VAT on eServices is applied. So how does this impact the economy and business?For some time now (the first piece of legislation came into effect in 2003) the European Commission have been trying to come up with ways to ensure that the eServices sector pays its fair share of VAT. There have been quite a few amendments and new pieces of legislation in the interim but now the Commission believe that they have found the solution. The birth of the digital economy has created numerous headaches for tax authorities around the world. They have lost revenues as loopholes have been used to avoid taxation. The 2015 VAT on eServices is the EU’s latest attempt to ensure that the digital economy plays fair and pays fair. In all of their communications leading up to the introduction of the new VAT practice the EU have been adamant that non-compliance will not be accepted. Time will tell in this regard how things will progress economically in Europe.
What is happening?
On January 1, 2015, VAT on eServices changes. An eService – by the way – is an service that is supplied via the internet. The 2015 rule change will dictate that VAT is to be charged based on where the end customer is located, or where they usually reside in the EU. Current rules state that VAT on eServices is charged based on where the merchant supplying the service is located. This is the essence of the rule change.
Who will be affected?
As stated any merchant supplying an eService to a private individual (non-taxable person) in the EU will be affected. The EU has previously loosely defined eServices as any service that requires internet access to be supplied. Examples of affected services are downloads of images, movies and music as well as installation via the internet of anti-virus software. Merchants will also have to differentiate between B2C and B2B sales as only B2C sales in the EU are affected.
What to do now?
Merchants that will be affected by the new rules will have to ensure that their systems are compliant before January 1, 2015. There are numerous other compliance issues introduced by the new VAT on eServices. These include the process proving where a merchant’s end customer is located. The rules require the merchant to collect two non-conflicting pieces of evidence to prove the customer’s location. Accepted evidence includes a credit card billing address; IP address; fixed landline; mobile phone SIM card country code, and other commercially relevant pieces of information.
In addition merchants will be required to store transaction data for ten years. The type of data to be stored is not sensitive, only the detail of the transaction such as amount, data, VAT rate charged, FX conversion of transaction amount and VAT rate, type of service supplied and date.
Okay, anything else?
Well, the new VAT on eServices also introduces a system called the mini One-Stop Shop (or MOSS). The MOSS scheme is optional but it will allow merchants to declare all of their EU VAT with one tax authority. If merchants opt against using MOSS then they will have to declare VAT in each tax authority where they have supplied an eService. This, potentially, means declaring VAT with the 28 tax authorities of the EU.