On January 1, 2015, significant changes in the Vat rules will kick in. These new rules are the result of legislation introduced in the EU in 2008 as part of the Vat Package, intended to establish a level playing field between businesses involved in the provision of digital services to retail consumers in Europe. This is achieved by bringing the Vat treatment of such services reliant on the place where they are consumed.
Currently, supplies to final consumers by EU businesses are taxed in the country of the supplier. For this reason, a supplier only needs to be concerned with its own location when accounting for Vat on digital services. The supplier charges consumers the Vat rate of the country the business is established in, irrespective of where the consumer is based.
Digital services are thus taxed at Vat rates that can vary up to 27 per cent, though consumers are generally unaware of the rate that are being taxed at as the retail price incorporates the Vat amount.
This creates an anomaly, as revenues do not accrue to the member state in which the services are provided. In addition, given that the rates of Vat are not the same across the EU, suppliers in member states with a lower Vat rate have a competitive advantage over businesses established in others.
The changes will not affect the supply of goods where the only use of an electronic system is to place the order for the good.
The affected services are digital services consisting of broadcasting, telecommunications and e-services, including items such as apps, music downloads, gaming and e-books.
As a result of the new taxation rules, all sellers of digital services into the EU market are required to determine the country where that customer belongs to and then charge the appropriate Vat rate of that country. The place where a customer belongs is to be understood as the country where the customer is established, has a permanent address or usually resides.
The EU legislation provides guidance on the concepts of permanent address and usual residence. The first refers to the address of a natural person entered in the population or similar register, or the address indicated by that person to the relevant tax authorities. The second refers to the place where that person usually lives as a result of personal and occupational ties. Where these ties are in different countries, the usual residence is determined by the personal ties that show close links between the person and a place where he is living.
Suppliers need to be ready to face this array of changes that are being introduced across the EU in two months’ time
Suppliers need to obtain the consumer’s details in order to make a determination on the proper Vat rate. In order to reduce the onerous requirement on suppliers to obtain evidence of where customers live at the point of sale, a regulation was adopted in 2013 to assist suppliers to determine the place of supply of their e-services more easily. The regulation brought clarifications and introduced presumptions as to where the consumer’s place of belonging is located. For instance, if the service is supplied through a mobile phone, the location will be based on the country code of the SIM card. The supplier can rebut these presumptions with evidence based on certain non-contradictory elements such as billing address, the IP address of the device and bank details. The seller must put in place a Vat compliance system or a revenue accounting system that properly sources its revenue from consumer transaction.
Supplies providing digital services to consumers across the EU will have the assistance of an optional one-stop-shop to reduce the administrative burden that the change in the place of supply rules will bring. Under this system, suppliers will only need to register in one EU member state and submit electronically one return within 20 days of the end of the calendar quarter return period in respect of all EU digital supplies. One single payment due at the same time of the return is to be made to the member state in which the supplier is registered under this system. Registrations are open as from this month but the system is not compulsory; suppliers can instead register in every member state where they do business.
Suppliers need to be ready to face this array of changes that are being introduced across the EU in two months’ time.
Josette Grech is an associate with Guido de Marco and Associates.