New EU Tax Rules On Digital Products

fade-leftfade-right What Are They And How Do They Apply To Me?

 

**DISCLAIMER: The information in this page is for general guidance only and does not constitute legal or accounting advice. Please contact an accountant or your local tax authority for more information on this topic.

The smallest businesses and sole traders will be the hardest hit by the new change in the EU Tax laws. It seems that most small businesses and sole traders, including their accountants, are not up-to-date with the new legislation.

The thing that is making it difficult to comply with the new law, is that different countries are interpreting the new rules in different ways, meaning that to understand this new legislation means that you would need to  check with your local tax authority as to their specific implementation.

1. What are the new EU regulations/VAT MOSS?

Broadly speaking, the headline about the new regulations is that it’s all down to a change in the way Value Added Tax (VAT) is applied to the purchase of digital services. Whereby as from 1 Jan 2015 instead of the tax rate being applied according to where the seller is located, the seller must determine where the buyer is located and apply the relevant local rate of tax to the purchase.

So, this means that if you live in Spain and someone in France purchases your digital file, you need to pay VAT at the French rate to the French authorities (albeit if you are in one of the countries where a Mini-One-Stop-Shop system is in place, once you have correctly calculated it you can pay it to your own authority who will pass it on for you).

The MOSS (mini one stop shop) part of it, is system introduced to avoid the necessity to register in each country in which you makes sales within the EU other than your own country of residence.

To register for the MOSS : https://www.gov.uk/register-and-use-the-vat-mini-one-stop-shop

Why is this being introduced?

In essence, this has been brought to stop billions of euros of the consumer tax being lost due to multi-nationals locating in low tax jurisdictions – an aim which few would argue with.

The European Commission argues that this will create a level playing field because it means that sellers will no longer be able to unfairly undercut their competitors by locating themselves in another EU member state with a lower VAT rate – but in reality its implementation without any de minimis exemption threshold will unfairly disadvantage the EU’s smallest companies and individual traders; creating a divide between the multi-national companies who can afford to comply with this complex and archaic piece of legislation and those sole-traders and micro-businesses that simply can’t.

2. Which Services/Products Does This Apply To?

The headline application is “broadcasting, telecommunications and e-services that are electronically supplied.”

In reality, if you dig a little deeper this has been defined so broadly as to capture many things that you might not expect. At a high level, e-services are stated to include:.

  • images or text, such as photos, screensavers, e-books and other digitised documents e.g. pdf files
  • music, films and games, including games of chance and gambling games, and of programmes on demand
  • on-line magazines
  • website supply or web hosting services
  • distance maintenance of programmes and equipment
  • supplies of software and software updates
  • advertising space on a website

What is meant by electronically supplied?

Electronically supplied services are services that are delivered over the internet, or over and electronic network where there is minimal or not human intervention.  In other words, any thing that is automated will apply.

If your website has a “Buy Now” button for customers to click and make their purchase  then this applies e.g

  • content downloads onto their device
  • customer receives an automated e-mail containing the content

Examples of electronic supplies and whether or not they are ‘digital services’

Service E-service? Electronically supplied? Covered by the new rules
Pdf document manually e-mailed by seller Yes No No
Pdf document automatically e-mailed by seller’s system Yes Yes Yes
Pdf document automatically downloaded from site Yes Yes Yes
Stock photographs available for automatic download Yes Yes Yes
Live webinar No No No
On-line course consisting of pre-recorded videos and downloadable pdfs Yes Yes Yes
On-line course consisting of pre-recorded videos and downloadable pdfs plus support from a live tutor Yes No No
Individually commissioned content sent in digital form e.g. photographs, reports, medical results Yes No No
Link to online content or download sent by manual e-mail Yes Yes Yes

 

Source: Click Here

EU Tax

3. I Have Read The Definition Above And The Services/Products I Supply Don’t Appear To Be Covered – I Can Breathe A Sigh Of Relief Right?

These rules are just the first wave of legislation – sell anything online? YOU are next in the EU’s sights. Similar rules are planned to extend to all goods and services as early as 2016, eradicating any distance selling thresholds you currently enjoy. At present people selling goods across national boundaries enjoy a distance selling threshold of either €35,000 or €100,000 depending on the country they sell into before having to register for VAT in that country.

4. What data do I need to obtain to prove where my customer is located?

This is the trickiest bit I’m afraid, And, unless you’re selling via a third party reseller (see below), the onus is on YOU, as the micro business owner, to PROVE the place of supply. And you have to do this by providing two non-contradictory pieces of evidence.

To comply with the new laws, you have to collect two (or three, if they don’t match) of the following types of evidence – and I have to check DURING the purchase process that they give the same country:

Customer’s:

  • billing address
  • IP address (the geographic location of the customer’s computer)
  • The location of the customer’s bank
  • The country code of the SIM card the customer used

N.B. For those based in the UK, HMRC has issued further guidance around this point.

5. How do I go about capturing that data?

That’s the big question – at present if you sell direct from your own website there are very few payment systems up and running to allow us to do that. Not least because, in reality, in order to charge the right VAT rate we must know where our customer is even before they get to the payment stage in order to display the correct price to them in the first place. This is causing a lot of confusion as most of the checkout system that most people use are not currently up-to-date with the new legislation.  That’s not to mention the loss of sales because customers decide they don’t want to supply us with the required information.

We understand that there are a number of systems, plug-ins etc to handle this for us in the pipeline (at a cost of course), but since most of those will not be available by 1 Jan 2015 we believe this element is currently impossible for most businesses to comply with, which is why were are asking everyone to sign our petition to get this clause removed for the smallest businesses.

6. I am located outside the EU, so I don’t need to worry about this right?

This rules apply to all sellers providing digital service (as defined above) to customers within the EU, no matter where in the world they are located.

Quite how this will be enforced is unclear, but we are hearing noise that other countries will follow suit if this is successful – so unless we stop this now, expect selling outside your own borders to get even more complicated in years to come!

I sell through a third party platform, so I don’t need to worry about this right?

The rules state if a third party platform handles the payment and supply as well as sets standard T&C’s then it is that they ARE responsible for VAT.

Unfortunately, that is not so say that all third party platforms are ready to comply with this legislation as many are small businesses themselves and have only found out about this in recent weeks. So please do check with your third party platform.

Furthermore, payment providers such as PayPal are not considered third party platforms – they just provide a payment mechanism – they do not take part in supply of services so and are not responsible for accounting for VAT. At present, many of them will not even supply you with the relevant data you require to comply.  There are a few a platforms that have updated their systems in order to comply with the new rules.

  • ClickBank
  • JVZoo
  • Payhip

 

We are working to put together an exhaustive list of which platforms/ technological solutions will allow you to comply and will post that as soon as it is available.

Collecting and storing information about customer location

If by some miracle you do manage to capture the data required to comply, unfortunately it does end there as you need to store the information for 10 years securely (potentially on servers in the EU) in case you are audited. This means you also need to register as a data controller.

Where can I find out more info?

Read the European Commission guidelines here: http://ec.europa.eu/…/v…/how_vat_works/telecom/index_en.htm…

Alternatively, please contact your own tax authority for their guidelines.

Appendix:

UK HMRC guidance Business Brief 46 update to data requirements:
Step 1

When the customer places their order ask them to confirm either:

  • the EU member state they usually live in
  • their billing address

Step 2

When the customer pays for the product using the payment service provider, arrange for that provider to transmit the following two pieces of evidence to you:

  • the customer’s billing address
  • the country code of the customer’s bank or registered credit card

(For confidentiality the payment service provider can remove the house number and street name from the billing address.)

If the information on the EU member state where the customer is normally resident tallies, that will be sufficient to define the customer’s location and you can record the details in your accounting records. However, if the information does not tally, you do not need to cancel the sale, but you must contact the customer and ask them to reconcile the discrepancy between the two sources of information.

If you feel that this doesn’t apply to you then you will be surprised.  A few companies have increased their prices to EU customers such as Apple, who have increased the price of it’s developer licenses to include UK VAT.  That’s not all.  Rather than deal with the whole fiasco, many businesses are now blocking EU customers because of the introduction of the new EU VAT rules.  The question now becomes, how will this affect the world economy?