There are numerous issues ahead for businesses that have B2C sales of digital services in the EU. The new VAT rules only affect sales from a business to a non-taxable person, the end consumer. The first hurdle that eMerchants will have to address is how to locate their end consumer in the EU.
Locating your consumer in the EU
The new VAT on eServices require eMerchants to identify the location of their consumers. The burden of proof is on the merchants, they need to know where their end consumer is. They can do this by collecting two non-conflicting pieces of evidence. The acceptable pieces of evidence includes:
- The billing address of the consumer
- Consumer’s IP address
- Banking details
- Phone SIM card country code – the SIM card identifies the country of the end consumer
- Fixed landline – certain services require a fixed landline to be delivered
- Other commercially relevant information
Why the need for clarification?
The EU’s explanatory notes on the new VAT rules clearly explain why clarification of the rules was required, the notes state: “Suppliers of telecommunications, broadcasting and electronic services (digital services) are usually supplied at a distance and the supplier needs to be able to determine in an easy way the location of his customer, so that the VAT treatment can be automated imposing as little administrative burden as possible.”
Most eMerchants will scoff at the “as little administrative burden as possible,” especially SMEs.
The new rules require all eMerchants – regardless of sales volume – to comply. That means that an eMerchant with sales of €25,000 in the EU will have to meet the same requirements as an eMerchant with sales of €5 million. If an eMerchant decides to account for all their EU sales themselves without registering with the MOSS system then the rules will increase this administrative burden.
Who will be affected?
All suppliers of broadcasting, telecommunications and electronic services (digital services) with B2C sales in the EU will be affected. Electronic services are defined as a service that requires the internet to be supplied. Therefore any business that requires the download of images, music, software will be affected. Businesses that offer streaming services of video online will also be affected.
What will eMerchants have to do to comply?
As well as collecting the two non-conflicting pieces of evidence to establish where their end consumer is located, eMerchants will also have to store transaction data for ten years. The type of data that will need to be stored by the eMerchant include the VAT rate applied, the transaction amount, etc. This is a requirement of the new VAT on eServices rules.
Suppliers of digital services must also remember that there are ten EU member states that are not part of the eurozone. Depending on the tax jurisdiction an eMerchant will also have to account for the VAT rate in real-time and in local currency. This requirement will add yet another layer of complexity to compliance with the new VAT on eServices rule.
The key for eMerchants – of any size – prior to January 1, 2015, is to be prepared. These rules will not change, they are set in stone: the EU has already confirmed that. It is now time for eMerchants to gain as much knowledge as is possible ahead of the introduction of the New EU VAT on eServices rules.