From 1st January 2015, there will be significant changes to the way cross border online sales are taxed. This will affect businesses from both inside and outside the EU trading in any of the 28 member states whether they are based there or not. The changes affect telecommunications, broadcasting and electronically delivered service companies (TBES) providing goods and services to customers.
The outcome of these changes is to move from an origin system of taxation, where VAT is charged at the rate applying in the country where the seller lives, to a destination system that is applying the rate of VAT in the country where the customer lives.
The effect of this is that every digital business will have to work out where its customer is and potentially collect VAT from 28 different countries. Since businesses have customer bases with increasingly wide geographical spread, the changes are going to potentially create a considerable amount of work.
Are you affected?
The rule changes cover any service or product delivered digitally via the internet, and in the case of electronic services that could mean distance learning products, web hosting, software, subscription services, apps and similar items. While delivery could be over a mobile device via an app or a satellite connection.
With electronic services becoming increasingly added on to many products, in car satellite navigation systems for example, any electronic information product where the supplier issues data updates is covered by the regulations.
The companies will have to work out the “place of supply” for digital services, and this is not easy when the service is delivered electronically. The European Commission has given some specifics as to how businesses should determine where their customer is based. For services such as making a call in a telephone box or using a WiFi hotspot the regulations will treat the places of supply as the location of that telephone box or WiFi hotspot. Suppliers can also use the international dialling code of the mobile phone via which an app or other services delivered, or the viewing card address for a satellite viewing service.
For everything else the place of supply needs to be based on two separate pieces of information which do not contradict each other. Businesses will have to ensure that their systems can identify these pieces of evidence and store and maintain the data.
Businesses are permitted to make assumptions about the place of supply based on a list within the implementing regulations. For example bank details, customer address, the location of the fixed landline or IP address of the device or the mobile country code on the SIM card are all valid assumptions.
However, the suppliers problem will be in ensuring that their systems can identify locations and maintain appropriate records and that may take some considerable effort in making software changes for some companies.