Advisory bulletin: VAT and cross-border online trade in the EU 2015
The new EU VAT laws took effect this year. But what has actually changed, and for whom? For vendors who sell to other European countries, there are now a number of considerations that must be given special attention. We've put together a summary for you of the most important rules, background knowledge and tips.
Open borders and the free movement of goods and services: the European Union and its single market would seem to be a veritable mecca for online merchants and suppliers of services. The positive trade climate in the EU has come about in large part thanks to the harmonization of numerous laws and constantly improving telecommunications and logistics infrastructure. As a result, the environment for online merchants has greatly improved over the course of the last decade. At the same time, VAT rates differs in many countries, and oftentimes sellers are responsible for determining which tax rate is applicable to their products or services in another Member State. In addition, in a number of countries individual, reduced rates apply under respective national law.
Things are changing, but for whom?
You are a B2C online seller of goods in other EU countries? If so, then nothing will change for you. You'll still need to calculate and pay your VAT according to the European VAT regulations on distance selling. More information on this can be found in point 1 of this article below. Sell electronic services to private customers, e.g. music and movie downloads, software, online courses or apps? If so, starting immediately you'll have to apply the VAT regime of the country in which your customer is located. Vendors who sell to business customers continue to use the reverse charge procedure, i.e. the biller does not charge VAT. Consequently, the change primarily affects sellers of electronic services abroad. See point 2 of this article for more information regarding this.
Why then is the regulation trouble for companies like Amazon and eBay, which primarily sell goods?
American giants like Amazon and eBay opted to establish their European headquarters in Luxembourg since that country levies a very low VAT rate of 3 percent on digital services. This is especially advantageous for sales of e.g. ebooks. Amazon is increasingly focusing on selling digitalized media. This advantage is done away with under the new regulations. Beginning now, the country where the consumer resides determines which tax rates must be applied. In Spain, for example, VAT on ebooks is 21 percent. In addition, Amazon only registered its Luxembourg headquarters as a seller of products - e.g. the British branch is officially nothing more than a "logistics service provider". Consequently, the VAT rate in the UK was always extremely low. While countries such as France and Britain have long railed against this "tax dumping", this proved to be a bonanza for Luxembourg: out of its 2013 GDP of 43 billion euros, no less than 950 million euros were collected from e-commerce alone. The EU has now put an end to this game.
1.) You sell goods to private customers in other EU countries
In principle, the delivery of goods to consumers in other EU countries is subject to the VAT regulation of the country of consumption (destination country) if a certain threshold value is exceeded. In such cases, the seller must register itself in the Member State for VAT purposes. The following two informational documents of the EU Commission provide additional details: "VAT in the European Community" and VAT thresholds - Annex I(26 kB). A seller also has the right to register itself for VAT purposes even if the threshold is not exceeded. This can be advantageous, for example if you're unable to accurately assess whether you'll exceed the thresholds in certain countries. This will end up saving you additional work later on, should a threshold be exceeded. You can find the different rates of VAT in the EU Member States here. In addition, the European Commission also provides a list of national contact points for questions regarding VAT.
2.) You sell electronic services, or broadcasting or telecommunications services to other European countries
Example: A Dutch customer downloads an application from a German app developer. In this case, the German seller must charge the Dutch customer the Dutch VAT rate. Apps fall under electronic services, as well as under other internet services, web sites, web hosting, software (including updates), video streaming, lotteries and fee-based online broadcasts. Broadcasting services are all television and radio stations which are made available to users through various media. Telecommunication services include inter alia landline and mobile telephony as well as web-based services such as e.g. internet telephony. As a rule, under the new regulations the location of the "service recipient", i.e. the user, is determinative for the applicable rate of VAT. You can find all information on the new guideline, questions, answers and document downloads on this EU information web site.
VAT receipts from sales of the above-mentioned services rendered to other European countries must be collected and paid in the country of destination. To assist entrepreneurs with registration and administration, EU countries are offering a MOSS (Mini One-Stop Shop) (more information can be found in this EU practical guide (pdf)). Entrepreneurs can take advantage of this service via their local responsible tax office, at which they can centrally report and remit their Europe-wide taxes. Points of contact for any questions, advice and registration regarding the change to the law have been set up in all countries. You can find them on this list.
Caution: The European Court of Justice has ruled (Judgment of 26.10.2010 (C-97/09)) that the national small business regulation does not apply to other European countries. As a result, while you may not have been required to register in your home country, you may be obliged to do so under the new regime if you have foreign sales of e-services. However, there are similar regulations in many EU countries. Only the Netherlands, Spain and Sweden have no such regulation in place. Small businesses can find useful information on the European Small Business Portal.
For pricing, the following applies: the total price must always be shown to the customer. Starting now, this depends on where the user is located, i.e. where the service is consumed. There are two ways to implement this new regulation. You can either calculate the appropriate price based on your existing prices per country, which can be confusing at times: how do you determine the customer's origin? Are programming costs transferable? The second option you have is to sell your service for the same price throughout Europe and absorb any potentially resulting losses on your margin. In general, it is recommended that the customer always be informed of how the price is arrived at.
Make sure to pay attention to country-specific rules when invoicing. Italy, for example, requires every invoice issued to a private individual to designate the person's tax number.
Help with cross-border sales
Sellers need to answer numerous questions and take care of formalities when making cross-border sale on the internet e.g. how to obtain international protection for a business idea, how to correctly register and pay VAT, and how to handle online payments in other countries. To help meet this need, the European Commission has published an informational page as part of a project dubbed "Watify" (currently available in English) which provides answers to questions in step-by-step manner, offers tips and delineates the correct procedure for various formalities. As mentioned above, you can find VAT rates, reductions and regulations on this list. A list of national contact points is available on the info page of the European Commission.
Thanks to the European single market, selling to another country has become easier. However, linguistic, administrative and legal provisions continue to pose various challenges. Many times, it can be useful to consult with and seek help from a native speaker who is experienced with local e-commerce. This will help prevent language problems and misunderstandings and save you from having to reinvent the wheel amongst a tangle of local laws.