Taxing the digital economy: recent changes to VAT place of supply rules
EU VAT rules changed with effect from 1 January 2015 for businesses with EU establishments supplying "digital services" to consumers.
Businesses established in the EU that supply "digital services" to consumers in other EU jurisdictions need to charge, and account for, VAT in the jurisdiction in which their customer belongs. This represents a fundamental change from the previous position. Previously, the supplier charged VAT in its own jurisdiction and applied a single rate of VAT to those supplies made to consumers. The new rules are designed to ensure that digital services are taxed where they are consumed and greatly increase the burden of VAT compliance on digital businesses operating cross-border within the EU.
"Digital services" encompasses supplies of:
- broadcasting – scheduled broadcasting of TV and radio, live streaming and webcasts but NOT on-demand downloads;
- telecommunications – landline and mobile services, internet connections supplied by ISPs; and
- e-services – services which are supplied electronically and whose provision involves little or no human intervention but are highly automated e.g. digital downloads of content (such as music, videos and e-books); services provided by online marketplaces; and automated online examination and testing (such as multiple choice testing).
How does this affect businesses outside the EU?
Businesses based outside the EU that have an EU establishment (such as a European headquarters ("HQ") also need to consider whether the changes apply to them. Non-EU established suppliers of "digital services" who are considering setting up a trading presence or HQ in the EU to sell "digital services" to EU consumers, should note that the differing VAT rates of the various EU jurisdictions may no longer influence the decision as to where to establish their business as they will be required to account for the different VAT rates across Europe based on where their customers are located.
Affected businesses should take steps now (if they have not already done so) to ensure compliance with the new rules. This is likely to be centred on ensuring that:
- sales platforms are equipped to collect the necessary information to enable them to accurately identify where customers belong and whether customers are business customers (for instance by requiring EU VAT registration details);
- sales platforms are able to charge the correct rate of VAT and issue appropriate invoices to customers;
- sufficient records are maintained to support VAT charging decisions;
- the terms and conditions of sale and data protection policies allow all of the above to take place;
- they comply with applicable consumer protection and data protection legislation; and
- they register for the "Mini One-Stop Shop" ("MOSS") to ease the burden of accounting for VAT in multiple EU jurisdictions if that would be beneficial.