Starting next year, the EU will change how value-added tax (VAT) is applied to e-commerce within the community in "business to consumer" transactions. In a move designed to redistribute VAT revenues across Europe, taxing rights on cross-border transactions for telecommunications, radio and television broadcasting, and electronic services will switch to the countries where customers, rather than companies, are based. This change does not impact business to business e-commerce, which provides more than 90 percent of digital services to the community, only transactions between businesses and non-taxable persons or organizations (e.g., an individual buying an e-book or downloading music).
This taxing scheme was recently endorsed by 86 countries at an Organization for Economic Cooperation and Development (OECD) Global Forum on VAT in Tokyo. The OECD said the rise of digital commerce, growth of cross-border business and other developments in global taxation have resulted in a shrinking corporate and VAT tax base, driving the need for reform.
Up to now, major players such as Apple, Microsoft, and Amazon have been incentivized to base their digital operations in low VAT EU countries. For example, in a community where most VAT rates are between 18 and 21 percent, Luxembourg's standard rate of 15 percent, and only three percent on e-books, has long made it a desirable location. Luxembourg has already announced it is raising their rate to 17 percent next year, as they stand to lose an estimated €700 million to other member states.
In addition to basing VAT on where the customer is located, the OECD recommends a simplified on-line registration scheme. The EU is accomplishing this by modernizing and enhancing the VAT Information Exchange System (VIES) to allow for on-line real time confirmation of VAT status to help companies determine whether or not a transaction should have VAT applied to it. Also, non-EU businesses will be allowed to register with a single VAT authority in the Member State of their choice, instead of registering with each country they operate in. Through this one-stop registration scheme non-EU companies can handle all their required obligations under this change.