You don’t often get a situation where taxation gets any simpler and that’s certainly not the case with forthcoming European Union Value Added Tax (VAT)changes that will have an impact on B2C e-services companies worldwide.
From 1 January, any B2C company selling e-services to private individuals and non-business customers within the European Union (EU) must charge VAT based on the point of consumption, instead of where that e-services provider is located.
That’s completely the reverse of the situation in the US where taxation typically occurs at the point of residency as is the current position across the 28 countries in the EU.
What this means in practice is that any company providing e-services to individuals and non-business customers within the EU will have to determine where the consumer is located in order to charge the correct rate of VAT. In turn this means that companies will have to support multiple rates of VAT as there is no consistent VAT-rate across the EU with rates ranging from 15% to 27%.
From a technology point-of-view, providers will need to be able to identify the IP address the customer is using so as to determine their location. A billing address is no longer going to be enough. If you fail to do this or file incorrect VAT returns, then you face fines that could be as high as twice the level of unpaid VAT.
All told, a splendid additional burden to place on international participants in the global digital economy. Well done, Brussels!
Just not bothering
To make matters worse, according to a new study by KPMG, 75% of e-services providers polled are considering raising their prices as a result of the new administrative burdens, with potential increases of up to 11% in EU nations with the highest VAT rates.
That’s going to be bad news for consumers in countries such as the UK, where the VAT rate is 20%, but where at present the majority of e-services bought by UK consumers are sold out of countries such as Luxembourg where the VAT rate is lower.
For example, e-books bought from companies based in Luxembourg such as Amazon carry a rate of only 3%. That will shoot up to 20% for UK buyers under the new regime, with potential knock-on consequences for the providers of such services as customers see prices increase. In fact, some 65% of businesses fear consumers will reduce their spending if prices increase as a result of the changes.
The alternative response may be that some providers will simply decide that it’s too much effort to service every EU nation and stop selling into certain countries.
According to KPMG’s Amanda Tickel, achieving compliance with the new rules is extremely challenging. She explains:
The new VAT rules mean affected companies face an increased compliance burden and billing becomes more difficult to manage. In the first instance, businesses need to ensure their systems can capture the right sort of information to evidence where each customer lives and apply the correct VAT rate. Coupled with this, those affected urgently need to decide how they’ll report and pay the VAT.
So what’s to be done if you’re an e-services provider to Europe? If we ignore the idea of basically just not bothering, then there are two main options:
- Register for VAT in each EU member state where they have customers - 28 countries and counting, each with at least two sets of tax rates – standard and reduced tax rates
- Register in one EU country under a scheme known as 'Mini One Stop Shop (MOSS)' regardless of how many countries their customers are in. That country collects and distributes the VAT for all the other countries – charged at the national rate where the customer is located.
At this week’s NetSuite Suite Connect summit in London, the US ERP and accounting firm made a play to address this emerging challenge with an enhancement to its SuiteTax offering that will be available to customers from the end of this month. CEO Zach Nelson said:
In the US tax is applied where you are physically located as a provider. This is interesting because tax is going to be placed where the service is delivered. This is a big issue for people.
All that said, there are those who see some benefits to consumers to be had from the changes. eCommerce expert Mike Ni of Avangate argues:
Businesses which provide online services today understand customers are unforgiving, and demand the most frictionless experience possible, where they can select, purchase, try and consume content using the fastest route. Time-bandits, such as inaccurate payment processing and additional paywalls are frowned upon in this era of the ‘New Services Economy’.
From our research, 45% online consumers compare three to four different online channels before making a buying decision. This proves they shop around and move to the most efficient service, regardless of the country of origin, especially in the case of digital goods and online services. If anything, the new EU VAT rules will give even more power to an already empowered buyer, as the VAT which applies belongs to the shopper’s country of residence.
But there will be new burdens for providers, he concedes:
The new rules will force online businesses to rethink their commerce platforms. Gone are the days when using just PayPal or Stripe is good enough for businesses. Under the tighter EU regulation, businesses which sell services online must know exactly where their customers are located so they can apply the right tax code. This is something payment-only processors are simply not equipped to deal with, not to mention the additional burdens of correct invoicing for consumers and companies with or without VAT IDs.
I’m deeply conflicted here. On the one hand. the idea that companies like Amazon are going to find themselves with a bigger tax bill is fitting, while the additional VAT revenues that will come into the UK government’s coffers is welcome at a time of continued national austerity.
On the other hand, as a selfish consumer, I’m none too keen on the prospect of my e-books and music downloads becoming more expensive as a result of e-services firms having to pay higher taxes.
From a wider perspective, I fear this is another example of the European Commission threatening to create a multi-tier digital Europe. If it becomes too expensive or administratively cumbersome to deal with some smaller EU markets, then many, mostly US, providers will just not bother, leaving some countries effectively disenfranchised.
While the Commission is clearly acting from the best of motives, to screw more money out of those US firms expediently locating themselves in low-tax regimes, the road to hell is as ever paved with good intentions.