1. What has changed?
Among the complexities of the new VAT law, the central change made is relatively simple. Before this year, VAT in the EU was calculated in the country of the seller, rather than the country of the buyer. However, this is no longer the case. Now, a seller of an electronic service must charge VAT in the EU country where the customer is, not where the business is based. For businesses operating from an EU member country with an already high VAT rate, the effects of the new law could therefore be beneficial. However, for many companies tax liability and, significantly, compliance costs have increased substantially.
2. Which businesses are affected?
The change in the VAT law has left many businesses confused as to whether they are affected or not. In short, any business-to-consumer (B2C) digital delivery transitions in the EU; specifically, telecoms, broadcasting and electronic services, are affected. The EU provides many different ways to help you work out whether these new laws affect you or not. However, by answering these three questions, you can quickly figure out if the VAT scheme applies to you.
- Is your business transacting related online sales to consumers located in the European Union?
- Does your business offer digital, broadcasting or telecom services online?
- Are you the Seller of Record?
If your answer was yes to all three questions, chances are, the new VAT law does apply to you.
If you are one of these businesses, you will now have to determine where your European customers are. In the process of this change, merchants will now be responsible for countering the significant potential threat of consumer fraud. Europeans will quickly figure out that they can often save money by falsifying their purchase location. Every retailer will now need to find a way to determine and document the country of every customer through every transaction.
3. Pricing adjustments
Careful consideration needs to be applied to merchants pricing strategy when responding to the new VAT law. Businesses will have three options moving forwards:
- Absorb the increased costs and leave VAT-inclusive prices as they were in 2014, without passing on new costs to customers;
- Increase prices for all customers to adjust for average increases in VAT liability;
- Implement net pricing to adjust prices according to each customer’s location.
Implementing net pricing is the most transparent way to embrace the new VAT law. However, floating prices might raise consumer concerns and put tension on consumer protection obligations that require VAT-inclusive pricing. What we know for definite is that Digital marketers need to consider the three choices above carefully and decide where their priorities lie.
4. Implement the change with VAT MOSS
The law means that digital businesses must pay the VAT they owe to all the EU countries where they have customers – which could become a very complicated and time consuming task. Fortunately VAT MOSS, or Mini One-Stop Shop, allows companies based in the EU to register to file their VAT returns in a single country; a much better solution than filing separate VAT returns for each of the 28 countries in the EU!
In the UK, tax authorities will continue to allow companies with UK revenues below a threshold not to collect UK VAT. The MOSS approach makes the new VAT easier for businesses to handle, and the UK’s new rules for small business will help ease the burden. However, the MOSS can be limiting in its use. While filing with a single MOSS is much easier than filing 28 separate VAT returns, the hard work comes a long time before the return is filled as companies must compute VAT correctly, determine and report the tax attributes of the buyer and seller, and defend against local audits. In the end, filling in the VAT return is a small task by comparison.
5. Rule the new age
So far, the response and uptake of this new law from European businesses has been mixed, with many companies still struggling to come to terms with what the changes are, and how it affects their business. In some cases, digital businesses are so overwhelmed by the new law they are simply ignoring it completely – a risky approach to say the least. The new VAT has been implemented and it is here to stay. Every business has the chance to respond to its challenges more quickly and intelligently than the competition.
James Fredlund is vice president of tax at Digital River, a leading global provider of Commerce-as-a-Service solutions.