2015: VAT compliance issues for EU e-services suppliers

November 4, 2013

Effective 1 January 2015, all businesses that supply e-services, broadcasting or telecommunications services to European Union (EU) consumers will need to charge VAT at the appropriate rate in every member state where they have customers.

This rule has applied to non-EU suppliers for many years, but it is a change for suppliers based in the EU. Potentially, the new rules mean that companies will need to account for VAT at the correct rate in up to 28 Member states.

They face the challenge of accurately determining where their EU customers reside and ensuring that their financial accounting and reporting systems are set up to charge and account for the VAT due at the appropriate rates, as well as addressing the potential impact on IT systems, margin and consumer experience with relevant stakeholders in the business.

In this article, the first in a series about the changes, we look at some of the VAT compliance and other issues that companies face stake holders in the business.

One-stop shop for EU businesses

To simplify the process of collecting and accounting for VAT in 28 Member states, a one-stop-shop registration scheme (OSS) will be introduced for EU suppliers. This will allow a supplier to register for VAT in one member state. A similar OSS scheme currently applies to non-EU suppliers who provide e-services, although it does not apply to broadcasters or telecommunications suppliers.

The 2015 OSS scheme, which is to be referred to as the Union Scheme, will differ somewhat from the existing OSS in place for non-EU-located suppliers, but it still seeks to reduce the administrative burden for EU suppliers operating under the new rules.

It should be noted that the OSS for non-EU suppliers will also be extended to cover telecommunication and broadcasting services as well as e-services, bringing the scope of the non-EU and EU schemes in line with each other.

VAT rate on sales to private consumers

Although the Union Scheme changes the rules on registration, the country of Union Scheme registration should not make a difference in terms of VAT — which is charged to customers on the purchase of the services — because the VAT due will be the same regardless of the country of registration.

For example, a supplier registered for VAT in Luxembourg with customers resident in the UK will charge VAT at the rate that applies in the UK (currently 20%), not the rate in Luxembourg.

Currency risk

However, some practical considerations do need to be taken into account. For example, countries can decide in which currency the Union Scheme return should be completed. Where countries have not adopted the euro, there could be currency risk for businesses that register for the Union Scheme in the non-euro country but make sales across the EU in euros.

One place of registration but 28 tax authorities

Even though the administration of the Union Scheme will take place in one member state, it does not reduce the burden on suppliers of dealing with the tax authorities in 28 member states in the event that they fail to be compliant.

In cases of noncompliance, penalty regimes for late filing, underpayments of tax and interest payments would depend on the country where the consumer is located and not the country where the supplier is registered. For many suppliers, this may increase tax risk, as many countries within the EU impose severe penalties for noncompliance with VAT requirements.

Determining the customer’s place of residence

Another difficulty that EU suppliers will face under the new rules is determining where consumers are located in order to account for the correct rate of VAT, even though these services are increasingly “mobile.”

For certain e-services, telecommunications services and broadcasting services, determining the place of supply under the new rules should be relatively easy.

For example, where the physical presence of the consumer is required in order for the services to be provided, such as a phone booth, Wi-Fi hot spot or internet café, the VAT Implementing Regulation states that VAT is due at the location where the services are used.

For e-services, telecommunications services and broadcasting services supplied through a fixed line or a mobile phone, the presumption is that the customer is established at the place of installation of the line or the mobile country code of the SIM card used to receive the services.

For e-services, telecommunications services and broadcasting services supplied by use of a decoder or similar device, or if a viewing card is needed, the presumption is that the place of supply is where the device is located, or if that place is not known, the place to which the viewing card is sent with a view to being used there.

However, for other affected services the determination process becomes more complex. The VAT Implementing Regulation sets out that at least two pieces of non-contradictory evidence documenting a customer’s location must be collected by the supplier and used to determine the place of supply. Gathering such customer information may sound like a straightforward commercial exercise, but there are practical questions to resolve.

  • For example, which pieces of information do suppliers ask for?
  • Will customers be willing to provide this information when it has not, to date, been a requirement of receiving the supplier’s service?
  • What happens if none of the information collected matches?
  • And, more importantly, how do suppliers’ systems need to be set up to correctly capture the required information and use it to determine the rate of VAT applicable to a supply?

For many suppliers, this requirement will necessitate changes to the website design/customer interface so that sufficient details are captured to justify the tax treatment of the transaction.

At the same time, there is a clear commercial requirement to minimize the impact on the customer experience of using a site or placing an order. Information requests that disrupt the user experience or create delays in the order placement process will potentially put the transaction at risk.

The full version of this article was published in EY´s Indirect Tax Briefing, issue 8 (PDF, 3.28 MB)

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