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Brussels, 1 July 2014
Questions & Answers: VAT changes from 2015
See also IP/14/758
Why was this change in VAT rules needed?
This change to the VAT rules will introduce more efficiency and fairness into taxation. By taxing at the place of consumption, there will be a level playing-field between all businesses supplying telecommunication, broadcasting and electronic services on a given market. The consumer will pay the same amount of tax regardless of where the supplier is located. This will simplify things for consumers, who will not have to work out where the supplier is established, and it will create fairer competition between domestic suppliers and those established in other EU countries. The level playing field aspect is particularly important for small businesses, which usually do not have resources to spend in VAT planning schemes.
The new rules will also ensure fairer revenue distribution between Member States. VAT is a consumption tax, and the new rules will ensure that taxation reflects where consumption takes place. This should boost tax revenues for most Member States: from now on, the VAT on purchases that their residents make will now go to their own treasury and not to a small number of low-tax Member States where e-giants have established themselves.
The EU is not the only jurisdiction that has decided to apply this principle. Other countries such as Norway or South Africa have decided to do the same, following OECD recommendations.
What type of transactions will be covered?
The change in place of supply rules concerns only digital services, being telecommunications, radio and television broadcasting and electronic services, supplied to private consumers. These can be, for example, phone or satellite TV subscriptions, downloadable software, songs or e-books. Any other e-commerce activity is not covered by the change. For instance, distance selling of physical goods or of other services that involve human intervention, even though the communication is done by email (i.e. legal services carried out at distance; education at distance involving assistance by the teacher) are not covered by the changes.
What has the Commission done to prepare?
In order to secure coherent and uniform application of the rules, and a smooth transition to the new system, the Commission has been working intensively with Member States and businesses to exchange information and points of view. The Commission took action to ensure efficient implementation in five main areas:
The Commission will continue to monitor Member States' progress in implementing the mini-One Stop Shop, which should constitute a major step towards the simpler and more effective functioning of the Single Market. A web-portal is now available to allow taxpayers to check VAT rules in all Member States e.g. to know the various rates etc.
What have Member States done to prepare?
Member States are responsible for the transposition and application of the new EU rules on their territory. They have transposed the Directive into national law. They have also set up the technical infrastructure and web portals that will enable their operators to comply and facilitate exchange of information with other Member States.
Member States have also the responsibility to inform taxpayers of the upcoming changes.
What do businesses need to do to prepare?
Businesses should get acquainted with the new rules and update their accounting system to ensure that all transactions are reported in the country where they should be. This is why the Commission published very detailed guidelines on the mini-One Stop Shop (MOSS) in 2013, and detailed explanatory notes in 2014. It is also taking part in communication events in Member States and outside the EU to explain the changes coming up and ensure businesses are aware and prepared.
What about small businesses that were previously exempt from VAT?
SME’s that enjoy an exemption in their own country can retain it for services they sell to private consumers in their own Member State, provided that their Member State has opted for such a facility.
If they supply digital services to private consumers in other Member States, they will have to register in the mini One-Stop Shop because the VAT is due in another Member State. The MOSS has been made as simple and user-friendly as possible: it is fully electronic and it allows all businesses who opt for it to register, to declare and pay the VAT due in their own Member State, with the tax administration they know and in their own language. All communications will be by electronic means only.
How can compliance be ensured?
To reach their customers, businesses need to be visible online. If they are visible to customers in a country, they will also be visible to the tax administration of this country. On this basis, amongst other available tools, tax administrations will already have a good idea of which businesses to audit.
The Commission has worked with Member States to develop audit guidelines in order to ensure each plays their role in identifying where VAT is due. In addition EU legislation already provides for an extensive cooperation between tax administrations to assess and collect VAT.
Will this mean a rise in prices for these services in most Member States?
The change for consumers, if any, will be marginal. The basic price of the product remains the same, and then the VAT (calculated as a percentage of the basic price) may go up or down depending on where the consumer has been previously buying these services. For example, if a consumer has until now bought his/her software from a provider located in a Member State with a lower VAT rate than his/her own, then they will experience a small price difference (a few cents/percentage points). Conversely, if the VAT rate is lower where the consumer lives than where the supplier is based, there will be a small drop in the overall price. However, these are considered to be short-term effects. It is expected that in the longer term the new rules will increase market efficiency and increase the number of suppliers and competition in general. This, in turn, should drive prices down. The new rules for e-services are exactly the same as with goods sold on a website, for which the VAT rate of the consumer is already applicable since many years.
Will this mean a loss in revenue for certain Member States where a large number of e-service providers are resident?
Taxation at the place of consumption is only logical for a consumption tax such as VAT. It may be the case that certain Member States with a low VAT rate may see their market share reduced as the advantage for companies to relocate to their territories for tax reasons is removed. However, a very long preparation period between the adoption of the Directive and its implementation has allowed any Member State in this position to prepare and adapt to the change. Moreover, there is a transitional period until end of 2019 during which the countries of establishment (i.e. where the supplier is based) will keep part of the revenue.
Shouldn't the One Stop Shop concept by extended to all e-commerce supplies (including distance sales)?
This was the initial proposal of the Commission in 2004, as the Commission is strongly in favour of a One Stop Shop, in particular for the distance sales of goods. The high level expert group on taxation of the digital economy made the same recommendation in its report of last May (see IP/14/604). However not all Member States accepted such a wide scope from the start. The application of a mini One Stop Shop may be an opportunity for Member States to experience the benefits of such a system, and may open the way for the wider application in the future.