The new EU VAT laws took effect this year. But what has actually changed, and for whom? For vendors who sell to other European countries, there are now a number of considerations that must be given special attention. Ecommerce Europe’s Business Partner Salesupply has put together a summary for you of the most important rules, background knowledge and tips.
Open borders and the free movement of goods and services: the European Union and its single market would seem to be a veritable Mecca for online merchants and suppliers of services. The positive trade climate in the EU has come about in large part thanks to the harmonization of numerous laws and constantly improving telecommunications and logistics infrastructure. As a result, the environment for online merchants has greatly improved over the course of the last decade. At the same time, VAT rates differ in many countries, and oftentimes sellers are responsible for determining which tax rate is applicable to their products or services in another Member State. In addition, in a number of countries individual, reduced rates apply under respective national law.
Things are changing, but for whom?
Are you a B2C online seller of goods in other EU countries? If so, then nothing will change for you. You’ll still need to calculate and pay your VAT according to the European VAT regulations on distance selling. More information on this can be found in point 1 of this article below. Are you selling electronic services to private customers, e.g. music and movie downloads, software, online courses or apps? If so, starting immediately you’ll have to apply the VAT regime of the country in which your customer is located. Vendors who sell to business customers continue to use the reverse charge procedure, i.e. the biller does not charge VAT. Consequently, the change primarily affects sellers of electronic services abroad. See point 2 of this article for more information regarding this.
Why then is the regulation trouble for companies like Amazon and eBay, which primarily sell goods?
American giants like Amazon and eBay opted to establish their European headquarters in Luxembourg since that country levies a very low VAT rate of 3 percent on digital services. This is especially advantageous for sales of e.g. e-books. Amazon is increasingly focusing on selling digitalized media. This advantage is done away with under the new regulations. Beginning now, the country where the consumer resides determines which tax rates must be applied. In Spain, for example, VAT on e-books is 21 percent. In addition, Amazon only registered its Luxembourg headquarters as a seller of products – e.g. the British branch is officially nothing more than a “logistics service provider”. Consequently, the VAT rate in the UK was always extremely low. While countries such as France and Britain have long railed against this “tax dumping”, this proved to be a bonanza for Luxembourg: out of its 2013 GDP of 43 billion euros, no less than 950 million euros were collected from e-commerce alone. The EU has now put an end to this game.
1.) You sell goods to private customers in other EU countries
In principle, the delivery of goods to consumers in other EU countries is subject to the VAT regulation of the country of consumption (destination country) if a certain threshold value is exceeded. In such cases, the seller must register itself in the Member State for VAT purposes. The following two informational documents of the EU Commission provide additional details: “VAT in the European Community” and VAT thresholds – Annex I(26 kB). A seller also has the right to register itself for VAT purposes even if the threshold is not exceeded. This can be advantageous, for example if you’re unable to accurately assess whether you’ll exceed the thresholds in certain countries. This will end up saving you additional work later on, should a threshold be exceeded. You can find the different rates of VAT in the EU Member States here. In addition, the European Commission also provides a list of national contact points for questions regarding VAT.
2.) You sell electronic, broadcasting or telecommunications services to other European countries
Example: A Dutch customer downloads an application from a German app developer. In this case, the German user must charge the Dutch customer the Dutch VAT rate. Apps fall under electronic services, as well as under other internet services, web sites, web hosting, software (including updates), video streaming, lotteries and fee-based online broadcasts. Broadcasting services are all television and radio stations which are made available to users through various media. Telecommunication services include inter alia landline and mobile telephony as well as web-based services such as e.g. internet telephony. As a rule, under the new regulations the location of the “service recipient”, i.e. the user, is determinative for the applicable rate of VAT. You can find all information on the new guideline, questions, answers and document downloads on this EU information web site.