New VAT regime in force in the EU for 2015
Published on 14th Jan 2015
A change on the common system of value added tax in the EU affects the digital content industry enormously. It concerns suppliers of digital content who use online services for their commercial exploitation and provide their services to end consumers (B2C) within the European Union (EU).
Changes in the Council Implementing Regulation (EU) No. 282/2011 of 15 March 2011 laying down implementing measures for Directive 2006/112/EC on the common system of value added tax (recast) affect the digital content industry enormously.
At the beginning of 2015, a new VAT regime has come into force. It concerns suppliers of digital content who use online services for their commercial exploitation and provide their services to end consumers (B2C) within the European Union (EU). The place of supply changed from “the establishment of the provider” to “the location of the end consumer“, and in consequence, suppliers need to face dealing with VAT regulations of all EU member states instead of just the one where they are domiciled.
The new regulations and reporting procedure therefore now extend to suppliers within the EU the rules that had been applicable only to non-EU entrepreneurs until now, and will impact the bookkeeping of concerned companies.
Who is affected?
The changes apply to the supply of digital content, such as software (including updates and in-game items as well as changes to or upgrades of software, platform services (i.e. packages going beyond mere Internet access and including other elements such as news, weather or travel reports, games, website hosting, access to online forums, etc.).
The new VAT regime does not affect physical goods that are merely subject to electronic order processing, such as games on DVDs and similar tangible media as well as printed matter, such as guides, game art books and similar items.
Do the changes concern all recipients, including App Stores?
Not all online services are affected. Special rules apply for online services which are not sup-plied directly to the end consumer but via intermediaries such as App-Stores. The numbers of parties involved in the distribution and the payment methods can vary. Such transactions may involve multiple intermediaries and therefore cross several borders.
This however, makes it difficult to determine who is responsible for the VAT since it is difficult to follow the service to the ultimate consumer. Accordingly, it was necessary to provide legal certainty for the parties involved. And of course for the VAT authorities it is necessary to define the supplier of the services to the end consumer and to ensure the collection of tax.
The new regulation provides the rule that taxable persons who take part in the supply of such services are presumed to act in their own names but on behalf of the provider of those services. This legal presumption implies that each intermediary of the supply chain between an electronic service provider and the final consumer is deemed to have itself received and then further supplied the electronic service.
Accordingly, the actual service will be divided for VAT purposes at least into two services, depending on the amount of participating intermediaries. Thus, it is important on which position the intermediary stands in the supply chain. This principle is illustrated by the following examples:
- If the content provider is an App Store and makes available the apps via a net-work provider to the end consumer, the services will be divided for VAT purposes into two services: one from the App Store to the network provider and the other from the network provider to the end consumer. The App Store will in general be responsible for the VAT handling of the first service and the network provider has to face the issues with the service to the end consumer which means the new VAT regime will be applicable to him.
- On the other hand, in the case of an entrepreneur who develops apps and provides them via an App Store to the end consumer, the app store may be deemed to be the one selling those apps to the end consumer. The entrepreneur who owns the app is responsible for the VAT treatment of the first service. In consequence the app store would be in charge for the services to the end consumer and therefore facing the issues relating to the new VAT regime (charging and remitting consumer VAT).
As an exception, the new regulation stipulates that a provider who has been explicitly indicated as supplier by the taxable person will not be responsible for charging and remitting consumer VAT. However, such indication of supplier status must be reflected in the agreement between the taxable entity and the provider.
The place of supply changes from the current place “where the supplier is established” to the place “where the end consumer is located“. This might lead to the result that suppliers who provide services within the entire EU need to face all special regulations regarding invoices within the EU member states and need to deal with every VAT authority in every single EU member state. This might include filing of preliminary VAT applications as well as the annual VAT returns in every Member State involved.
Suppliers need to register in all EU member states and deal with different VAT rates across the EU ranging from 15 to 27 per cent. In addition, VAT rates or invoice regulations can sometimes change in a matter of days. Suppliers must obviously also keep track of the location of each end consumer. All of this might lead to the implementation of a complete new system for handling online services in relation to VAT.
In order to simply the task for concerned companies, the Mini One Stop Shop, a simplification mechanism already applicable for online services provided by non-EU suppliers to end consumer within the EU, has also been extended to EU companies. The changes influence the VAT reporting procedure as well as the bookkeeping of the companies concerned.
What is a Mini One Stop Shop and how can it help?
A Mini One Stop Shop (MOSS) is a contact point determined by each Member State. Using the MOSS allows registering only in the Member State in which the supplier is identified. It is optional but simplifies the submission and assessment process for those services. The registered person only needs to submit VAT returns quarterly to the MOSS along with the VAT due. However, these VAT returns are additional to those a taxable person has to submit under its domes-tic regulations.
MOSS is already available to taxable persons not established within the EU and will additionally be available for taxable persons which are established within the EU. Two schemes are available: on the one hand the Union scheme and on the other hand the Non-Union scheme.
Already implemented scheme for non-EU entrepreneurs
The scheme for non-EU taxable persons is already implemented. Such an entrepreneur can register to use the MOSS if he has not established his business or a fixed establishment in the EU and is not registered or otherwise required to be identified for VAT purposes in the EU. The taxable person is free to choose its Member State of identification which allocates the taxable person with an individual VAT identification number. A VAT return has to be filed for the online services to non-taxable persons.
Scheme for EU entrepreneurs
It is established for businesses or fixed establishments in the territory of the EU. Such entrepreneurs have to register with the MOSS in the EU Member State of its establishment. For German entrepreneurs, this is the Bundeszentralamt für Steuern. The individual registration number will be the same as the one already allocated for domestic transactions.
What to do as an affected supplier?
Immediate action has to be taken. In some cases it is necessary to implement a completely new system for handling online services related to VAT. In other cases the administrative burden might be lower. However, a registration for the EU scheme has been possible since 1 October 2014.
Last but not least, since the determination of the location of each end consumer is necessary, it is important to involve the appropriate IT and legal resources to develop possible schemes for the identification of the establishment of the end consumer, all in keeping with applicable privacy regulations.