The EU’s upcoming reform to its Value Added Tax (VAT) regulations is promising to have a significant effect on ecommerce in the 28-member union. At issue is the effective VAT rate charged on electronically supplied products and services.
Traditionally, the rate charged has been based on the location of the seller. So, regardless of where a buyer is in the EU, the merchant always just has to collect its home country VAT. The absolute minimum VAT is 15% but each state has the ability to raise their tax, leaving huge rate gaps between counties like Hungary (27%) and Sweden (25%) and those countries that have stayed at or near the minimum like Luxembourg.
Understandably, many ecommerce merchants, including online giants like Amazon and Google, based their European operations in low-VAT states like Luxembourg. But with the gap rates reaching over 12% between some jurisdictions, this setup has caused many EU governments to lose hundreds of billions of Euros a year in tax revenue which prompted this current reform.
How VAT Will be Managed Effective January 1, 2015
The move to the new VAT regimen on January 1, 2015 will have important consequences for the estimated 50,000 ecommerce companies of all sizes across the EU. Put simply, the VAT companies will have to collect is shifting from the one rate where the seller is based to the 75 rates found across the 28 countries of the EU where the individual customers are purchasing.
Obviously, the biggest obstacle for ecommerce companies will be the administrative challenge. Companies large and small will now have to:
- Keep track of VAT rates and manually update accounting systems with changes.
- Invest in/update systems to store order and transaction information for up to ten years, a new EU requirement.
- Collect evidence of customers’ country of residence.
When it comes to actually submitting their VAT payments, companies will have two choices. The first option is to register for each country’s VAT individually. Alternatively, companies can register for MOSS, otherwise known as the Mini One-Stop Shop scheme. MOSS provides a simplified approach to the new taxation process. Here’s how it works:
- Electronic companies register for the MOSS scheme in a single member state, usually where operations are based. This state will be referred to as the “Member State of Identification.”
- Businesses will be required to submit quarterly VAT returns detailing their online sales along with the required VAT that is due.
- Note that these returns are in addition to the normal VAT returns a business is obligated to submit to its national government.
- These returns, along with the VAT, is then passed from the “Member State of Identification” to the member states where consumption occurred.
Non-compliance with any regulations outlined in the new VAT agreement will be expensive. Companies can expect to be charged up to 300% of the normal tax in certain member states. It is also anticipated that increased audits will occur as a result of the new system so adjusting to the new regulations quickly and correctly will be vital.
Who Will Not Be Affected
The good news is that for ecommerce companies based outside the EU, there is no change. They will continue to pay out VAT based on where the EU purchaser is located. In essence, this will level the playing field in some respects for non-EU businesses that may find themselves at an advantage in the short-term as EU businesses catch up.
Likewise, RevenueWire merchants will not have to worry about the upcoming changes as our platform already automatically handles all consumption taxes, including the EU’s VAT. So, for our clients and merchants outside the EU, New Years will be business as usual!
To find out more on the upcoming VAT changes, check out the EU’s website.