VAT changes from 2015

01 July 2014
by eub2 -- last modified 01 July 2014

A major change in the EU VAT system comes into force in six months' time, which will ease life for many businesses and ensure fairer revenue distribution between EU Member States. From 1 January 2015, VAT on all telecommunications, broadcasting and electronic services will be due where the customer is based, rather than where the supplier is located. This changeover is intended to ensure a more level playing field for businesses, and fairer taxation rights amongst Member States. In parallel, a mini One Stop Shop will be launched, greatly reducing costs and administrative burdens for businesses concerned. With the mini One Stop Shop, businesses supplying e-services to customers in more than one EU country will be able to declare and pay all their VAT in their own Member State. This is consistent with the Commission's goal of reducing tax obstacles and burdens for cross-border companies in the Single Market. The Commission has invested greatly over the past few years to ensure that national tax authorities and businesses are well-prepared and equipped to ensure a smooth transition to the new system next year. This work continues, along with an intensive information campaign, to ensure that both Member States and companies can reap the full benefits of these important changes.

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 operators supplying telecommunication, broadcasting and electronic services on a given market. The customer 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.

What type of transactions will be covered?

The change in place of supply rules concerns 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.

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:

• Preparing and adopting the relevant legal framework, in particular implementing regulations to ensure coherent and consistent application of the new legislation;
• Providing for common understanding on the application of the new place-of-supply rules and on related obligations (MOSS);
• Ensuring the IT implementation of the MOSS;
• Clarifying the audit approach in the framework of the MOSS
• Informing and raising awareness among stakeholders: for this the commission organised seminars and conferences for taxpayers inside and outside of the EU.

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. From October, a web-portal will be 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 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. They have also informed taxpayers of the changes to come.

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 in 2013, and detailed explanatory notes in 2014. It is also taking part in communication events to explain the changes coming up and ensure businesses are aware and prepared.

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 up to now, a consumer has bought his/her software from a provider located in a Member State with a lower VAT rate than his/her own, then the 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, in the longer term, that the new rules will increase the efficiency of the market and increase the number of suppliers and competition in general. This, in turn, should drive prices down.

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. 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.