VAT and Selling Digital Goods to EU Consumersby
Jan. 1, 2015 saw the launch of new value-added tax (VAT) rules for providers of digital goods and services to European Union (EU) consumers. What’s changed? While some changes only affect EU providers, all US providers will now have to register and file VAT returns with the new Mini One-Stop-Shop (MOSS) regime.
That’s the easy part. The more difficult task is that US providers of digital goods and services face a wider definition compared to selling and distributing the goods in the United States. As a result, far more providers will now have tax obligations.
Something Old and Something New
The EU changes come in two parts. First, EU-based providers of digital goods must now charge and collect VAT at the rate of their EU consumers’ country of residence. Previously, providers simply charged their own VAT rate on sales to other EU states and included the income in their domestic VAT returns.
This was already the case for US (and other non-EU) providers that came into the EU since 2003. However, there are now strict rules on what evidence US providers should collect and store in order to prove they have correctly identified the country of residence of their EU customers. This can include at least two pieces of nonconflicting evidence of residency, such as credit card and IP address information.
Second, all US providers must now register with the new reporting portal, MOSS, launched in each of the 28 EU member states, to enable providers to make single periodic filings, reporting all sales and VAT for all countries. Filings are to be quarterly, and the first one under the new regime was due April 20.
US providers are generally free to pick the MOSS portal of any EU country. However, if they have employees, operations, or a permanent establishment (similar to US nexus) in any country, that can trigger requirements to register in all countries – so beware!
EU Digital Services: It’s Bigger Than You Thought
In the United States, digital goods tend to refer only to downloads of music, games, or e-books. However, the EU has a much broader definition that includes digital or electronic services. Providers of some of the following services will also be drawn into the 2015 rules:
- Streaming films and music
- Online games
- Subscriptions for membership sites or online dating websites
- E-learning websites
- Web hosting
- SaaS accounting and similar data-processing services
- Online betting
- Telecommunication services
- Broadcasting services
There is often no clear definition of digital goods or services in national-implementing legislation across the member states, so there is still a lot of confusion about what is in or out of the new measures.
US providers should note that the European Commission – the civil service of the EU – recently announced that it will be looking at US companies to identify noncompliance with the new requirements. This is possibly because there are so many digital providers in North America, so the levels of potential missing tax revenues are high. There has also been talk of the tax authorities focusing first on dating and gambling websites.
When the EU Taxes, the Rest of the World Follows
The EU is leading the charge in taxing digital goods and services. South Africa launched its digital services tax last year. Other countries are following – Japan and South Korea will implement consumption taxes on sales to their consumers by foreign providers this year. Canada and Australia are reviewing their options, too.
The EU 2015 VAT changes are a major shift in recognition of the fast-evolving digital marketplace, acknowledging the ability of US providers to sell across EU borders to consumers without being on the ground. VAT changes added new VAT complexities to US companies and extended the tax net to many digital services.
With the tax authorities paying special attention to US providers’ compliance plans, it is worth addressing compliance before the EU tax man has a word with you.
About the author:
As the leader of Avalara’s Global Tax Alliance, Richard Asquith helps businesses understand and manage their tax-compliance obligations as they enter or expand into new markets. Previously, he was with TMF Group, where he founded and led its global VAT practice for nearly 10 years. He began his career at KPMG in the United Kingdom and later joined Ernst & Young, working in Russia, Hungary, and France, assisting companies entering new markets. Contact Richard at [email protected].