THE EU’s Explanatory Notes on the new VAT Directive for 2015 provide all the information that merchants need to ensure their EU VAT compliance. Compliance essentially boils to – as per the Explanatory Notes – “the relevant taxable persons would need to be able to process personal data of their customers in order to prove to the tax authorities that they correctly applied the VAT rules on place of supply.” The burden of proof is on the supplier of the digital services. They need to prove that their end consumer is indeed in the country of the VAT rate which was applied to the sale.
How do I prove where my end consumer is?
Merchants that supply B2C digital services sales to a consumer in the EU must provide two “non-contradictory” pieces of evidence.
- The types of evidence accepted by the EU tax authorities include the following:
- Billing address of the consumer
- IP address of the consumer
- Bank details of the consumer
- Phone SIM card country code – it will confirm where the consumer
- Fixed landline – certain sales may be made through a fixed landline
- Other commercially relevant information
Why is the EU obsessed with compliance?
Compliance with any rule is paramount but when a rule is openly flouted the authorities will eventually instigate a clampdown. This is precisely what is happening in relation to the New EU VAT compliance rules that are due to kick into effect on January 1, 2015. The wheel have been in motion for many years as the digital economy has steadily eroded EU VAT receipts. The EU were caught on the hop by the impact of the digital economy. An EU-commissioned report – released in 2012- merely provided proof of how much revenue was being lost. The report showed that there was a ‘VAT Gap’ of some €192 billion.
The actual reasons for this ‘VAT Gap’ were numerous and include fraud, poor book-keeping and non-compliance. Fraud will always be present as there will always be a criminal element – no matter what the process; education can improve poor book-keeping while only stricter laws can improve compliance. As the EU’s Taxation Commissioner Algirdas Semeta stated in October 2013 the EU now wants the digital economy to “play fair and pay fair.” If they don’t then the EU authorities plan to crackdown on non-compliance.
What happens if a merchant is not ready for January 1, 2015?
Well, thus far all the EU have said is ‘tough luck’. The EU VAT compliance rules change on January 1, 2015, and all merchants with digital services sales in the EU. The new EU VAT compliance rules do not discriminate. It does not matter the amount of EU sales – it can be €3,000 or €3 million – all merchants must comply.
There is no easy way out. Merchants must now decide what their process of VAT compliance will be. They have two options:
- Register with the Mini One-Stop Shop (MOSS) system – registration in the UK, for example, open in October. Through MOSS a merchant will be able to declare all their VAT with one EU member state. The tax authority of that member state then distributes the relevant VAT to the countries where the sales occurred.
- A merchant can decide to register individually with each EU member state in which they have sales.
EU VAT compliance is key from January 1, 2015, don’t be caught out.