In this blog post, Elena Sakova, Strategist and Global Operations expert at Xsolla talks about the upcoming changes to European tax legislation that will affect B2C sellers of telecommunications, broadcasting and electronically supplied services.
Starting January 1, 2015 both EU and foreign businesses working with EU customers will be obliged to pay the VAT at the rate applicable in the consumer’s member state (current legislation stipulates that EU businesses must be taxed based on the place of their establishment).
The new regulation is intended to harmonize VAT treatment of e-services (telecommunications, broadcasting and electronically supplied services) delivered to final consumers and set an equal treatment of EU and non-EU companies providing their services to EU consumers.
Who will be affected?
Both EU and non-EU businesses will be affected by the commencing rules settled in the Directive 2006/112/EC as long as they sell their goods and services to consumers located in the European Union. The Directive sets the requirements related to registration for VAT purposes. No minimum thresholds apply, even a one-time transaction satisfies a registration requirement.
I suggest that companies willing to double-check if they fall under the new regulations take a look at the Council Implementing Regulation of 15th March 2011 (282/2011/EU). It contains a definition of electronically supplied services (ESS), according to which digitized products including software, online, client games and mobile apps must be treated as ESS.
How to identify user location?
According to the new rules, all electronically supplied services delivered to a non-taxable person will be taxed at the rate set in the Member State where the customer is established, has his permanent address or usually resides.
As I see it, the biggest challenge that the new regulation sets for businesses is the correct determination of user’s location.
There are general guidelines and certain presumptions that need to be considered when determining the location of end user. For sellers of in-game digital goods location of end user should be identified based on at least two pieces of non-contradictory evidence collected from such user, such as: IP address, billing information, SIM country code, etc. Taking the upcoming changes to EU legislation into consideration, Xsolla has developed a smart algorithm for accurate identification of user location. This tool automatically calculates the applicable VAT rate at the moment of purchase.
Who is responsible for VAT?
It is the sole responsibility of ESS B2C supplier to correctly calculate and pay VAT to the appropriate tax authorities.
In case the company works with EU intermediaries it is important to clearly identify if the transaction is B2C or B2B.
I urge publishers and game developers contracting with European payment service providers to keep in mind that as long as they are indicated as suppliers on the user receipt, they remain liable for the VAT (and determination of user location).
I also would like to highlight the fact that EU Member States implement the new directive in their own ways, which means that businesses will face different administrative procedures for VAT filing, as well as different penalty regimes for non-compliance. For example, Belgium is about to impose penalty in the amount of up to 200% of tax due on businesses non-compliant with the new regime.
How to register?
In order to be compliant with the new rules, non-EU businesses in the B2C sector must register and account for VAT in all EU Member States they sell their products.
A convenient alternative to multiple registrations is the Mini One-Stop Shop (“MOSS”) scheme. VAT MOSS simplifies the procedure of filing VAT declarations and allows for VAT quarterly returns and payments to be submitted to the tax authorities of merchant’s state of choice as a single point of contact.
VAT MOSS registration is currently available in several Member States. Registration can be completed online. Each EU Member State tax authority offers online registration on their official website (in my opinion, Ireland has one of the most user-friendly interfaces, making it easy to complete the registration process).
I recommend businesses to keep an important deadline in mind: registration should be completed till the end of December to start using MOSS from January 1, 2015. Otherwise MOSS registration takes effect on the first day of the next calendar quarter. However, if you start supplies before this date, make sure to inform the Member State of id by the tenth day of the month following that first supply. Failure to meet this deadline means that business will be required to register in each EU country where its users are located.