Time For the Digital Economy to Comply With EU VAT Rules
Today’s post comes from Guest Blogger, Daniel Clark.
ANY business that requires their consumers to have internet access to enjoy their services will be affected by the new EU VAT digital services reform.
The new rules have been created with the intention of creating a “level playing field” for all businesses in the digital economy. These are the word of the EU’s Taxation Commissioner Algirdas Semeta who has also stated that the aim of the new EU VAT on digital services is to ensure that the digital economy “plays fair and pays fair.”
In a sense, the powers that be in Brussels, have become increasingly agitated over the influence and power of Silicon Valley multinationals within the EU.
The new rules will close the oft-used loophole of non-EU businesses setting up their European HQ in Luxembourg. The Grand Duchy has become extremely popular due to its low-tax environment. For some businesses – such as Amazon – the VAT rate drops as low as 3% for eBooks. This is referred to as a ‘super-reduced’ rate.
The Silicon Valley giants have been able to do this without breaking any laws. These new VAT rules are the European Commission’s first steps towards changing the tax culture in the EU.
So, why change VAT first?
VAT has not been as effective as the European Commission would have hoped. It has been too easy to avoid or not comply with VAT regulations. The main reason for this is that VAT – which was always intended to be a tax on consumption – was turned on its head and businesses took advantage. The giants setting up in Luxembourg were doing so to take advantage of the low-tax environment because the rules allowed them to do so. They charge the low VAT rate based on where they are located. The key change in the new rules returns VAT to a tax on consumption and from January 2015 onwards VAT on digital services will be charged based on where the consumer is located.
This instantly eliminates any commercial advantage to setting up in a low-tax environment.
This will hurt Luxembourg
Luxembourg has already changed their VAT rates – probably because of the introduction of these new rules. The finance ministry in Luxembourg has estimated a loss of between €600 million and €1 billion from the EU VAT on digital services reform. That is 70% of its VAT revenue.
However, there isn’t a lot of sympathy for the Grand Duchy with many arguing that they have for too long taken advantage of the VAT system at the expense of other EU member states.
Meanwhile, EU member states with a large digital service consumer base such as the UK and Germany will benefit from the new rules. Remember, VAT will now have to be charged based on the location of the consumer. The rule change only affects B2C sales of digital services. The UK, for example, has already estimated that it will benefit to the tune of €1.2 billion over four years between 2015 and 2018.
