VAT returns to being a consumption tax

The recent introduction of B2C 2015 EU VAT (value added tax) rules will flip the e-commerce world on its head and bring compliance into sharp focus for merchants.

The European Commission has placed compliance — and its enforcement — at the top of its to-do list. The commission can’t let a situation develop whereby the EU loses nearly €200 billion in VAT receipts in one year: This actually happened in 2011. The results of that EU-commissioned report hit a nerve in Brussels. The reasons for this “VAT gap” ranged from poor bookkeeping to noncompliance to downright fraud.

The poor bookkeeping and noncompliance are their targets here — there are always going to be fraudsters trying to make a quick buck. C’est la vie! Of course, new rules on the taxation of cross-border digital services were already in place, but they needed to be strengthened. The result is that VAT on these services returns to being the consumption tax that is was always meant to be.

VAT is added at each stage of a product’s distribution. Digital services are distributed via the Internet — hence, VAT will now be added onto their consumption. This is the key distinction in how the new B2C 2015 EU VAT rules define the broadcasting, telecommunications, and electronic services that will be affected post-January 2015. If the service requires access to the Internet in order to be consumed, then that service is classed as a digital service and therefore comes under the remit of the new legislation. Examples of such services (in a wide-ranging industry) are the downloading of music, images, e-books, and software; website hosting; online news and magazine subscriptions; online gaming; and virtual classrooms.

The key change in the legislation, however, is that the place of consumption is now the only consideration for taxation purposes: The end consumer’s location is all that matters. Prior to the B2C 2015 EU VAT legislation, VAT was applied to these services based on where the supplier was based.



The commission’s explanatory notes on the new rules explained their reasoning further: “The underlying reason for these changes was to bring the VAT treatment of these services in line with one of the main principles of VAT that, as a consumption tax, revenues should accrue to the Member State in which goods or services are consumed.”

The notes — released in March 2014 — point to the uncompetitive nature of the rules pre-2015 reform.

“Until the end of 2014, business to final consumer (B2C) supplies by EU businesses are taxed in the country of the supplier. This means that for supplies made to final consumers, businesses established in Member States applying lower VAT rates have a competitive advantage over businesses established in other Member States. The new rules of taxation based on the country where the customer belongs will provide, as from 2015, a level playing field and should also ensure that the VAT receipts accrue to the Member State of consumption.”

So the e-commerce world in the EU will be flipped on its head, but only to return to the position it was always meant to be in. From Jan. 1, 2015 onward, VAT on digital services will again be based on consumption — it just took the EU awhile to figure it out.

Daniel Clark is a freelance writer and blogger.

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