Key questions answered ahead of new EU VAT rules

By Daniel, 19 August, 2014

Digital service merchants across the globe will have plenty of questions ahead of the introduction of the new EU VAT rules by  The rules change the landscape of doing business in the EU for digital service merchants. 


Well, here are some answers to common questions.


What is changing?

A new VAT Directive is being introduced. These new EU VAT rules change how VAT is to be applied to the supply of digital services. The legislation defines a digital service, or eService, as a service that requires the internet to be supplied. Currently, the merchants that supply these services apply VAT based on their location in the EU. The major rule change is that from January 1, 2015, merchants will have to start charging VAT based on the location of their end customer (non-taxable person).


Why are the rules changing?

Simple answer: revenue. The rapid growth of the digital economy has deprived EU tax authorities of much-needed tax revenue. They have been deprived because current rules allow merchants that supply digital services to set up their EU HQ in a low-tax environment. The merchants win by virtue of their low VAT bill while EU tax authorities lose out. This is the main reason why the rules are changing. The EU is also attempting to crack down on VAT non-compliance. In 2011 an EU-commissioned report found that some €192 billion was lost due to non-payment of VAT. Non-payment can be through ignorance of rules, poor book-keeping or simple non-compliance.


Who will be affected?

Any merchant that supplies a digital service to a non-taxable person in the EU will be affected. The rule change only affect B2C sales, not B2B. Examples of such services include the download of images, moves, and music as well as the installation via the internet of anti-virus software. The legislation has narrowed the focus of the new rules to broadcasting, telecommunications and electronic services.


When is new rule being implemented?

The new EU VAT rules comes into effect on January 1, 2015.


What do merchants do now?

Merchants affected by the new EU VAT rules have two options. They will have to charge VAT on their B2C sales but how they do that is their own choice. They can declare the VAT charged on all their B2C sales with each EU member state (all 28) individually or, alternatively, they can avail of the new mini One-Stop Shop (or MOSS) system that is ushered in with the new rules. With MOSS the merchant nominates a Member State of Identification (MSI) - typically their member state where they are located - for their VAT declaration. The tax authority of the MSI will then distribute the VAT due on sales in the other EU jurisdictions. Merchants access MOSS via a web portal and there will also be a designated person responsible for MOSS in each EU member states. MOSS registrations begin on October 1.


Non-EU merchants with B2C sales of digital services are free to choose any EU member state as their MSI. Again, if that merchant already has a physical presence, HQ, in an EU member states then that country will become their MSI.


Apart from an obvious revenue-raising tactic the EU will point to tax harmonisation and the creation of a level playing field as the rationale behind the new EU VAT rules by