If you are doing business online, you might have been hearing from your partners or competitors their concerns on VAT compliance for e-businesses. This hassle is seen around the e-commerce since 2015. Up to 2015 all B2C transactions were taxed based on vendor’s location as most of B2C transactions appeared within the borders. However, due to “digital revolution” many tax authorities noticed significant VAT revenue to foregone by not taxing cross-border sales of digital goods and services. In 2015 the Organisation of Economic Cooperation and Development (OECD) published updated international VAT guidelines which endorsed many countries to implement new rules of taxing cross-border e-commerce transactions based on destination principle, meaning B2B and B2C transactions be taxed in the country in which the customer is established.
What are the terms I should understand?
Here are the main definitions e-commerce should know to understand VAT compliance:
E-commerce refers to all commercial transactions conducted online, including sale of goods and services.
Digital Services, also known as Online Services, Electronic Services or e-services, refer to the delivery of information, including data and content over the Internet or an electronic network. The supply of e-services is essentially automated, involves minimal human intervention and impossible in the absence of IT and doesn’t refer to any physical good.
Business to Consumer (B2C) is a form of transaction conducted directly between the business and private consumer who is the end-user of its product or service sold and is not VAT registered.
Business to Business (B2B) also called B to B, refers to the transaction between companies or the end-user individual consumer is VAT registered.
VAT – Value Added Tax is the tax payable on taxable supplies and importations.
GST – Goods and Services Tax, is substitute for VAT in some non-EU countries such as Australia, New Zealand or India. There are different names used for the tax payable on taxable supplies and importations in different countries, like Sales Tax in United States or Harmonized Sales Tax (HST), Quebec Sales Tax (QST) and PST in Canada.
Distance sale – occurs when goods are dispatched or transported to a private consumer (not VAT registered) in another European Union (EU) Member State, and the supplier is responsible for the delivery of the goods.
How do the New Rules work?
According to 2015 EU VAT Directive and to respective VAT laws applied in other countries across the world afterwards, VAT must be applied to the B2C sale of a digital service based on where the customer of the services is located.
Meaning, if you provide B2C digital service, you must charge VAT during the sale, apply the tax rate of the country which your client is the resident of and pay VAT in that country.
Which services do the new rules apply to?
The definition of e-services varies between jurisdictions, however typically includes telecommunication, television and radio broadcasting and other digital services, examples are:
- e-books, movies, TV shows, images, music and online newspaper subscriptions
- online supplies of games, apps
- downloadable games, music and apps
- webinars or distance learning courses
- gambling services
- website design, hosting or publishing services
- access to databases
- software and software maintenance, Software-as-a-Service (SaaS)
How to determine the customer’s location?
To determine the customer’s location, the business must collect at least two pieces of non-conflicting location evidence. Accepted pieces of evidence vary between jurisdictions, but mostly include these:
- the customer’s billing address
- IP address of the customer’s device
- bank details, including the location of the bank
- credit card details that shows the location of the credit card issuer
- mobile country code
- other commercially relevant information
Should I register from the first sale in each country?
There are different registration thresholds set among different countries. In some, you have to register for VAT, charge it during the sale and pay VAT to tax Authorities from the very first B2C transaction. Other tax jurisdictions have established registration thresholds.
Notable, that there are still some jurisdictions that haven’t implemented VAT rules for non-resident companies selling e-services to their residents.
Challenges to businesses:
- Identify location of each customer.
- Analyse whether the e-service provided falls under the definition of the “digital services” in the customer’s country.
- Monitor B2C sales turnover in each country.
- Know VAT registration thresholds for non-resident companies in countries you sell to.
- Track constantly if your turnover has reached the registration threshold.
- Different VAT registration procedures for non-resident companies in different jurisdictions.
- Different reporting periods, submission and payment deadlines in different tax jurisdictions.
What are the steps I should make to comply with the rules?
- Choose pricing strategy: VAT inclusive or VAT exclusive.
- Determine customer’s location using data collected.
- Determine the tax type of the customer, whether it is B2B or B2C sale.
- Register for VAT in countries where the registration threshold is reached.
- Charge appropriate rate of VAT on sales in countries where the threshold.
- Prepare and submit VAT reports periodically in each country.
- Keep data records off all transactions and location evidence for a minimum of 10 years.
How tax authorities receive the information on my transactions?
Obviously, that global digitalization has not only impacted the businesses, but gave the access to the latest technologies to the tax authorities. Nowadays, tax authorities easily receive information about your transactions using several sources, such as banks, payments processors, marketplaces and payment systems.
What are the consequences of not complying with VAT rules and not paying VAT?
There are penalties for late registration and late payment interest. Rate varies from 10% to 200% depending on the country legislation.
If you have any further questions regarding your business being VAT compliant around the world, we are inviting you to contact our VAT experts team for further help.