As most EU established B2C suppliers of e-services (i.e. telecoms, broadcasting and electronic services) are aware by now, there are some significant VAT changes coming into effect from 1 January 2015. As highlighted in our recent story, businesses will either have to register for VAT in each country where their customer is located, or register for the MOSS scheme and complete a single quarterly VAT return. Regardless of which method is used, both will require local VAT to be collected according to the rules in place for that EU Member State.
Aside from the specific VAT implications for businesses such as pricing and capturing of data concerning the location of the customer, the new rules may have a wider impact for EU businesses.
EU established businesses have always been required to charge VAT on B2C supplies of e-services, but before July 2003 non-EU businesses were not. This treatment was a disadvantage for EU-based suppliers since, due to the VAT element, their services would either be more expensive or they would make a lower profit than non-EU businesses. It didn’t take long before businesses started to relocate outside of the EU to avoid the burden of VAT.
In reaction to this distortion of competition, the EU introduced Council Directive 2002/38/EC which required that from 1 July 2003, all non-EU businesses providing B2C supplies of e-services had to collect VAT at the rate of the country in which their customer was resident. Although this levelled the playing field to some extent, businesses soon realised the benefit of establishing (or re-establishing) themselves in an EU country with a low rate of VAT (since under the rules, EU established business only had to charge VAT based on where they were established, and not where their customer was resident). Luxembourg was one of the most popular choices due to its low rate of VAT (15%).
The 2015 changes bring EU established businesses into line with non-EU established businesses. Countries that did not initially attract the relocation of e-service providers due to having higher VAT rates are expecting a significant increase in VAT revenue as a result of the change. HMRC has already recognised this and estimates that “the changes will increase the overall UK VAT yield by an additional £300 million per year and protect up to £5 billion per year.”
With the promise of tax revenues increasing, tax authorities will be instructed to ensure the forecasted revenues are achieved. If they are not, businesses can expect to be audited by the tax authority of the Member State in which they are registered. This could be done at the instruction of another Member State which has requested information on that business under a proposed Directive which seeks to extend laws on the automatic sharing of information. (Legislation is already in effect which permits the exchange of information between EU Member States).
A further issue for tax authorities could be the enforcement of the rules and the collecting of taxes owed to another Member State. The Mutual Assistance for the Recovery of Debt (MARD) Directive was effected on 1 January 2012 and is a legislative tool used to recover debts in other Member States. The question that arises is that when audits start to increase – and there is little doubt that this will be the case – will tax authorities want to, or even be able to spend time and money chasing after debts owed to another tax authority?
The change in VAT rules for e-service suppliers means that businesses will no longer be able to benefit from being established in an EU country with a low rate of VAT and, at the same time, will have to deal with the increased complexity of the reporting requirements. This raises a serious question as to whether businesses will want to remain in the EU or, once again, relocate their operations outside of the EU.