For many on the outside looking in the EU taxation system is very complicated. It is - and that’s why the 2015 VAT changes aim to simplify the process. It may not work, but that’s the aim of the EU authorities. The new changes cover the 28 EU member states and concentrate specifically on the ecommerce sector of broadcasting, telecommunications and electronic services. This sector is one which is believed to have taken advantage of loopholes within the EU’s tax system. The new VAT Directive is one attempt to halt that practice (at the same time it aims to increase the flow of VAT returns to member states).
How does the EU define an e-service?
The exact definition of what is being taxed here is ambiguous at best, in EU documentation.
The closest we come to a precise term is as follows: “It is a service (i.e. not goods) delivered automatically via the internet. Examples of electronic services are: website hosting; online games downloaded to PC or mobile phones; software downloads; music streaming, and e-books. Services not affected by the 2015 VAT changes include telephony (telephone calls via the internet); live broadcasting; access to the internet; helpdesk services, and interactive teaching services.
Why is the EU targeting this particular sector?
The EU’s Taxation Commissioner Algirdas Semeta effectively said that the EU was targeting this sector as it is seen to be the key area that is not ‘playing fair’ in relation to tax declaration. In a speech he gave in October 2013 he stated that the digital sector now needs to ‘pay fair’. The amount of VAT slipping through the tax net in the EU is astounding: some €200 billion in 2011 according to an EU-commissioned report.
How much does the EU expect to raise from the 2015 VAT changes?
The EU as a whole has not stated how much it expects to raise. However, the UK’s tax authority, HMRC, and the Chancellor of the Exchequer George Osborne are already on the record stating the the UK expects to raise £300m per year between 2015 and 2018. Luxembourg, on the other hand - where many global digital companies such as Amazon have their EU HQ - has stated that it stands to lose about 1% of its GDP, or €220m. The Grand Duchy has already taken steps to address this by raising their VAT rates. The new standard VAT rate has been raised from 15% to 17%. The country’s ‘basic necessity rate’ of 3% remains. The changes do not come into effect until January 1, 2015, coinciding with the introduction of the EU’s new 2015 VAT changes. Essentially, the larger economies with the greater volume of online consumers stand to make a great deal more from the 2015 VAT changes than the smaller economies.
When do the 2015 VAT changes come into effect?
Well, it does exactly what it says on the tin: the VAT Directive comes into effect on January 1, 2015. Affected companies will have to update their payment systems before then. They will also have to update their invoice system to allow for these changes. Remember, it is not optional - this is an EU-wide Directive agreed upon by all 28 EU member states. Compliance is crucial.