Based on the knowledge that the current VAT system is no longer adapted to the rapidly-evolving digital and mobile economy, the European Commission has been striving for years for profound modernisation of the VAT system. A thorough study and investigation into the way in which this should be done specifically resulted in a proposal from the Commission, in December 2016, giving priority to simplification, fraud resistance and accessibility to businesses. This proposal is known as the ‘VAT Action Plan’. The reform is based on four main pillars and shall be enforced in phases, starting from 2019 and achieving completion around 2021.
On 5 December 2017, a package of measures was already approved by ECOFIN, whereby a first set of rules related to e-commerce will be implemented as from 1 January 2019. One of the major priorities in doing so is to reduce the administrative burden on (smaller) companies.
What will specifically change as from 1 January 2019 when it comes to electronic, telecom and communication services in a B2C context?
Services carried out electronically for private individuals and other buyers without VAT obligations are considered to take place according to the VAT tracking rules in the country where the recipient usually resides or lives. In other words, VAT on such services must be charged in the country where the private customer lives. The same rule applies to telecom and broadcasting services.
For example, if a Belgian company sells e-books or digital software to private individuals living in France, Spain and the Netherlands, this means that it needs a VAT number in each of these countries in order to respect the local VAT requirements. In principle this applies as from the very first trading activity.
In order to avoid a local VAT registration in every European member state, European service providers can make use of the MOSS rule (= Mini One Stop Shop). This is a simplified rule allowing a service provider to submit a digital quarterly statement in the home state, in order to settle the VAT owed in each member state. Although MOSS is a simplification, it cannot be denied that businesses will still face all kinds of administrative duties. Businesses that wish to look beyond their own countries will therefore face additional costs, creating an obstacle for smaller companies most of all.
Localisation – threshold €10,000
Keeping facilitation and simplification of e-commerce in the back of your mind, a new threshold of €10,000 is to be introduced as from 1 January 2019. As long as this threshold is not exceeded in the current or previous calendar year, the service provider may charge the VAT applicable in its own country on electronic services, telecom and communication services sold to private individuals. It will therefore have no obligation to register immediately as from the first trading activity in other member states nor to apply the MOSS.
Only once a turnover of €10,000 is exceeded shall it be obliged to charge the VAT applying in the country where the recipient lives. This will then immediately apply to the rest of the calendar year as well as the following calendar year. Note that, in order to determine the annual threshold of €10,000, the relevant services to private individuals must be cumulated across all EU member states. Of course, it is also possible to charge the customer his local VAT rate right from the very first activity. Note that this simplification does not apply to non-EU companies. These will be obliged to charge the VAT rate related to the buyer's country right from the very first euro.
If we take the above example, the Belgian service provider would be able to charge Belgian VAT on its services, until exceeding the threshold of €10,000 in a particular year, for all of its services to private customers in France, Spain and Holland combined. As from the service in which the threshold of €10,000 is exceeded it must register for VAT in each member country or submit a MOSS declaration.
A Swiss company offering the same services would be obliged to identify itself in France, Spain and the Netherlands for tax purposes as from the very first euro charged.
Proof of buyer's address – only 1 piece of evidence required
An individual's home or usual place of residence is the decisive criteria determining in which land VAT must be charged. It is the responsibility of the service provider to charge the correct level of VAT and therefore to know in which land its customer resides.
Suppose that a private individual buys and downloads a music file from his hotel room at his holiday destination. The service provider must charge the rate of VAT applying to the country where the buyer lives. It is therefore down to the service provider to find out this information in one way or another.
As it is not always easy to establish where a private buyer lives, the Implementing Regulation no. 282/2011 dated 15 March 2011 has introduced a few assumptions in this respect. This means, for example, it is assumed that when purchasing an electronic service using a Wi-Fi hotspot, hotel lobby, internet café, etc. where someone must be physically present, the buyer is considered to live at this physical location.
In non-specific cited cases, the service provider can demonstrate the home address or usual residence of its customer based on two separate pieces of non-conflicting evidence (such as e.g. invoice address, IP address, bank details, mobile country code on a SIM card,…). As from 2019 not two, but just one piece of evidence will be required to demonstrate the buyer's place of residence, as long as the annual turnover achieved from electronic, telecom or network services remains below €100,000.
Invoicing rules – member state of identification
Rules exist with regard to trading activities in an international context determining which member state governs the invoicing rules. The governing member state may determine the content, delivery terms and modalities related to invoicing. For remote purchases (=sale of goods to private individuals whereby the seller provides transport to another member state) and for the provision of electronic services, telecom and network services, the governing member state is the one where the customer is based or living. This means that the service provider must respect the invoicing rules of the private individual's country, and must therefore also take into account the various regulations applying to the customer's home or country of residence.
As from 1 January 2019 a simplified rule is take effect and the supplier or service provider in the above cases shall only be required to consider the invoicing rules in the member state where the company itself is located.
Companies located outside the EU – MOSS regulation
For companies located outside the EU and supplying electronic services, telecom and communication services to individuals based in Europe, there is a simplification rule similar to the MOSS rule. This rule means they are not required to register in every EU member state where they have private customers, and means that they only need to register for VAT in a single member state.
However, organisations based outside the EU that, for whatever reason, already possess a VAT number in a member state are not able to make use of the current MOSS rule. These are therefore excluded and thus obliged to request a VAT number in every member state where VAT is being charged. In order to resolve this problem, non-EU organisations with an EU VAT number will no longer be excluded from the MOSS rule as from January 2019.
Changes expected by 2021
Besides the aforementioned changes, focused on online services, there are still plenty of other proposals on the shelf. The intention is therefore for the MOSS rule to be extended as from 1 January 2021 to include the cross-border sale of goods (e.g. webshops) and for the current hurdles to remote selling to be abolished. In terms of goods sales platforms, new VAT rules shall apply and we can expect a thorough pricing reform. Furthermore, the exemption threshold of €22 for the import of small packages shall be abolished and it will be possible to make use of the MOSS declaration in such cases as well. More information shall be provided on these later changes in a future edition.