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28th Jan 2023

Online businesses in despair over EU tax rules

  • The rules - designed to improve VAT compliance in the EU - go into place on 1 January 2015 (Photo: Tim Reckmann)

New VAT rules coming into force on 1 January 2015 designed to put a stop to billions of euros of the consumer tax being lost due to a loophole have left some businesses overwhelmed and "confused".

Under the rules - applying to telecommunication, broadcasting, and e-service companies - VAT will be charged in the country of the consumer rather than the seller.

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Currently the VAT applied to e-books or music downloads is the one where the company is based - leading retail giants such as Amazon and Apple to set up in low-VAT-rate Luxembourg.

But while the new regime is set to result in a windfall for some treasuries - the UK recently estimated it would see an extra €390 million a year - some small businesses have been left reeling by the complicated rules.

John McCarthy, the CEO of Taxamo, a company set up to help companies deal with the changes, says there is "general confusion" and a feeling of "this can't be the case" among businesses.

The rules require companies to charge VAT where their consumer is based. But VAT rates vary hugely in the EU.

Companies can sign up to a national one-stop shop for VAT registration - this saves them from having to file VAT returns for each of the member states where they have customers.

But the information requirements are onerous.

To find out where a consumer is based - sometimes it is not obvious as the person may be paying by PayPal - a company needs two pieces of consistent evidence such as credit card number and an address.

This information also must be stored by the company for up to 10 years - which itself creates questions of data security and protection.

Small businesses (some of whom were exempt from VAT until now) will in January all be obliged to register for VAT for the first time. The rules affect a range of sellers from games producers to app makers, e-publishers and even those selling knitting patterns or instructions on how to make jewellery.

"It's a completely new process for business. It's kind of daunting," notes McCarthy.

"Very often e-service merchants do not pick up a lot of information about their consumers. In the past they've actually tried not to pick up information because it's an impediment to a sale," he said about the obligations to find out where buyers are based.

There are also invoicing requirements (these vary according to member states), regular audits and quarterly returns (rules that get hugely complicated when a customer asks for a refund).

Juliet McKenna, a science fiction writer, says the rules will slash her income.

She said writers such as her look to revenue sources other than Amazon to sell their books. "One of the main sources of income is independently epublishing. But if this now has to go through Amazon, or any other third party that can comply with these new regulations, that immediately takes 30 percent of our profit".

Rosie Slosek, tax return coach for UK freelancers, says that small digital companies such as hers are being hit with "a corporate-level administrative burden".

Taxamo is getting a "huge increase in traffic in the last three weeks" as people wake up to the implications of the rules.

Part of the reason that there is a lack of knowledge has been put down to the fact that the final details on the new VAT regime were only agreed earlier this year.

In addition there is little incentive for national tax authorities to flag up the rules as any extra revenues will be going to another country.

The European Commission, for its part, says the scheme will ensure a fairer revenue distribution - a 2012 commission report showed that €192 billion in VAT went unaccounted for in 2011 - and says the one-stop-shop for VAT registration will make life easer for businesses.

Although the rules were agreed before micro e-services became so popular, commission officials point out that alot of time since has been spent informing the business community of the pending changes.

At the state level Luxembourg is set to lose the most from the rule change - about 70 percent in VAT revenues by its own reckoning.

Meanwhile, there are some who say the rules do not go far enough. Gerhard Huemer from Ueapme, representing small businesses, praises the law as it creates a "level playing field" among large and small businesses, who are not so easily able to move their bases to low-tax countries.

However he notes that the "overwhelming number" of small firms represented by his organisation are not affected by the rules which his organisation would like to see extended to other sectors, such as construction.

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