Changes to VAT on digital services in the European Union
The European Directive 2002/38/EC* has introduced new VAT rules involving business to consumer supplies of digital services, which will come into force on the 1st January 2015. The EU has introduced a unique online service, the VAT Mini One Stop Shop (VAT MOSS). We explain the impact of this decision.
Changes for individuals
The new rules are being introduced so that citizens of the EU will be charged the VAT rate of their country of residence and no longer the VAT rate in the jurisdiction where their digital services provider is based. This means that European individuals will be subject to the VAT of their country of residence, regardless of the country from which they purchase a digital service. A UK resident who buys an e-service from a provider based in Spain will be subject to the UK VAT in force (20%), for example.
VAT rates vary from 15% in Luxembourg to 27% in Hungary. This new directive may increase or decrease these rates in some countries (see the list of VAT rates in EU countries**).
Digital services affected by the reform
There are three main services that will be affected by the changes: telecommunications, broadcasting and electronic services. A few examples are landline and mobile telephone services, internet provider services, broadcasting of radio and television programmes and internet live transmissions. Application (apps) downloads, music downloads, online video games, electronic books and antivirus subscriptions will also be affected. All products and services of the OVH brands, OVH.com (including OVH.co.uk), hubiC, Kimsufi, So you Start and RunAbove will therefore fall under the scope of the new directive.
VAT returns via MOSS
Individuals don't need to do anything in particular. However, they will be asked to check and update their billing details.
The web portal, MOSS, will reverse the VAT declaration process for digital service providers. They will no longer have to register to declare and pay VAT in every EU member state in which they have customers. They simply need to subscribe to the service.
Similarly, businesses established in non-EU countries which provide services electronically to EU consumers may register for VAT in only one EU member state, even though they may have customers in several countries.
Why is there a new directive?
Firstly, these rules iron out any distortions of competition within the EU. More generally, they fit into the international context by putting all players in digital services on the same footing.
"These days, there's huge inequality within the EU. This directive will help to avoid flaws towards countries with low tax rates. It gives the power back to the Member States. It will also impact American players that target European customers and whose products and services aren't subject to VAT. From now on, all players will be playing by the same rules with every customer," explained Alban Schmutz, Vice President of Business Development at OVH. "In addition, this change reflects a fundamental trend. International taxation is based on the concept of a stable fiscal establishement. Previously, we only exchanged physical goods and materials, and therefore we taxed based on place. This logic has been challenged by the global dematerialisation of goods. The EU's decision is the first step towards ensuring consistency across international tax systems related to digital services."
**VAT rates in EU countries