New VAT (value added tax) rules effective January 1 increase compliance burden posing significant challenge for small and medium size businesses.
As a CPA who helps many clients with their ecommerce accounting, one area that I focus on is the ever increasing complexity of sales and use taxes.
If you are a small business selling digital products and services in the EU (European Union) consumer market significant changes to the VAT (value added tax) rules went into effect January 1, 2015. These changes increase the VAT compliance burden which has a disproportionate impact on small and medium size businesses.
The VAT law isn’t new. It has been in existence since 2003 but there has been little public awareness of the law. The 2003 law stipulated
- Any US business that is not a tax resident in the EU is required to collect and pay VAT on all digital products and services sold in the EU to consumers.
- The business must register in each country or
- Complete a one-time simplified registration and filing
Note: If you sell physical products to consumers in the EU, these are treated differently with different VAT rules.
What changed in 2015?
As of January 1, 2015, US businesses can no longer take advantage of the one business, one VAT rate for digital consumer sales across Europe by setting up an e-commerce supply platform in Europe. The 2015 changes are in response to the loophole that allowed multinational corporations such as Amazon and Google from running all of their European sales through low VAT countries. As of January the sale of digital services are taxed at the VAT rate of the country in which the consumer is located (known as place of consumption rule of taxation). The 2015 change adapts the place of consumption as the taxation rule for all sellers, wherever located.
Also new in 2015, all sellers of digital products and services into the EU consumer market will be required to collect details regarding the location of its consumers in order to determine the proper VAT rate and amount to collect on transactions with each consumer in Europe. Sellers must be prepared to demonstrate that they have a revenue accounting system which properly sources its revenue from consumer transactions and have properly self-assessed their VAT liability.
Who is impacted? Do you need to worry about VAT?
Your business is subject to the VAT rule if;
* Operating as a US based businesses that is not a tax resident of the EU
* Selling digital products and services (broadly defined; excludes certain telecommunications and broadcasting services as these have a separate set of rules)
* Selling to consumers who reside in an EU country
Note: There is no minimum exclusion. If your business meets the above criteria and you sell any amount to a EU resident consumer, the sell is subject to the VAT rules.
How is your business impacted?
There are 28 countries in the EU and 75 different rates of VAT that can go as high as 27%. VAT is based on the retail price not profit margin and should be included in the price of the product or service.
While all businesses meeting the above criteria are impacted, those selling lower priced and price sensitive products and services may feel the impact more. If you don’t adequately cover the cost of VAT in your retail price, when VAT due is remitted, it could wipe out your profit.
What are the options for compliance?
If you do comply you will need to register for VAT, charge VAT on all sales of digital products and services sold into the EU consumer market and remit tax filings and payments on a periodic basis.
The most burdensome and costly option is to set up a billing system that tracks every sale to the country in which the consumer resides in order to collect and remit the correct VAT. As a CPA who helps many online businesses with their tax and accounting, I don’t see this as a suitable option for most small and medium sized business.
There are several streamlined options that are available or in the works. These are;
* A simplified VAT filing option known as VAT MOSS (Mini One Stop Shop) Under VAT MOSS, a US company can select one EU Member State with which to register and declare all of the VAT collected. Once registered the company submits quarterly returns to their Member State. In return the Member State is responsible for distributing the relevant VAT to the EU Member States where digital products and services were supplied.
* Large internet portals may be an option for compliance allowing nonresident businesses to contract away their VAT taxable status. US businesses would pay a fee to the internet portal based in Europe. Commercial rights would be transferred to the internet portal through which the digital products and services are sold. This allows the US seller to avoid seller status for VAT purposes. The internet portal becomes for VAT purposes the EU seller. The VAT compliance burden then falls on the internet portal,
What can you do minimize your exposure?
* Review and understand the detail in VAT rules
* Review your digital supply chain contracts to identify and manage latent VAT liabilities
* Upgrade accounting systems
* Cure any noncompliance
About the Author
David Heistein, CPA
Dave is co-founder and managing partner at Profitwise Accounting. Dave is a Certified Public Accountant in the state of California, as well as an advanced QuickBooks Pro Advisor and Instructor. As a small business owner, he is dedicated to educating and informing other business owners on bookkeeping and accounting matters.