Author: Sander Adamson
The European Union has adopted new rules on VAT that will simplify and facilitate e-commerce. The rules will come into effect in full on 1 January 2021, but companies that provide electronic services will be able to benefit from the rules already starting 1 January 2019.
The purpose of the changes is:
- to reduce the administrative burden on digital services suppliers starting 1 January 2019
- to apply similar simplified VAT rules that are currently in force for digital services, also to distance sales and other services as well as of 1 January 2021
Simplified rules for electronically suppliedservices as of 1 January 2019
Taxation of electronically supplied services according to the current rules
Currently, supply of electronic services to consumers are always taxed in the state in which the consumer is located. To keep service providers from having to register as a VAT payer in every EU Member State, a simplified tax payment system can be applied (the Mini One-Stop-Shop or MOSS scheme).
Under the simplified taxation system, the provider of the services must still tax e-service with the VAT rate of the EU Member State in which the consumer receiving the service is located, but the payment of the tax is made through a service provider’s state tax authority, which transfers the amount of the tax to the relevant EU Member State.
The current rules set no threshold as of which electronically supplied services are subject to taxation in another EU Member State; thus the services have to be taxed in the other EU Member State from the very first transaction.
An Estonian company registered as a VAT payer in Estonia provides e-services to an individual in Sweden. The Estonian VAT payer adds Swedish VAT to the price of the service and pays it to the Estonian Tax Board’s bank account. The Estonian authority transfers the paid amount to the Swedish tax authority.
The new rules set a 10,000-euro threshold starting from which e-services have to be taxed at the VAT rate of the consumer’s country of location
The new rules set a 10,000-euro annual threshold for cross-bordere-services. If e-services to other EU Member States are provided under the threshold, companies founded in the EU will not incur the obligation to charge VAT according to the consumer’s country of location; the services will be taxed with the VAT rate of the Member State in which the seller is located.
Only provision of cross-border e-services is counted toward the threshold. Above all, the smaller companies primarily operating on their home market will be benefiting from the change.
Regardless of whether the threshold has been exceeded or not, companies can voluntarily tax cross-border e-services pursuant to the MOSS scheme.
How a customer’s location is currently determined
A consumer’s location can be determined using different criteria and presumptions. Under the current rules, the service supplier has to gather at least two pieces of non-contradictory evidence allowing it to decide what the country of location of the consumer is and on that basis, add that country’s VAT rate to the price of service.
Such evidence are:
- the billing address of the customer(excluding PO box)
- the IP address of the device used by the customer or any method of geolocation;
- bank details such as the place where the bank account used for payment is and the billing address of the customer held by that bank;
- the Mobile Country Code of the International Mobile Subscriber Identity stored on the Subscriber Identity Module card used by the customer;
- the location of the customer’s fixed land line through which the service is supplied to him
- other commercially relevant information:
- Consumer trading history
- Gift card point of sale or country-locked gift cards
- Unique payment mechanisms
Customer self-certificationUnder the new rules, only one evidence is needed if supply does not exceed 100,000 euros
If the company’s total annual supply of e-services does not exceed 100,000 euros, the seller of service can use only one of the evidence specified on the above list to determine the location of the consumer.
Simplified rules for distance sales and other services where the place of supply is the consumer’s Member State (from 1 January 2021)
Starting 1 January 2021, it is planned to extend the simplified VAT payment scheme, similar to MOSS, to distance sales (where goods are sold to consumers across borders) and services where the place of supply is the consumer’s Member State.
At present, EU Member States apply different thresholds to distance sales at which point the seller has the obligation to register as a VAT payer in the Member State of location of the consumer and apply previously mentioned Member States VAT rate to the supply. The annul thresholds range from 35 000–100 000 euros. If the supply is lower than the threshold, the VAT rate of the seller’s country of location is applied.
To avoid excessive administrative burden of registering as a VAT payer in more than one Member State, similar system to current MOSS scheme will effective as of 1st of January 2021 to companies engaged in distance sales. This means that sellers will no longer have to register as VAT payers in another Member State, but rather the VAT of another Member State can be collected in Estonia and paid via the tax authority to the other Member State.
Under the new rules, the individual annual threshold of each Member State will no longer be applied, and is being replaced by a general threshold of 10,000 euros. If the annul distance sales threshold is not exceeded, the VAT rate of the seller’s location can be applied. If the annual threshold for distance sales is exceeded, the VAT rates of the Member States of the consumers to whom the goods are sold must be applied. The VAT of the given Member State is to be paid via the supplier’s tax authority.
In addition to distance sales, the simplified VAT rules will be applied to services provided to consumers in other Member States and where the place of supply is the consumer’s country of location (construction services, vehicle rental).