A few months ago the European Commission introduced changes to the EU VAT legislation applicable from 1.1.2015 which relate to electronic communications services, electronic broadcasting and electronic services to private consumers. Although these changes were included to Directive 2008/8/EC (Article 5), the European Council did not adopt the necessary legislation until the end of 2013. Furthermore the guidance and explanatory notes were published in the first half of 2014.
Until 31.12.2014 providers of such services were obliged to charge the VAT rate applicable to the Member State they in which they were tax residents or no VAT was charged within the EU in case where their tax residence was outside EU. However, as from 1.1.2015, the providers of such services are obliged to charge the VAT rate that is applicable in the EU country where the recipient of the services is situated.
The aforementioned Directive only affects B2C transactions, as in B2B trade the customer is responsible for the proper settlement of relevant duties and VAT charges. More specifically for B2B transaction between EU countries the client company is using the VAT reverse-charge mechanism.
he European Parliament, based on the nature of the VAT as a consumption charge, proceeded to this action aiming to increase the tax base of the country-consumer.
It should be noted that the changes are effective from 1.1.2015 for all the providers having transactions with private clients in any EU Member State irrespectively of whether the European Directive has yet been incorporated into national law by that date.
As a support tool in this project, the EU created the application of Mini One Stop Shop (MOSS) in which providers can register for VAT purposes only in one EU Member State which will in turn be responsible for the payment of VAT to the Member States that the services were provided. In an attempt to normalize abrupt changes in domestic revenues of the Member States, the EU appointed a retention period until 31.12.2019, during which the Member State of VAT identification will be retaining a specific mediation rate. Further, providers should be aware that the competent authorities will have the ability to control any transaction which falls within MOSS and for ten years they shall be required to maintain all records of their transactions. Additionally a further difficulty lies in the fact that the registration in MOSS is not activated the day the provider completes the registration form but on the first day of the next quarter after the completion of the application.
On the other hand, if a company offering such services is does not wish to join MOSS it should appoint a tax representative in all EU countries that is dealing with.
The new legislative framework creates several adjustment issues to providers of such services. The first issue concerns the need to introduce appropriate electronic tools in order to recognize the country of origin of orders and the legal status of each consumer (individual, company, organization exempt from VAT in its country). The second issue relates to the weakness of direct compliance with the specific regulatory framework within the prescribed time. The variance of VAT rates in the EU (3% -27%) as well as specific domestic criteria for the monitoring and reporting of VAT, shall increase the operational cost for providers who will thereon turn to tax advisors and accountants for help. The third issue that arises concerns the pricing behavior of those firms. Initially they should redefine their profit margin and decide whether to charge an average European VAT rate (21,54%) or implement different VAT rates according to VAT legislation of the consumer’s country. Then they need to analyze further whether it is in their interest to pass on the full amount of VAT and additional operating costs to consumers or to absorb some of these costs so that they do not suffer excessive sales decrease.
Another potential risk is for small firms to reconsider dealing with some Member States due to the fact that it will become unprofitable in terms of operating costs and thus stop their local operations. Such an action would result to an immediate reduction in competition and is likely to further increase the prices of this kind of services in some Member States.
The European Commission is aware of these concerns and replies that all adjustment difficulties will be temporary and due to the functionality of MOSS the market will return to balance within a short period of time.
For more information, refer to the respective website of the European Commission
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