According to the Digital Economic Value Index 25% of the world’s economy will be digital by 2020.
In this blog, we look at how tax authorities are responding to the growth in the digital economy and highlight a few of the challenges that this ‘destination-based approach to tax’ creates for businesses who supply digitally delivered services to Europe.
Digital goods and services
In this fast-moving and constantly-changing global marketplace, entrepreneurs are benefiting from the opportunity to supply digitally delivered goods and services at home and abroad.
From efficiency savings and a higher level of productivity, through to a reduction in overheads and an increase in the return-on-investment achieved, the rewards can be substantial.
So, it’s no surprise to discover that digital is now firmly embedded in every business.
Companies of all shapes and sizes are finding themselves at a cross-road in terms of meeting customers’ needs, with small and medium-sized enterprises (SMEs) well placed to embrace new ways of working to take a slice of this emerging market.
In fact, some of the fastest growing companies and most reputable sales merchants are already taking advantage of technological advances and improving digital skills to enter new markets, win new customers, build long lasting relationships, compete with well-established suppliers and achieve sustainable and profitable growth.
Reaping the rewards
Governments and policy-makers acknowledge the growing importance of this emerging digital and knowledge-based e-marketplace as a key driver of economic growth and prosperity.
While tax authorities recognise that - with digital sales forecast to contribute up to 25% of all sales by 2020 - there is a potential risk of a black hole in VAT receipts.
This perceived risk or, more precisely, this potential cost to global economies, has led many countries to find new ways to tax the digital economy; with tax rules applied - piece-by-piece – to cross-border, digital sales, based on the consumer’s location.
What about sales to Europe?
In Europe, a destination-based approach was discussed and agreed back in 2008, with the resulting EU VAT Directive framed to take advantage of technological trends.
From the start of 2015, the current EU VAT rules were implemented on the supply of e-services to EU Member States.
These destination-based tax regulations apply to every business that supplies digitally delivered services, cross border, to private citizens – regardless of how large or small the company turnover.
As importantly, each of the 28 EU Member States are committed to extend theses destination-based EU VAT rules to the sale of digitally delivered goods as well as services.
Compliance is crucial
Under the terms of the EU VAT Directive, each EU Member State continues to set its’ own rate of VAT, GST or sales tax as well as the currency for EU VAT repayments. And, each tax authority selects the format, such as a CSV file, that a business must or must not use to record and report any EU VAT collected.
These differing requirements create a complex tax environment. But failure to comply can lead to significant financial penalties!
Is VAT MOSS the answer?
To make it easier to comply with the EU VAT rules, every business that supplies digitally delivered services to Europe is encouraged to register for VAT MOSS – the value-added-tax mini-one-stop-shop scheme.
The VAT MOSS registration process is straightforward and, at the end of every calendar quarter you report and repay any EU VAT collected to your local tax authority. Or - if your company is located outside of the EU - to the tax authority you registered with for VAT MOSS. The tax authority then hands-over any EU VAT collected to the EU Member States where the relevant e-service was delivered.
The benefits of MOSS are clear. But there are also issues.
VAT MOSS doesn’t help your business determine the status of your customer – are you delivering a service to a business or a consumer? And it doesn’t identify where your customer is located!
VAT MOSS doesn’t help to calculate the correct rate of VAT to apply to each sale and it doesn’t record the amount of EU VAT you’ve charged per item.
Crucially, MOSS doesn’t help to safely and securely store EU VAT related data for 10 years – the minimum requirement of the current EU VAT regulations.
With or without VAT MOSS, applying current taxation rules in this brave new world can prove tricky – if not impossible - for even the most tax aware and tech savvy business owners.
Yet failure to display an accurate price - including the VAT, GST or sales tax for each item or service - can have a negative impact on your business.
In fact, a lack of price transparency can lead to abandoned shopping carts and baskets at the checkout - as customers fail to complete the purchase!
To overcome the many challenges that destination-based taxation creates, more and more businesses are integrating their online stores with vatmate – the cost-effective EU VAT and VAT MOSS management tool for companies who supply digital services cross-border.
This NCC certified software-as-a-service (SaaS) solution is designed to ensure that your data is safe and that your business is EU VAT compliant.
Support for your business
As a SaaS, vatmate offers ‘one step integration’ with the leading international e-payment gateways, Worldpay and PayPal, and supports WordPress, Joomla and other market leading web development platforms.
Once set-up, vatmate automatically identifies everyone who visits your website!
Through this ‘real-time’ information, the management solution calculates the correct rate of EU VAT - based on the location of the visitor plus their status as a business or private citizen - and records the actual amount of EU VAT charged on every item sold.
The feature rich functionality enables business owners and their team members, as well as accountants and tax experts, to complete EU VAT or VAT MOSS returns at the end of the financial quarter and, as an added benefit, to create monthly, quarterly or ad hoc management reports to support informed decision-making.
As a registered VAT MOSS agent, vatmate extend offers the added benefit of automatically creating and submitting the quarterly VAT MOSS return in the correct currency and format on your behalf.
This additional feature helps to free up valuable time for you and your team to focus on furthering the development of your business!
Note: For specific guidance, contact your local tax authority, your accountant or an acknowledged tax expert.