VAT relating to cross-border business-to-consumer transactions will be charged at the rate in the country where the customer is based, rather than that of the supplier, under new EU rules to take effect in 2015.
Explanatory notes on new VAT rules for telecoms, broadcasting and electronic services have been published by the European Commission. The new rules reform VAT on internet-delivered services such as software, ringtones and music and will take effect from 2015.
"This information will help businesses to prepare and to comply with the new tax rules from day one," a statement by the Commission said.
European finance ministers adopted the measures into legislation in 2008, but they will only become effective in 2015. They are designed to stop businesses which offer these services from locating in countries with preferential VAT regimes. The fact that the VAT rate of the supplier has so far applied to online transactions led to many firms such as Amazon, Skype and Paypal, relocating to Luxembourg, which in 2008 had a standard VAT rate of 15 per cent, and still does today. That is equivalent to the EU VAT Directives minimum standard VAT rate and represents the lowest standard VAT rate of all the EU member states.
When the new rules were adopted in 2008, the then EU Commissioner for taxation and customs László Kovács said that the new rules would eradicate inequalities in a system where the competition for business locations was skewed. "This is particularly true of services which can be supplied at a distance where, as a result of current rules, businesses have been locating in countries with lower VAT rates," said Kovács. "As a result, member states have seen their revenues eroded."
The moves were resisted by Luxembourg at the time which said that it would lose €200m a year in VAT revenues. The agreement to make the new rules effective from 2015 was widely seen as a concession to Luxembourg.
The new guide on the 2015 VAT rules focuses on the place of supply implementing measures which apply across all EU member states.
Darren Mellor-Clark of Pinsent Masons, the law firm behind Out-Law.com, said: "The VAT package is an on-going series of measures designed to bring VAT into the 21st century and more closely aligned to the modern economy, embracing digital and other technologies. The complexity of interpreting the VAT legislation and rebuilding enterprise resource planning systems to deal with the changes is a major challenge for multinational businesses. I'm sure that such businesses will be pleased to receive further confirmation and guidance as they implement change."
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