EU’s New VAT Rules Could Create a Mess for Startups
techcrunch.com
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Currently, I live in Massachusetts, which does not require collecting sales tax on digital goods. According to these new laws, even though I live in the USA, and don't collect any address information for my customers, I now need to:
1. Collect address and IP address information
2. Register with a MOSS somewhere in the EU
3. Determine what VAT rate applies to the customer
4. Integrate with a (slow, unreliable) API to allow business customers to not pay VAT
5. Add VAT to their purchase (in USD, my merchant currency)
6. Generate VAT invoices that follow the regulations of every EU country
7. Submit tax payments quarterly with customer info
8. Pay VAT taxes in GBP, possibly at a different USD exchange rate
I'm almost considering shutting down sales to EU customers.
Yes and no.
Yes the EU authorities would love for the entire world to collect VAT from its citizens.
No because the EU has absolutely no way to enforce this worldwide.
However, the big fun is coming on Thursday, when the EU is due to rule over Google and politely requesting that Google splits off search from the rest of its business.
I believe this decision will be indicative of how crazy the EU lawmakers might be prepared to go.
For example, if they try and enforce splitting up Google, maybe they'd have the sheer bloody-mindedness to try and enforce blocking sales from EU cards to e.g. non-registered US sellers?
Can you provide examples of that?
The European Parliament passing a non-binding resolution recommending that the European Commission take seek a certain goal as part of a remedy if its concerns aren't otherwise resolved in an ongoing proceeding is not analogous to the US DOJ actually seeking a particular remedy in a proceeding.
My point stands regardless. Show me where the United States Government attempts to force major European or Asian companies to split into pieces. I'd love to see numerous examples of the US Government doing what the EU Commission is doing.
Yes, but the issue isn't the EC seeking to do that as part of any enforcement action, the issue is the European Parliament passing a non-binding resolution recommending that the EC should do that (and, as I understand it, that it should do that if its issues with Google aren't satisfactorily resolved otherwise.)
So, the US DOJ actually attempting to do that in a concrete enforcement action wouldn't be a parallel comparison, it would be a much more significant action than what is actually happening in Europe right now.
> The DOJ's domestic powers are far greater than the EU Commission's ability to impact Google, but that's not for lack of wanting to.
More relevantly, either the DOJ or the EU Commission, within their respective jurisdiction, actually do substantive antitrust enforcement actions, and actual enforcement actions by those entities are categorically quite different than non-binding resolutions recommending elements that should be sought in such action by the respective legislative bodies.
> My point stands regardless. Show me where the United States Government attempts to force major European or Asian companies to split into pieces.
A non-binding resolution by a legislative body isn't really much of an effort to force anything. Its more of an effort to be seen as engaged without actually doing anything substantive.
> I'd love to see numerous examples of the US Government doing what the EU Commission is doing.
The European Commission isn't actually doing anything here. There are lots of examples of the US Government not breaking up foreign companies.
Conflating the European Commission with the European Parliament is kind of like confusing the US White House -- or the whole of the Executive Branch -- with the US Congress -- and what you are doing here goes another step further, and proposes an equivalence between non-binding action by the legislature and concrete enforcement action by the executive.
That's not accurate. What the European Parliament is due to vote on is a non-binding resolution that would recommend that the European Commission consider proposals that would include unbundling Google's search from other commercial features.
> I believe this decision will be indicative of how crazy the EU lawmakers might be prepared to go.
Or it might be an indicator of what people in general are willing to do when their actions have no direct effect (non-binding resolution) and therefore don't actually have to address the details of substantive concerns.
This doesn't seem to me the same as "splitting up Google", more like unbundling or splitting up products. For example, I can see them mandating that Android support other search engines in the launcher/Google Now.
Then someone will launch a business that will do the same you do, but complying with regulations.
Taxes must be collected; without taxes, the welfare state collapses. You should know that, to be able to sell something in a market, you must understand its regulations first, and respect the decisions the citizens have taken (in this case, regarding taxes) through democratic ways.
I have a SaaS service in the EU. I have always paid my taxes and I'm not against them. But I want to have a reliable and hopefully simple process to know how to process payments. The proposed changes are a bit PITA to everybody. I hope they will come with a simpler process, as it's scary all that I will have to do to add a foreign EU customer.
https://www.gov.uk/register-and-use-the-vat-mini-one-stop-sh...
I gather similar schemes are being set up elsewhere in the EU, though I don't know if it's universal.
It appears that as a business that is already VAT registered and filing quarterly returns in the UK, the key points for us will be that:
1. we have to charge VAT to customers elsewhere in the EU at their local rates, which we will be responsible for monitoring in all 28 states;
2. we have to submit all of the VAT to the UK tax authority (HMRC) as we do at present;
3. we have to file an additional quarterly return via MOSS breaking down exactly where our customers/revenues come from, so HMRC can distribute the funds to their counterparts around the EU;
4. we will be required to collect a completely impractical standard of evidence for the location of those customers and will be entirely responsible if and when we fail to do the impossible and it turns out someone lied to us about where they live; and
5. we will be subject to arbitrary audit/investigation by 28 tax authorities instead of just our own, at our own expense naturally (though there is some suggestion that the UK authorities will at least try to co-ordinate this to prevent what they consider an unreasonable burden being imposed).
The real sting in the tail, if I've understood the announcements so far correctly, will be for those who have a low volume of trade and so currently do not have to register for VAT at all. In order to use MOSS, you have to be VAT registered within the UK, and thus either add the current VAT rate onto all your prices when charging customers or take a hit of the equivalent fraction of your existing revenues if you choose to keep prices the same. I really hope I'm wrong about this, but I haven't yet seen anything suggesting that just because you're under the threshold for VAT registration in any/all EU states you'll be exempt from the new funds transfer arrangements, meaning a single foreign customer could suddenly put your entire business within the range of requiring VAT registration.
They're saying you can be registered purely for the VAT MOSS and so account for VAT as if your were unregistered for UK transactions.
I've not read anything on whether you'll be allowed to reclaim VAT on your inputs on e-goods/services you sell with VAT though (which is the usual way VAT registration works, you don't pay VAT on your inputs).
This group https://www.facebook.com/groups/DigitalVAT2015/ seems to be useful to keep track of it all from an SME perspective.
The way this is all written, I'll actually have to do work to BLOCK customers from the EU, or face legal issues. It seem more reasonable to require that the people who LIVE in the EU deal with their own local taxes.
Can you imagine having to keep track of tax laws of 195 countries? I'm sure a company like Amazon can deal with that no problem, but self-employed people developing software, music or ebooks are basically screwed and now need to waste a ton of their time trying to figure out exactly how to jump through the ever-changing hoops.
If I do it at checkout time, I am performing sort of a bait-and-switch with customers, which would leave a sour taste in my mouth.
I thought about the idea of adding a surcharge for EU customers since I need to deal with all of this. I don't know enough about international tax law to know if this is ok.
However, the issue is really that it is taking up time from providing a product. Sure, I could charge more, but unlikely enough to hire someone to deal with the issues. Instead it would more likely negatively affect the number of licenses I sell, which would again lead to me probably not being able to afford to pay someone to deal with it for me.
In the end it comes down to the fact that the EU is making it significantly harder for small companies or individuals to sell digital goods. In the end we are talking about every person who writes an ebook, sells some piece of software or sells digital music having to deal with these issues.
It seems the EU is stacking the deck against small companies and instead favoring larger organizations that can afford full-time accountants. Or favoring large companies that then sell VAT services to the individual.
This is a common effect and often an intended one when it comes to regulatory capture and the raising of trade barriers to protect those in power.
Charge more at checkout, EU citizens will either understand or they won't, but they are the ones that need to confront their own laws passed by their politicians.
You mean, like anywhere in the US where the price shown is without tax and you calculate it afterwards?
Except the citizens haven't taken that decision: the unelected European Commission has.
We could probably go down the reductio ad absurdum road of highlighting their appointment by someone who got elected somewhere along the way, but this powerful body is in no way directly accountable to citizens.
Some of the British North American colonials had a popular mantra of "no taxation without representation", which might appeal in this situation.
1. The citizens vote for a local Member of Parliament to be their representative (the winning MP actually being chosen via the statistically dubious First Past The Post system).
2. The party with the largest group of MPs probably forms the government (except when it doesn't, as with our current coalition administration).
3. The leader of the winning party becomes Prime Minister (except when that leader changes after the election, even if there was an explicit promise before the election that this wasn't what people would be voting for, as with Gordon Brown in the previous administration).
4. The senior executive roles within the government and indirect representatives such as European Commissioners are effectively appointed by the PM and their possibly entirely unelected political advisors.
The idea that European Commissioners have any meaningful electoral accountability at all is crazy. If you don't think so, try this simple test: When our citizens cast their only relevant vote on this matter at the last election in their constituency, was it even possible for them to know the name of the person who would ultimately become the European Commissioner for our country?
More than 50% of MPs have voted for the current UK Government. Yes, they aren't all in the same party. Many countries have coalition governments, and we have no problem with them. A minority government sounds very undemocratic
Right. But that means there is already an average of averages problem, even leaving aside the well documented criticisms of how those MPs are themselves elected. And literally everything beyond that is a matter of political dealing, not representative democracy, so the idea that there is any meaningful democratic accountability at all for the European Commission is still silly.
In any case, we're drifting well off the original topic now and I'm not sure this discussion is going anywhere constructive, so I'm going to stop there.
The electoral college doesn't get to choose any person for President. It's a direct correlation vote: do this, get that result. Such is not true with EC appointments. You vote for a national government, then you pray they appointment an EC that you favor, but there is no legally required direct correlation that says they have to appoint X person. You make that point within your own post (where you note that governments who have chosen unpopular candidates suffer), contradicting your claim that it's just like how the US President is elected.
Yes, in fact, they do.
> It's a direct correlation vote: do this, get that result.
A lot of people look at it that way, and that's approximately what happens (especially currently), but not because there are any enforced constraints, just because the way electors are chosen gives a very strong likelihood of that effect; historically unpledged electors were a thing [0], and faithless electors remain a thing [1].
No, it really isn't.
When the US people go to the polls to vote for a president, they are voting for the President. There might be some oddities in how the votes are counted, as with any electoral system, but there is no doubt about what position you're voting for or who your vote a certain way will help the most.
The number of levels of indirection involved in the election of European Commissioners and the mandates they receive within the Commission is such that there is really no significant accountability to the general public at all. The reality is that the Commission is often full of failed national politicians who have been given a cushy job as a thank-you from political colleagues when they can no longer credibly run for office in their own country. The "we have to do this, it's a European directive that all national governments must implement" technique has become a standard political tool for introducing unpopular legislation that would cause serious political damage if anyone whose job actually depended on being directly elected were to propose it back home.
A question that occurs for me is how TTIP would affect this situation, though. If TTIP was established, would the EU then require US businesses to collect VAT in the same fashion? Because that would be really sucky for you.
http://www.aicpa.org/publications/taxadviser/2013/june/pages... http://www.taxamo.com/digital-eu-vat-myths/ http://ebiz.pwc.com/2013/01/eu-2015-vat-changes-to-eservices...
Even if I were to presume that I could just ignore it since I am small, if I were to become more successful then I could owe back taxes and fines. I'm no expert on international law, but I presume there could be issues if I were running a company avoiding EU taxes and I ever decide to visit the EU.
>I'm almost considering shutting down sales to EU customers.
Do you have a payment processor (like Fastspring)? If so then they're handling all that ugly mess.
Note that in practice, you probably won't have to fear much as long as your revenue does not exceed a certain threshold. In Germany, for example, the "Bemessungsgrenze" is 17'500€, but I'm not sure if that also applies to your case.
Furthermore, you should also see the positive side: when for example renting dedicated servers from a German hoster, you won't have to pay VAT, so everything is 20% cheaper for you.
If it becomes feasible ($ wise), perhaps this then can be a new process implementation with lower (but feasible) margins.
If not feasible, then sales stop to the EU.
This means that if you sell £50 a year of knitting patterns you now have a liability to document the geography of your customers and prove that non are in other EU countries, OR pay tax to each country you sell to individually. HMRC are saying that companies (who may be individuals [sole traders in local parlance]) can not legally refuse to sell across EU borders to avoid this either. Along with that as you're now holding personal information on your customers there is a whole raft of new laws to attend including apparently a £35 registration with the UK Information Commissioners Office (ICO).
Foreigners already don't pay local VAT in the EU do they? This change is about sales to customers in the EU, there is no change AFAICT to transactions with customers not in the EU the VAT laws relevant to that are unaltered.
It's totally bonkers. The people involved have described "micro businesses" as selling < £2million GBP of digital services. They clearly haven't considered the impact on the many small businesses (now being termed nano businesses) that sell maybe a few thousand GBP of e-books or a few hundred pounds of knitting patterns or similar.
It's going to be terrible situation for tech start ups but it's been bad for everyone for a while who sells across borders in EU. You have to find out what strange box defined by eurocrats that your business fits into (if any). It's not that easy.
I'm a lawyer selling most of my services across borders. Some of my revenue is purely digital (downloads of documents and may be hit by the new rules), some would be characterized as consultancy services. If my client is in another member state and is VAT registered (like most, but not all companies) I don't have to charge VAT. But instead I am left to explain to my client that the mess is now theirs due to the weird chargeback rules (that they only know if they are used to selling B2B or buying from suppliers in other member states). If I sell services to private persons or companies that are not VAT registered, I have to charge the VAT of the country my law firm is in.
If I had given legal advice related to real estate I would be subject to yet other rules.
When I sell to companies outside of the EU it's a different set of rules again.
Most bookkeepers and accountants are very insecure about these rules. If professional accountants are not comfortable advising on the rules, the system is too complicated.
That would appear to fulfil a long-term aspiration of the European project.
Similar to the sales tax in the US/Canada
http://en.wikipedia.org/wiki/Value-added_tax#Comparison_with...
But there's VAT to be paid on the sale, which is kind of similar.
There are politicians and policymakers in the EU who would like to see that happen. However, every country in the EU has different VAT exemptions for goods and services - harmonising that across EU nations would be extremely difficult. Politicians will have an impossible task persuading the public that goods and services that were never subject to VAT will now be taxed.
What the EU should have proposed is a common VAT rate across the EU for digital goods. (This could still include exemptions or reduced rates for certain goods such as e-books.) I suspect this would have faced less opposition from member countries and it would eliminate much of the bureaucratic and administrative burden these new laws introduce.
That business eventually went south and now I know better. I will never hire anyone again until the money is flowing in the door at a speed I simply can't keep up with.
And the are burdens that are generally not imposed by the regulations passed by our representatives, but are rather imposed by the bureaucracies tasked with enforcing those regulations. Bureaucracies are pretty much about documentation, and most see little harm in more. And this mismatch of understanding slowly stifles small businesses.
This is not a problem with regulations, it’s a problem with bureaucracies and empathy.
It's sad, really. Literally everyone loses, except for our sanity.
This is called VAT on e-Services.
Most App Stores (except Google Play) took care of this already but if you did direct sales (e.g. via Paypal, direct payments etc) you need to calculate the tax every quarter and pay it to a member state (which will then distribute it to the other states so that you need to do only one payment).
You can read more on the UK government page:
https://secure.hmce.gov.uk/ecom/voes/welcome.do
The main new thing now is that app stores who had a subsidiary in Luxembourg can no longer funnel it through the lowest VAT country but need to split it up according to the customer country.
We've used this (for http://www.voyando.com) to change our software (ie. replaced a static VAT-variable for EU countries to a dynamic one based on what customers filled in during sign up). It was no more than 4 hours of work :-).
The (extra) tax filings are no more than a list with the different countries & VAT amounts. My bookkeeper/accountant will handle the rest ;-).
Just make sure your code doesn't crash because of this :)
"GB" vs "UK" for United Kingdom is another one to pay attention to.
Name of the Country in it’s own language, abbreviated to 2 letters. Results in EL for Greece, UK for the United Kingdom, etc.
GB is an island and has nothing to do with the UK, it’s as if you’d call Japan now Hokkaido, it makes no sense.
Which is correct, "GB" is ISO 3166 Alpha-2 country code for United Kingdom.
In the UK, 'accounts and records' that form a core part of the business's function (such as tax or compliance records, or even records for delivering a product to a customer) are exempt and do not require a Data Protection Act registration. There are many other reasons why you may need to be registered, of course, and the ICO have a useful online test to see if you do: http://ico.org.uk/for_organisations/data_protection/registra...
It should also be mentioned the changes only apply to B2C sales, not B2B.
HMRC (the UK tax authorities) even say "a digital certificate from a reputable organisation can also be used" but that sounds like a logistical headache.
As with most things tax related in the UK, it comes down to whether you think you're within the rules as best you interpret them, and whether you're confident you can honestly defend your stance to a VAT inspector. Other countries may not operate similarly, but the UK tax system tends to operate via debates over intents and outcomes rather than strict adherence to statutes.
More information on the above at http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPort...
If you supply digital services to consumers through an online portal, gateway or marketplace then it’s important to determine whether you’re making the supply to the customer or to the platform operator. Where the platform operator sets the general terms and conditions, authorises payment or delivery, or doesn’t clearly state the name of the supplier on the receipt or invoice issued to the consumer, then they’ll be seen as making the B2C supply even if they’re contractually only an agent.
https://www.gov.uk/government/publications/vat-supplying-dig...
So if you sell your digital products through Amazon or another online marketplace you can just calm the heck down and get on with business as usual.
Can you explain this further?
Amazon marketplace put the suppliers name on the page you purchase from, the seller is in control of whether items are sold, the seller is in control of the vital element _the price_. Amazon have T&C but they're not really the terms of sale per se, they're the terms for controlling the marketplace (the seller sets terms for example about non-redistribution or other copyright considerations). The seller appears to be responsible for 2 out of 3 of the main elements of the sale ignoring the point on T&Cs.
If Amazon hold the goods, or purchase them up front then I think they'd be liable but if the seller holds them I can't see how the arguments work.
Yes Amazon could enable the handling as part of their marketplace but I don't see them as liable for any non-compliance.
Now, if EU had a unique VAT across all countries, things would go much smoother. I also think it would help a lot to turn EU into a more unified single market, much like US is.
Of course, ideally, we would have the same rate across the entire EU for a given product category, but even then it might make sense to find some way to move it from the business’ country to the customers’ country, given that it is not intended as a tax to fund business operation but the cost of a given population of customers.
Well, not so fast. The U.S. has been dealing with sales tax issues on the Internet for years. Not only are there 50 different states, but local municipalities in those states also collect sales tax.
And ALL of them are mad they're missing out on sales tax from online sales.
There has been huge push-back against proposals to require Internet businesses to collect and pay sales tax across the U.S., but the handwriting is on the wall - sooner or later, U.S. retailers won't be able to play the tax-only-with-physical-presence game. Amazon has laws passed SPECIFICALLY FOR AMAZON[0] requiring they collect sales tax.
This feels like it's going to get worse before if gets better.
The law is supposed to have a clearinghouse ("one stop shop") per country, to which you forward all your non-local VAT information and they handle it.
I am also collecting links and resources on GitHub http://rachelandrew.github.io/eu-vat/
I've noticed several things like this come down the pipe since I moved to Europe and started paying attention. It seems that they just really like to pass legislation to make it harder to run software businesses over here.
Not that I'm complaining, mind you. Anything that removes more potential competition from my businesses can only be a good thing.
Please elaborate. I have quite a few friends who run "traditional brick and mortar" businesses and compared to the shit they have to put up with my "virtual" business is like a walk in the park.
The idea that someone selling a couple of copies of an e-book a year on gumroad should be required to register for VAT is utterly insane.
It's going to create a layer of rent-seeking middlemen and generally make the market less efficient.
If I accidentally click UAE instead of UK then I save 20% on a whole host of products.
1) If you're already VAT registered, this isn't really adding much work. Just track IP address and credit card address for the sale (you probably are anyway). Your accountant can take care of the rest.
2) App store sales are unaffected as long as they are collecting the VAT for you. As far as I know, both Google and Apple do this.
3) If you are not VAT registered and are under the threshold of £81k/yr. You have two choices: Register and go through all the compliance (this is a pain).
Or don't register, then block all non-UK EU countries from buying. You can still accept UK and other countries such as the USA, but the moment you make a cross-border transaction into the EU, you will have to register for VAT, start charging VAT and filing quarterly reports.
I assume that other countries with VAT thresholds will be similar, don't sell to EU countries other than your own and you should be fine. Although obviously check with your accountant first!
In theory, the EU requires you to collect VAT from EU citizens regardless of where you yourself are based.
The new rules state that you should charge VAT at the customer's local rate, so being based in a tax haven wouldn't - again, in theory - do you any good.
How on earth they ever intend to enforce any of this against the rest of the world is anyone's guess.
Well I'm certainly interested in how they see themselves exercising their power extra-territorially. I'm inclined towards letting them swivel on my middle finger.
HMRC themselves say that VAT isn't chargeable on sales outside of the EU, so doesn't that run contrary to what you're saying about the EU requirement for global VAT collection?
Incorporating in Delaware, or having a subsidiary/reseller in the US front the actual sales, seems like a better option.
Maybe its one of those sites where the editorial stance is so brazen in all texts that its best to consider it an opinion magazine.
Additionally, the accounting is already so complicated, if you're selling for BTC instead of local currencies I suspect at least one countries tax authority would throw a wobbler and want to treat it in a contradictory way to others.
Of course, you can also just ignore this and become a tax evader in a foreign country you have no intention of visiting. The question then becomes, will countries start using the European Arrest Warrant system to trigger arrest and extradition of (say) British people for failure to file taxes in Hungary? Quite possibly! The world is getting more globalised, so increasingly and especially for online businesses, this ends up meaning instead of following no countries law, or just your "home" countries, you end up having to follow all of them at once!
I's not worth to me to update system to verify consumer address, create invoices with more than 10 possible vat rates and do additional accounting work.
If I would have a lot of B2C consumers, I'd just incorporate in US or other non-EU country for this. I could offer them cheaper service (no VAT) and I would have much less work to do.
No, it's just the same for everyone.
It seems a bit unfair for the EU to demand e.g. US-based sites to collect VAT, and there not being anything going in the opposite direction.
Maybe. If our system is smooth enough to handle it then why not?
Alternately one can hope we will finally abolish the nation-state and just collect tax in a unified international way.
> It seems a bit unfair for the EU to demand e.g. US-based sites to collect VAT, and there not being anything going in the opposite direction.
Plenty of US states have similar laws that you're supposed to collect sales tax for customers in that state even if you're a website selling from elsewhere.