Making Sense of the New VAT Rules | Hacker News Reader

Making Sense of the New VAT Rules

rachelandrew.github.io

62 pointsAliCollins62 comments

The main reason for this change, which was agreed in 2008 and came into effect on the 1st of January 2015, is to stop companies like Amazon, Apple, Google and other large companies from enjoying low taxes as they base their digital services arm in Luxembourg. For ebooks, they enjoy a low 3% sales tax. A very nice loophole for these large corporations but it has rightly so been closed.

The knock on effect is that small business and retailers have to deal with this new EU VAT change too where VAT needs to be calculated at the customers location rather than the sellers location. Once they do this, they then need to report it to their respective government. This adds a lot of administrative burden on small sellers that are barely making any sales.

The most important thing that the EU could have done which they didn't do is to have a threshold so that small business and individuals aren't affected. Recently, Japan introduced a similar change but maintained a threshold to protect small businesses: http://www.vatlive.com/asia-pacific/japan-consumption-tax-fo...

The EU VAT change is an unnecessary burden for small business and individuals which is why we handle VAT completely for our customers.

I am the founder of Payhip: https://payhip.com

Wouldn't a clever idea be to let the payment procesor handle the taxes? so you hand over to google/amazon/apple to do your payment, and give them a tax free price, and they apply the tax for the buyers location, and compile a monthly invoice for you?

Some of the digital purchase platforms will do this for you. Bare paypal won't on its own. Also "buyer's location" is unnecessarily complicated to determine and prove.

What's more bizarre is this only affects "automated" systems. If you say "paypal me £5 and I'll send you a comic", you're fine.

That sounds like a valid solution for small businesses.

One of the big practical difficulties with the whole EU VAT mess is that different EU tax authorities can and do interpret the same rules in different ways. For example, in the UK, HMRC seem to have stated relatively clearly that incorporating this kind of manual step currently puts the transaction outside of the scope of the new rules, but I've seen reports that other states aren't accepting this. Even if you go via your home state's One Stop Shop service, you're still now subject to audit and potentially penalisation by any of the other tax authorities if they don't like your numbers.

Of course, the send-it-by-email strategy also only applies if you're talking about a one-off "digital download" style transaction. That seems to include a lot of tiny microbusinesses, but it's no use for people doing, say, X-as-a-service or library/subscription style web sites who happen to have a small number of customers from other nations in the EU.

> "buyer's location" is unnecessarily complicated to determine and prove.

My only way of guessing this is by country of delivery? For instance, I'm living in the UK, but if I pay by using my Irish credit card, should I be charged using Irish or UK vat?

In EU you have to advertise the price with the tax already included. So even if somebody else is handling the tax rates for you, you have to advertise the correct price on your website depending on where the buyer is.

Yeah, but I assume Amazon lets you either keep the price the same and Amazon then sends you a bill or you let Amazon increase the price and take the VAT directly from the sale.

well. you can also do it the other way around and charge the same price but the VAT component changes. -e.g. 5€ gross price will result in different net prices depending on the buyers location. hence slight differences in the margin for you

You also have to display the VAT rate and share of the price. So this won't help much.

But you probably don't have to show that level of detail until the payment stage, by which time hopefully you do have enough information to determine it.

In contrast, consumer protection laws in various EU states require that the price shown is the full tax-inclusive price throughout, even if it's in big numbers right there on your home page.

That's easy to work around, just set the total price to the maximum for all possible rates. It does mean that you're pocketing more revenue from countries with lower sales tax rates, but makes it simpler to manage in the front end.

The calculation to make is will you lose in terms of total profit by charging people in Luxembourg 24% more than you would otherwise (3% sales tax vs 27% VAT in Hungary)?

The above is what Amazon does and I believe they allow authors the option to add or exclude VAT from their price. Amazon handle VAT completely.

The problem is that lots of people don't use Amazon/Google/Apple and they sell direct. They have to implement the necessary code changes to detect and calculate VAT correctly. On top of this, you have to register for VAT MOSS (UK) and then report and pay VAT to HMRC (UK). This is a lot of hassle and believe it or not, small businesses have been closing because of this.

For us, we had to change our terms of service so that authors and content creators gave us a licence to sell their work so that we can become the supplier and therefore the legal burden is on us to calculate, report and pay VAT to HMRC.

That's what your parent is saying (s)he does.

Here is a blog post by Andrus Ansip, the European Commissioner for the Digital Single Market, on the new EU VAT rules. It's not a particularly supportive or re-assuring post given the criticisms of the new rules

https://ec.europa.eu/commission/2014-2019/ansip/blog/euvat_e...

Apparently these rules were agreed in 2008. Countries have obviously failed to communicate the impending changes. I liked this comment below the post:

"And so much for it being in place since 2008.

This is akin to the Vogons in Douglas Adam's Hitchhikers Guide to the Galaxy claiming that the plans for Earths destruction have been available for viewing on Alpha Centauri for 50 years."

Adams liked that joke so much, he used it twice:

“But the plans were on display…”

“On display? I eventually had to go down to the cellar to find them.”

“That’s the display department.”

“With a flashlight.”

“Ah, well, the lights had probably gone.”

“So had the stairs.”

“But look, you found the notice, didn’t you?”

“Yes,” said Arthur, “yes I did. It was on display in the bottom of a locked filing cabinet stuck in a disused lavatory with a sign on the door saying ‘Beware of the Leopard.”

Which, in my mind anyway, is really the joke itself.

It's worth noting that the post you linked to was from 16 December 2014, which is ancient history in terms of this issue. Vince Cable (the UK's Business Secretary) wrote a similarly ignorant and dismissive response[1] to an on-line petition on 8 December.

However, there has been a lot of further discussion, at least in the UK, since that time. It seems that the government and tax authorities here may finally be realising how much they screwed this one up.

Unfortunately, since most of the small businesses elsewhere in the EU don't even seem to know they're now breaking the rules and their respective tax authorities seem far less bothered about those rules, there isn't the same level of protest (at least not yet) so Eurocrats like Ansip may or may not be under any real pressure to fix the problem so far. And it seems that any serious fix does require further action at EU level, because national governments and tax authorities don't have the flexibility to make unilateral decisions on some of the key points (unless they flagrantly ignore the rules themselves, as several do seem to be doing already).

[1] https://www.change.org/p/vince-cable-mp-uphold-the-vat-exemp...

As I mention in my post below, if you're a non-EU company selling digital goods and services to EU customers, then strictly speaking these new rules don't change much - it's was already the case that non-EU suppliers that supply electronically supplied services to EU customers (B2C transactions, not B2B) should be charging the customer VAT at their local rate.

Businesses could choose to register in each state or a single one using the VoES (VAT on e-services) system. These rules have been in place since 2003.

However I imagine that a lot of non-EU companies didn't bother with this either out of ignorance or simply because they didn't care or thought it could be enforced.

Under these new rules, MOSS replaces VoES but it's practically the same thing. This mostly affects EU businesses who now have to charge the rate where the customer belongs, not where the supplier belongs.

I think ignorance is almost exclusively why non-EU companies didn't use VoES. I never heard of it until this fall when I started hearing rumblings of VAT MOSS.

When starting a small business where you sell digital goods, one of the last things you are thinking about is researching tax laws for the 250 countries around the world (or trying to find an accountant versed in tax laws around the world). Instead, you worry about laws based on where you operate from.

I realize that the EU implemented VoES since it is easier to enforce tax collection on businesses than individual consumers, but it is pretty messed up from a conceptual standpoint. Making every business that could possibly ever sell a non-physical good from a website have to register in foreign countries, deal with making international wire transfers, generate invoices based on laws in 28 different countries, etc. The alternative being consumers pay the appropriate tax to the country they already pay taxes in…

In many countries consumers are already supposed to pay over the VAT component on foreign purchases. It turns out, that almost no consumers ever did that, and now the collection liability is being shifted to companies instead.

Hey, JP here from Taxamo. A few points. These new EU rules are effectively seen as the template for the taxation of the digital economy. The OECD has stated that a simplified online registration scheme (such as MOSS), is "the only viable option for applying taxes to e-commerce sales by non-resident traders to private consumers (so-called B2C)." Tax authorities around the globe are looking at how these new rules work out as numerous countries (e.g. Japan, South Africa, Australia, Canada) are either planning to introduce similar rules, or have already revealed plans. The VAT is now due in the country where the digital service is supplied. It is that country's tax, the companies are vehicles for the collection of this tax from their end users. But there's so much more to these new rules than evidence collection or invoicing. That's why we have created a solution that covers all elements of the new rules. Take a look for yourself: http://www.taxamo.com/how-it-works/

Taxamo seems to be purely focussed on EU compliance. Do you know of any other countries that have already or are about to put in place similar sales tax regulations? Would Taxamo add timely support for new countries and regions or will the focus remain only EU?

Also if you limit sales to businesses (and verify their business status) in the EU region and therefore have no VAT on your invoices do you still have to file a zero value VAT submission via MOSS?

A couple of useful resources if you need to calculate VAT rates across Europe and Stripe's fees in each country: http://jsonvat.com/, https://stripefees.com/

It's also important to note that these new rules cover the sale of digital goods to CONSUMERS only, if you are (for example) a registered business in the UK and selling to a registered business in Germany, German VAT is not applied, and you do not have to pass it on (via VATMOSS) to the German government.

Yes, B2B sales between EU countries are handled using the reverse charge system, when the supply is where the customer belongs - subject to certain use and enjoyment provisions (e.g. If a UK business sells software to a German business for use in the German business's UK office it would be subject to UK VAT instead).

If you want help determining what rate to charge a customer, I built both JS and Python libraries that include functionality to:

  - Determine rate based on
    - phone number
    - billing address
    - self-declared location
    - IP address
  - Validate VAT IDs
  - Fetch exchange rate info from the European Central Bank

You can find the code at https://github.com/wbond/vat-moss.js and https://github.com/wbond/vat_moss-python.

I also wrote up a bit about dealing with registering for VAT MOSS, generating invoices, etc.

Yet another reason why, as a startup, you should stay far away from writing your own payment processing - unless you're a payment startup.

It's not a timesink, it's a freaking black hole.

it's less about the payment processing but about the invoicing and billing itself. anyways, it means more complexity for start ups in the EU which sucks

Yes, well, I used "payment processing" as an umbrella term here.

Because what you mention is in fact one of the things that people often only realise after they're already halfway into implementing a pretty Stripe binding; "Oh, oops, we have to send proper invoices, too". And then "Oh, dunning, pro-rating, etc. turns out a lot more complex than I thought".

I've been there a few times, it can be done, but it has been a nightmare every single time.

Agreed accounting/payment processing is a crazy time sink. On the other hand, I'm not aware of any on-line payment service or marketplace site that could even support all the fundamental requirements for a lot of start-up business models to comply with the new rules right now without doing a significant degree of additional integration or customisation work anyway.

For example, it's all very well having the payment service work out the actual VAT and do the invoicing, but under existing consumer protection laws in various EU states you still have to show the tax-inclusive price throughout. That immediately means you can no longer display a static price on your web site, if you add VAT at the appropriate local rate to a fixed base price rather than having a fixed total price paid by the customer and then taking a different VAT hit internally depending on where each customer is.

The new EU rules are only for digital products right? So how about selling a "magic bean" that comes with a free download of whatever you're selling? Or sell a "planting of a seed" service that has a user area that contains special bonuses, like a download of whatever.

Are these workable or too far out?

Maybe. Some countries have all sorts of anti avoidance rules when it comes to tax.

As a small company, do you really want to go to court because you're selling beans instead of downloads? I assume this will be spotted relatively quickly when authorities do an audit. Also, the larger players, they would never use this.

The rules apply to digital products AND services (e.g. memberships, cloud storage ...). You'd need to physically ship something to avoid the rules, but then, other burdens (import/export/customs/taxes) come in place.

What if, and I'm just thinking out loud here, the digital product (software) was free but you had to receive an activation code (by snail mail) to use it?

Terrible user experience for sure, but under what taxation would this fall?

I have read 'masters of doom' last night and I can't believe we used to ship around 'installation disks wrapped in ziploc bags', but maybe it's time to get back to that? j/k

Grey area IMO and different EU tax authorities may have differing views, just to make things more complicated.

you also have to pay VAT on physical products when you import them. When I receive a package from the US, I have to pay VAT and customs fees on delivery (unless the sender declares it as a "present", but that's illegal)

There is usually a threshold under which no VAT is levied (different for each country however).

There aren't any of those. That's pretty much the point of the EU.

I've seen reports of people arguing along those lines to circumvent the new rules for now, e.g., selling software on CD that is posted to the purchaser with a free accompanying download. Some are trying a similar strategy without any physical element involved, but instead relying on the presence of some manual step, such as attaching a PDF to an e-mail sent by a real person rather than being a fully automated download.

I haven't seen anyone challenge the validity of the physical product workarounds so far, but note that similar rules are due to apply to physical sales as well as digital ones from next year, so this is probably a temporary reprieve at best.

Has there been any concrete evidence that the EU plans to extend these rules to physical goods as I've only seen speculation.

For now, I'm trusting the comments from the various trade and campaign groups on that point. They've been in meetings I haven't with organisations like HMRC, and they all seem to be telling a similar story, though also with a similar lack of detail so far.

I completely agree that some official guidance we can all see and act on is well overdue on this point. There are several issues connected to the new EU VAT rules that are being widely reported but I'm having trouble finding official citations; probably the most important one I've come across is the legality or otherwise of declining to sell to customers in the EU but outside your home nation in an attempt to avoid the whole mess.

One workaround is to change your business model and accept donations instead. That obviously won't work for everyone, obviously.

This works because tips and gratuities are not considered taxable consideration for VAT purposes and therefore outside the scope of VAT. It has to be a genuine tip though - i.e. voluntary, no minimum or recommended amount and not a condition of purchase.

There is a platform out there that lets you sell things under this model but I can't remember it's name.

Physical goods are already subject to VAT in the EU; in many cases at higher rates than apply to digital goods.

You gain nothing by selling beans (with free downloads) except extra costs for you and extra hassles for your customers.

Extract more money from Amazon by harming small businesses, because no tax is ever high or complicated enough! Hooray! Everybody is so much better off now that we have to pay more money to the EU to conduct business. It's so great.

Happily it turns out that these new rules only apply in cases where the EU provides an important service: the legality of the trade itself in the first place.

What is to prevent some guy from making a US business that does nothing other than sell EU businesses' products to customers on their behalf ?

Because selling products to the US is VAT-exempt, and US companies selling to EU customers is also VAT-exempt.

I'm betting the first company doing this will be amazon.

That has nothing to do with this change in VAT rules. If that loophole actually existed Amazon would already be using it.

US businesses are actually required to charge VAT, but smaller operations get away without doing that. At Amazon's volume it makes sense to set up tax entity in the EU to avoid import duty.

For example for amazon.com selling to a consumer in Ireland sees 17% import duty + compunded 23% VAT on the item cost and the shipping cost.

> What is to prevent some guy from making a US business that does nothing other than sell EU businesses' products to customers on their behalf ?

Customers having to pay import duties and VAT, then being involved in an international tax evasion scheme.

> US companies selling to EU customers is also VAT-exempt

You got this wrong. US companies need to collect and pay VAT if they want to sell to the EU - edit: for digital goods.

On digital goods and services. I'm pretty sure the liability to pay VAT on physical goods, along with any import duty, is the customers when the item is imported.

For the record, here's the HMRC (UK revenue service) explanation of the special VoES scheme that's been around for ages:

http://webarchive.nationalarchives.gov.uk/20120128212010/htt...

Yes I forgot to mention that - for digital goods :)

US companies need to comply with these rules, but many of them don't.

I think the main issue here is enforcement. I don't think it's reasonable to expect the IRS to enforce foreign legislation on US companies. And that's exactly the reason why US companies often don't comply.

Edit: I'm talking about digital downloads and digital services. If you're shipping goods then there might also be import duty liabilities, not sure.

Enforcement makes the whole process utterly impractical.

The EU's VAT and tax authorities are barely keeping up with work as it is. And the idea that companies with five or six figure turnovers are worth chasing for a few percentage points of extra VAT is nonsensical when there's so much other VAT and tax fraud in the EU.

I'm not convinced taxation is the real point. To me this seems more like a ham-fisted attempt to force businesses to keep records for surveillance purposes.

I wonder if at some point in the next decade we'll see companies having to make their online sales records visible to the tax authorities for "automated verification", so they can find out who's been buying machetes and bomb chemicals.

Yes, absolutely. There are cases where hundreds of millions have gone missing in carousel frauds. I'd assume those take precedence over small VAT cases.

Not sure on the second part, but I do know some tax authorities are already using various data mining techniques to flag certain behaviours.

Customs in the customer's country may intercept the package and charge VAT and duty for it. That has happened to me from time to time with Amazon as far back as 1998.

And the carrier company will charge a fee for "handling the paperwork" or whatever the hell it is they do.

My experience has been that this happens pretty infrequently if your packages are relatively small. I think it's only happened to me once in fact and that was a long time ago.

US/non-EU companies selling digital products and services to the EU is most certainly NOT exempt, and it wasn't exempt before these recent changes - it's been a requirement that US/non-EU businesses selling digital services register to charge VAT to EU customers at their local VAT rate since 2003!

Rather than registering in each EU country, they could register in one country and use the VoES system to submit their returns.

It was because of this ruling that big companies like Amazon found a workaround by setting up subsidiaries in countries with low VAT rates like Luxembourg and sold their goods from there. This meant they could charge Lux VAT instead of the customer country's VAT rate.

This obviously gave them an unfair advantage not only over local businesses but also non-EU businesses that used the VoES system.

In effect these new rules change little for non EU businesses. The VoES system is being retired in favour of the new MOSS system which is effectively the same sort of thing, only now, ALL businesses including those in the EU, have to charge local VAT when selling digital services to the EU.

For e big companies like Amazon, this closes a loophole. For those who were correctly charging VAT under the VoES system, nothing much changes. For those non-EU companies who were chose not to comply with the 2002 rules, well I'd imagine they will continue to not bother. And those who were ignorant of them (many I'm sure) might now be a bit more aware.

But of course the businesses it affects the most are small EU businesses who now have to charge different rates of VAT or use MOSS when they didn't before.

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