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Europe: The Mini One Stop Shop for e-services, broadcasting and telecom services

In January 2015 the VAT legislation providing for the place of taxation for e-services, broadcasting and telecom services will change. Although the actual change in legislation will be minimal, it will have a substantial impact on the providers of these services from a VAT compliance perspective. This article discusses the beneficial scenario for counterbalancing the increased challenges on VAT compliance by using the Mini One Stop Shop scheme.

Overview of VAT changes in e-services,  broadcasting and telecom services per January 2015

From 1 January 2015, the country of taxation of e-services, broadcasting and telecom services provided to private consumers will shift from the country of the service provider to the country of the consumer.1

By taxing these supplies in the country of consumption a more level playing field is created. For instance, electronic services provided by a supplier now established in Luxembourg are taxed at a VAT rate of 15% (e-books even 3%), whereas as of 2015 the VAT rate applicable in the country of residence of the customer will become decisive. Non-EU established suppliers of these services were already obliged to ensure taxation took place in the country of consumption since 1 July 2003 to avoid distortions on the internal market.2

Although a seemingly small change in legislation, the budgetary effects for EU member states will be considerable. With an average VAT rate of 21% within the EU, countries with a VAT rate substantially lower than that – especially Luxembourg – will be hit hard. Furthermore the VAT compliance burden for service providers will increase substantially since they need to register in the EU countries where the customers are located and thus need to periodically file VAT returns.

Effects on VAT compliance

The effects on compliance demands for service providers are illustrated in the table below.

The first hurdle the service provider will have to overcome is to identify the location of the customer. As evidence of the residence of the customer the following information can be used:

  •       the billing address of the customer
  •       the customer’s IP address of the device that is used
  •       bank details provided by the customer
  •       mobile country code of the customer’s SIM card
  •       the location of the fixed landline
  •       other commercially relevant information

Under the current legislation, identifying the location of the customer is not a requirement if the service provider is established in an EU member state. Not only identifying the customer’s residence, but also determining and applying the correct VAT rate will be required, giving rise to increased demands on IT systems.

Once the residence of the customer is identified the service provider is confronted with the fact that they may be required to register for VAT purposes in all 28 EU member states, for the supply of e-services is a cross-border activity in optima forma. As this is a very undesirable consequence, a way to avoid registration has been introduced by means of the Mini One Stop Shop scheme. Not only will this avoid having to register in all EU member states, it will also avoid having to file VAT returns in the various EU countries and make separate VAT payments to all the various tax authorities.

Current Situation                                                          Situation per 1 January 2015

Country supplier

Country customer

VAT rate

Country supplier

Country customer

VAT rate

Luxembourg

Spain

15%

Luxembourg

Spain

21%

Denmark

15%

Denmark

25%

Germany

15%

Germany

19%

Luxembourg

15%

Luxembourg

15%

 

Details of the Mini One Stop Shop

A practical guide to the VAT Mini One Stop Shop was published by the European Commission at the end of 2013.3

Although not binding, these guidelines provide functional and technical specifications of adopting the Mini One Stop Shop scheme. Modifications of the guidelines and the current information as described in this article may therefore become effective.

Under the Mini One Stop Shop scheme companies providing e-services, broadcasting and telecom services will be able to account for the VAT that is due in the member states of consumption by filing just one single return in the country of identification and making one single payment. This member state will then distribute the VAT due in the member states of consumption.

The Mini One Stop Shop is similar to the system already available for non- EU entities to account for VAT on the present services. Under the Mini One Stop Shop there are two schemes available:

  • the Union scheme for EU established companies
  • the non-Union scheme for non- EU established or registered companies, and companies not required to register

Established taxable persons

Taxable persons can be considered established by having either a business establishment or a fixed establishment. In order for a company to be considered as having a fixed establishment it is required to have a sufficient degree of permanence and a suitable structure in terms of human and technical resources to be able to make the supplies of services. A mere VAT registration does not mean a company has a fixed establishment in the country of registration.

If a taxable person chooses (it is not imperative) to adopt the Mini One Stop Shop it will have to register in 

the member state of identification. Under the Union scheme this is the member state of establishment, either business or fixed. Should a taxable person only have a fixed establishment in the EU, it can choose between these member states for a member state of identification.

Taxable persons wishing to apply the non-Union scheme can choose any member state to be the member state of identification. This member state will attribute the taxable person with an individual VAT identification number (which will start with EU).

Which turnover is included in the Mini One Stop Shop return?

Domestic sales

All sales that are consumed in the country of establishment are not included in the Mini One Stop Shop return. These sales will need to be accounted for in the domestic VAT return. Companies using the non- Union scheme must also include the sales in the country of identification and will therefore not be required to file a domestic return.

Sales from fixed establishment

Where a taxable person has a fixed establishment in a member state, all supplies of the present services made by that taxable person to consumers in that member state are also declared via the domestic VAT return of that establishment and not on the Mini One Stop Shop return.

Sales by VAT Groups

Some EU member states provide the option of forming a VAT Group for VAT purposes. VAT groups can also make filings under the Mini One Stop Shop scheme. It is required to register under the same VAT identification number with which domestic sales are reported. Should separate numbers have been given on a domestic level then a new or existing single number must be allocated to the VAT Group under the Mini One Stop Shop scheme.

Sales from any fixed establishments by members of a VAT group are not included in the Mini One Stop Shop VAT return of the VAT Group. These will have to be reported in the VAT return by that fixed establishment. The ties with that fixed establishment are therefore broken for Mini One Stop Shop purposes.

Exemptions

Any supplies that are exempted in the EU member state of consumption (e.g. e-gambling or e-education) must not be included in the Mini One Stop Shop return. As countries may have different legislation with regard to the application of exemption, the supplier must keep a good record of which sales are to be included in the return. For example services related to e-gambling in certain member states.

Consequences of opting for the Mini One Stop Shop

Filing a return under one of the Mini One Stop Shop schemes will decrease the impact on VAT compliance and avoid having to file several returns. Taxable persons will, however, need to bear in mind that VAT regulations on any sales that are accounted for under the Mini One Stop Shop scheme will still apply.

This means that, for instance, when invoicing the invoicing rules of the member state of consumption are applicable. As of 1 January 2013 the rules for electronic invoicing should have been more or less harmonised, however there can still be a discussion between member states for instance on what constitutes an electronic invoice of which the authenticity of the origin and the integrity of the content is guaranteed.4

Not only with respect to invoicing rules, but also in the situation of bad debt relief the rules of the member state of consumption will have to be applied. A return filed under the scheme should be made out into Euros, although member states of identification with a currency other than the Euro may be required to file the return in their national currency. It is then up to the member state of identification to make conversions back into Euros and transfer the return information and the VAT due to the other member states. Upon choosing a member state of identification – for non- EU established entities – filing a return in a member state that has adopted the Euro may therefore be preferable.

Furthermore, returns are to be filed on a quarterly basis and submitted within 20 days of the end of the period covered by the return, including payment within that period. All EU member states however retain the right to impose penalties should a taxable person not meet these filing and/or payment deadlines under the Mini One Stop Shop scheme.

Other considerations

Incurred input VAT

It may be likely that a taxable person will incur VAT on business expenses in the member state of consumption of its services, for instance, VAT on hotel accommodation and transport. The returns filed under the Mini One Stop Shop scheme can however only include VAT due on consumption of the amount of VAT that must be paid by taxable persons. 

It may be likely that a taxable person will incur VAT on business expenses in the member state of consumption of its services, for instance, VAT on hotel accommodation and transport. The returns filed under the Mini One Stop Shop scheme can however only include VAT due on consumption of the supplied services. To reclaim the VAT incurred on expenses a separate refund claim will still need to be filed under the Electronic VAT Refund Mechanism or the 13th VAT Directive.5

Effective use and enjoyment of services

An exception to the principle that VAT is due in the country of the customer will apply in the situation where the effective use and enjoyment of the service takes place in another country. As an example, this would mean that downloading e-books on a grand scale whilst temporarily visiting Luxembourg and reading the books in the Netherlands, should not be taxed at 3% (rate in Luxembourg) but at 21% (applicable VAT rate in the Netherlands). This exception may have been introduced to avoid fraud, but the effective use and enjoyment of e-services will become difficult for taxable persons to check, if not impossible.

Distance sales of goods

As it stands at the moment the Mini One Stop Shop will only become available for the supply of e-services, broadcasting and telecom services. Under current legislation taxable persons that exceed a certain threshold when selling goods to private persons in other EU member states are obliged to register for VAT in that country and will have to make VAT filings. It would therefore be beneficial if the European Commission would order that the supply of goods that constitute distance sales could also be included in the Mini One Stop Shop return to decrease the administrative burden on taxable persons.

Availability and timing

The web portal for the Mini One Stop Shop schemes will become available per 1 October 2014 to enable taxable persons for a timely registration. Taxable persons will have the option to register for the Mini One Stop Shop by using this web portal as of then. If the member state will be informed by the tenth day of the month following the first supply, the scheme may still start from the date of that first supply. Sales as of 1 January 2015 can therefore still be accounted for under the Mini One Stop Shop if the member state has been notified before 10 February 2015.

If this deadline is not met, any sales in other EU member states will need to be accounted for in the member state where the customer is located and thus will possibly require up to 28 VAT registrations. Taxable persons wanting to adopt the Mini One Stop Shop – and it is expected most suppliers will – should therefore immediately take action in October to ensure everything is up and running by 1 January 2015.

Footnotes

1 Council Directive 2008/8/EC.

2 Council Directive 2002/38/EC.

http://ec.europa.eu/taxation_ customs/resources/documents/ taxation/vat/how_vat_works/ telecom/one-stop-shop-guidelines_ en.pdf

4   Council Directive 2010/45/EU.

5   Council Directive 2008/9/EC

for the Union scheme and Council Directive 86/560/EEC for the non- Union scheme.

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