Starting in 2003 there have been constant developments in taxing B2C digital downloads in the EU. They first tackled sales that non-EU (read US) companies make to individuals in the EU – from 2003 U.S. digital sellers need to remit VAT on these sales. Rates vary, depending on the country of the individuals buyer.
From January 1, 2015 the EU introduced rules that pull EU-resident sellers into the same framework. Thus, a EU seller of digital downloads must currently charge VAT at the customer’s country’s rate, instead of the rate of the seller’s country.
Other countries, like Albania, Ghana, Iceland, Kenya, Korea, Norway, South Africa, Switzerland, Tanzania and the Bahamas have been ogling the EU developments and have implemented similar VAT rules. And just keep in mind that B2C VAT taxation is expected to be implemented shortly in Japan, Australia, New Zealand, Canada, Turkey and Israel. Surely this list will snowball to a point where most VAT countries will have these rules.
To no one’s surprise, the major challenge for the EU tax authorities is collecting the tax from non-residents. Non-residents will be required to register in order to file and remit the tax. And even though there are significant simplifications for non-residents to register in the EU, still there is significant ‘leakage’ – many software vendors have not filed.
The EU at this time has no registration threshold for these vendors. Every U.S. company that sells software to individuals outside the U.S. must consider whether a VAT registration is required.
Now, the authorities are considering to first go after the vendors’ payment platforms to collect the VAT (and penalties / interest!) that the merchant is liable to pay. The reasoning is simple: the platform collects the money, so the platform has the cash to pay the VAT if the merchant doesn’t pay VAT. This is based on the insight in online commerce that the authorities developed – there is no EU-wide rule change, case law or any other basis.
Note that this potential collection requirement for the platform would apply even if the platform has a written agreement with the merchant that the merchant is the legal seller, not the platform!
Also, with VAT making headlines as (still) a very fraud-sensitive tax, the expectation is that authorities will start creating new laws or regulations, preceded by case law, on collecting unpaid VAT in the e-commerce world.
In the past, authorities have made similar attempts to put VAT liability on payment platforms – the VAT liability of credit card processors in Korea springs to mind. However, this new trend looks like a serious development, and platforms and merchant should be prepared – particularly in the EU.