U.S. based sellers of electronic services (you know: music, video, games, apps etc.) to individuals anywhere are overwhelmed by the VAT compliance requirements. They now have to account for VAT at the applicable local rates in the following countries:
- All 28 EU member states,
- South Korea,
- South Africa and
- New Zealand.
- Update: Switzerland
- Norway and
- Iceland to be added to this ever increasing list
Taiwan, Canada, Russia and Australia will be added to this list soon, and within the next 2-3 years this list will grow to at least 45 countries. Update: Some say that BEPS will inspire all 130+ VAT countries to adopt some form of tax liability for B2C e-sellers within the next 5 years.
As a result, B2C e-sellers will be required to identify their customers by country and calculate the VAT amount due for each customer. Online VAT registration and bi-monthly / quarterly online filings are required as well, plus, of course, online payment in the local currency.
In addition, they will need to set up a tax determination system, pulling the correct rates from a database or from the cloud.
Granted, most B2C e-sellers will qualify for the “simplified” filing option in the EU: register for VAT in one single country and use that registration to report the VAT liability in every EU member state. But that simplification still requires that VAT is calculated in each customer’s member state.
Also, when B2C e-sellers are selling through an aggregator like iTunes / Appstore, Google Play store, Digital River and the like, the aggregator applies a so-called commissionaire structure in most (but not all!) of the countries that require VAT registration. For VAT purposes, this commissionaire transaction means that the e-seller uses the aggregator as a buy-seller (a distributor). As a result, the e-seller does not transact with an individual, and therefore the B2C VAT rules don’t apply on the transaction between the seller and the aggregator. The aggregator is on the hook for the VAT on the sale to the individual – and the aggregator will add the VAT at the rate of the country of the individual to the final sale.
PayPal and other payment platforms do NOT typically act as an aggregator, so using PayPal etc. won’t help with minimizing the B2C VAT liability. Also, PayPal does not normally help you identify your customers – you have to pay extra for that.
If all this doesn’t help, and the B2C e-seller is liable to be registered in all of the above countries, there is really no way out.
U.S. e-sellers always ask what the chances are of getting caught. Frankly, at this time these chances are not very significant. Some EU countries will send e-mails to these companies, saying that the authorities noticed that the e-seller is selling to individuals, stating the applicable law and gently asking to register for VAT and pay the VAT due.
I am aware that some countries are working with the U.S. Internal Revenue Service and other U.S. government agencies in order to go after the major culprits. I have not heard of anyone within the U.S. government being receptive to this, nor have I heard of a successful pursuit. It seems that there are very few treaties that would allow such action. But overseas authorities will go after the culprits in some form – what about company executives being held at immigration on their family vacation to Paris?
The biggest deterrent to non-compliance that I have seen thus far is the following. Most of these B2C e-sellers are audited at some point – either for an IPO, or due diligence of a suitor, or perhaps by their own internal or external auditors. If these companies do not report VAT on their overseas sales, they are basically overstating their overseas revenue with 21% (average VAT rate in the EU) – penalties excluded. This is a “body” that no sane CFO wants to have lingering in his closet.
There are plenty of businesses here in the U.S. and in Europe that can help B2C e-sellers set up their VAT accounting system, register for VAT and manage routine VAT compliance. I don’t provide this kind of services, but drop me a line if you want recommendations, tips and/or tricks.