May 2014

VAT changes concerning telecommunication, broadcasting and e-commerce services from 2015

What will change as from 1st January 2015?

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Currently telecommunication, broadcasting and e-commerce services supplied by EU suppliers to private customers based in the EU (B2C transactions) are subject to VAT where the supplier is established.

As from 1st January, 2015 the place of supply for these services will become the place where the customer has his permanent address or usually resides. Member States will however have the possibility to subject the transactions to VAT under the ‘effective use and enjoyment’ rules.

Challenges

The changes will have an important impact for businesses operating in these sectors as, amongst other things, they will have to:

  • Analyse the requirements imposed in relation to the changes in the place of taxation
  • Identify where these customers are located according to the appropriate criteria
  • Adapt their IT systems
  • Align their commercial policies and the pricing of their services
  • Review their processes to be able to comply with the new VAT reporting requirements
  • Review the agreements with their counterparts (e.g., vendors, intermediaries, etc.)

Why is it time to act now

The changes will take place in less than two years, but even if this seems a long way off given the scale and complexity of the changes it is important for affected businesses to act now.

Moreover, the changes may have to be applied to services started before 2015 if they are not completed until 2015.

Key issues

Analysis of the requirements
An EU Regulation (COM 2012/763) which is currently being discussed in the Council will lay down implementing measures particularly in respect of the requirements for identifying the place where the recipient “has his permanent address or usually resides”. Also, this has not yet been formally adopted, we now have a good idea as to how the changes will operate in practice.

It is crucial therefore to analyse all the relevant legal changes in order to be able to define for each business the best solution and strategy to enable it to be ready and compliant when the changes will become effective.

Identification of the customer’s location
The EU Regulation provides a list of criteria (i.e., billing address, Internet Protocol, Country Code of the SIM card, etc.) which will have to be used by businesses to identify where their customers are based, in order to ensure that the VAT rate of the correct jurisdiction is applied.

Adapt the IT system
Systems will have to be configured in such a way that they enable the customer’s country to be recognised and the correct rate of VAT to be applied to all transactions. Systems will also need to ensure that all local requirements are met. It is important to act now as the implementation of the changes to the IT system will need to be preceded by a test phase so as to ensure the correct and efficient management of VAT across the countries where the business will have VAT obligations from 2015 onwards and to avoid any business disruptions.

Commercial implications
In the current scenario businesses active in the e-commerce, telecommunication, radio and television broadcasting sectors usually apply universal pricing. After 2015, they will have to carefully evaluate whether to continue with universal pricing policy or change it.

Due to the differences in VAT rates across the EU Member States, universal pricing may lead to the erosion of profit margins and, on the other hand, the adoption of differential pricing may bring commercial issues and increase the attempts by customers to manipulate the price they pay.

The table below shows an example of the consequences arising from the adoption of the two different pricing policies:

EU Member State

Standard VAT rate

Universal Pricing

Differential Pricing

 

 

VAT exclusive price (€)

VAT (€)

Total price (€)

VAT exclusive price (€)

VAT (€)

Total price (€)

Luxembourg

15%

86.96

13.04

100

86.96

13.04

100

Germany

19%

84.03

15.97

100

86.96

16.52

103.48

France

20%

83.33

16.67

100

86.96

17.39

104.35

UK

20%

83.33

16.67

100

86.96

17.39

104.35

Italy

22%

81.97

18.03

100

86.96

19.13

106.09

Hungary

27%

78.74

21.26

100

86.96

23.48

110.44

Compliance operations
As from 1 January, 2015 businesses will potentially have to register for VAT purposes in all EU countries where their private customers belong.

This means that businesses will potentially have to deal with 28 different tax Authorities in respect, amongst others, the filing of VAT returns, the VAT payment, the VAT audits, etc.

In addition, businesses will have to apply 28 different standard VAT rates (plus potentially reduced VAT rates).

In order to reduce the administrative burden businesses can opt for the Mini-One-Stop-Shop (so-called “MOSS”) according to which EU businesses will be entitled to file a single VAT return and to perform one cumulative payment to the competent tax Authorities.

Agreements with third parties
The changes to the place of taxation rules imply the need to review agreements with third parties so to ensure the proper identification of the VAT responsibilities of each of the involved parties.

Approach

The scale of the changes gives rise to different steps to be undertaken. The main steps should be:

Analysis the impact of the changes on your business scenario Identify the issues and define the actions Establish a work programme and a timetable Implement the changes into the IT system Test the changes made to the  IT system

How can we help?

EY with its multidisciplinary, integrated approach can assist you in identifying the best solution for designing your IT system, tailored to your needs.

Once the best solution has been identified we can assist you in implementing it and ensuring that it fully complies with all VAT requirements.

EY has set up a Business Working Group with the largest e-commerce, telecommunication, radio and television broadcasting companies that will be affected by the 2015 changes. This Group has successfully used its collective expertise and detailed understanding of the practical and commercial issues arising from the 2015 changes to effectively engage with the European Commission and the Member States with a view to having the legislation reflect the needs of business wherever possible.

We serve all of the top 20 telecommunications companies ranked by market capitalization: 7 as auditors and 13 as advisors and EY Luxembourg has over 85 multidisciplinary professionals fully dedicated to the e-commerce, telecommunication, radio and television broadcasting sectors and has accrued substantial experience in assisting businesses operating in these sectors.

Learn More

If the changes affect your business and you would like to discuss the issue with us in more detail, please do not hesitate to contact us.

 

Download the Tax Alert (pdf, 559kb).