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Will the new EU VAT regulation on e-services destabilise the digital market?

Healy Consultants Group PLC
13 February, 2015

Did you know that Luxembourg is probably the most affected country in the single European market by the new EU rules on VAT (value added tax, largely equivalent to sales tax or a goods and services tax GST).

Currently Luxembourg's VAT rate is flat 15%, the lowest in the EU. Consequently, the country is the preferred jurisdiction among companies selling various IT and digital services including applications and digital subscriptions to local customers.

Luxembourg was attractive for Amazon, as the country levies preferential VAT of only 3% on e-books. This worked well because of the EU's rule that VAT on services is charged in the country in which the seller is located, whereas goods are taxed in the country of receipt. As a result, e-book distributors could charge less for the final price on items, while retaining the same level of profits.

While this policy worked well for Luxembourg, providing fresh income of tax receipts on digital services sales for the small country, these recent changes will result in an unexpected hole in the budget.

On a global scale, the tax burden on digital services is quickly catching up to the levels of physical goods, being payable in the buyer's country of residence. The buyers of apps, e-books, digital music and other digital items will surely feel the tax burden in the increased final prices of the goods, but the administrative burden of the producers will increase as well.

This new revised law requires the market to track and keep record of the buyer's residence, with the records stored for 10 years instead of the normal 6-year retention period. Digital entrepreneurs would have to follow up the sale with charge of the applicable VAT on their product in the customer's country. At the end the seller will need to reconcile these figures with their country's Mini One Stop Shop (VATMOSS) every quarter.

The VATMOSS will be in charge of handling the distribution of the VAT receipts to the countries included in the new regulation resulting in Luxembourg no longer receiving the majority of direct revenue. This said, in the end, the digital businesses will begin to feel the administrative burden of the data collection, time-consuming analysis and ongoing retention requirements.

Favourably, in many cases organizations selling digital services in the EU, namely the portals and aggregators selling these final digital products on behalf of developers and artists alike, have taken the responsibility to operate the administration required by the new EU regulations.

The lack of any minimum sales threshold for registration and every business is required to participate in the VAT calculation. In other words, every businesses must register with their country's local VATMOSS equivalent in order to make a single digital sale.

As a result of this policy, Europe's digital economy which already struggles to keep up with the US may be severely affected as the tax rules are under siege.

Visit Healy Consultants' website to learn more about doing business in Luxembourg and running a business online.

About the Author

Healy Consultants Group PLC

Since 2003, Healy Consultants assists international Clients with company incorporation services worldwide. Our services include: company registration, opening of corporate bank account, accounting and tax services, legal services, jurisdiction comparisons...more.

To inquire more information about global business set up; call us on +65 6735 0120 or email us at email@healyconsultants.com


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