If your company sells electronic services to European consumers, you might be overwhelmed by the scale and complexity of the change in European Union's (EU) value-added tax (VAT). But we have some advice to offer about what we think matters most.

Understand what has changed 

This year the European Commission changed the way VAT is calculated for direct-to-consumer sales of electronically supplied services. Before this year, VAT in the European Union was calculated in the country of the seller; however, this law has now changed.  As of 1st January 2015, the seller of an electronic service must charge VAT in the EU country where the customer belongs, not where the business is based. The change means that, for many companies, tax liability and compliance costs have increased substantially.

Determine and document customers' locations

The most daunting challenge of complying with the new VAT scheme is the most obvious; determining where your customers are. In the process, merchants must counter the significant potential for consumer fraud. Europeans will quickly figure out that they can often save money by falsifying their purchase location. Every retailer will need to find a way to determine and document the actual location of every customer, every time.

Adjust pricing

Retailers will want to consider their pricing strategy carefully as they respond to the new VAT. Merchants of electronic services have three basic options: absorb increased cost and leave VAT-inclusive prices as they were in 2014, without passing new costs on to consumers; increase prices for all customers to adjust for average increases in VAT liability; or implement net pricing to adjust prices according to each customer's location.
Net pricing is the clearest and most transparent way to reckon with the new VAT law. But floating prices might alarm consumers and put tension on consumer-protection obligations that require VAT-inclusive pricing. Consider your market carefully, and make changes to your pricing strategy accordingly.

Stay compliant 

In the end, the new law means that businesses must pay the VAT they owe to all the EU countries where they have customers. Fortunately, EU lawmakers have come up with a helpful alternative to paying VAT in 28 member countries separately; the mini One-Stop Shop, or MOSS. This VAT MOSS allows companies based in the EU to register to file their VAT returns in a single country.  In the UK, tax authorities will continue to allow companies with UK revenues below a threshold not to collect UK VAT - but other countries, VAT is still required. The MOSS scheme makes the new VAT easier for businesses to handle, and the UK's new rules for small business will help ease the burden there. Still, the MOSS has its limits. While filing with a single MOSS is much easier than filing 28 separate VAT returns, the hard work of compliance comes long before the return is filed such as computing and collecting the tax for each country.

Succeed in the new era

The responses that businesses in Europe have taken to the new VAT regulations certainly can vary. In fact, some digital businesses, particularly small ones, are so overwhelmed by the complexities of the new VAT that they are simply ignoring it. That's a dangerous approach. The new VAT is here to stay, and every business has the chance to respond to its challenges more quickly and intelligently than the competition.

How will your business seize the opportunity? For more information, listen to Digital River's free webinar on the new VAT.

Disclaimer
Please be advised that the information presented above is a representation of Digital River's interpretation of EU VAT changes.  This information is to be used for informational purposes only and not for the purpose of providing legal or tax advice.  You should consult with your legal counsel or tax advisor with respect to any particular issue or problem.