Is your business delivering electronic content to consumers worldwide? Have you registered for value-added tax (VAT) where your customers are located? When it comes to electronic content, VAT can be complicated, and your business may need to be registered in each country of supply.
The global electronic content market is booming. Products that were traditionally sold in tangible formats—music, books, movies—are readily available as instantaneous downloads, straight to a consumer’s device of choice. And companies invested in these types of goods are working quickly to make the digital switch, to meet the demands of the market.
How is it that these companies, familiar with VAT being a consumer responsibility, may suddenly find themselves presented with numerous fines and penalties for noncompliance?
Surprise: Digital “goods” are actually considered services
Typically, when a U.S.-based company sells goods to private EU citizens, the business will not have to register for VAT, if the customer acts as the importer of record. However, electronic content is a unique type of product, known as an electronically supplied service (ESS). Any type of downloadable content—MP3s, games, videos, mobile applications, eBooks— can be considered ESS. Specific VAT applies to supplies of such services within the EU, the default position being that the supplies take place in the country where the customer resides.
For example, if a business in the U.S. sells a CD to a consumer in the U.K., no VAT registration is required by the U.S. company, as the customer is the importer of record when the goods are shipped. However, if the company sells a digital version of the same album to the same consumer, the business is liable for VAT and must register in the U.K. This is because MP3s are considered ESS, so VAT needs to be collected where the service is supplied, the U.K. in this instance.
If you’re making the switch, be conscientious
The number of companies in the ESS space will likely grow in the next few years as the market expands. The digital music market is projected to hit $20 billion, eBook sales are expected to triple by 2016 and mobile app store revenue may exceed $58 billion. There will likely be many companies realigning products to meet the market demand, like CD companies selling MP3s or magazine publishers moving to digital editions.
These are the companies that often find themselves in VAT compliance hot water, when making the switch from tangible goods to ESS. Tax authorities are actively pursuing providers of such products, as the ESS market grows, to determine whether or not they are complying with VAT regulations. Sizeable penalties are being levied for failing to comply, and at-fault companies may even need to repay historic VAT fees and late payment interest.
The good news: For non-EU based suppliers of ESS with the need to register for VAT across Europe, there is a special simplification scheme which enables multiple EU country VAT accounting to be administered through a central portal and a single country registration.
For EU-based suppliers of ESS who currently account for VAT on supplies locally, a change in approach will roll out in 2015. A current proposal will make registering for VAT in the EU a “one stop shop,” as opposed to registering piecemeal in each of the individual member states. The Mini One Stop Shop (MOSS) proposal is set to go into effect January 2015, first for e-commerce, broadcasting and telecom services.
Being proactive can help avoid headaches
Retroactively fitting your business for VAT registration can be complicated and expensive. The best way to avoid issues with ESS is to be proactive when restructuring your business to provide digital materials. You can get started today by signing up for a free VAT health check, where HSP experts will assess your current situation, address potential pitfalls and make recommendations for next steps. With proper planning and the right systematic changes, supplying ESS won’t become a VAT nightmare.