August 19, 2016
VAT Changes Will Impact E-Commerce in EU
by Karisse Hendrick, Editor-at-Large, CardNotPresent.com
Beginning January 1, 2015, a large percentage of e-commerce merchants based in the European Union will face major changes in how VAT (Value Added Tax) is assessed. These upcoming changes will impact e-commerce merchants delivering goods electronically (digital goods), broadcasting and telecommunications companies, but will not apply to companies that ship physical goods to consumers.
Until now, VAT has been based on the country in which the merchant is located within the EU. After the first of the year, the tax will be calculated based on the country where each consumer is located. In addition, the new laws will require businesses to track and document the location of their consumers and have them on record for 10 years. Adding to the complexity, all 28 European member states have different regulations, languages and penalties for not complying with these new mandates.
The European commission has stated that the intent of this law is to “even the playing field” for businesses located in all countries, including merchants based in countries that have lower VAT rates for businesses. E-commerce merchants outside the EU have been required to track and account for VAT based on their consumer’s locations for digital-delivery transactions since 2003 and will continue to be required to do so.
The mandate allows for each merchant to define how they determine the country in which a consumer is located primarily because verification tools vary among merchants and systems, but also because there is currently no standard method for all e-commerce businesses to determine a consumer’s location. Depending on the products and services provided, the European Commission has provided a list of identifiers that would qualify as “non-contradictory” location evidence. Each business is required to record and store two of these and to ensure that the same evidence is used for all consumers. Approved identifiers include:
- Billing Address
- Unique Payment Methods
- Gift Card Point-of-Sale
- Country-Locked Gift Cards
- Customer Self Certification
- IP Address
This list is not exhaustive. These are just a few examples that have been called out in previous documentation. The law’s new provisions allow for a business to use “commercially reasonable” attributes to determine consumer location.
Before getting too far into this process, check with your Payment Service Provider or processor to verify that your business is subject to these changes. If the answer is “yes,” this rule change will require a significant overhaul of processes and procedures in capturing, determining a location and storing the information securely for 10 years, as well as any new tools or systems needed to support these changes. Now is the time to start working internally to determine which identifiers to select and what processes need to be reworked.
In addition, it is important to be aware of how these changes will impact your business’ bottom line. For companies domiciled in countries with a low VAT rate, profit margins may decrease under the new changes. But, the opposite could be true for businesses currently operating in a country with a high VAT. If the former is true, you will need to determine how you will compensate for this added tax. It may be optimal to increase prices in countries with a higher VAT than has been required previously, bearing in mind that your competitors may not be doing the same thing.
Ultimately, being informed, researching the internal and external impacts to your business and consulting your payment provider can prepare you for these changes and allow you to begin the new year in full compliance with the new changes by the January 1st deadline.