Recent changes to EU rules on value added tax (VAT) are putting huge pressure on small digital businesses. Most recently, the European Court of Justice (ECJ) ruled that ebooks cannot benefit from the same rate of reduced VAT as physical books because they should be considered a “digital service” and not a product. For some countries, such as Luxembourg, this could mean a jump of almost 15% in the VAT rate charged for ebooks.
The new rules are part of a raft of reforms aimed at making it harder for large international companies such as Amazon, Apple and Starbucks to exploit tax loopholes, including basing their headquarters in an EU country (such as Luxembourg) with a low rate of VAT but selling products to customers from across Europe.
As of 1 January 2015, companies selling digital services must charge VAT rates based on their customer’s location within the EU, rather than where their own business is based. Small businesses – such as web designers, online publishers and independent authors and musicians – complain that these new rules are strangling them in red tape.
There is no minimum threshold for the rules, meaning that even micro-businesses are now required to validate their customers’ location using two pieces of non-conflicting evidence (such as a billing address and a matching IP address), something which could present additional problems because processing such data would also make them subject to strict EU data protection laws.
The European Commission has tried to ease the burden of compliance by setting up VAT Mini One Stop Shops (or VATMOSS) as a way for businesses to register and submit VAT returns in one place for all 28 Member States. However, the Commission is coming under increasing pressure to reform the rules, particularly given that Commission President Jean-Claude Juncker has placed such an emphasis on the importance of the Digital Single Market.
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