Germany: New German VAT rules in ecommerce as of January 2015
08 December 2014
Posted by: Authors: Thomas P. Gierath and Alin Seegel
Authors: Thomas P. Gierath and Alin Seegel (Reed Smith)
Although online shop providers had to implement extensive changes to consumer rights (in particular, the new rules regarding the right of withdrawal) on the basis of the implementation of the EU Consumer Rights Directive (2011/83/EC) only in June of this year, new changes to eCommerce are already pending: From 1 January 2015, globally, online retailers that provide services to consumers in an EU country electronically (B2C sales) must pay the VAT in the EU country in which the consumer resides (the so-called country-of-destination principle).
Taxation of such B2C sales within the EU was previously determined in accordance with the country-of-origin principle, i.e., the online shop provider invoiced each of its private customers according to the VAT applicable in the customer's country. The country-of-destination principle applied only for customers from non-EU member states. However, starting from 2015, the country-of-destination principle will be extended to sales within the EU. This amendment is based on Directive 2008/8/EC, dated 12 February 2008, which is to simultaneously be implemented by all EU member states early next year.
Which transactions are affected by the changes? Commercial transactions with a customer who is a resident in the EU. Furthermore, it is a requirement that the service, is provided by electronic means.
The following practical cases are exemplary of the most important electronic services:
- Hosting offers
- Streaming offers
- Fee-based member portals
- Operators of online databases
- Downloads of music and movies
- Providers of digital photographs or e-books
- Operators of online sales platforms
- Online tutorial offers
Furthermore, the change even affects businesses from outside the EU providing electronic services within the EU.
Which transactions are not affected by the changes? Agreements with regard to electronic services, between businesses (B2B) are not affected by this new regulation.
Similarly, agreements negotiated on the internet and only dealing with physical merchandise, are not affected.
What are the concrete changes? Starting with January 2015, online shop providers must for EU transactions pay VAT in the (private) customer's country of origin (the so-called taxation according to the country-of-destination principle):
- For instance, if a Spanish customer purchases and downloads an e-book from a German provider, the latter must pay VAT in Spain
- Conversely, if a German customer purchases and downloads an e-book from a Spanish provider, the latter must pay VAT in Germany
Introduction of a so-called "Mini-One-Stop-Shop" (one-time registration) for providers of electronic services located in an EU member state, with the consequence that the EU provider does not have to register in each member state. However, the provider must then present in its country of residence a separate declaration of all sales from electronic B2C services within the EU. The distribution of tax revenue to the respective member states then is the responsibility of the administrative authorities.
Amendments and/or adjustments to billing and price labelling for customers, since customers are to be billed with VAT that is applicable in the customer's country; i.e., in the extreme, it would be necessary to provide 28 different billing and price labelling versions.
Practical problems The new regulation has the effect that businesses that provide services across the EU must increasingly grapple with VAT laws applicable to the countries of residence of its consumers, because, despite the general harmonisation of the VAT regulations, considerable discrepancies still exist between EU member states.
Starting in January 2015, providers will be required to provide price labelling and sales adjusted to the respective VAT applicable in those EU countries in which they provide electronic services.
The "Mini-One-Stop-Shop" application must not obscure the fact that, while VAT revenue is payable in only one country, the revenues are subject to local regulatory frameworks in various member states.
Starting in January 2015, providers will be required to prove the location of a consumer, which cannot be adduced by conventional means (ID card, passport) within the scope of electronically provided services. The most practical solution appears to be localisation of the consumer via IP address.
What must be done in practice? Application and registration with the Bundeszentralamt für Steuern (BZSt) (Central Federal Tax Office) for participation in the "Mini-One-Stop-Shop" facilitation of procedure for VAT on electronic services.
As of 1 October 2014, affected German businesses can apply for participation in the "Mini-One-Stop-Shop" facilitation of procedure for VAT on electronic services at the Bundeszentralamt für Steuern (BZSt) (Central Federal Tax Office). With this, sales generated in other member states of the European Union and falling within the scope of the new regulations can be declared with the BZSt, and VAT can be paid in one lump sum. The application can be made on the online portal of the BZSt at https://www.elsteronline.de/bportal/bop/Oeffentlich.tax.
Each business from the EU or a third country, offering electronic services across the EU, must consider tax-related issues (and reporting requirements) in each EU country in which it offers its electronic services.
Considering the fact that different EU countries have different tax rates, and considering that private customers must always be provided with sales prices including VAT, the price labelling on the website and invoicing must be adjusted. The location of the recipient of electronic services ought to be identifiable based on the IP address.
Accordingly, in the context of VAT tax advance returns, in-house accounting must be adapted to the problems associated with the different VAT rates, so that VAT tax is paid correctly.
This article first appeared on mondaq.com.