EU VAT rules make EU startups uncompetitive in a global market(rachelandrew.co.uk)
rachelandrew.co.uk
EU VAT rules make EU startups uncompetitive in a global market
http://rachelandrew.co.uk/archives/2014/11/30/how-the-eu-vat-rules-make-eu-startups-and-digital-businesses-uncompetitive-in-a-global-market/
17 comments
This is hugely important. The rules themselves are designed to stop people like Amazon abusing the system (and believe me, they abuse it), but there's no provision for smaller companies, no one stop shop for dealing with the VAT authorities. It's going to be a disaster for SaaS startups.
Amazon do not abuse it, they just run shop from an EU country with low VAT rate (Luxembourg) last I checked.
And yes the VAT rules really do add alot of overheads on a business and bloat, which companies elsewhere are not subjected to.
I have raised this with Revenue in Ireland (pointing at competitors in US, China etc not held back by paperwork) they ignored it and clarified (I wanted it in writing, I recommend every business has a clarification in writing if they are not sure about the VAT position, to cover their asses) that YES we have to charge 23% VAT to ANYONE from EU29 countries, and 0% VAT for outside.
Tho' nothing was said about how this is to be measured, So I am keeping timestamps, ip addresses and billing addresses when accepting payment for our hosting products.
All in all its just a pain in the rear having to jump thru' this loops with no benefit to my company and plenty of downside :(
And yes the VAT rules really do add alot of overheads on a business and bloat, which companies elsewhere are not subjected to.
I have raised this with Revenue in Ireland (pointing at competitors in US, China etc not held back by paperwork) they ignored it and clarified (I wanted it in writing, I recommend every business has a clarification in writing if they are not sure about the VAT position, to cover their asses) that YES we have to charge 23% VAT to ANYONE from EU29 countries, and 0% VAT for outside.
Tho' nothing was said about how this is to be measured, So I am keeping timestamps, ip addresses and billing addresses when accepting payment for our hosting products.
All in all its just a pain in the rear having to jump thru' this loops with no benefit to my company and plenty of downside :(
"Amazon do not abuse it, they just run shop from an EU country with low VAT rate (Luxembourg) last I checked."
They "abuse" it from the point of view from the countries where they don't pay the VAT.... f.e. the UK would like Amazon to pay VAT in the UK, and not in Luxembourg. So this new law is meant to prevent that, but at the same time waltz over small companies.
They "abuse" it from the point of view from the countries where they don't pay the VAT.... f.e. the UK would like Amazon to pay VAT in the UK, and not in Luxembourg. So this new law is meant to prevent that, but at the same time waltz over small companies.
UK politicians (judging by recent headlines) also want to leave the EU, or at least threatening to do so if they don't get their way.
They might like/want X but they will have to negotiate and endup with X-Y or nothing, since negotiating something as important as VAT while threatening to leave the club is politically counterproductive.
They might like/want X but they will have to negotiate and endup with X-Y or nothing, since negotiating something as important as VAT while threatening to leave the club is politically counterproductive.
I don't think this law was actually pushed for by the UK. And countries like Hungary where VAT is 27% have much more to gain by it.
They are only threatening because the election is coming up and an anti EU party got a surprising amount of votes in the EU election (still not that many in real terms).
Very few UK politicians want to leave the EU.
They're walking a fine line in "abusing it" though. Why is it correct that a shopper in the UK, who would normally pay 20% VAT on an item if sold from the UK online, or in shop, but pays a lot less because Amazon has the clout and size to setup an operation there?
It's similar to the changes a few years ago to the channel islands that was used (and some say abused) by online CD and DVD stores, including some large high-street names.
Now, the way this has been implemented, and the speed at which a lot of small retailers will have to change their systems is unfortunate, and the EU have shot themselves in the foot there.
It's similar to the changes a few years ago to the channel islands that was used (and some say abused) by online CD and DVD stores, including some large high-street names.
Now, the way this has been implemented, and the speed at which a lot of small retailers will have to change their systems is unfortunate, and the EU have shot themselves in the foot there.
Amazon already charge VAT on items at 20% in the UK.
Amazon not only make it look as though they're selling from countries other than Luxembourg, they actually charge their customers the higher VAT rates of those countries when selling digital goods but only pay the lower Luxembourg rate.
not on VAT, there is "no lower" rate on VAT for sellers since it's collected directly for the state. They are having a discount on the profits tax.
It's actually going to benefit these larger companies if people are forced into selling their products via App Stores, Amazon etc. because doing so via their own store becomes impossible.
We're already VAT registered. We already do cross border sales and we have no clear guidance on how to implement this.
We're already VAT registered. We already do cross border sales and we have no clear guidance on how to implement this.
There is a one stop shop[0]. The main problem is that there's no longer any VAT threshold for smaller companies (atm you can avoid VAT registration if you're earning less than £81,000)
https://www.gov.uk/register-and-use-the-vat-mini-one-stop-sh...
https://www.gov.uk/register-and-use-the-vat-mini-one-stop-sh...
The effective removal of the threshold is another important issue. I'm trying to raise awareness of the impending issue for those companies who are VAT registered.
A good example would be a design agency who also wants to launch a product. Other than freelancers most small agencies are likely to be VAT registered, so they will need to use the MOSS and collect the required data.
A good example would be a design agency who also wants to launch a product. Other than freelancers most small agencies are likely to be VAT registered, so they will need to use the MOSS and collect the required data.
MOSS doesn't solve the difficult requirements for proving in which country a customer lives - providing they don't have a VAT number of course.
This same one stop shop that GDS said was unusable and could not go live? [1]
[1] https://gdsdata.blog.gov.uk/vat-mini-one-stop-shop-service-a...
[1] https://gdsdata.blog.gov.uk/vat-mini-one-stop-shop-service-a...
My understanding is that these rules affect everyone in the world who sells into the EU. It doesn't matter if you are located in the US or South Africa or Australia - you will still be expected to account for VAT and submit the returns.
I have no idea how this will ever be enforced for anyone outside the EU.
I have no idea how this will ever be enforced for anyone outside the EU.
That is the case but I'm not seeing US startups worrying too much about complying. As you say, how will it be enforced? I imagine it is likely to be an issue if they have an actual EU presence but otherwise ...?
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Google Cloud has found a creative (stupid IMO) solution to this. They no longer allow non-business in the EU to use their services as of recently.
https://support.google.com/cloudbilling/answer/6090602?hl=en
https://support.google.com/cloudbilling/answer/6090602?hl=en
Why am I not surprised? The people who run the european commissions are career politicians. Involved in politics from day 1 and rarely have had real jobs. Let alone ran a business of their own. It figures...
The top EU folk get a massive monthly budget for assistants and consultants = expert help (for EU MPs, this "extra staff budget" is to the tune of 30k USD per month [1], though often abused to fund family members/friends, just as you'd expect).
So indeed you should be surprised (and enraged) if you think they're not doing a good enough job.
The fact they're not experts has been factored in and provided for by the system.
[1] http://en.euabc.com/word/814
So indeed you should be surprised (and enraged) if you think they're not doing a good enough job.
The fact they're not experts has been factored in and provided for by the system.
[1] http://en.euabc.com/word/814
Your comment doesn't add very much to the discussion. I could argue that most software engineers have never had a 'real' job either.
Tax across the EU is an important concern, given how large companies can position themselves to take full advantage of differences. People should be thinking about this. Unfortunately, the law is a rather blunt instrument and there's a valid argument that current changes hurt small companies disproportionately more.
Tax across the EU is an important concern, given how large companies can position themselves to take full advantage of differences. People should be thinking about this. Unfortunately, the law is a rather blunt instrument and there's a valid argument that current changes hurt small companies disproportionately more.
I disagree; there is a very fundamental problem around when unelected (unsackable) comfortably situated people with golden pensions who do not create wealth, sit in rooms devising intricate schemes for taxing wealth creators and moreover are completely isolated from the effects of their actions. And the problem is exacerbated by the absence of a signed-off auditors' account for the EU over something like fifteen years. Business leaders in this situation would be in prison by now. It is simply a scandal.
I'll leave software engineers to say whether or not they've ever had a 'real' job.
I'll leave software engineers to say whether or not they've ever had a 'real' job.
I'm not sure what you're disagreeing with. I never made any claims that supported (or opposed) the current EU set up. I merely pointed out that the comment I replied to added nothing constructive to the conversation and that Tax is an important issue.
I'm not even sure what argument you're trying to make as it simply comes across as a rant. Wealth creators should decide tax policy? Career politicians are career politicians? Do you actually know how such policies are put together and the processes/consultation they go through? I have no idea so I'm not going to form a strong opinion either way.
I'm not even sure what argument you're trying to make as it simply comes across as a rant. Wealth creators should decide tax policy? Career politicians are career politicians? Do you actually know how such policies are put together and the processes/consultation they go through? I have no idea so I'm not going to form a strong opinion either way.
I'm a big fan of EU integration, but sometimes the EU Parliament shows a complete lack of understanding about the needs of small online companies (including startups). I understand pretty well that the goal is to stop Amaon et al to game our VAT system, but you can't impose the same kind of complication to small businesses.
I think they do understand but the pressure to increase revenue outweighs those concerns.
Indeed - they have to cover this for instance.
http://www.telegraph.co.uk/news/worldnews/europe/eu/11255493...
However I understand that some feel that drawing attention to the processes and construction of the EU is irrelevant and is a rant - the latter retort being an effective conversation stopper.
However I understand that some feel that drawing attention to the processes and construction of the EU is irrelevant and is a rant - the latter retort being an effective conversation stopper.
Except VAT isn't paid to the EU so it won't cover that hole (if it exists). The pressure is from nation states that want the VAT revenue.
We need a flat VAT rate for digital services over the whole EU. Or indeed all services. The whole process of converging VAT rates has been too slow, which for physical goods was kind of ok, but for cross border services it matters. If they did this, then I would not care about VAT registration being compulsory.
Customer location vat seems to be really easy to abuse. Luxembourg VPN + Post Forwarding = 15% rate on everything that can be ordered online. Compared to maximum vat in EU (Hungary, 27%) that's an enormous difference.
One of the key elements of the new rules is that merchants must collect two pieces of non-conflicting evidence. And the onus of proof is on the merchants' shoulders. They must keep searching until they have two pieces of evidence that do not conflict. If IP address, for example, conflicts with cc billing address then more evidence will be required from the customer.
And on top of that, you can be audited by each EU country's tax authority as well... something I have not seen too many people worried about. I think it's an important thing that is being overlooked.
Potential audits will be co-ordinated between EU member states. For example, if an audit of a UK merchant is sought then the relevant EU tax authority (for argument's sake Spain) will have to go through HMRC first. Check out the answer to Q10 here: http://www.taxamo.com/new-eu-vat-rules-q-a/
CC billing address is the simplest one to falsify, just use an anonymous prepaid card (they accept all addresses).
Still, not many people will go out of their way to exploit this loophole.
Still, not many people will go out of their way to exploit this loophole.
Why not just use a European VAT in case a product isn't bound to a specific country, although the VAT should be "donated" to the country.
VISA, Mastercard, Paypal and etc should have systems in order to donate it to the right country (they know the owner of the card). Don't have a solution yet for Bitcoin though...
VISA, Mastercard, Paypal and etc should have systems in order to donate it to the right country (they know the owner of the card). Don't have a solution yet for Bitcoin though...
That's what we should do, but there is no common economic policy in Europe, and this is collected for the national budgets, not for the European budget. We are talking about shitload of money, half of the French State tax revenue for example.
We are also talking about shitload of fraud.
We are also talking about shitload of fraud.
That's what MOSS is for. The issue I'm describing is how to prove location in order to complete the MOSS return.
Slightly off topic, but for some reason, reading this post and the comments made me think of PG's essay on startup hubs, where he mentions startupicide. These VAT rules seem to (inadvertently) act that way.
http://paulgraham.com/hubs.html
http://paulgraham.com/hubs.html
The problem is that some countries are within the European union but are tax havens. Luxemburg is such a country with 15% VAT but most other countries have 20%+ VAT.
The solution should be to have one VAT level which is higher than 15% and the same in the whole union.
Won't happen
1. Countries like UK where the EU is constantly demonized in the tabloids (and hence in the mind of average person who reads this trash) would have their populations screaming murder, hell there already strong calls to leave the EU
2. Countries like Ireland have increased VAT to insane levels as a revenue raising measure to pay for huge deficits run up by banking fiascos and huge welfare/healthcare commitments
Anyways even the US has individual states setting their own sales taxes (or none) albeit at a quite lower average level than anywhere in EU
What is needed is clear exemption EU wide for online businesses selling service (And maybe even goods) for lets say 10 years, to encourage competition There is a reason the likes of Amazon, Ebay etc have appeared in the US first
1. Countries like UK where the EU is constantly demonized in the tabloids (and hence in the mind of average person who reads this trash) would have their populations screaming murder, hell there already strong calls to leave the EU
2. Countries like Ireland have increased VAT to insane levels as a revenue raising measure to pay for huge deficits run up by banking fiascos and huge welfare/healthcare commitments
Anyways even the US has individual states setting their own sales taxes (or none) albeit at a quite lower average level than anywhere in EU
What is needed is clear exemption EU wide for online businesses selling service (And maybe even goods) for lets say 10 years, to encourage competition There is a reason the likes of Amazon, Ebay etc have appeared in the US first
Let them leave the EU, without such a big nation they are nothing (being financial capital of the world won't change much for the EU, but a lot for the UK).
UK needs EU, weither they like it or not.
UK needs EU, weither they like it or not.
Is tax haven another term for tax competition?
I'd argue that tax competition is where one jurisdiction uses tax law to attract substantive business to their country (e.g. a factory, a call centre, a movie). I'd call it a tax haven is where there's no actual change in the operation of business except for a couple of lawyers and accountants.
And that's kind of the point. If you buy from Amazon in the UK, the goods are already stored in a warehouse in the UK, the consumer is in the UK, the guys doing the deliveries will be UK citizens. It's a UK operation.
And that's kind of the point. If you buy from Amazon in the UK, the goods are already stored in a warehouse in the UK, the consumer is in the UK, the guys doing the deliveries will be UK citizens. It's a UK operation.
'If the customers IP address and billing address conflict you are going to have to halt the purchase unless ...'.
So how do I, as a customer, go about buying something online while not at home? The 'unless' doesn't appear to unravel the mystery.
So how do I, as a customer, go about buying something online while not at home? The 'unless' doesn't appear to unravel the mystery.
You can buy from a non-EU company just fine.
But other than that, there are other allowed bits of information to proof country of consumption, it's just going to be a pain to implement in your check-out process :-/
But other than that, there are other allowed bits of information to proof country of consumption, it's just going to be a pain to implement in your check-out process :-/
I'm trying to compile a list of applicable rates and exceptions at https://github.com/kdeldycke/vat-rates . Feel free to contribute ! :)
Roll on crypto-anarchy.
The worst part is that non-VAT registered (because of turnover of less than £70K/~$100K in UK) businesses will have to register for VAT in each of the 28 EU countries they sell to individually (and probably in 15+ non-English languages).
I intend to stop selling to (non-UK) EU countries in 2015, but I am worried about that decision as it may open me up to discrimination laws. If that's the case, I'll have to close my business entirely.
I intend to stop selling to (non-UK) EU countries in 2015, but I am worried about that decision as it may open me up to discrimination laws. If that's the case, I'll have to close my business entirely.
There's supposed to be a one-stop shop system to avoid this. Whether it's going to work properly on launch day is another question!
The MOSS (one stop shop) is only available to VAT-registered entities. Making it available to all would solve the problem for me.
But you will be WAT-registered entity as soon as you register in a first country. I still think the law is badly written but I think it does not require registering in all 28 EU countries.
Are you sure about this, I thought HMRC needed a UK VAT registration number?
Honestly, I am not sure about anything related to this law. I am also not UK-based so I don't know haw exactly is the EU directive implemented in UK.
I live in the Czech Republic and here you can become so called "person identified for VAT" which (if I understand correctly - IANAL) enables you to use mini one stop shop for selling over the border while internally (selling inside the country) you remain in non-VAT regime.
Our law is based on the same EU directive as yours so I suggest you check whether your law also offers something like that.
It is still more complicated than it should be (I think the whole concept of VAT is bad) but I hope it is not as bad as registering in all EU countries.
I will also consider 3rd party services like http://www.taxamo.com - I am not related to them, I am just sharing that because you might find it useful.
I live in the Czech Republic and here you can become so called "person identified for VAT" which (if I understand correctly - IANAL) enables you to use mini one stop shop for selling over the border while internally (selling inside the country) you remain in non-VAT regime.
Our law is based on the same EU directive as yours so I suggest you check whether your law also offers something like that.
It is still more complicated than it should be (I think the whole concept of VAT is bad) but I hope it is not as bad as registering in all EU countries.
I will also consider 3rd party services like http://www.taxamo.com - I am not related to them, I am just sharing that because you might find it useful.
[deleted]
Sure, looks like there will be some pain and confusion in the short term, but in the long term, how does this really hurt EU startups in the global market?
Presumably the various payment solutions are going to adapt to this, simply because it costs a lot less to to implement whatever is necessary than to just give up the EU market.
Presumably the various payment solutions are going to adapt to this, simply because it costs a lot less to to implement whatever is necessary than to just give up the EU market.
Creating a smooth path to checkout and removing obstacles is really important in terms of conversion rates. Having to ask for information that people are going to see as very intrusive during that checkout flow is highly likely to cause cart abandonment.
We get people already complaining that we make them create an account to buy software - and we use the accounts for other things such as support and license management. How much more will people feel they are being asked for too much information if all they want to buy is an ebook?
We get people already complaining that we make them create an account to buy software - and we use the accounts for other things such as support and license management. How much more will people feel they are being asked for too much information if all they want to buy is an ebook?
Yeah, this is really going to entrench the big players (Amazon, Google, Apple et al) who already have your contact details for a myriad other reasons.
Any payment solution that is based on credit cards would have the same contact details. How does size matter here?
The problem as reported is that many current payment methods used online either do not have such information, or the payment system being used (eg credit card via paypal) hides that data from the vendor, making it very hard to both provide a seamless checkout and capture the information required to levy the correct taxes.
That said, I'm really not sure that all this "two pieces of data must be collected" is as onerous as everybody is saying - the guidance seems much looser than that. For each transaction they want 2 consistent pieces of evidence of location, but the sources of said data are fairly broad & include ip address, some form of geolocation and the self reported location by the end-user, credit card location etc etc. Anything that the vendor believes to be reasonably reliable according to their data-model really. See guidance document here: http://ec.europa.eu/taxation_customs/resources/documents/tax... which amongst other things states that a country located account number (bank / credit card) combined with a customer self-reported country location is enough in many cases. (This is what Steam requests already btw.)
The problem for vendors is that the rules pushes liability onto them when they want certainty, plus the data storage requirements are fairly stringent (10 years!). The tax authorities are effectively saying: you can either collect enough information to be absolutely certain of the end-user location or collect less and carry the risk that an audit will result in big fines if we decide that you've been attempting to evade VAT by misrepresenting the location of your customers. This is of course no different from any other tax, but with a new system there's always some uncertainty to begin with until things settle down & no one likes uncertainty.
That said, I'm really not sure that all this "two pieces of data must be collected" is as onerous as everybody is saying - the guidance seems much looser than that. For each transaction they want 2 consistent pieces of evidence of location, but the sources of said data are fairly broad & include ip address, some form of geolocation and the self reported location by the end-user, credit card location etc etc. Anything that the vendor believes to be reasonably reliable according to their data-model really. See guidance document here: http://ec.europa.eu/taxation_customs/resources/documents/tax... which amongst other things states that a country located account number (bank / credit card) combined with a customer self-reported country location is enough in many cases. (This is what Steam requests already btw.)
The problem for vendors is that the rules pushes liability onto them when they want certainty, plus the data storage requirements are fairly stringent (10 years!). The tax authorities are effectively saying: you can either collect enough information to be absolutely certain of the end-user location or collect less and carry the risk that an audit will result in big fines if we decide that you've been attempting to evade VAT by misrepresenting the location of your customers. This is of course no different from any other tax, but with a new system there's always some uncertainty to begin with until things settle down & no one likes uncertainty.
Stripe/Paypal already have the billing address of the (credit-card based) customer. They would need to adapt their APIs/checkout flows to enable a nice UX. If they don't they expose themselves to increased competition from other solutions that do manage to solve this.
this is only on digital goods, right ? why is this only on digital goods. ? how is this dealt in US, there are different states, and if saas from new york sells something to LA, how is that dealt ?.
Switzerland is in the middle of Europe but not part of the EU.
Just incorporate there.
Just incorporate there.
The new rules change how VAT on digital services is to be collected. Existing (2014) rules demand VAT to be accounted for based on the location of the supplier, but from Jan 1, 2015, the rules change. After Jan 1 VAT will have to be applied based on the customer's EU location. All digital service suppliers (EU and non-EU) will be affected.
The minimum capital requirement for a Swiss Limited Liability Company is CHF 20,000 and the maximum is CHF 2,000,000. At least 20% has to be paid (in cash or in kind) prior to incorporation.
It doesn't matter. Any company selling digital services in the EU need to follow the new VAT rules. Including US companies, and of course Swiss ones.