The EU VAT rate explained through 4 questions

The new European Union (EU) Value Added Tax (VAT) regulations that went into effect Jan. 1, 2015, have already led to issues for some small businesses – and with the rules set to expand to a whole new class of products, it's important that global digital service and product providers big and small understand how to navigate these complicated EU tax laws. 

The new VAT regulations have not been well-received by business owners, and for good reason. These rules can be difficult to understand and take plenty of work to ensure compliance – they make importing any sort of digital service into any EU member country substantially more difficult.

Plenty of business owners still have questions about how to address the VAT regulations implemented this year. For a few answers, read the explanation of these new rules below:

'Is my business subject to these new VAT regulations?' 
There are numerous lingering questions since the new VAT regulations were introduced, but first off: Who do they apply to? Well, this is one of the simpler aspects of this year's VAT changes. Any business selling automated digital services to consumers in any of the EU member countries has to pay the VAT, beside a select few whose products are purchased in the UK. Whether you're headquartered in Paris, France, or Paris, Texas, if you sell automated digital services to people who live in any EU nation, chances are you should be paying the VAT.

The exception is businesses offering services to consumers in the UK who sell less than £81,000 worth of products annually. However, by the end of June, this exclusion will be lifted, and all businesses large and small will be subject to the new VAT rules if they sell within the EU.

'I sell automated digital services to EU consumers, what does that mean?'
If you sell automated digital services – or soon will – to people who live in any of the EU member nations, then the new VAT regulations apply to you. So, what do these changes entail? Well, previously, businesses had to pay the VAT depending on where the product originated from. Taking advantage of this, multi-national companies such as Amazon would funnel products through low-VAT countries – the Seattle-based e-commerce company often used Luxembourg – to save money. 

To combat this and ensure that each EU member country gets its fair due under VAT rules, changes were made so that businesses would have to pay the VAT in the country where the service or product is bought, rather than sold. This means that if you're located in Toronto, and you sell to consumers in France and in Germany, the VAT rate you're required to pay will be different for buyers in each country. To complicate matters further, each EU member is divided into zones, and the VAT rate differs for various products. In all, under the new regulations, there are 81 different VAT rates that businesses that sell to EU consumers need to know, or have within close reach. 

'I sell to customers all over Europe, how do I keep track of this?'
If the 81 separate VAT rates didn't complicate things for businesses enough, automated digital services providers will also have to prove exactly where their customers are located throughout the EU. Doing so will take a lot of work. To fulfill this requirement, businesses will have to provide two pieces of evidence proving customers' exact locations. According to EU VAT Action, examples of non-contradictory pieces of evidence that could be used include:

  • The customer's billing address
  • The Internet Protocol (IP) address of the customer's device
  • His or her bank details
  • The country code of the customer's SIM card
  • The location of the fixed land line through which he or she receives service
  • Other commercial information that could indicate location

'Maybe these regulations apply to me, but to be sure, what are automated digital services?'
What classifies as an automated digital service isn't exactly set-in-stone, EU VAT Action noted, but there are some general guidelines to help you determine whether you're providing EU customers with products subject to these new VAT rates. Basically, it is any product that is downloadable or used online. Yes, that covers many things, a few examples of which are:

  • Images or text
  • Music, films or games – including gambling games
  • Online magazine
  • Website hosting services
  • Software or software updates
  • Advertising space on websites

This  long list of products will be expanded in 2016 when VAT rates are applied to all goods sold online to EU consumers. Business owners who sell digital services to people in Europe, or those who sell anything online to those consumers, should make sure they have a system in place to navigate the complex VAT regulations and ensure compliance.