Online Levy

Let the E.U. Buyer Beware

european uniform value added tax_reuters
The entrance of the Berlaymont building - the European Commission's headquarters in Brussels. New regulations will be implemented in Germany in 2015.
  • Why it matters

    Why it matters

    Starting next year, a change in how value-added taxes are assessed in the 28-country European Union will eliminate an advantage for some businesses in low-VAT countries such as Luxembourg and Malta.

  • Facts


    • Starting in 2015, value-added taxes in the E.U. will be based on the country of the buyer, not the seller, for the first time.
    • VAT rates in the 28-country bloc range from 15 percent in Luxembourg to 27 percent in Hungary.
    • The change in VAT collection will force many businesses to adjust their VAT levels, and determine the exact location of customers.
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In the past, it was rarely a good thing when the subject of creating a harmonized value-added tax (VAT) rate at the European level was brought up. For businesses, any change usually meant more bureaucracy, more work for their accountants and ultimately more costs for them.

But everything is supposed to be different this time, with the latest changes in the decades-long pursuit to create a harmonized value-added tax rate for the European Union. The newest reform attempts to apply a harmonized E.U. rate to telecommunications, broadcast and electronic services, among other things.

Approved by European lawmakers in 2008, this part will be implemented in Germany in early next year.

For the first time, the VAT rate on purchases will depend on where the customer lives, not where the company selling the product or service is based. With this change, the European Union wants to embed the principle of consumption even more solidly in the taxation of sales. The European Commission also wants to establish rules of play for better competition among companies in the inner-European market.

This is because conditions are anything but harmonized in Europe when it comes to sales taxes.

Luxembourg, an E.U. member country, has the lowest VAT rate of 15 percent, which will rise to 17 percent on January 1. Malta applies an 18 percent tax. Hungary, with 27 percent, has the highest. Germany, the largest economy, charges 19 percent. Most E.U. countries impose VAT rates of 20 to 25 percent on purchases.

The European Union’s latest VAT reform perpetuates this range of rates and provides options for products and services where reduced rates apply. Many E.U. countries have used lower VAT to their advantage, said Frank Gehring, an expert in indirect taxation at PriceWaterhouseCoopers. “Until now, sellers based in Hungary, with its statutory tax rate of 27 percent, were at a significant disadvantage compared to those in Luxembourg, with its rate of 15 percent.”


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E.U. online consumers will pay the value-added tax rate of their home country — not the rate of the sellers. Source: DPA


This will change when the VAT rate on purchases is based on the location of a purchase or service, not the headquarters of the seller.

The change will greatly affect mobile wireless companies and broadcasters, as well as companies that sell downloads of games, music, e-books and online news. According to Mr. Gehring, the new rule doesn’t just apply to services because they use the Internet as a mode of transmission. “When you order a book from an online retailer,” he says, “it isn’t an electronic service, but the delivery of a book – the only difference being that it was ordered online.”

Businesses affected by the change will have to adjust their pricing to retailer consumers. Business customers will not be affected by the new rule.

But the new change will create a new paperwork burden for businesses, Mr. Gehring said. In essence, companies will have to determine where their customers live, and apply the relevant VAT. “They’ll have to keep records and correctly assess and post the applicable VAT,” he said. “This creates a substantial cost of adjusting bookkeeping systems.”

For the first time, the VAT rate on purchases will depend on where the customer lives, not where the company selling the product or service is based.

To help simplify the process, the European Union has established a mini one-stop-shop procedure for businesses to pay VAT.

Maryse Volvert, a team leader in the European Commission’s directorate general for taxation and customs union, explains: “Companies that choose this method will have only one office where they will file and pay their VAT. They can do this with their own tax authorities, and in the language in which they do business.” This, she adds, is a significant simplification, because companies would otherwise be required to register with and submit returns to financial authorities in all countries where they do business.

The change in taxation approach is another small step toward a uniform VAT rate in the supposedly single European market. Ms. Volvert, the commission taxation expert, said political realities make it unlikely that the European Union will adopt a completely harmonized VAT system in the near future.

“It would certainly be easier to handle,” she said. “But VAT is too important a source of income for the member states. That’s why any further EU-wide reforms of the VAT will have to proceed gradually.”

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