2019 EU VAT Changes, Part 1: Origin Taxation, Less Evidence

The European Union’s (EU’s) value added tax (VAT) system fluctuates constantly.

Nearly every year, companies doing business in the EU must adapt to new VAT rules. These changes often require companies to alter their tax management processes and tax technology, ERP systems and even business models. This past year was no different as the EU approved its Digital VAT Package, an effort to adapt the VAT system to the rise of electronic commerce while reducing red tape.

The Digital VAT Package will have a broad impact on businesses engaged in e-commerce transactions in Europe, and many of these changes will apply beginning 1 Jan 2019. All of these changes are relevant to B2C suppliers of digital services to EU consumers. I’ll report on five notable changes associated with the Digital VAT package, including the following two.

First, EU suppliers that generate relatively low turnover, or revenue (less than EUR 10,000), from cross-border supplies of digital services will benefit from the VAT system’s taxation at origin stipulation. These companies will be allowed to apply their familiar home-country rules. (Until the new rules take effect 1 Jan, these companies were required to charge the VAT rate of the country of destination -- where their customers are located.) If the threshold of EUR 10,000 is exceeded, the supplier will have to charge the VAT rate of the customer’s country. In these situations, companies and their tax functions will need to determine where customers are located.

The second simplification measure permits EU suppliers whose turnover from intra-EU B2C digital services does not exceed EUR 100,000 to determine the location of the customer on the basis of one piece of evidence. (Until the new rules take effect, companies were required to make this determination based on two pieces of evidence.)

Unfortunately, both measures do not apply to non-EU companies whose turnover remains below the EUR 10,000 or EUR 100,000 thresholds. This less favourable treatment of non-EU businesses seems to be at odds with the principle of neutrality and the intention to create a level playing field for all suppliers of digital services.

In my next post, I’ll cover three more important VAT rules changes.