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Overview of EU VATchanges for digital
products andservices in 2015
2
1 January 2015: What’s new?Effective 1 January 2015, the taxing jurisdiction for selected telecommunication and broadcast media services, along with other electronically delivered content provided to EU resident individuals, is changing.
Instead of VAT being paid in the country of the supplier, it will become payable where the customer is resident. This means that affected businesses will have pricing and information challenges and VAT reporting obligations for every EU country in which they have non-business customers.
The 2015 VAT changes will also have wider business implications. There are real financial, technical, commercial and practical implications; addressing these will take time as several interdependent systems and processes are likely to be affected.
We recommend an impact assessment of these changes to provide for sufficient time to plan and implement your 2015 strategy.
3Overview of EU VAT changes for digital products and services in 2015
Are you selling physical goods or digital services?
Do the services fall within telecommunications, radio and television broadcasting, and digital services (e.g., e-books,
online newspaper subscriptions and online testing services)?
Are you providing services to business customers or private individuals?
Are they EU or non-EU customers?
Business impacted by the 2015 VAT changes
Business not impacted by the 2015 VAT changes
Physical goods
No
Business customers
Non-EU customers
Does this affect you?
Digital services
Yes
Private individuals
EU customers
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The implications for your business
The changes are less than two years away, and there is now sufficient certainty as to how they will operate in practice. The commercial, legal and practical implications need to be addressed urgently if all necessary measures are to be implemented in time, including the following:
Five key areas1. Pricing and customer experience — A strategy to protect revenues and profit margins.
2. Systems — For every transaction, from quote to cash, systems must recognize the customer’s country and apply the correct rate of VAT. Systems must also be configured and maintained to ensure that the correct amount of tax is paid to each country and other local requirements are met. Systems changes should be designed, implemented and tested ahead of 2015 to ensure timely, accurate and efficient management of VAT across multiple countries. There may also be a need to run marketing and communications campaigns about the changes to consumers.
3. Contracts with partners, third party vendors and intermediaries — Contracts should be reviewed and renegotiated to ensure that the VAT accounting responsibilities of each party are clearly defined.
4. Corporate structure — The business should consider whether the current corporate structure is appropriate for 2015 from a commercial and a tax perspective and review the potential to relocate to countries that are “open for business.” This may be particularly relevant for those businesses that currently have their sales base in Luxembourg.
5. Compliance — 2015 will significantly increase the VAT compliance burden for businesses. The impact of local VAT rules will need to be addressed so that all relevant VAT compliance obligations are met efficiently and in time, and penalties for noncompliance are avoided. The operating model for this needs to be defined.
EU member state
Current VAT rate Universal pricing Differential pricing
VAT excl. price (€) VAT (€) Total
price (€)VAT excl. price (€) VAT (€) Total price (€)
(difference)United Kingdom 20% 8.33 1.67 10.00 8.33 1.67 10.00 (=)Luxembourg 3% 9.71 0.29 10.00 8.33 0.25 8.58 (-1.42)Germany 19% 8.40 1.60 10.00 8.33 1.58 9.91 (-0.09)Netherlands 21% 8.26 1.74 10.00 8.33 1.75 10.08 (+0.08)France 19.6% 8.36 1.64 10.00 8.33 1.63 9.96 (-0.04)Belgium 21% 8.26 1.74 10.00 8.33 1.75 10.08 (+0.08)Italy 21% 8.26 1.74 10.00 8.33 1.75 10.08 (+0.08)Denmark 25% 8.00 2.00 10.00 8.33 2.08 10.41 (+0.41)Hungary 27% 7.87 2.13 10.00 8.33 2.25 10.58 (+0.58)
EU VAT rates (sample included in this table) currently range from 3% to 27%.
The current economic crisis has seen a trend in VAT rates increasing.
A high VAT rate will impact margins from 2015 unless a pricing strategy is agreed upon in advance.
5Overview of EU VAT changes for digital products and services in 2015
ff What proportion of my product and service portfolio is impacted, and how is this projected to change over the coming years?ff What is the scale of my “Direct-to-Consumer” channels, and how will this change?ff What is the current and projected sales mix of impacted transactions?ff What is the current and future geographic mix of transactions? (note — even one customer in a geography is enough)ff Is there an agreed upon and appropriate pricing strategy to balance margin protection, cash flow predictability and customer acceptance?ff How will customer experience be impacted through additional data capture and pricing variances across geographies?
ff Can my customer service operations scale to absorb the anticipated growth in customer contacts the changes will drive (e.g., failure to identify country of residence)?ff What impact will the changes have across the
technology and process landscape?ff Is my corporate structure appropriate for the 2015
tax outlook?ff Do I have the appropriate agent/principal
arrangements with my channel partners?ff Can my systems and associated processes handle
the increased customer data capture and processing demands sufficiently quickly? Can any changes be made in time?ff What is the timeline for making the necessary
changes, and how does this interact with other ongoing programs?ff What is the mix of principal/agent arrangements
in my supplier contracts, and how much should I change these?ff How does my customer policy need to change to
allow additional data capture?ff Do we have the right knowledge in the business to
manage local VAT rules?
Exam
ple
cons
ider
atio
ns
Cust
omer
faci
ngB
usin
ess
faci
ng
Custo
mer se
gmen
tsCustomer segments
Brand
iden
tity and reputationChannels
Products and services
Parts of the business
Operations Customer services Sales Legal and
commercial
Tax Marketing Finance IT
Partners, vendors and
intermediaries
business process outsourcing/ outsourcers
Product and service
development
Capabilities
People and organization
Operational strategy Technology Process and
policy
Vision and strategy
Likely area of business and capability impact
Possible area of business and capability impact
Where does this affect you?
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How ready is your business?
Tax/finance teams
Checklist item How ready are you? What drives readiness in each area? Who needs to act?
VAT registrations will be required in each country where even one individual customer resides, or a central EU registration will be needed.
Not ready
Nearly ready
Ready
Tax compliance footprint
Tax/finance teamsRegular VAT filings will need to be made in each country where individual customers reside.
Not ready
Nearly ready
ReadyTax processes
CFO, sales, marketing directors, commercial team
Businesses must consider their pricing strategy. If universal pricing is used, margins will be lower in countries with higher VAT rates. If differential pricing is used, customers will pay different amounts in each country.
Not ready
Nearly ready
Ready
Pricing and margins
CIO, CTO IT/systems/AR teams
Where current systems have gaps in functionality, additional tax and other new capabilities may be needed to drive live tax decision-making and pricing. This, and associated changes, impacts a wide systems footprint.
Not ready
Nearly ready
Ready
Systems architecture
CIO, CTO IT/systems/AR teams
Businesses must consider how accurate customer residence data will be captured and how this will drive VAT decision-making. Systems will need to be updated to reflect the changes in pricing, extra steps in the purchase and VAT treatment.
Not ready
Nearly ready
Ready
Systems functionality
7Overview of EU VAT changes for digital products and services in 2015
Marketing, director, digital lead, IT teams
Checklist item How ready are you? What drives readiness in each area? Who needs to act?
Businesses must consider the impact on the customer if the gross price changes when the customer provides its details. Also, the impact of additional data capture and validation requirements on existing order capture processes should be considered.
Not ready
Nearly ready
Ready
Customer experience
CFO, CTO IT/systems/AR teams
Invoices will need to be amended to reflect invoice and record keeping requirements in each individual customer’s country of residence. Systems will need to support audit requirements in each country.
Not ready
Nearly ready
Ready
Records and audit readiness
Tax/legal/commercial teams
If an intermediary acts as a disclosed agent in a transaction with an individual, the provider must obtain access to timely VAT information from the intermediary to allow it to account for VAT in the customer’s country.
Not ready
Nearly ready
Ready
Arrangements with intermediaries
Tax/legal teamsExisting contracts need to be reviewed and new contracts set up so that it is clear who supplies what to whom, who accounts for VAT and where information on customer location will be obtained.
Not ready
Nearly ready
ReadyContracts
CFO, COO, commercial team
Businesses should consider the countries from which they operate. Certain fulfillment models may no longer be tax-efficient after 1 January 2015.
Not ready
Nearly ready
Ready
Location strategy
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Failure to act can result in any/all of the following outcomes:
Financial exposure, business disruption and compliance risk
Penalties and interest are applied by local tax authorities for VAT not accounted for, failure to register for VAT, incorrect record-keeping, etc., resulting in reduced profit margins. Penalties can be as high as 200% of the VAT not accounted for. In some cases, profit margins can be significantly reduced or erased altogether.
Where businesses are not proactive in addressing the 2015 changes and contracts are left unrevised, businesses rather than their contractual counterparties may be liable for any VAT incorrectly accounted for. Also, the counterparties may not be contractually obliged to provide the business with the customer information it requires to meet its compliance obligations. By 2015, counterparties may be unwilling to renegotiate contracts.
The lead times for implementing systems changes are one of the most significant items on the timeline. If proper and timely consideration is not given, systems will not be able to capture the necessary information to comply with local VAT rules. Once noncompliance is identified, there is likely to be a long turnaround time before systems can be amended. Where penalties are high for noncompliance, this may result in a forced suspension of sales to customers in certain markets.
Local tax authorities may initiate legal proceedings — and potentially even criminal proceedings — where a high value of VAT has not been declared, or for persistent noncompliance.
Businesses may be forced to stop selling to individual customers in countries until they are capable of complying with local VAT rules.
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9Overview of EU VAT changes for digital products and services in 2015
Why act now?
Approach
Deliver work program and strategy by December 2014
Design a work program and strategy
Diagnose actions that need to be taken
Identify issues relating to the five key focus areas
Analyze current business operations
If not already begun, there is comparatively little time to create, deliver and test a program in the months before 1 January 2015.
The impacts of the changes are spread across many parts of the business. There are several potential changes that will take many months, or even years to accomplish, as follows:
ff Identifying the impacts on technology systems and associated processes, designing and then implementing the required changes to core systems is challenging. This process is likely to extend the timeline because of complex interdependencies.
ff Changing contractual arrangements with suppliers, service providers, channel partners and retailers is an involved and time-consuming activity; the contracts themselves may have time left to run before they can be amended.
Adding to this time pressure is the extra challenge of communicating the chosen approach to consumers across Europe. If pricing is different in each country and the purchasing experience is made more complex because of proof of residence requirements — there is a need to communicate this well ahead of the implementation date.
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Steve PattonNew York, NYDirect: +1 212 773 2827Mobile: +1 917 833 8713Email: [email protected]
Ernst & Young LLP has a global network that is experienced in providing support across multiple jurisdictions and business functions, including Commercial, IT, Finance, Legal and Tax.
We have dedicated tax and business advisory team members who have significant experience in the telecommunications, media and technology industries.
Our VAT professionals work closely with other tax and business advisory colleagues and systems experts with relevant industry experience.
The global Ernst & Young Organization’s 2015 Working Group comprises over 30 major telecommunication, software, media and online service providers that will be affected by the 2015 changes.
This Group has successfully used its collective expertise and detailed understanding of the practical and commercial issues arising from the 2015 changes to effectively engage with the European Commission and the Member States with a view to having the policies reflect the needs of business wherever possible.
How can Ernst & Young LLP help?
Whom to contact
Co
mpliance
Syst
ems
Contracts
Corporate structure
Pricing
Prac
tical
Financial
CommercialHow can we
help your business with the
VAT changes?
Corin HobbsSan Jose, CADirect: +1 408 947 6808Mobile: +1 408 239 7628Email: [email protected]
Deirdre HoganSan Francisco, CADirect: +1 415 894 4926Mobile: +1 415 527 8251Email: [email protected]
Anne FredenSan Francisco, CADirect: +1 415 894 8732Mobile: +1 925 588 6212Email: [email protected]
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Next stepsffBusiness readiness check
ffIdentify the critical path and any urgent activities
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