11 December 2013
The issue of how to tax the digital economy is at the forefront of policy initiatives around the world.
The European Union has decided to establish an expert group to examine the issue and determine best practices; the first meeting is scheduled for 12 December, with proposals to the European Commission expected in the first half of 2014. One of the designated members of the expert group is Pierre Collin, co-author of the Colin and Collin report issued in January 2013. In their recommendation to the French government, the authors proposed reviewing the concept of "permanent establishment" to better capture the digital economy. The matter is also a priority of the Base Erosion and Profit Shifting Action Plan ("BEPS"), launched at the request of the G20 Finance Ministers, which led to the set up of a task force on the digital economy, aimed at identifying the issues raised by the digital economy and possible actions to address them. The OECD has requested general comments as well as specific input on a number questions related to digital economy taxation (in both direct and indirect tax areas) for use in producing a discussion draft leading up to a public consultation in early 2014.
Equally (or even more) important is the progress and the development of the indirect taxation framework, namely the upcoming "Mini One Stop Shop" (MOSS), due to become effective at the EU level by 1 January 2015.
Major changes are ahead, and EU- and non-EU-based companies should begin preparing for them.
The policy debate on the best way to apply consumption taxation to the digital economy is far from new; the OECD principles on the taxation of e-commerce were agreed to at a 1998 conference in Ottawa and reiterated in recent OECD VAT Guidelines. These principles establish that the rules for consumption taxes (such as VAT) should result in taxation in the jurisdiction where consumption takes place. At the time, the OECD also agreed that a simplified online registration scheme was the only viable option for applying taxes to e-commerce sales by non-resident traders.
The EU was a pioneer in applying these principles to non-EU traders supplying electronic services to EU-based private consumers, as some form of (low scale) MOSS was already in existence back in 2003. The regime will soon be extended to EU traders doing business in multiple jurisdictions and will encompass digital economy more broadly; it will be available to EU and non-EU suppliers of telecommunication, television and radio broadcasting services in addition to electronically supplied services (Digital Services).
What Is MOSS About?
Effective 1 January 2015, for VAT purposes, the place of supply of Digital Services to non-taxable persons will be the country where the consumers are established. For companies doing business with EU-based consumers, complying with these new rules would, in principle, require multiple VAT registrations in order to collect and pay the VAT to the different tax authorities of countries they are doing business in.
The Mini One Stop Shop is a simplification mechanism. MOSS will allow EU- and non-EU-based companies selling Digital Services to EU-based consumers to electronically file one VAT return and pay all VAT collected in the EU to one Member State. That Member State would then be responsible to redistribute the proceeds to the Member States where the consumers reside. Technically, MOSS is divided into a Union (targeting EU providers doing business in EU countries other than the one of their establishment) and a non-Union scheme (targeting non-EU providers, i.e., with no establishments in the European Union). Each scheme has its peculiarities (e.g., non-EU traders will be granted an EU VAT number, while EU traders will be using existing domestic VAT numbers), but both pursue equivalent simplification effects (namely one single electronic VAT return for EU transactions).
The MOSS Framework and Work Ahead
There is no single legal framework to MOSS; indeed, MOSS is found in more than five different sets of EU acts, combining directives (where, in principle, rules need to be implemented domestically to be effective) and regulations (directly applicable). Although the core principle are known already, and the implementation deadline of 1 January 2015 is set in stone, some of the key rules for MOSS are not yet formalized (such as the definitions of "Member State of consumption" and "private consumers") and we are still lacking guidance on how the audit of MOSS will be conducted (either centralized at the level of the Member State of the VAT return or decentralized in the countries where Digital Services are provided).
The EU Commission is taking an important part in promoting the scheme and explaining its functioning to businesses. At the end of October 2013, the EU Commission published a comprehensive guide on MOSS called "Guide to the VAT Mini One Stop Shop." The guide is an important building block to MOSS, as it provides a better understanding of key components such as the registration and deregistration process, the VAT return process, the payment process (including reimbursements), record keeping provisions and other compliance aspects. In the current attempt to reshape the VAT landscape in the European Union (see the future of VAT discussions at http://ec.europa.eu/taxation_customs/taxation/vat/future_vat/index_en.htm), the success of MOSS is perceived as a critical milestone by the EU Commission, as it will be the first time that Member States are cooperating to the collection of VAT at large scale.
The Mini One Stop Shop coming into force on 1 January 2015 is likely to be the most efficient way to comply with new indirect taxation rules in the European Union for suppliers of Digital Services. EU and non-EU suppliers of Digital Services to EU-based private consumers should become familiar with MOSS and check whether they will be in a position to apply for it. If ineligible (for example because of multiple VAT registrations in the European Union), companies can consider some restructuring steps that could permit them to take advantage of the simplification offered by MOSS. The interplay with the development of a new framework for direct taxation of Digital Services should also be interesting to monitor.
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