Editor's note: This is a guest post from Dominik Tobschall, a German lawyer and software developer, and co-founder and CEO at fruux, a unified contacts, calendaring and tasks service that works across platforms and devices. The German startup is behind the sabre/dav sync technology.
Seven years ago, in February 2008, the Council of the European Union approved Directive 2008/8/EC to little fanfare. Now, seven years later, this directive is back to haunt European startups on a massive scale with its new VAT (Value Added Tax) rules on the place of supply.
With effect from 1 January, 2015 the place of supply for electronic services (also telecommunication services and broadcasting) provided to consumers is deemed to be the location of the consumer.
Previously the place of supply for e.g. a SaaS (Software as a Service) company providing its services to consumers would -in general- have been the location of the company.
The place of supply is important for tax purposes. It decides where the company is liable for VAT.
Under the old rules, it didn't matter where a customer was located. A company would always have paid the local VAT rate in its own country, because the place of supply was at the location of the company(for example a german SaaS company would have paid 19% VAT on its sales to its local tax office, regardless if the customer is located in Germany, Italy, Austria or elsewhere in the European Union).
Under the new rules however, because the place of supply is deemed to be at the location of the customer, the company has to pay VAT to the foreign tax authorities (for example a German SaaS company selling to a German customer has to pay 19% VAT to its local tax office, but for its sales to Italian customers it has to pay 22% VAT to the Italian tax authorities, for sales to its Austrian customers 20% VAT to the tax authorities in Austria, and so on).
To comply with these new rules, companies either have to register in each country they are selling to and report their sales to this country or register for the MOSS (Mini One Stop Shop) scheme in their own country and file country-by-country reports there.
What is the idea behind these rules?
These new rules are designed to prevent so called jurisdiction shopping. Under the old rules, multinational corporations (e.g. Apple) were able benefit from lower VAT rates, simply by deciding where they incorporated their European distribution subsidiaries (e.g. iTunes S.à r.l. in Luxemburg). The new rules prevent this jurisdiction shopping -at least for VAT purposes- as companies are always liable for VAT in the country of their customer and with the VAT rate of that country.
These new rules are actively harmful to startups
One might think that companies had seven years to prepare for these new rules, but many aren't even aware due to the extremely poor communication of tax authorities and governments. But even if companies would be largely aware, startups typically neither have the manpower in-house, nor an army of consultants and tax advisors to take care of the extra burden generated by these new rules - unlike multinational corporations, where even the headcount of the in-house tax department typically surpasses the total headcount of an early stage startup.
A startup is a company designed to grow fast. To achieve this growth, they will often sell internationally right from the start and because of this run into the brick wall of international tax compliancy way before they are prepared to deal with this complexity.
The Mini One Stop Shop doesn't fix the problem.
With the MOSS scheme companies don't have to report and register in each and every country they are selling to, but they still have to report their per-country sales to the MOSS in their own country. In Germany the competent authority is e.g. the Federal Central Tax Office.
Admittedly, reporting country-by-country sales to the MOSS instead to each and every country is a lot less complex, but companies are still severely affected by these new VAT rules:
- Requirement to ask customers for more data during checkout, which negatively affects conversions.
- Additional work to compile country-by-country reports (and often no easy way to automatically gather this data from payment processors).
- Development time for invoice handling instead of product features.
- Additional work for tax advisors resulting in higher costs for companies.
- More admin overhead with separate MOSS filings in additional to normal tax reporting.
Bottom line: startups are currently forced to burn precious time and money that would be way better invested in building a great product and finding the right customers for it.
How to fix VAT for EU startups?
One easy way to fix this would be to exempt companies with sales below a certain threshold from these rules - similar to the exemption for the supply of goods up to the threshold of 100,000 EUR in Article 34 in Directive 2006/112/EC. Up to this threshold companies would pay VAT on their consumer sales in the country they are located.
A threshold would allow startups to focus on building great products and investing their time and energy in their growth, but also effectively prevent big multinationals from jurisdiction shopping and ensure that VAT yields get distributed fairly between countries within the European Union.
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Featured image credit: Adam J / Shutterstock