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EU Rules Give Competitive Edge to American Webhosts

Fri, 5th December 2014, 20:44

In an of age of bloated governments fatcats, unable to balance a budget, or even pretend to live within their means, news of impending tax hikes come as little surprise. Austerity has become a misaligned buzzword synonymous with keeping more while sharing less.

For European companies offering “digital services” (eg:webhosting), a hangover having no connection to the prior nights activities is due to be imposed on January 1st, 2015.

On January 1st the EU is changing the rules governing the VAT charged by companies providing “digital services” to consumers in EU countries other than the one the company is based. Currently companies charge VAT at the rate of the country they are based in. A UK based company charges UK VAT to all their customers regardless of location while a French company would charge the French rate. Starting in January, VAT must be charged at the rate of the country where the customer is based.

Editor’s Note: VAT and other similar type goods and services taxes are a form of national sales tax, imposed by many countries, on most goods and services. They are traditionally only imposed on a country’s own citizens. Foreigners are generally entitled to rebates of VAT taxes paid. (some countries do create barriers for collecting those rebates). Depending on the locality, the tax may be in addition to a local or state/provincial sales tax. Again depending on the country, VATs can exceed 20 plus percent… not frivolous by any measure!

Although impossible to explained in a couple of brief sentences, businesses in the supply chain, through a system of credit/debit are rebated any VAT paid. The tax, by design, is paid by the end user and/or consumer. As the tax is paid on almost every conceivable form of goods or services, the paper trail is very useful in identifying tax cheats.

The new regulations state that digital service company will need to get, and retain two pieces of information that indicate what country a customer is in. This could be a combination of (but not limited to):

  • Customer’s address
  • Customer’s phone number
  • Customer’s bank account details
  • Customer’s IP address

 

Then it gets crazy. Paying the VAT each country is owed?

 

Not without heart, the EU gobermint is providing a couple of options. A web host could register to pay VAT in each EU country that they have customers, and then file a tax return in each country every year. Or they could use a VAT Mini One Stop Shop portal and file a single return.

The issues arises in that the UK has a very high threshold before businesses are required to register for VAT, (at the time of writing £81,000), while other EU countries may have a much lower, or even zero threshold. New or smaller web host may not sell enough to need registering for VAT in the UK but could be forced to register in another EU country for even selling one “digital service” to someone in that country.

The second option is only available for companies registered for VAT. Technically one could voluntarily register to collect VAT and get started on filing that monthly paperwork. Okay so you may well want to get some professional advice on what is the best approach.

While the impact of the new rules on new or smaller European web-hosts is self evident, the additional reporting burden for providing digital service to "foreign consumers" could possibly remove any competitive edge or incentive for many mid sized firms. For larger companies or those dealing exclusively with business clients the new rules will have few repercussions.

 

Outside Looking In. The Fallout

 

In all likelihood this change is going to represent a ‘lot of extra work for very little reward’. Not only for EU businesses selling “digital services” to customers in different EU countries, but for the tax man looking to reap another windfall.

EU businesses, digital and otherwise, are competing in a global marketplace. As mentioned earlier, VAT style taxing is imposed by countries to screw over their own citizens as foreign companies are exempt from collecting VAT if they are not EU based. Presently foreign web hosts and other digital services have close to a 25% pricing advantage over locals. It almost seems counter-intuitive to add another layer of complication.

Go figure!

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