How does a digital service provider use VAT MOSS?

Quite often, entrepreneurs, entering the EU market with their digital goods or services forget about the colossally important aspect – VAT (Value Added Tax).

Moreover, a number of entrepreneurs believe that VAT is not related to their type of goods/services and then get very upset when they have to pay VAT which they did not collect from their customers.

Please note, this article is only about B2C business. Different rules apply for B2B.

What services/goods are considered as delivered electronically

Services/goods are considered as delivered electronically if they are automatically provided through the internet where there is little or no human intervention at all:

  • Where the sale of digital content is fully automatic, e.g., the consumer clicks the “Buy Now” button on a website and either the content is downloaded to the consumer’s device
  • Where the consumer receives an automated email with content
  • Where the sale of digital content is largely automatic, and the small amount of manual process does not change the nature of delivery from an electronic service

All electronic services that are delivered electronically in this manner are digital services/goods and companies need to charge VAT when selling them.

Applicable to these types of businesses:

  • Selling text, images (such as photos), e-books, and other digital documents (such as PDF files)
  • Selling music, movies, or games
  • Online magazines
  • Web hosting
  • Selling software or software updates

Please note, this list is for illustrative purposes and is not exhaustive and has its exceptions.

What about digital goods platforms and marketplaces?

If a company provides electronic services to customers through an online portal, gateway or marketplace, you need to determine whether the company sells to the customer or the platform operator.

The platform operator makes the sale to the customer if the platform operator has identified you as a merchant, but sets the general terms and conditions of the services/goods, handles payment or delivery/downloading of the digital service. Then the platform operator will be responsible for accounting for the payment of the VAT charged to the consumer.

For example: the marketplaces Bandacamp, Envato and Amazon Kindle Direct Publishing.

However, I advise you to read the terms and conditions of the marketplace first and understand their policies regarding VAT charges.

Let’s move on to VAT MOSS

If you sell digital services/goods in the EU you should definitely think about registering as a VAT payer in advance.

Moreover, as of 2015, the place of delivery of the service/goods is where your customer is located, not where your company is registered.

The changes were adopted to combat companies that registered in countries with the lowest VAT rate, allowing them to pay VAT in the country of registration on all EU sales.

If you are planning to provide services in several EU countries, you should be aware that each country has its own VAT registration threshold (e.g. in Estonia 40,000 EUR and in Cyprus 15,600 EUR).

For the sale of digital services and goods, there is a lower threshold of 10,000 EUR, within which VAT can be charged according to the rate of your company’s country of registration, not the country where the customer is located.

Does this mean that you have to register as a VAT payer in each country separately?

The good news is no. The VAT Mini One Stop Shop (VAT MOSS) was created in 2015 precisely for these types of businesses.

The main purpose of VAT MOSS is to simplify reporting, reduce financial and administrative costs of reporting.

Let’s look at an example:

Company A is registered in Cyprus and has developed its VPN service. It sells subscriptions to its service to individuals in the markets of Cyprus, Estonia, Poland and Spain.

No VAT MOSS registration With VAT MOSS registration
Company A must register in Cyprus, Estonia, Spain and Poland as a VAT payer. Company A is registered in 1 country (often the country of registration of the company itself) as a VAT MOSS payer.
Company A must charge VAT according to the local rate of each country (19% in Cyprus, 20% in Estonia, 23% in Poland, 21% in Spain). Company A must charge VAT according to the local rate of each country (19% in Cyprus, 20% in Estonia, 23% in Poland, 21% in Spain).
Company A is required to file VAT returns in accordance with local laws, deadlines and requirements. Company A submits a single report (once a quarter) for VAT (to the tax authority in the country of registration).
Company A pays VAT to each tax office separately. Company A pays VAT to 1 tax office (in the tax office of the country of registration).
Thus, to work effectively, Company A will need four accountants in each country, because the reporting process and other formalities are different between the countries. Thus, VAT MOSS operates on the principle of a single window and allows you to greatly simplify and reduce the cost of VAT reporting.

What rate of VAT should be applied?

It is necessary to apply the VAT rate of the place of service consumption. The place of service consumption is not where your company is registered, but where your customer is located.

For example, if we sell digital goods/services to someone in Estonia, we apply a rate of 20%.

The current VAT rate for all EU member states is published on the European Commission website.

How do I locate a customer?

If the customer is an individual (a tax-exempt person), the location is determined by his/her place of registration, permanent residence or place of habitual residence.

Generally, the location of the Client is determined by:

  • IP address
  • Billing address
  • Details of bank account
  • Bank card details (BIN)
  • Country of your SIM card registration
  • Other commercially significant information
  • Please note that you have to collect at least two pieces of evidence that do not contradict each other.

What is commercially sensitive information?

It is possible that the only evidence available will be commercially significant information. This does not mean that one piece of evidence alone will be sufficient to locate a customer.

Commercially relevant information as a whole (two or more separate pieces of evidence) may provide evidence of a customer’s location.

In such a situation, the supplier must take into account the reliability of the available information when making a decision. The supplier must also be able to justify the relevance of this information to itself.

It is not possible to list all the different pieces of evidence that fall into the category of “commercially relevant information.” Business models vary widely, so evidence that is credible in one case will be completely unreliable in another.

Examples of commercially relevant information:

  • Gift cards intended for use only in one country
  • Documentation of third parties providing payment services (the Stripe payment system functionality makes it very easy to work with VAT MOSS)
  • Self-certification by the client (e.g. when placing an order online where the client specifies the country, card details and other data).
  • These details should be kept for 10 years after the end of the year in which the sale occurred, regardless of whether you have stopped using the VAT MOSS scheme.

What to do if the evidence contradicts each other?

In any case, consider that the evidence must be distinct and must not duplicate each other.

For example, if the client provides the billing address and then confirms that address through self-certification, this would be considered one piece of evidence.

A similar situation arises when a customer provides bank details which in turn point to a unique payment mechanism or is confirmed by a payment service provider, or when an IP address and geo-location point to the same location. In these cases, it should be assumed that the provider has only one proof.

There may be cases where companies collect four or more pieces of evidence, resulting in two (or more) separate sets of mutually non-contradictory evidence pointing to different locations where a customer may be located.

It should be emphasized that it is up to the vendor to decide which evidence to collect and, if the information collected is inconsistent, which elements of it are considered most commercially relevant to locating the customer.

If the sale is to an individual, priority should be given to the individual’s place of habitual residence. A permanent address should be used only if there is evidence of the use of services at that address.

The provider will need to decide which evidence is most reliable in determining the customer’s location with respect to their particular business activity.

When in doubt, priority should be given to the location that best ensures taxation at the place of actual consumption of the services supplied.

If a universal pricing policy is applied, i.e., if the same price is charged regardless of the country of origin of the customer, customers will have no incentive to hide their location for tax purposes.

If your company is registered outside the EU and you sell digital goods/services in the EU

Companies who sell digital goods/services in the EU and are based outside the EU (including the UK from 1 January 2021) are also required to register with VAT MOSS.

Such companies can register for VAT MOSS in any EU country of their choice.

How do I report VAT MOSS?

Full details of how to submit a VAT MOSS report are given in Annex 3 of Regulation (EU) 815/2012.

In brief, a report must be filed for each EU member state where services/goods were supplied in the reporting period, indicating the amount supplied and the applicable VAT.

In cases where there were no deliveries to certain countries during the reporting period, no report shall be submitted.

You can submit the reports electronically through your personal account.

Deadlines for submitting VAT MOSS reports

Reporting is submitted quarterly, within 20 days after the end of the period.

From January 1 to March 31, from April 1 to June 30, from July 1 to September 30 and from October 1 to December 31.

The last reporting deadlines for each of these periods are April 20, July 20, October 20, and January 20.

Conclusion

Before starting a business in the European marketplace, it is important to determine if your goods or services will be considered delivered electronically.

If so, you should register as a VAT MOSS payer, this will make further VAT reporting much easier and cheaper.

If you still have questions, we would be happy to advise you on VAT MOSS and accompany your business.

UA
+380443793128

Mon-Fri 10:00-19:00

Ukraine

Konyskoho St. 55А, Kyiv, Ukraine, 04053

EST
+3726028480

Mon-Fri 10:00-19:00

Estonia

Harju maakond, Tallinn, Kesklinna linnaosa, Tuukri tn 19-315, 10152

USA
+13478979183

Mon-Fri 10:00-19:00

United States

228 Park Ave S PMB 516920 New York, New York 10003-1502 US