Finance Focus

Whether or not the cost will be passed on by suppliers will be dependent on many factors. The digital book market for example, tends to price e-books according to standard incremental price points, therefore a price increase matching exactly the extra VAT amount is unlikely to work. Some suppliers may choose to raise their prices gradually.

Q

How should companies prepare for these upcoming changes?

All businesses affected by the changes will need to investigate and decide on the best pricing strategy across the EU. For example, if we take a relatively simplistic view, there are two main options;

i) Charge a universal price across the EU but achieve different margins on sales to customers in different member states (due to the different VAT rates in each), or

ii) Charge differentially, applying different prices in different member states so as to achieve required margins in each. Typically, this involves a greater cost, but grants the seller more control, particularly in price sensitive markets such as those of e-services.

Pricing strategy is complex and businesses will need to forecast their options (which can take time) in order to remain competitive. It might not be your decision – if you supply your services through a platform, another business may be taking these pricing decisions with you receiving a revenue share, so you need to know the impact on your margins to effectively forecast your future net revenues.

There are legal issues to consider, especially around how the change might affect B2B contracts with intermediaries. You need to be clear on who is responsible for accounting for the VAT, who will manage any challenges from the tax authorities (who may require customer data to be made available), plus any potential data protection issues.

If your business is responsible for the VAT due to the final customer you have two choices: you can either

register for VAT in all those EU member states where you have customers or you can opt to pay the VAT through a new online facility called the “Mini One Stop Shop” or “MOSS”.

Either way, businesses will need to change their systems and

processes to gather the required

customer master data to identify where the customer belongs (and charge the relevant rate of VAT) for every sale of e-services, broadcasting or telecoms made. Systems must also be capable of invoicing according to the rules in each of the 28 Member States, and every transaction will need to feed through into the correct VAT return or the MOSS. The systems and process changes necessary for this to be compliant by 1 January 2015 are significant, and businesses need to budget the time and costs of this as soon as possible.

This list of preparations is not exhaustive, and the issues I have raised are really the tip of the iceberg. If businesses are at all unsure about what they need to be doing to be ready by 1 January 2015, they need to take advice as soon as possible.

Q

What are your recommendations for effective management of VAT?

Take it seriously. For most consumer businesses VAT is the biggest single cost to be deducted from gross revenue. The penalties for accounting incorrectly for VAT are severe in many countries, as much as 100- 200% of the mistake you make.

An error in data

management can have a huge reputational impact. Making changes to your customer order processes, billing and other systems takes months to design, test and implement; 2015 might sound like a long way out, but it will be imminent to the IT Director.

Q 1

Do the 2015 VAT changes mean business structures will change?

Under current rules, B2C businesses in these sectors supply from one location, adhering to one set of VAT rules, applying a single VAT rate. This is a centralised operating model, often in a low VAT rate jurisdiction such as Luxembourg. From 2015 there will be a new level playing field for VAT where these affected

services are concerned, and there will no longer be any advantage to being located in a low VAT rate jurisdiction. This means other variables will become more important in determining the best location for a business, e.g. talent pool, cost of living, direct tax rates, attitudes of the tax authorities, political stability and local economies.

The knock on effect will be felt by governments, both in the shift of VAT revenue, but also due to the redistribution of suppliers as they relocate to new jurisdictions and take their employees, assets and other tax streams with them. The total impact in each Member State is yet to be seen, and will certainly be positive for the UK Treasury; a recent article estimated that the effect across the EU will be a potential annual rise of €2.5 billion in VAT revenues ($3.4 billion)1

,

with those charging higher VAT rates for the affected services seeing the greatest impact. For Luxembourg, however, the annual fall in tax revenues as a result of the 2015 changes could be in the hundreds of millions of Euros2

.

As with any change, the disruptive effect means that new competitors are likely to emerge, pressures for product innovation will increase and suppliers will be forced to identify new efficiencies in their supply chain to maximise margins. Forward thinking businesses are already getting ready.

Q

What other VAT changes, recent or upcoming, should companies operating in the EU be aware of?

There is increasingly a view that when it comes to VAT in Europe, the only way is up. Both rates and the scope of VAT have been steadily climbing, plus the variety of other indirect taxes and turnover taxes is rising. In a 2013 Survey on VAT conducted by KPMG, two-thirds of EMA businesses polled said they thought VAT rates would increase even further in the next three years. And since that survey was conducted, France, Italy, Croatia and Cyprus have all increased their rates with the Ukraine and Luxembourg both expected to implement rate changes soon.

EU digital VAT rule change forces Luxembourg to raise rates, 06 February 2014, Salman Shaheen – International Tax Review. 2.

Luxembourg Mulls Tax Rise To Avert Budget Disaster” 13 November 2013, Ulrika Lomas, Tax-News.com, Brussels. 49