Changes to Value-Added Tax Make Subscription Sales More Cumbersome in Europe

When selling digital subscriptions to European-based customers, it’s important to know the intricacies of the Value-Added Tax, a special tax intended to reap revenues

When selling digital subscriptions to European-based customers, it’s important to know the intricacies of the Value-Added Tax, a special tax intended to reap revenues from print newspapers and magazines, but an archaic, cumbersome system for digital publishers. And the system is about to get even more complicated.Starting in January 2015, the European Union wants digital publishers to collect VAT based on where customers are purchasing wares. (The actual percentage amount of VAT that’s to be collected varies by country). Previously, VAT added to subscription prices was calculated based on the publisher’s address.For those of you unfamiliar with VAT, here’s a basic breakdown on how the tax works:

  • In general, digital publishers need to collect from individuals but not businesses. (Check out our Members-Only On-Demand Video for an explanation as to how businesses eventually pay the VAT.)
  • Digital publishers based outside of the EU should technically be collecting VAT based on the location of their customers. So, a US publisher selling to a Dutch customer would charge a 21% VAT on a subscription and a 20% VAT to a customer based in the UK.
  • Previously, publishers based in EU would charge according to their location. So a UK-based publisher would charge 20% VAT to customers in the UK and in the Netherlands. But the new law would force the UK publisher to alter its VAT rate based on customer location.

What digital products and services are subject to VAT? According to Deloitte tax experts Benno Tamminga and Martin Ryan, VAT can be applied to:

  • website supply, web-hosting, distance maintenance of programs and equipment
  • supply of software and updating
  • supply of images, text and information and making available of databases
  • supply of music, films and games, including games of chance and gambling games, and political, cultural, artistic
  • sporting, scientific and entertainment broadcasts and events
  • supply of distance teaching

The new rules also seem to include apps, eBooks, video-on-demand, music downloads, and the digital versions of newspapers and magazines.Which means all European-based digital publishers, especially those in the B2C space, should start coordinating pricing and payment processing with their accounting departments ASAP.

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