A little while ago I got a nasty surprise.
I had bought a digital product online. Some expensive training course.
I had to pay an EXTRA 19% Value Added Tax (VAT – EU VAT Digital Products) to the German government.
Scheisse!
But why?
Well, there are new VAT rules in de EU since January 2015 (ok, not so new now). You are now forced to pay VAT in the country where you as a customer are located.
But I was not in Germany. I haven’ been there for a looong time.
What happened?
I am using a Virtual Protection Network (VPN). This protects my traffic by encrypting it. It also bundles traffic so the original source remains hidden. And it directs all this traffic to an exit point in… Germany!
Apparently to this payment provider I am German based on my IP address. And I have to pay German taxes.
What did I do?
Well, I stopped marching, put down my beer and switched of my VPN off course.
…No taxes…
But I do not like that my traffic goes unprotected through hotel WIFI’s. And who knows what kind of ISP’s along the way.
“But Julius, what are the alternatives? And don’t hold back!”
One solution would be to use a different kind of VPN. Like Hidemyass. They allow you to choose your own exit point. You can easily switch between countries. And you can make sure that the exit point reflects your situation the best while being protected…
These services can also be handy when you are visiting restricted websites or pages that are somehow blocked (like Reddit, in Indonesia – Yeah, I know).
Another option would be to route your traffic through a proxy service like Foxyproxy.
Make sure your traffic is routed securely though, when you make online payments.
EU VAT Digital Products – Entrepreneurs Selling To The EU
Now the big headache is off course for those that sell digital products to Europe.
How bad is it?
Rick Minor, the author of the book “VAT on Electronically Supplied Services to EU Consumers – A Practical Compliance Guide for Cross-Border Suppliers” (I know)…
…puts it this way:
“Before any sales in Europe take place, the nonresident seller is obliged to be properly registered for VAT. This means registering for VAT in each European country in which the seller expects to have consumers, or to make a one-time election for a simplified registration and filing procedure to meet its European compliance obligation. Despite having been in place since 2003, there seems to be very little public awareness of this important European VAT obligation for US sellers.”
A quick look at my Google Analytics data tells me that I have visitors and potential customers from all these countries. Yay!
What You Have To Do
Here is what you have to do when you are stupid/bold/hopeless enough to sell digital products to Europeans:
* Change the way you register for VAT. You must register in all the different EU countries (28, but not for long) or register in one country where you file quarterly according to the standards of the VAT Mini One Stop Shop (VAT MOSS).
* Change the way you charge VAT. You will have to charge different VAT to every individual in the subjected countries.
* Collect evidence of a buyer’s location. You are now required to obtain TWO pieces of evidence of the buyer’s location. This could be the customer’s IP address AND something else like the billing address. And you have to keep those records for 10 years.
Of course, most big payment providers are fully compliant with these rules and regulations and will charge all required taxes automatically based on the IP address, as described.
To make things easier, there are already wordpress plugins that help you collect all the necessary data. One stated this:
“We are proud to say that this is the most powerful free EU VAT solution on the market. It was designed with you, the merchant, in mind, and it will make it easier to deal with the new, complex EU VAT regulations.”
Wow. I feel special.
What Can You Do?
It might be the case that you are a small business owner reading this and think “well, how am I ever going to deal with this.”
Now, this might not be the ideal solution but think about the following:
A very important aspect of legal speak is “definitions”. You want to make sure you understand how the product that you offer is defined.
And perhaps tweak it a bit…?
For example…
On a Pdf document automatically emailed by seller’s system. VAT needs to be paid.
On a Pdf document manually emailed by seller. No VAT.
Online course consisting of pre-recorded videos and downloadable pdfs? VAT.
Online course consisting of pre-recorded videos and downloadable pdfs PLUS support from a live tutor. No VAT.
I found this page that might be interesting for this exercise. Do check if it is fully up-to-date for your case though.
What Did That Teach Us?
As a starting business owner, you can alter the product or the way you deliver it and remain tax-free and compliant.
You could sell face-to-face consults, or have reports “specialized” and send by email. If you sell expensive products, you could have a Personal Assistant send a personalized product to your clients by email.
And when your volume increase, at one point it might make economic sense to fully comply with this nonsense.
Hey! I am just brain storming here…
This is a good article that summarizes all the important aspects of the EU VAT rules those outside of the EU need to consider.
Ok, that was it.
Have a good day.
Julius van der Beek
EU VAT Digital Produtcs Compliant (and special)
P.S. Are you interested to find out how you live tax-free
Brilliant! I wish everyone knew this! I always renounce 100% of the times to buy online courses, since there is no point in giving away 21% of the value to God knows who, just for a document I will probably only read for 10%… Complete bogus law.