The New VAT: What’s Happening and Why it Matters (Part 1)

By: Jim Fredlund

This year marks the start of a new era for Internet retailers in the European Union. Starting on January 1, the European Commission changed the way value-added tax (VAT) is calculated for direct-to-consumer sales of electronically supplied services.

While the new VAT law is exceedingly complex, the central change it makes is simple. Before this year, VAT in the European Union was calculated in the country of the seller, allowing businesses based in low-VAT member states to enjoy a competitive advantage. No longer. As of January 1 2015, the seller of an electronic service must charge VAT in the EU country where the customer belongs – not where the business is based. For businesses operating from an EU member state with an already high VAT rate, the effects of the new law may be beneficial. Businesses in other circumstances, however, may see their tax liability and regulatory costs increase substantially.

The responses that businesses in Europe have taken to the new VAT regulations certainly can vary. As we monitor the European commercial landscape, we’ve observed that some businesses are so overwhelmed by the complexities of the new VAT law that they are simply ignoring it. That will be a costly mistake. The new VAT is here to stay, and success in European digital commerce requires businesses to adapt to the new regulatory landscape.

Succeeding in the New Era

Every retailer affected by the new VAT law has an opportunity to accept the challenge of compliance more nimbly and intelligently than the competition.

From our point of view, intelligent adaptation transcends mere compliance. We believe that digital retailers can and should respond to the new VAT not as a regulatory burden but as a strategic opportunity. In our next post on the new VAT law, we’ll offer some specific ways businesses can turn the challenges of the new law into opportunities for success.

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