Ireland stands to win in VAT shake-up on online trading

New EU legislation governing tax on internet sales will come into effect on January 1st

The VAT system for online goods and services is about to be turned upside down. As of January 1st, Irish residents buying ebooks or music downloads from an online vendor in Europe will pay VAT in Ireland, at Irish rates.

That’s a shift from the current system, in which consumers pay VAT at the rate of the EU country in which the seller is based.

For businesses here and internationally, the flip-flop means they will likely need to upgrade IT systems to incorporate the change, and take a new approach to managing information.

For example, any vendor selling to European consumers – whether an EU firm, a US multinational, or an individual selling a self-published ebook from a personal website – will need to collect data on where the buyer is located, charge VAT at the appropriate rate, and pay the relevant national tax authority in Europe.


In addition, records of the transactions with the buyer’s resident country must be kept for 10 years, while observing appropriate EU data protection regulations.

“E-commerce has been a growing phenomenon, and VAT legislation hadn’t really recognised it. The legislation is now catching up with the real world,” says Breen Cassidy, indirect tax partner, EY Ireland.

The incoming legislation is an attempt to harmonise an approach to VAT for sellers in Europe and abroad “because they can’t agree on a standard VAT rate around Europe”.

Additionally, the new approach will deal with a political issue European politicians have found increasingly vexing – loss of tax revenue by member states to countries with lower online tax rates. In particular, within the EU itself the legislation targets Luxembourg, which has brought in significant state income by charging a special 3 per cent VAT for ebooks. The normal VAT rate on goods in Luxembourg is 15 per cent.

This has, controversially, caused vendors such as Amazon and iTunes to base operations in the country, enabling them to undercut competitors selling goods from within other member states with significantly higher tax rates of up to 27 per cent on the same items. 'Luxembourg badly hit' "Luxembourg is going to be badly hit by this," notes Mr Cassidy. In March, Luxembourg's finance minister Pierre Gramegna estimated the country would lose 70 per cent of its total VAT revenue when the new rules come into full effect, a loss he estimated at between €660 million and €1.1 billion. The country will raise its general VAT rate to 17 per cent to try and compensate.

On the other hand, countries with a large online consumer base, such as the UK, are expecting significant new income from the e-commerce VAT changes. UK chancellor for the exchequer George Osborne said in his Autumn Statement budget speech that he expected the UK would take in £1.2 billion (€1.5 billion) in additional VAT between 2015 and 2018.

The Government here also expects to see a VAT windfall as the changes are phased in. Minister for Finance Michael Noonan has budgeted for an extra €100 million in VAT in 2015 and 2016; €125 million in 2017 and 2018, and €150 million by 2019.

In order to ease in the changes, particularly for hard-hit countries like Luxembourg, the legislation will not come into effect fully until January 1st, 2019. During 2015 and 2016, 30 per cent of VAT on a sale will stay in the seller’s country, while 70 per cent will go to the buyer’s country. Over the following two years, 15 per cent will remain in the seller country, and 85 per cent will go to the buyer’s state. The full VAT charge will accrue to the buyer’s state in 2019.

The EU is continuing to allow vendors opt for an easy ‘Mini One Stop Shop’ (Moss) approach to sorting out European VAT obligations. Under Moss, companies can use one member state as a base, rather than having to register in each country for VAT.

Through that Moss country, they make a quarterly VAT payment, which will then be processed and distributed to the relevant EU states.

Companies can also use an online portal based in a member state. Buyers use their credit cards or online payment system as normal, and the portal processes the VAT payments, with the VAT return filed in the country from which the portal operates.

Given the large base of multinationals and support services already located here, Ireland seems to be widely viewed as a useful Moss or portal location.

"Ireland may emerge as the VAT registration jurisdiction of choice for non-resident sellers to set up European residence, given the US e-commerce 'cluster' and currency advantages," stated an article last summer in Forbes, written by Rick Minor, former tax counsel for AOL Europe in Luxembourg and the principal author of VAT on Electronically Supplied Services to EU Consumers: A Practical Compliance Guide for Cross-Border Suppliers of Digital Goods and Services.

“As the European business of those non-resident sellers VAT-registered in Ireland expands or matures, Ireland will be high on their list of European jurisdictions for direct investment when those non-resident sellers decide to go tax-resident and establish a more permanent presence in Europe.”

Another key advantage will be that companies can pay their VAT in euro in Ireland, while the payment would have to be made in sterling in the UK, introducing additional currency transaction costs, says Minor.

“The Irish Revenue has certainly taken a pro-active approach to this,” says Mr Cassidy. In addition to holding seminars on the subject in Ireland, Revenue has also taken a roadshow to Silicon Valley and other locations, he adds.

“The message is that yes, there is a base here,” for offering VAT services, he says. Agreeing with Minor, he also believes offering VAT services makes Ireland more attractive to companies already here and those looking for a European base. ‘Ireland more central’ “It makes Ireland more central to the entity that’s sitting in Ireland,” he says.

In addition, the Irish exchequer has a four-year transition window in which it will be able to snare 30, and then 15, per cent of the total VAT take of any company that can be persuaded to sell online goods and services from Ireland.

Not everyone is pleased with the e-commerce VAT changes.

Some small to medium companies worry about the additional costs involved in repatriating VAT, altering IT systems and managing data. And, as VAT is liable even on small, one-off payments, the new obligations are likely to create a burden for small vendors such as self-published authors, or crafts makers.

Using #VATMESS and #VATMOSS hashtags, SMEs in the UK recently organised a social media protest about the changes, complaining that the EU has 75 different VAT rates that will have to be addressed by vendors.

Knowledge of the changes remains low among SMEs. KPMG UK estimated last month that 60 per cent of the UK's 34,000 SMEs are still unaware of the pending changes that are now less than a month away.