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How Do I Become Compliant with 2015 EU VAT Rule Changes?

Overview

As of January 1, 2015, new rules became effective on how to collect taxes on digital services sold to customers in the European Union (EU). Read this article to learn more about the new EU Value Added Tax (VAT) rules and what you can do to become compliant.

What has Changed?

Before these new rules, calculating the VAT rate was based on the your legal place of business. With the new rules, you must charge a VAT rate based on the location of your customers. You must now collect and report on many VAT rates. See section 2 of Explanatory Notes 2015 for more information.

These new EU VAT rules apply if:

  • You sell digital services. 

Digital services are products that are delivered in a digital format over the internet, telecommunications infrastructure, or broadcast service. For example, video on demand, music downloads, downloaded apps, and e-books are digital services. Placing an order through an electronic system for physical products is not a digital services and are excluded from these new rules.

  • Your customer is a consumer with a billing address in the EU.

See Taxation and Customs Union for more information.

What Do I Need to Do?

Location Compliance

You must collect at least two pieces of information to verify your customer addresses. Zuora does not confirm location compliance when processing transactions. No transactions will fail as result of these new rules. Collect this information as part of your operating procedures and maintain them for auditing purposes.

Proof 1: Self-certifying Evidence

Self-certifying evidence is  information such as billing or shipping addresses. Zuora is well-suited for collecting  billing and shipping addresses. Use the Bill to Contact address on the Customer Account as self-certifying evidence.

Billing Address of Customer Account is Self-certifying Evidence for EU VAT

See the following for more information:

Proof 2: Commercial Evidence

Commercial evidence comes from external sources, such as a credit card account or bank account. Zuora recommends using an outside service to collect commercial evidence from Internet Protocol (IP) addresses, Credit Card Issuer Identification Number (IIN), or banking information.

Pricing Structures

Zuora recommends that you review your pricing structures in your Zuora Product Catalog. Your revenue will change especially if you have set Taxation Mode to the Tax Inclusion option. Your pricing structure is not impacted by these new rules.

Check the Taxation options in your product rate plan charges. 

Product Rate Plan Charge with Inclusive Tax Mode

See the following for more information:

Reporting

You must report all EU VAT collections. There is no minimum cutoff amount for cross border sales. You have two reporting options:

  1. Report VAT to a Mini One Stop Shop (MOSS)
  2. Register and report all member states where you supply digital services

When reporting VAT, you must differentiate between domestic, EU, non-EU sales, digital and physical goods, Business-to-Business (B2B) versus Business-to-Consumer (B2C), and VAT rate across the EU and any changes implemented by member states.

You must complete reporting within 20 days of the end of the quarter as define by the EU. Note that this period may not align with your accounting periods. The EU quarters are:

  • January 1 to March 31
  • April 1 to June 30
  • July 1 to September 30
  • October 1 to December 31

You must submit and store the following information for ten years from December 31 of the year of the transaction:

  • Country code of the Member State of consumption
  • Standard VAT rate in the Member State of consumption
  • Reduced VAT rate in the Member State of consumption
  • Taxable amount at the standard rate
  • VAT amount at the standard rate
  • Taxable amount at the reduced rate
  • VAT amount at the reduced rate
  • Total VAT amount payable

See Guide to the VAT Mini One Stop Shop.

See VAT Rates Applied in the Member States of the European Union

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