The way in which electronic, telecoms, and broadcasting services are taxed when supplied internationally within the European Union will change on 1 January 2015. In just over a year’s time, providers of these services will have to pay the VAT collected from each consumer to the member state where that consumer lives. Currently, providers pay the value added tax (VAT) to the member states where they operate their businesses.
This change will not only affect which member state receives the VAT on these services, but also the VAT rate that the consumer will be charged. Today, if you live in the UK and pay to download music, chances are you’ll be charged 15% VAT by a Luxembourg company. A UK-based provider of the same service would have to charge you the higher UK VAT rate of 20%.
VAT rates vary widely within the EU. At 15%, Luxembourg has the lowest standard VAT rate of all EU member states. Along with its competitive corporate income tax regime, this has made Luxembourg a popular place to run online businesses. Hungary has the highest standard rate of all member states at 27%, with Denmark, Sweden and Croatia close behind at a 25% standard rate. In an industry where physical borders are inconsequential and barriers to trade fairly low, service providers in low-rate member states have an advantage over domestic suppliers in member states with higher VAT rates. It is this differing treatment that the EU’s new rules will address.
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