App developers will need to forensically trawl over their contracts with app marketplaces and other platforms ahead of the introduction of new EU VAT rules on January 1, 2015.
How contracts are written between developers and app stores will be crucial as regards who pays the EU VAT on the cross-border supply of digital services. For example, Google and Apple will pay the VAT – but what about other app stores and intermediaries?
How these contracts are written will decide if developers are liable to collect and declare VAT, or whether they can rest easy – safe in the knowledge that their VAT liability will be taken care of.
An app developer selling to Apple’s app store does not have to worry about collecting and declaring VAT as Apple will take care of the VAT liability on their behalf. This has always been the case so nothing will change for developers that sell their apps to Apple’s app store. That sale is deemed to be business-to-business (B2B). The app marketplace – in this case Apple’s app store – operates the B2C sales with the end customer. Only B2C sales of digital services are affected by the new rules.
Likewise, Google Play – which recently changed its terms of conditions – will also collect and declare VAT on behalf of app developers.
However, take a close look at existing contracts given that Google’s terms changed recently. Contact Google and your tax advisor to clarify all the relevant points of your contract.
Some platforms still place the onus of VAT collection and declaration on the app developer. For those operating in this sphere.
If you are a developer that sells apps or online games directly to a customer in the EU then you are liable to account for the VAT on the cross-border supply of these services.
How is it determined who is making the digital service?
Taxamo’s recent seminar in London answered this question. For apps sold through an online app marketplace (e.g. Apple’s App Store) or a platform, the business running the platform will normally be responsible for VAT.
The app developer will not be responsible if the ordinary person in the street assumes that they are buying from the business operating the platform.
The list of digital services in the implementing regulations is not exhaustive. As a guide: if the internet is required to access a paid-for service then that service will likely be within scope of the new rules.
Indeed, if you are a PSP/portal/gateway/aggregator it is very important to look thoroughly at your contracts with content providers. How do you deal with the customer?:
- Are you the one authorising the payment?
- Are you the one authorising delivery of the services?
- Are your terms and conditions being accepted or are those of the content provider also included?
Do the rules target Apple, Google, and Microsoft?
At a recent BDO/Pollen Venture Capital webinar Andrew Webb, senior indirect taxes policy manager at HMRC, emphasised how difficult it will be for multinational platforms (such as Apple, Google, and Microsoft) to avoid charging and declaring these new taxes: “The scope of these rules are quite broad. It will be challenging for these platforms to sidestep these responsibilities. They would have to change a lot about how they trade if they were to try and sidestep these responsibilities.”
He added: “From a compliance perspective, tax authorities felt that this was the most suitable approach.”
Indeed, the new rules are aimed at improving compliance with EU VAT rules. Back in 2011 an EU-commissioned report found that some €192 billion per year was lost through a combination of poor book-keeping, fraud, and ignorance of rules. The digital economy was viewed as being the where the most VAT leakage occurred.
Must register for VAT to use MOSS
At the BDO/Pollen Venture Capital seminar – as he was at Taxamo’s recent event – Andrew Webb was quizzed in relation to the lack of a threshold ceiling for businesses selling digital services cross-border in the EU. He admitted that the UK weren’t entirely happy with the lack of a threshold.
“Yes, that is the case. The UK – when MOSS framework was discussed – did raise issue of threshold. No great support for UK stance. Digital supplies several years ago were not as important as they now are.”
Mr Webb continued: “I can confirm that you will have to be VAT registered to use MOSS. However, if it becomes clear that this is still a concern for a large proportion of micro-businesses then HMRC would be willing to ask for the issue to be looked at again. There would have to be a good reason for it to be renegotiated.”
Without MOSS, Mr Webb said, a business might have to register and account for VAT in multiple jurisdictions. MOSS is deemed to be a support to these businesses so that they do not have to register and account for VAT in multiple jurisdictions.
If a UK-based developer decides to use the UK’s MOSS portal (it is optional) then HMRC will take on the responsibility of splitting that multiple tax return to the relevant tax authorities across the EU.
Again, for in-app purchases it will all rely on what is in the contract between the developer and the app store marketplace. If the in-app purchase is processed through the app store then they will have to deal with VAT. If the developer processes the credit card then it is they that must collect and declare the VAT on all cross-border supplies.
Intermediary companies can also deal with VAT on behalf of developers. They effectively act as app stores. The common payment thread would mean that the app sale between the developer and the intermediary is a B2B sale and therefore outside the scope of these rules.
The consensus at the BDO/Pollen Venture Capital seminar was that most app/online games developers are extremely unlikely to collecting and declaring VAT. The likelihood is that they will stop selling direct, simply due to the extra overheads involved. But, of course, it all depends on scale. If it is a small app development company with no back office to deal with these new rules then that will be a significant administrative burden, even if they were to choose the MOSS route. For larger app/online games companies they may have the resources to collect and declare all of their EU VAT themselves.
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