EU VAT Changes and Digital Distribution

Pink Gregory

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https://www.gov.uk/government/publications/vat-supplying-digital-services-to-private-consumers

So, here's a thing that I learned of only today, 3 days before it comes into effect in the UK, just wondering how you chaps think this'll affect digital distribution, seeing as that's extremely relevant here.

Essentially, as opposed to charging VAT on overseas digital sales based on the seller's country of operation (e.g. Valve operating out of Luxembourg and paying 15%); in EU member states, the VAT will be charged at the rate based on the buyer's country of residence - some countries having a VAT rate of 25% or higher.

I'm not personally going to touch on some of the issues, such as speculating on what Paypal are going to do to accommodate this; but I would be curious to hear thoughts.

Do you think we'll see price hikes across the board? Or will distributors like Steam, GOG and Humble just take a little out of their profits to maintain the same prices? GOG already uses their 'fair price package' to iron out the regional pricing in some titles, I would hope that this'll be dealt with in the same way.

I'm sure I don't quite understand how this will work in regards to regional pricing.
 

erbkaiser

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I think we'll be seeing Steam and other stores charge this directly to their customers, so in most countries games will become even more expensive :/

The real problem I think is for the smaller sellers. If I understand this change right, if I am a small business owner who sells items online, from now on I'll be forced to keep track of the VAT rate of all EU countries and declare taxes in the buyer's country -- which is a massive overhead. I think we'll be seeing stores start to lock things to their own country :/
 

Pink Gregory

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erbkaiser said:
The real problem I think is for the smaller sellers. If I understand this change right, if I am a small business owner who sells items online, from now on I'll be forced to keep track of the VAT rate of all EU countries and declare taxes in the buyer's country -- which is a massive overhead. I think we'll be seeing stores start to lock things to their own country :/
I think the decider is going to be what Paypal decides to do.

People who do business through a third party aren't going to be so troubled, as it'll be the third party's responsibility to deal with the VAT charges and give royalties back to their client - as for small businesses there is a department of the UK tax office that will deal with this as well, provided that two sources of non-conflicting evidence can be found to prove the customers' country of residence. I don't doubt that other EU countries have a similar system, or at least I hope that they do.

I suppose at that point it'll be down to individual business owners.
 

Prince of Ales

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Your link is broken.

I'd have to read up on the details. UK is 20% VAT. If Steam are currently getting away with 15% then this would take a £30 title to £31.30.

I did a VAT course couple of years ago but we never went into digital sales. I guess it makes sense that there are different rules (the way physical acquisitions work, the seller has to pay some VAT at the point of entry into the UK, but then they claim this back again at the point of sale; it's a very weird system to be honest).
 

Pink Gregory

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Prince of Ales said:
Your link is broken.
So it is. Fixed it.

Prince of Ales said:
I'd have to read up on the details. UK is 20% VAT. If Steam are currently getting away with 15% then this would take a £30 title to £31.30.

I did a VAT course couple of years ago but we never went into digital sales. I guess it makes sense that there are different rules (the way physical acquisitions work, the seller has to pay some VAT at the point of entry into the UK, but then they claim this back again at the point of sale; it's a very weird system to be honest).
The changes are designed to close that tax loophole of paying less VAT for international business in certain member states (Amazon and Steam in Luxembourg with that 15%).

I would hope that a price hike would be viewed as toxic publicity, though I'm not worried about paying another £1-2 for a game myself, I only have to deal with a relatively low 20%; whereas Hungary has 27%.

Thing is, these are companies that expanded to Europe as opposed to being based there; you can't really say that they're avoiding tax if they could have chosen to set up anywhere - GOG.com is an interesting case, because it's a Polish company that operates out of Cyprus (apparently).

Actually at this point I'd less call it a loophole than adapting to an odd design.

Oh, and supposedly this might be happening also with physical goods in 2016. Hopefully there's some time to debate it.
 
Sep 14, 2009
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well for the affected countries (UK for now?) couldn't those consumers just run a VPN to find the lowest VAT country and simply purchase from there instead?

Obviously this will cause some sort of effect, not sure how though, doesn't do anything to me in the US as of right now.
 

Pink Gregory

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True, but it seems like the consequences will be passed on to the consumer; I mean, I would hope that doing so would lead to absolutely toxic publicity - basically admitting to tax dodging and charging to compensate for having to pay more tax.

"Speaking to Develop, Harbottle and Lewis lawyer Nic Murfett predicts that Valve will have to up their prices to absorb the extra VAT liability - passing on the expense to us.

"From January 1st 2015, Valve will have to account for the VAT payable on each purchase made within the EU at the rate applicable in the Member State in which the relevant consumer is located and not the Member State in which Valve is registered,? he explained.

?Therefore, it?s likely that, rather than including a flat VAT rate in the retail price for each game that is made available on Steam in the EU, Valve will either start distinguishing the VAT that is payable on each purchase from the retail price of that purchase (as the amount of VAT will vary depending on the Member State in which the consumer is located) or raise the price of all of its games across the EU in order to account for its increased VAT liability.?

Source - http://www.dealspwn.com/steam-xbla-prices-rise-budget-closes-tax-loophole-169798

(I know that's a prediction rather than a statement, but...)
 

Prince of Ales

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Unkillable Cat said:
This is more to crack down on companies dodging tax.
Ultimately it's to stop smaller countries from operating as tax havens. That 15% VAT that Steam have been paying was all going to Luxembourg rather than to the UK, France, Germany etc. And so obviously all these other countries weren't too happy about it, hence changing the law.

gmaverick019 said:
well for the affected countries (UK for now?) couldn't those consumers just run a VPN to find the lowest VAT country and simply purchase from there instead?
Whether or not it would be technically feasible to "lie" to Steam about where you live, I'm pretty sure it would be illegal to do so now. Not that it would be an easy thing to enforce. The HMRC pamphlet puts the responsibility on the business to deduce where a customer lives:

...the business making the supply must obtain and keep 2 pieces of non-contradictory information to support and evidence the member state where the customer is normally located.
So it sounds like Steam might have to make additional checks when you make a purchase.
 

fix-the-spade

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Pink Gregory said:
Do you think we'll see price hikes across the board?
Bingo, if this affects all distributors and publishers the same, they will all simply adjust prices to compensate, if the adjustment means prices going up so be it, if it means they get more from the same price, they'll keep as is.

I predict a big rise in people using VPNs to gain access to regional variant stores with lower pricing, as happens already with Origin.

I'm surprised it's taken this long for this to happen, any physical goods get VAT applied when they enter the country, You'd have though this would automatically apply to digital ones too, guess not.
 

Albino Boo

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fix-the-spade said:
Pink Gregory said:
Do you think we'll see price hikes across the board?
Bingo, if this affects all distributors and publishers the same, they will all simply adjust prices to compensate, if the adjustment means prices going up so be it, if it means they get more from the same price, they'll keep as is.

I predict a big rise in people using VPNs to gain access to regional variant stores with lower pricing, as happens already with Origin.

I'm surprised it's taken this long for this to happen, any physical goods get VAT applied when they enter the country, You'd have though this would automatically apply to digital ones too, guess not.
You can use a VPN as much as you like it won't change the country of origin of your payment. It doesnt matter if you use paypal, bank account or credit card the money is instantly known from it point of origin. No bank can accept electronic payment without knowing its origin, failing to do can result in criminal prosecution.


Pink Gregory said:
Thing is, these are companies that expanded to Europe as opposed to being based there; you can't really say that they're avoiding tax if they could have chosen to set up anywhere - GOG.com is an interesting case, because it's a Polish company that operates out of Cyprus (apparently).

Actually at this point I'd less call it a loophole than adapting to an odd design.

Oh, and supposedly this might be happening also with physical goods in 2016. Hopefully there's some time to debate it.
GOG is UK limited company, where CD Projekt operates out of I have no idea. Given that the Cypriot banking system collasped in 2013, I suspect they have moved on
 

mad825

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albino boo said:
You can use a VPN as much as you like it won't change the country of origin of your payment. It doesnt matter if you use paypal, bank account or credit card the money is instantly known from it point of origin. No bank can accept electronic payment without knowing its origin, failing to do can result in criminal prosecution.
Erm, yeah, whatever. The whole point of paypal is to serve as a proxy so that your debit/credit card details remain somewhat unknown. When you buy something via paypal, paypal takes the money out of your bank account and puts into the paypal then transfers that to the retailer.

The retailer doesn't at any point receive your bank details. If needed be, it can easily be traced by the authorities with proper jurisdiction.
 

Rozalia1

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Smart move is to price hike, just business after all.
Some would say (though I hope that number is fewer these days) that Valve would never do that, but being based in Luxembourg says it all really.

Its not like it'll affect their business negatively anyway as they have plenty of defenders, and there is a fine shield to hide behind.
 

Albino Boo

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mad825 said:
albino boo said:
You can use a VPN as much as you like it won't change the country of origin of your payment. It doesnt matter if you use paypal, bank account or credit card the money is instantly known from it point of origin. No bank can accept electronic payment without knowing its origin, failing to do can result in criminal prosecution.
Erm, yeah, whatever. The whole point of paypal is to serve as a proxy so that your debit/credit card details remain somewhat unknown. When you buy something via paypal, paypal takes the money out of your bank account and puts into the paypal then transfers that to the retailer.

The retailer doesn't at any point receive your bank details. If needed be, it can easily be traced by the authorities with proper jurisdiction.
PayPal like any other business that oprates in the European union has to apply the anti money luandring regulations and carry out due diligence that tax is not being avoided. This has been a fact since 2005. I repeat that that PayPal is already criminally liable for failing to insure proper tax is paid. The reason why PayPal froze the accounts of many kickstarter was due to compliance with US and EU money laundering regulations.
https://www.paypal-community.com/t5/PayPal-Forward/PayPal-and-Crowdfunding/ba-p/782560
 

Pink Gregory

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Comment by user Skapusniak, from my similar thread on the RPS forum -

"Prices may go up some on Steam/Origin/Uplay/iOS App Store etc., but the big effect is going to be on small indies who sell stuff outside the big platforms, or have a button on their web-site for buying directly from them in addition to being on a store.

Don't take anything I'm about to say as gospel if your livelihood or legal position depends on it but, the problems as I understand them for anybody selling anything non-physical, that is small, are:

The VAT registration turnover threshold doesn't apply to these sales. So if you have any buyers inside the EU not in the UK you now have to register for VAT, and submit all the relevant VAT paperwork quarterly to the HMRC when you didn't before if you were below the threshold.

You have to get 2 pieces of independent non-cotradictory proof that the customer is actually in the country you've charged VAT for. This is non-trivial, especially when a lot of payment processors/shopping cart software developers are based outside the EU and don't care/haven't heard about this stuff.

That interacts with the Data Protection laws, in that those 2 pieces of proof are personal information under data protection laws, and the VAT legislation requires you to keep them for 10 years inside the EU -- remember that even if the seller is inside the EU, it doesn't mean their hosting is. Last I heard the HMRC think that means you have to register as a Data Controller with the Information Comissioners Office, whilst the Information Comissioner's Office itself doesn't (falling under an accountancy exception).

Other laws mean you're supposed to display VAT inclusive prices for your goods. That's now the buyer's VAT rate not your VAT Rate. Another technical challenge.

There are 78 different rates of VAT across the EU, they might change at any time, and there is no one true legally canonical source for them.

Each EU state has different requirements as to whether you're supposed to issue a VAT invoice, and what its form should be.

Other laws mean that refusing to sell to someone in another EU member, on the basis that they are in another country, if you're in the EU and selling to your own country is usually illegal. There are other reasons you can refuse to sell, say: 'I only sell to VAT registered businesses', possibly 'I only sell to the countries I have copyright licenses for', but not that one.

You are technically subject to VAT audit from every other EU state's tax authorities. They're supposed to go through your country's VAT office first, but...



TL;DR This makes running your own online shop to sell your game(s) is a lot more technically and legally challenging, and if you're small you don't have legal/IT/Accountancy departments to punt it to, or shout at when the poor sods in them can't make it work.

Expect any indie inside the EU to now look to only sell on the platforms big enough to handle all of this, the ones that take a cut of the sales commensurate with their market clout. Things like itch.io for instance I don't think are handling this instead leaving it to the developer. Expect therefore Steam/Origin/iOS App store, etc. become even more important in the scheme of things.

Also, technically, anyone anywhere in the world selling into the EU is supposed to comply, even if they're outside the EU. Yes, good luck with that in general, but the more risk averse might decide just to block sales to the EU completely (if they don't get very many) on the grounds of the whole thing just not being worth the possible hassle, especially given that VISA/Mastercard remain a dual point of failure for e-commerce, and they can be lent on, and have been lent on, by governments. "
 

CrystalShadow

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mad825 said:
albino boo said:
You can use a VPN as much as you like it won't change the country of origin of your payment. It doesnt matter if you use paypal, bank account or credit card the money is instantly known from it point of origin. No bank can accept electronic payment without knowing its origin, failing to do can result in criminal prosecution.
Erm, yeah, whatever. The whole point of paypal is to serve as a proxy so that your debit/credit card details remain somewhat unknown. When you buy something via paypal, paypal takes the money out of your bank account and puts into the paypal then transfers that to the retailer.

The retailer doesn't at any point receive your bank details. If needed be, it can easily be traced by the authorities with proper jurisdiction.
Yes, well, given paypal's incredibly obnoxious policies about which country your account is registered to (of which I discovered the many, many complex pitfalls thanks to moving.) - I have a credit card and bank account in one country, which thanks to the move is registered to an address in the other. The bank was fine with this, but paypal's behaviour means I cannot register these cards to the address the bank registers to, rendering them unusable with the account. Nor can I update my address, change which country my account is set to, nor register any cards or accounts from my new country. In effect this has completely killed my paypal account. All the more so given that for instance, steam, refuses to accept paypal transactions now because steam's idea of what country I'm in doesn't match paypal's
Paypal claims the only way to resolve this is to close my account and open a new one. Though how I am supposed to deal with all the funds in my account given I cannot register any valid address or bank details with them is completely beyond me.
Really makes the whole thing seem dubious. If a mainstream bank can deal with a person changing countries without too much issue, why does paypal make such a huge fuss?
 

Pink Gregory

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For price jumps, it depends which state you're in. If Steam indeed charges a flat 15% from Luxembourg, that's only an increase of 5% to UK customers (our VAT rate is 20%), which on a £30 game (hardly the average price for something that sells on Steam) is about £1.50 extra. For anyone living in Hungary with a 27% VAT rate, however, that's quite a sharp increase. Of course this all depends on what individual developers decide to do - but I would imagine that it'd be damaging for small studios to cut their prices more.

Of course, how Steam will work this out in conjunction with regional pricing is not something that I can guess at.

I can see GOG landing themselves in some very hot water, after the whole regional pricing thing. But how they can work around it legally...I really don't know.
 

mad825

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albino boo said:
mad825 said:
albino boo said:
You can use a VPN as much as you like it won't change the country of origin of your payment. It doesnt matter if you use paypal, bank account or credit card the money is instantly known from it point of origin. No bank can accept electronic payment without knowing its origin, failing to do can result in criminal prosecution.
Erm, yeah, whatever. The whole point of paypal is to serve as a proxy so that your debit/credit card details remain somewhat unknown. When you buy something via paypal, paypal takes the money out of your bank account and puts into the paypal then transfers that to the retailer.

The retailer doesn't at any point receive your bank details. If needed be, it can easily be traced by the authorities with proper jurisdiction.
PayPal like any other business that oprates in the European union has to apply the anti money luandring regulations and carry out due diligence that tax is not being avoided. This has been a fact since 2005. I repeat that that PayPal is already criminally liable for failing to insure proper tax is paid. The reason why PayPal froze the accounts of many kickstarter was due to compliance with US and EU money laundering regulations.
https://www.paypal-community.com/t5/PayPal-Forward/PayPal-and-Crowdfunding/ba-p/782560
Totally a different issue.

Paypal doesn't charge users to send money, it only applies to those who receive. It's not paypal's responsibility to ensure the retailer receives the correct tax, only what the retailer is charging.
 

erbkaiser

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Worst case scenario would be for Steam etc. to use whatever the highest EU VAT rate is (25% IIRC) for everyone and just pocket the difference.