New VAT rules create a level playing field for start-ups and SMEs, says Revenue

19 Dec 2014

The new EU VAT rules on the sale of digital goods actually create a level playing field for start-ups to compete against multinationals, Ireland’s Revenue Commissioners has said.

On 1 January new VAT rules that will only affect providers of digital services, such as telecoms, software and streaming, will come into effect.

The VAT for digital downloads will be based on the customer’s country of residence instead of being the same across all EU territories.

Responding to claims by start-ups that the new rules will be too onerous to implement for small companies, the Revenue Commissioners said that start-ups and SMEs will be able to compete fairly against larger e-commerce giants who up till now benefited from low 3pc VAT rates in locations like Luxembourg.

Dermot Donegan, head of VAT Policy and Legislation at the Revenue Commissioners, told that the upside for Ireland is e-commerce companies may re-locate from Luxembourg Ireland because of the level playing field and the administrative benefits from that the country is the only English-speaking country in the Euro-zone.

Both the IDA and Revenue are promoting a scheme known as the Mini One Stop Shop (MOSS) so that tech firms will be able to submit VAT returns online in one country – in this case through the Revenue Online Service (ROS) in Ireland rather than across a multitude of countries.

Donegan said that the new VAT rules will result in an estimated annual windfall of €100m for the Irish Exchequer.

Under the deal hammered with Europe Ireland will retain 30pc of VAT paid through MOSS for the first two years and 14pc for the two years after that.

Donegan said that the Revenue Commissioners has already received a significant number of new registrations and has been “inundated” with enquiries about registering for the new system.

He said that many of the online businesses that had been taking advantage of the 3pc VAT rate in Luxembourg would already have operations in Ireland and are likely to shift functions to Ireland following the implementation of the new rules.

Donegan added that because of the huge cost of registering for tax in each EU member state, Ireland’s reputation for ease of administration has led to the country being regarded as the best tax administration in Europe, number one for the last seven years and running fourth to seventh worldwide according to the PwC/World Bank/IFC annual study.

A huge opportunity for start-ups and SMEs

Donegan said that the claim that small businesses won’t be able to comply with the data rules is “not a genuine concern.”

He said the new VAT rules were the result of 10 years of negotiations with businesses and tax authorities and were seen as a genuine achievement of Ireland’s presidency of the European Union in the first half of 2013.

“The bigger picture is this creates a huge opportunity for because up until now big businesses – mega corporations, if you will – based operations in Luxembourg and were able to apply just 3pc VAT.”

Until now companies selling e-books were able to benefit from 3pc VAT. From now on if that company sells an e-book in Ireland the local VAT of 23pc will be charged or if it is sold in the UK the local VAT of 20pc will apply.

“This creates a whole new level playing pitch,” Donegan said. “Smaller companies couldn’t compete with the big companies online because they didn’t have the resources to establish a presence in Luxembourg.”

Donegan also disputed claims that the new rules create more onerous record-keeping responsibilities.

“The MOSS system allows them to register in Ireland rather than in each member State, they process just one registration and one payment, all distributed. It’s an opportunity for businesses to go head-to-head with major players like they never could before.

“There is an opportunity for SMEs to exploit this opportunity.”

European VAT image via Shutterstock

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years