Opportunity knocks for digital firms

The Irish digital economy is predicted to be worth €21bn, and employ 150,000 by 2020. This thriving sector needs to be nurtured.

That’s why a new EU Vat rule to be introduced tomorrow is good for business, and good for the State, with a €600m Vat windfall already budgeted for 2015 to 2019.

There may be an initial shock to the system of the estimated 2,500 Irish companies that will be affected, but when we dig deep as to the reasons it will be seen as a positive piece of legislation.

We don’t have to look too far to see how quickly a digital start-up can prosper. Look at the online payments company Stripe, founded by Limerick brothers Patrick and John Collison, and its recent $3.5bn (€2.87bn) valuation in the US.

There are great opportunities for companies with the proper digital strategy. So, what exactly is happening at the turn of the year? An estimated 2,500 Irish firms supplying digital services to customers in the EU will have to alter how they operate online to comply with new EU Vat rules.

The new rule returns Vat to its rightful owners, the country where a purchase is made. It eliminates the decade-old trend of Irish businesses being undercut by companies based in low-Vat jurisdictions in the EU, such as Luxembourg.

The term ‘digital services’ covers a large swath of the digital economy’s real estate. The services that come under the umbrella of these new rules include (but not exclusively) app, game, and music downloads; e-books; online gaming, and online newspaper subscriptions.

A digital service is essentially where the service is provided fully automated, or with no, or minimal, human intervention. Now, only the cross-border B2C (business to customer) supply of digital services to customers in the EU are affected. Let’s break that down. The supply must be cross-border. For example from Ireland to a customer in another EU member state. It must be B2C, only sales to private individuals in the EU are affected — business-to-business (B2B) sales are not.

This is a crucial explanation as many Irish business operating online will actually not be affected.

Many, for example, are supplying B2B services and thus out of scope. In addition a large proportion of digital service suppliers will route their services through an app store or an online marketplace,such as Apple’s App Store or Google Play.

In most of these cases, the online marketplace will deal with the Vat burden as they carry out the B2C element of the sale. The contract between the digital service supplier and the marketplace is commonly B2B.

However, suppliers need to doublecheck their contracts prior to January 1, 2015, to determine their precise relationship with online marketplaces. Now that we have clarified what services are under the scope of the new rules we need to identify what actually changes in the application of Vat from the turn of the New Year.

The key Vat rule change is that Irish digital service suppliers will from the start of 2015 have to start charging Vat based on where their customers are located. The existing rules dictate that Vat is charged based on where the supplier of the digital service is located.

Affected companies will have to start collecting two pieces of evidence to confirm the location of their EU customer, such as the customer’s billing address, IP address, or bank details. Systems must now be altered so as to enable collection of this evidence and then to apply the correct Vat rate.

Ireland, meanwhile, is set to gain revenue from this Vat rule change. The state will benefit in two ways. Firstly, all the Vat on Irish consumer purchases of digital services will remain here. Two, the rules have included a clause where EU member states benefit if a multinational establishes a base in their tax jurisdiction for the purposes of registering, declaring and paying EU Vat.

Multinationals can choose any EU member state in which to register and declare the Vat recouped on their EU sales.

From the Irish treasury’s perspective, the rules represent a welcome windfall. Finance Minister Michael Noonan has budgeted for a VAT receipt boost of €600m between next year and 2019: €100m in 2015 and 2016; a further €125m in2017 and 2018, and €150m in 2019.

John McCarthy is CEO of EU Vat compliance specialists Taxamo. Based in Killorglin, Co Kerry, the company has developed a bespoke product to meet the requirements of the new EU Vat rules on the B2C supply of digital services.