Changes to VAT calculation behavior

[E-junkie_Guru]

As many of you may be aware, EU VAT rules are changing effective Jan. 1st, 2015, such that "electronically supplied e-services" (such as digitally-delivered non-physical goods) will become subject to the VAT rate at the buyer's location, rather than the seller's location. In order to accommodate these changes for our sellers' convenience, our VAT calculation behavior and related Transaction Log details will be changing as follows:



Effective midnight UTC on Jan. 1, 2015, whenever we process an order for sellers who have enabled VAT in Seller Admin > Sales Tax & VAT Settings, we will calculate VAT due for their items which have Sales Tax/VAT enabled by treating the product's Price setting as a gross price that includes VAT. Since conclusive buyer location data only becomes available to us after checkout, we cannot add VAT on top of item prices in the cart before checkout, so accurate VAT calculation can only occur when we process the order after checkout; therefore, our VAT calculation must determine after checkout what portion of your items' gross Price settings constitute VAT. This has the side benefit of allowing you to display and advertise a single flat item price to all buyers regardless of their location and applicable VAT rate.



Products using using Single File Download, Redirection, Send Stored/Generated Codes, or "Package files from other products" (aka "Bundle other products" in our new Admin) which do not also have Shipping/Buyer's Address enabled will be treated as digital goods subject to the buyer's VAT rate, rather than the seller's, and reduced VAT rates applicable to digital goods or specific file types (e.g. ebooks) also will be determined automatically. Products which DO have Shipping/Buyer's Address enabled will be treated as physical goods that remain subject to the seller's VAT rate, so please DO NOT manually enable Shipping/Buyer's Address for non-physical items that use VAT calculation.



For orders subject to VAT, we will perform a GeoIP lookup on the buyer's connection IP and require them to specify their country/postcode in the cart. When we process the order after checkout, we will log the buyer's GeoIP country, their Billing address (or PayPal account's Residence country), and either their Shipping address (if provided for other items in the same order) or the country they declared in the cart, and we will attempt to find a 2-way country match between those items in order to determine the buyer's place of supply for VAT purposes. In the rare case where no two of those items match, we would still process the order without calculating VAT and also email a Suspected Tax/Shipping Fraud notification to the seller, to bring that to your attention and let you decide how to resolve the situation.



Affiliate commissions will be calculated on the item's net price (gross price minus calculated VAT); however, in cases where VAT could not be determined due to a location-match failure (as described above), we will calculate commission on the affected item price(s) minus a generic 25% reduction to account for probable VAT.



You will be able to use your E-junkie Transaction Log to document each buyer's place of supply and determine how much VAT you'd need to remit to relevant EU jurisdictions or to a single VAT MOSS such as the UK's, which would then redistribute any VAT due to other EU jurisdictions. Downloadable Transaction Log export files for sellers using VAT will add new VAT-related fields at the end of each line, which should preserve compatibility with any existing software tools you may be using to process these files.



To take advantage of this new VAT calculation, all you should need to do is make sure VAT is enabled in your E-junkie Seller Admin > Sales Tax/VAT Settings and also select your origin country therein, and enable Sales Tax/VAT in the settings of each product that should be subject to VAT. Since this will treat item prices as gross including VAT, you may also wish to raise your prices to incorporate a "VAT overhead" factor sufficient to cover your total expected VAT liability. If you'd like to stall for time to edit your item prices, you can temporarily disable your sales by setting Seller Admin > Account Preferences > "Make items unavailable for purchase until" some date in the future, then simply delete that setting to resume selling once you've updated your prices. If you wish, you can also email us to request that we should just boost your VAT-enabled items' prices across the board by some percentage:

https://www.e-junkie.com/ej/contact.htm

[E-junkie_Guru]

BTW, these are the filename extensions we will be treating as "ebooks" wherever the buyer's location has a special VAT rate for ebooks; these include common e-reader file types as well as primarily-text formats not typically intended to be user-editable:



.pdf,

.epub,

.mobi, .prc, // Mobipocket

.txt,

.azw, .azw3, .kf8, // Amazon Kindle

.rtf,

.pdb, // eReader / Palm Media OR Plucker

.lit, // MS Reader

.lrf, .lrx, // Broadband eBooks (BBeB) / Sony media

.cbr, .cbz, .cb7, .cbt, .cba, // Comic Book Archive / compressed images

.chm, // Microsoft Compiled HTML (usually help)

.djvu, // Deja Vu / compressed images

.fb2, // FictionBook

.xeb, .ceb, // Founder Electronics / Apabi Reader (Chinese)

.ibooks, // Apple iBook

.opf, // Open Electronic Package / Open eBook

.ps,

.pdg, // SSReader (Chinese)

.xml,

.tr2, .tr3, // TomeRaider

.xps, .oxps, // Open XML Paper

[willowing]

Hi E-junkie Guru. Sorry, I'm very confused. The way I'm understanding your description of the change is:



I need to set my prices to pre-include a VAT charge (ie; let's say my usual current charge for a product is £50 - now I should charge £60) and then you guys will break it down afterwards? If this is right, this would mean I might charge customers who don't need to pay VAT, VAT and also, the VAT charge varies in each country in Europe so I'd lose out on some money in some countries and some customers might pay too much in others.



I'm probably completely misunderstanding you. Can you shine a light?



I'm also confused by this: "Since conclusive buyer location data only becomes available to us after checkout, we cannot add VAT on top of item prices in the cart before checkout, so accurate VAT calculation can only occur when we process the order after checkout; therefore, our VAT calculation must determine after checkout what portion of your items' gross Price settings constitute VAT."



I run an ejunkie cart on my site (www.willowing.org) and the steps go like this:



1. Add to cart

2. Fill in address

3. Go to check out



surely between step 2 & 3 you can add VAT? which would be the most efficient/ appropriate and accurate?



Am I completely losing it here?



So sorry but this is such a stressful area. Grateful for guidance/ help/ insight.

[willowing]

Hello again,



I sell the same products internationally (currently to up to 36 countries). To do as you suggest means I have to charge a standard 20% (or whatever I decide it's going to be) to ALL my customers (including customers outside of the EU) of which many do not need to pay VAT, but I have to set my prices to cover VAT to 'catch out' those in Europe. This seems utterly ridiculous and damaging to my business.



Surely there must be a way that VAT can be added to European customers only (even just a flat rate) to the product charge AFTER the person had filled in their address?



I'm utterly desperate to do this. If it can't happen I'm going to have to leave to find another place that can offer that.

[E-junkie_Guru]

Your initial understanding is correct; you should now set your prices with enough built-in overhead to include VAT, then after checkout we will calculate how much of the gross price(s) paid actually constitute VAT for each sale.



You could simply set this "VAT overhead" factor equal to the maximum VAT rate you expect to be subject to (and pocket any excess overhead as additional profit when a buyer's VAT rate happens to be lower), or you could take a savvier approach by looking at your sales history for each EU nation and their respective VAT rates to calculate an average overhead factor that would cover your total expected VAT liability (e.g., one seller recently estimated a 13% markup would do the trick for him).



The reason we're doing it this way is a bit of a compromise necessary to accommodate certain requirements of the new EU VAT rules:



1) Prices displayed or advertised to buyers at any point must be their final price including VAT. Since the VAT rate on digital items will now vary depending on the buyer's location, sellers can't simply display a fixed, common price to everyone and just tack VAT on top of that, and most independent sellers will find it infeasible and impractical, if not downright impossible, to implement custom scripting in their sales pages that would dynamically generate a variable final price (fixed base price + variable VAT amount) to display to each buyer, which would also create an incentive for buyers to falsify their IP address and/or self-declared location in order to avoid/minimize their tacked-on VAT. Moreover...



2) The buyer's IP address and/or self-declared location alone are not considered sufficient to establish the buyer's "place of supply"; the rules require collecting at least 3 unrelated pieces of location data and obtaining a match between at least 2 of those in order to conclusively determine place of supply. Even using one of those initially to guess at the proper VAT rate before checkout would violate point 1) above, if the final location/rate turns out to be different than the initial guess. Most sellers use PayPal for checkout, where we aren't even informed of the buyer's Residence or (if provided) Shipping address until after checkout, so we have to calculate VAT after checkout at least for PayPal, which effectively means doing so for all checkout methods.



You may be interested in the previous, rather extensive discussion about these VAT changes in our main support forum, which influenced the approach we developed and have implemented today:

http://www.e-junkie.com/bb/topic/6819

[willowing]

Thanks ejunkie Guru, can you just comment on the fact that non-Eu customers would be charged a lot more than they are needing to pay?

[E-junkie_Guru]

EDIT: We've now devised a couple approaches to set different prices on the same products for EU/B2C vs. non-EU/B2B buyers -- see this help page for instructions:

http://www.e-junkie.com/ej/tips.tax.vat-pricing.htm



=====



Yes, that's an unfortunate side effect for which we haven't sorted out a workaround yet.



You may wish to create a Discount Code such as "NOVAT" that non-EU buyers can use in their cart to apply a discount equal to the VAT markup you've applied to your prices. You can also use cart customization code to mention that in your cart, if you're using our standard overlay-style cart that appears "inside" your own page -- e.g., you could add the following lines just after the "function EJEJC_lc(th) { return false; }" line in your standard View Cart code:



function EJEJC_config() {

EJEJC_POSTCALL=true;

}

function EJEJC_shown() {

jQuery("#tdPmnt").attr("innerHTML",

"<b>Buyers outside the EU:</b> Enter discount code <b>NOVAT</b> to remove EU taxes included in our item prices.");

}

[willowing]

Thanks that is an idea. Is there a way that I can set a discount code to only be applicable to countries outside the EU?



Currently I just can't see how to get buyers in and outside the EU to 'behave' differently unless the system forces something like a discount code or an applied tax based on the country they're entering when requested.



I sell thousands of products per year. The admin nightmare that will ensue of having to chase people/ correct their mistakes and keep records is going to be deeply depressing ...

[E-junkie_Guru]

Unfortunately at present we have no way to make discounts conditional on buyer country, but we'll keep that idea in mind as we continue deliberating how best to handle non-EU buyers when VAT calculation is enabled. Meanwhile, we'd advise watching for orders where your no-VAT discount is applied; if you see any of those which calculate any VAT, that would indicate the discount was applied dishonestly.



Maybe we could devise a way to auto-apply a certain discount whenever the buyer's connection IP is outside the EU and they don't self-declare an EU country in their cart? Of course, that approach could run afoul of EU citizens traveling abroad, or even people who know how to deliberately falsify their IP, but that may be easier to monitor than making sure everyone manually entering a discount code is doing so honestly.

[bamberg]

So we are forced to put one common price for all of our customers, being it Non-EU, EU-business customers (who would normally provide us with a valid VAT ID and therefore don't need to pay VAT) and EU-consumers customers (for who we got the VAT calculated for each country)? This is amazingly annoying - note that we paid VAT for each EU country the last two years and it worked perfectly well... so we already paid VAT at the buyer's location. Now the only reason you changed it is that you require the "final" price being displayed?

[entusiasmado]

As a Eu citizen, calculating the price is the smallest problem. The big problem, that has made me stopped selling my ebook is that I will have to declare VAT revenues in the country of the buyer. So, if someone from Germany for instance ( maybe a spaniard living there) buys my ebook, I will be forced to set myself as a VAT seller in Germany. EU is a tax hell, not only because taxes are high, but also because you need to resurrect Aristotle to be able to navigate all the dumm regulations.

[entusiasmado]

As a Eu citizen, calculating the price is the smallest problem. The big problem, that has made me stopped selling my ebook is that I will have to declare VAT revenues in the country of the buyer. So, if someone from Germany for instance ( maybe a spaniard living there) buys my ebook, I will be forced to set myself as a VAT seller in Germany. EU is a tax hell, not only because taxes are high, but also because you need to resurrect Aristotle to be able to navigate all the dumm regulations.

[bamberg]

Not sure how it is for EU citizens, we are in Switzerland, so we only need to register with one VAT country (we did so in Germany), and we declare sales to all EU countries online and then pay the due VAT to the German financial institution (and they then distribute it to all EU countries). That was actually working very nicely for us as it only had a little bit of administrative overhead.

[metronome]

Quoted from the (fantastic) http://euvataction.org/key-facts/



"UK HMRC guidance Business Brief 46 update to data requirements:

Step 1



When the customer places their order ask them to confirm either:



the EU member state they usually live in

their billing address

Step 2



When the customer pays for the product using the payment service provider, arrange for that provider to transmit the following two pieces of evidence to you:



the customer’s billing address

the country code of the customer’s bank or registered credit card

For confidentiality the payment service provider can remove the house number and street name from the billing address.



If the information on the EU member state where the customer is normally resident tallies, that will be sufficient to define the customer’s location and you can record the details in your accounting records. However, if the information does not tally, you do not need to cancel the sale, but you must contact the customer and ask them to reconcile the discrepancy between the two sources of information."





Wouldn't it be better then to simply auto-detect (using GeoIP) their country of residence up front and populate a combo box with this (which the customer can override if they are currently outside their country of residence.) You can then display the required VAT rate prior to checkout.



The onus could then be on the seller to reconcile if the stated country and that which PayPal reports is different.



The original source of this HMRC suggestion is https://www.gov.uk/government/publications/revenue-and-customs-brief-46-2014-vat-rule-change-and-the-vat-mini-one-stop-shop-additional-guidance/revenue-and-customs-brief-46-2014-vat-rule-change-and-the-vat-mini-one-stop-shop-additional-guidance

[entusiasmado]

Bamberg it used to be like that. But not from today. You have to pay VAT in the country where your buyer is.

[bamberg]

I am pretty sure that it is still the case. see https://evat.bff-online.de/indexhtml

We pay VAT in the country where the buyer is, the payment/registration is however handled through just this one entity. However, it seems to be only applicable to businesses residing outside the EU.



btw, this would mean that businesses outside the EU actually have an advantage over EU businesses - how ridiculous is that.

[metronome]

Actually, it seems more or less you are doing everything I suggested, other than treating the price as a net amount and dynamically adding VAT where required, something that seems to me to be only a minor change: after all, VAT was already dynamically added for EU sales up until yesterday (albeit at a fixed percentage.)



Would it be possible to add this functionality which, for UK sellers at least, seems to comply with what HMRC are suggesting? The alternative, a fixed gross price, either punishes a non-EU buyer who is now paying above the odds, or means we have to take the loss and eat the VAT ourselves for EU sales, neither of which is at all appealing. Part of the reason we choose e-junkie as our processor was the competitive pricing, but if we need to absorb the EU VAT, it'd make sense financially to jump to a processor which does handle this.

[willowing]

@ejunkie guru. thanks for your helpful suggestions, can I just check a couple more things please.



yesterday I spent some time 'disabling' the 'shipping/ buyer's address' boxes as per your original instructions so that the correct VAT in the country of supply would be applied (eg: that way it assumes it's a digital product not a physical one), but this morning a notification from Sweden came through charging 20% VAT while I have it that their VAT rate is 25% - Am I doing something wrong in my settings?



My settings are:



In the main overall VAT settings I have 'EU VAT settings' as enabled while ignoring 'simple & advanced' settings



I have also enabled 'charge VAT/TAX' on each individual product.



Previously I had disabled all the 'buyer address' options but have just put that back on as we like to get that address for our records but I can change that back again, though it does not seem to have the effect you described.



Pls clarify the settings I need to adjust for this to work accurately.



Thanks

[willowing]

E-junkieGuru



Maybe we could devise a way to auto-apply a certain discount whenever the buyer's connection IP is outside the EU and they don't self-declare an EU country in their cart? Of course, that approach could run afoul of EU citizens traveling abroad, or even people who know how to deliberately falsify their IP, but that may be easier to monitor than making sure everyone manually entering a discount code is doing so honestly.

I would love the possibility of an auto-apply - is that possible already? Or would you guys need to create that? Thank you.

[lorilin]

EDIT:

I just thought of something. Maybe the simplest solution (for me) is to create two completely different webshops, one for EU customers and one for everyone else. Then I would create two versions of every product in my e-junkie admin -- one with price including VAT for the EU shop, and one without VAT for the "Everyone else" shop.



I'd have to depend on the customers to use the right shop, and would still have to check every order to make sure customers had used the right one.



I am now off to my settings page to try to figure out if this is even do-able.



I'll have to figure out how to add the VAT to the shipping charge as well...but heck, one thing at at time.



****** Original message ***********





Oh dear, I am very confused now...I hope I've misunderstood this, because if the changes means what I think it does...well...it is gonna be an administrative NIGHTMARE, and very difficult to explain to my customers.



I'm an EU-based seller. I sell PHYSICAL goods all over the world. About 40% of my sales are to non-EU countries.



The way the VAT has worked in the past with e-junkie has been PERFECT. EU buyers get VAT applied automatically, and non-EU buyers don't. I have an accurate record of how much VAT I've taken in (both in the E-junkie and Paypal logs), which makes it MUCH easier to do my books and check that everything is correct.



But it sounds like that won't work any more. I have a couple of questions:



1) Are you suggesting we charge some kind of global average fee to all buyers worldwide to sort of guesstimate how much VAT we're actually going to be liable for for EU sales? For PHYSICAL products?





2) The VAT on physical products I sell is still based on my own country's VAT rate, right? It's only for non-physical products that the BUYER's VAT rate applies?



If my competitors (like Amazon, etc.) are able to charge their customers accurate VAT automatically, there is NO WAY my prices will be competitive if I have to add some global charge.



I have a HUGE sales campaign coming up in early February, so it is imperative I figure something out by then.