www.pwc.co.uk

Results of PwC’s 2015 Impact and Readiness survey

The 2015 changes Time is running out

On 1 January 2015, the place of supply of telecommunications, broadcasting and electronically supplied services to private individuals located in the EU will change. We test the scale of the impact and the readiness of the affected businesses.

ContentsOverview 1

Mini One Stop Shop (MOSS) 3

Preparation for the 2015 changes 5

Impact of the changes 7

Presumptions 9

Evidencing customer location 11

1 PwC

Overview

Small change, big impact The start of 2015 will bring the biggest single change to the European Union value-added-tax regime that telecom operators, broadcasters and others that provide e-services have ever seen.

On 1 January 2015, the place of supply of telecommunications, broadcasting and electronically supplied services to private individuals located in the EU will change; from where the supplier is established, to the Member State in which each customer ‘belongs’. This change to the basic place of supply means that businesses will have to identify where each customer belongs; and understand how each Member State in which the customers belong will treat the sale of affected services .

The EU legislation, which has been enacted but takes effect from 1 January 2015, is expected to have a profound impact on e-service providers (i.e. telecommunications, broadcasting and Electronically Supplied Services), particularly on their pricing and commercial strategy. As providers of these services take steps to adapt to the new legislation, we have conducted a 2015 Impact and Readiness survey to gauge the impact and test how prepared this community of businesses is for these changes.

83Businesses participated

in the survey

Respondents profileAlthough businesses from across all sectors and territories were invited to respond, the majority of respondents came from the Electronically Supplied Services (“ESS”) sector. This high proportion of those involved in ESS is perhaps a reflection of the commercial and technical complexities that continue to be some way from resolution in this space, thereby necessitating a greater level of engagement in the ‘2015 process’ from those involved, even at this late stage. Equally it may simply be a reflection of the fact that there are a greater number of businesses in the ESS space than, for example, in the more consolidated world of telecoms.

What type of services do you supply? (Please tick all that apply)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

30%Telecoms

Broadcasing 14%

ESS 77%

Unclear 6%

Businesses participatedin our survey

2The 2015 changes – Time is running out.

Geographical profileWhilst the geographical profile of respondents is perhaps inevitable, it may also be a reflection of a more limited awareness and understanding of the 2015 changes outside the EU which undoubtedly exists, despite the best efforts of the EU Commission and others to publicise the changes and encourage compliance.

Role in the Supply chain Undoubtedly the number of respondents, the nature of the supplies, the location of the business and its place in the supply chain, are all factors which influence the outcome of a survey of this nature. However, we feel there is a sufficient cross section in all of the key categories to ensure that the results of our survey are representative.

Where is your business based?

88%EU

12%Non EU

Which of the below best describes the role of your business in affected supplies to customers? (Please tick all that apply)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

74%Direct sales

Sales via intermediaries 32%

Intermediary 18%

Payment processor 22%EU Non EU

3 PwC

Mini One Stop Shop (MOSS)

The success of the Mini One Stop Shop (“MOSS”) is critical to the successful implementation of a location (as a proxy for consumption) basis for taxation in the EU, if Member State tax authorities are to encourage compliance.

If successful, the MOSS scheme is also likely to pave the way to a broader one stop shop scheme for all supplies within the EU.

The EU Commission and Member States have worked hard to resolve any divergence in views amongst them and to agree on a method of implementation that is workable for Member States and, as far as possible, minimises the impact on the taxpayer. Doing so inevitably has involved a degree of compromise and as businesses have dug into the practical operation of the scheme, some wrinkles have become apparent and concerns expressed.

4The 2015 changes – Time is running out.

If you are not planning to use MOSS, why? If ‘undecided’ please detail why in the ‘Other’ box

For those that have made a decision not to use MOSS, the underlying rationale for the most part appears to be commercial, but it is also clear that some of the procedural rules around MOSS and the associated audit of taxpayers affairs does also seem to have been influential in decision making.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

30%Fixed establishment in EU

Existing registrations in EU

17%

Adjustment procedures

3%

Disclosure of information

5%

8%Concerns around audit

37%Other (please specify)

Are you planning to use the MOSS simplification for post-2015 compliance?

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

53%Yes

No 21%

In part 10%

Unclear 16%

The legislation on when MOSS can and cannot apply may also have driven behaviour – for example, the existence of a single VAT registration (without an establishment) in the EU prevents a non-EU business using the MOSS scheme.

In light of this it is perhaps not surprising that whilst over half of our respondents intend to use the MOSS scheme, there are a number of businesses that are, at this late stage, still undecided as to what to do.

MOSS, why not?Some of the other reasons specified by the respondents are as follows:

‘Main focus on single Member State’

‘Global structure to be finalised’

‘Expected classification as a payment processor’

‘Huge investment for low results’

‘Exemption from EU VAT’

‘Unclear still as to tax at point of consumption or residency’

‘Application of Article 24a’

5 PwC

Preparation for the 2015 changes

Given that our Survey was conducted only some 3 months before the rule changes bite, it is not surprising that many of our respondents regarded themselves in a healthy state or preparedness. However, there are still a significant proportion who it seems feel unprepared, or insufficiently prepared to deal with the changes come 1 January 2015.

Throughout the process of drafting the Implementing Regulation and the accompanying Explanatory Notes, the EU Commission has taken great care to consult widely with Member States, affected businesses and the indirect tax advisory community to ensure that the legislation is fit for purpose and, as far as possible, to minimise the burden on taxpayers. The net result of this is that the development of this legislation has involved a high degree of consultation between businesses and tax authorities.

As at today, how well prepared are you for the changes? (Please rank from 1-10, with 10 being as prepared as possible)

0% 10% 20% 30%

4%1

2 3%

3 7%

4 4%

5 14%

6 10%

7 18%

8 24%

9 10%

10 6%

6The 2015 changes – Time is running out.

In some respects, this resulted in practical workarounds (such as the proxies for customer location) being enshrined in law, but in others some less than ideal rules that were often a product of compromise between Member States.

It is notable that whilst our respondents have had some engagement with tax authorities in the Member State of consumption, this is understandably less than they have had with their ‘home’ tax authority. It will be interesting to see to what extent this balance of interaction is maintained once returns have been submitted and auditing begins.

Have you engaged with any of the following in respect of your supplies / compliance obligations? (Please tick all that apply)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

30%EU Commission

Local tax authority 54%

Others in your supply chain

67%

Other Member State tax authorities

31%

Supplier under Article 9A and reliance on 3rd parties for customer information & impact of the changesArticle 9A is a widely drawn provision that seeks to simplify the VAT accounting on complicated ESS supply and distribution chains. It is therefore perhaps not surprising, especially given our respondent profile, that a large number of respondents are expecting to be treated as the supplier to the consumer by virtue of the provision but the proportion of businesses captured is an illustration of how broad the practical application of the provision is.

The 40% of respondents relying on third parties for providing customer location information, demonstrates how ‘remote’ ESS supplies can be from their customer in the modern world.

51%

Expect to be treated as a supplier under

article 9A

40%

Will rely on a third party to obtain

information about their customers

7 PwC

Impact of the changes

The 14% of respondents who indicated that the 2015 changes may result in a business migration demonstrates that the ramifications of the 2015 can go beyond tax compliance and associated system configuration issues and drive significant commercial change. It would appear that some businesses are taking the opportunity to reorganise their affairs within the EU. Such reorganisations may also be driven by the removal of the financial benefit of being located in a low VAT rate Member State post 2015. The playing field will be levelled for the affected industry sectors such that the VAT compliance obligations will be the same agnostic of the location of the business.

14%

Expect the changes to cause a migration of

their businesses to another EU member state or to a location

outside the EU

Will the changes cause a migration of your business to another EU member state or to a location outside the EU?

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

14%Yes

No 86%

8The 2015 changes – Time is running out.

Please rank from 1-10 the impact of the changes on the following factors (10 being the most impacting):

4.5 5 5.5 6.56 7 7.54 8

5.94Scope of changes

Technical VAT aspects 6.63

Impact on the customer 4.83

Ongoing compliance 6.23

Obtaining necessary information

6.24

Commercial impact 5.01

Communications and training

5.25

Regulatory issues 5.87

IT systems 7.54

Transitional factors 5.32

We asked respondents to rank the impact of the changes in particular areas, which based on our experience of advising clients, were the most likely to cause issues. Not surprisingly the highest ranking impact was on IT systems. It is also interesting to note that getting to grips with the technical rules in each of the Member States is presenting some challenges. Ongoing compliance and obtaining the necessary evidence to support customer location also clearly presents some challenges, but it is surprising that the impact on the customer ranked relatively lowly in our survey – perhaps the ‘remote’ nature of customer interaction of many of the impacted services – particularly in the ESS space – makes price and other changes easier to manage, and reduces the perceived impact.

The scores above illustrate the average scale of impact of each of the factors identified by the respondents.

9 PwC

The EU legislation provides in certain circumstances, for the customer location to be presumed to be a particular location as a matter of law. These presumptions were introduced to ease the burden on businesses.

It is interesting to note that the lesser debated location based presumption features surprisingly high in our survey. Given the higher proportion of respondents in the ESS sector, the most popular and potentially more complicated presumption to be used, is that based on 2 pieces of evidence. It is also clear that some businesses will be providing more than one affected category of supply and as such will need to utilise more than one of the presumptions in the business.

Which of the presumptions listed below are most likely to apply to your supplies? (Please tick all that apply)

0% 10% 20% 30% 40% 50% 60% 70%

31%SIM card presumption

Decoder presumption 4%

Fixed line presumption 19%

2 pieces of non-contradictory evidence

53%

43%Location based presumption

3%On board passenger transport

Presumptions

Where applicable, the common consensus in the industry has been that the decoder, mobile SIM card country code, and location based presumptions would be the most straightforward means for a business with relevant supplies to identify the place of supply. However, the fact that 13% of respondents intend on using 3 pieces of evidence to rebut another presumption suggests that this might not always be the case.

87%

Are not planning to rebut any of the

presumptions

Are you planning to rebut any of the presumptions above?

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

13%Yes

No 87%

10The 2015 changes – Time is running out.

11 PwC

Evidencing customer location

If you are planning on using 2/3 pieces of evidence to identify customer location what pieces of evidence will you be using?(Please tick all that apply)

0% 10% 20% 30% 40% 50% 60% 70%

64%Billing address

IP address 61%

Bank details 41%

SIM card 22%

14%Fixed line

42%Other commercially relevant information

What other commercially relevant information are you intending on using? (Please tick all that apply)

0% 10% 20% 30% 40% 50% 60% 70%

29%Unique payment mechanisms

Consumer trading history

31%

Gift card point of sale 10%

Country-locked gift cards

8%

42%Documentation of

third-party payment service providers

48%Customer self-certification

8%Other (please specify)

The options as to which evidence respondents might be using to support customer location where one of the other presumptions does not apply were those specifically included by way of example in the Implementing Regulation. As such, many respondents will be utilising billing address and IP address – perhaps because these are indirectly ‘endorsed’ by the EU Commission as suitable pieces of evidence in the Regulation, but also perhaps because such information is often core to the operation of a consumer services business and as such is readily available. Concerns around the potential for manipulation of an IP address voiced by various parties during the consultation does not seem to have deterred businesses from using it.

The 40% of respondents who indicated that they would be using other commercially relevant information in support of customer location were given the option of choosing types of evidence that were highlighted in the explanatory notes and/or indicating other types of evidence that they were proposing to use. It is notable that a high proportion of respondents propose to use customer self certification as a means of evidence. Our experience is this is often likely to be used as a corroborator of other evidence rather than primary evidence but this may not of course always be the case. It is worth remembering that whilst the Regulation only requires commercially relevant information, there is no threshold test as to the quality of the information – with the only legal requirement on taxpayers appearing to be that they can demonstrate its commercial relevance to the supply in question. As such whilst an email address might be regarded by some as less than robust in isolation, there is nothing preventing a taxpayer from using it in this context provided its relevance can be justified in the context of the supply and the other corroborating piece of evidence used.

12The 2015 changes – Time is running out.

Our respondents of the survey have highlighted the following as significant challenges that they are faced with whilst preparing for the 2015 changes. As highlighted by the size of the images below, changes to the IT systems, including billing and other and the rules regarding evidencing customer locations are the few that feature on top of the list in our survey.

ERP

ProportionalityPrice changes

Legal

IT systems

Training

Local rules

Compliance

Evidencingcustomerlocation

Infrastructure

Billing & otherInvoicing

Legal/copyright text and reference number

Martin Blanche E:martin.j.blanche@uk.pwc.com T:+44 (0) 20 7213 8347

Johnathan Davies E:johnathan.c.davies@uk.pwc.comT:+44 (0) 20 7212 1208

Huma-Awan Haigh E:huma-awan.haigh@uk.pwc.comT: +44 (0) 20 7212 3639

To find out more please contact

PwC helps organisations and individuals create the value they’re looking for. We’re a network of firms in 157 countries with more than 195,000 people who are committed to delivering quality in assurance, tax and advisory services. Find out more and tell us what matters to you by visiting us at www.pwc.com.

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2014 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

Design Services 28846 (10/14).

Sophie Claessens E:sophie.claessens@be.pwc.comT: +32 3 2593169

Tom Corbett E: tom.corbett@ie.pwc.comT: +353 (0) 1 7925462