As you probably know if you are selling digital products and services, the VAT place of supply rules applying to electronic services in the EU are changing on 1/1/2015. This has produced a huge amount of angry tweets with the #VATMOSS hashtag already, and that was only the first act.
Value Added Tax collection in the European Union
For B2C businesses based in the EU, the situation was quite easy to handle until now. You have just paid VAT in the country where your business is VAT registered, regardless of your customer’s country of residence.
As of January 1st 2015, it all becomes much more complicated. VAT has to be paid in the country where the service is actually being delivered, that is, in your customer’s country. In case of a VAT audit, you will have to prove it by providing either the billing address of your customer, her IP address, the location of her bank, the country code of her SIM card or of her landline phone. And the VAT rates vary a lot from country to country within the EU. You can visit the excellent website of VATlive to find up-to-date VAT rates for all EU countries.
How are you adjusting your pricing?
These changes do not only require more administrative efforts, but are also a real challenge for businesses selling at low prices, and achieving minimal margins in very competitive markets.
With the new VAT rules, you are going to pay more VAT in some EU countries: Up to 27% in Hungary, compared to 17% in Luxembourg. This means, in the worse case, that you will be selling below costs if you don’t adjust your net prices.
Now if you increase your net prices to make sure you’re still making profit at 27% VAT, you’re definitely losing customers. So the best thing to do is to differentiate your prices geographically. But which is the best way of achieving this?
Geo-targeted pricing optimization with Darwin Pricing
If you are using Darwin Pricing already, this should be a no-brainer. You are already adjusting your prices based on the IP geolocation of your visitors, so you just have to adjust the price level in EU countries to account for the new VAT rate.
Make sure that you are sending the actual profit you are achieving with every sale to the Darwin Pricing API, so that your prices are being optimized to maximize the generated profit in every country. Don’t forget to deduce the exact VAT amount and your marginal production costs before sending us your sales revenue!