I would say it's something different yet:

EU wants to hinder rascal states that make money at the expense of the rest of the union taking advantage of their small size: they won't be able to collect VAT for business made in the whole EU just because they offer a lower rate. (I mention the size because the deal is convenient for the state only if its economy would be otherwise very small).

It does not matter if the company is American or European, I could have made a Luxembourg subsidiary of an Italian company and paid Luxembourg VAT rates.

Of course, this is a very stupid way of doing it: it works only for VAT, while the countries can still be fiscal havens for any other tax, and moreover it makes life hell for small B2C business.

The proper way would just agree on a uniform tax policy. Never going to happen.

I agree that the proper way would be unification, but that's impossible - the UK would be the first one to say no.

They should "just" add a size limit or at least make it much simpler for companies to comply with the law.

Hitherto, the UK has had a threshold for mandatory VAT registration: if your VAT-able turnover (sales within the EU) exceed the threshold, you must file a VAT-1 and register, but if your VAT-able sales are below the threshold (e.g. you do B2B sales to customers outside the EU -- which aren't VAT-able -- or your turnover is just plain low) you aren't required to register. As of the current time, the threshold is £81,000 per annum turnover: arguably, if you're turning over that much, you can bloody well afford the bookkeeping costs.

Unfortunately not all EU countries have a lower threshold and the new arrangements have a lower threshold for mandatory VAT registration of any amount -- a single €0.99 sale in Estonia and whoops, you need to be registered to collect and pay VAT in Estonia or via your own tax authority's One Stop Shop.

If the £81,000 threshold applied to the new arrangement, nobody would be shouting. But as it is, this will kill a huge number of spare bedroom businesses and start-ups.

In the UK at least it's not difficult or expensive to register for VAT, but it is yet another barrier. Bear in mind that registering a company is trivial in the UK compared to some other countries.

I registered my small business for VAT voluntarily when I was bringing in much less than 81k since I found that larger companies wouldn't deal with me if I wasn't VAT registered. Since I already had an accountant and used software for my bookkeeping the effort and increase in costs was negligible.

What is difficult is charging a different VAT rate for every non-VAT registered individual in every country you sell to.

"a single €0.99 sale in Estonia"

Would of course be done through a service. Maybe it's time for these "innovative" payment processor to actually be innovative and provide this service.

"£81,000 threshold applied to the new arrangement"

It can't apply to the new arrangement since you are now paying taxes in the customers country.

It seems that you would just either do your local sales as before and your international sales through a service or start two companies. That why you should be able to keep your threshold for domestic business. (Don't quote me on this though since I'm not in the UK)

It is definitely a lot harder to use this kind of tax avoidance if you are a European company.

Thanks for the correction, I updated the blog post.

jkulmala, the other part of your claim is wrong: "The change was made [...] to force them to move more operations to EU to get VAT reductions". After Jan 1, 2015, there will be zero VAT-related incentive to move to the EU, because any company (EU or non-EU) will get the same VAT reductions: the VAT in the customer's country.

Edit: yes, I meant VAT "reductions" not "payments". My point holds though: there won't be any more VAT incentives to move.

It's not what they pay, it's what they get to reduce. If you purchase supplies etc. you get to reduce the VAT you've paid.

So if you have $0 VAT from EU purchases, but $40 VAT from sales, you pay $40. But if you paid $40 VAT from EU purchases, and have $40 VAT from sales, you pay out $0.