The EU’s Digital Single Market strategy announced a legislative assault on geoblocking, the process of restricting access to online content based on a user’s physical location.
To the EU’s digital team, geoblocking means not being able to watch your favourite TV show on catch-up while on holiday in another country, or being redirected to a site offering higher prices in a local currency.
— Daniel Ratcliffe (@DanTwoHundred) May 25, 2015
While those concerns are absolutely valid, it’s clear that they are looking at the issue of geoblocking from a rather different perspective than those affected by the EU Place of Supply reforms (#VATMOSS). To the EU, geoblocking is a clear matter of using “a discriminatory process for commercial reasons.” To small traders dealing with VATMOSS, geoblocking has become a business option that small traders must consider in their e-commerce models.
Let’s be clear: this is not an issue of people seeking to carry out a form of tax evasion as a VATMOSS workaround. Tax evasion is if you make a sale and then fail to report or pay the correct taxes on it. What we are talking about here is sellers who would rather not make the sale at all than deal with VATMOSS, and want to block sales outside their own borders because of it.
Geoblocking as a response to VATMOSS is not a hypothetical situation. When the EU VAT Action campaign surveyed 2,000 affected businesses across Europe, 27% reported that they intend to exclude non-domestic EU sales – in other words, to geoblock – because of VATMOSS.
With one out of four small European e-commerce businesses actively considering geoblocking other member states as a part of their business model, it is worth looking at what the law says about this practice. Is it allowed, and can you be slapped for discrimination if you do it?
What the law says
In the UK, non-discrimination over the place of a customer’s residence is addressed in the Provision of Services Regulations 2009. Part 5 notes the following:
Requirements based on nationality or place of residence
30.—(1) A competent authority may not subject recipients of a service who are individuals to discriminatory requirements based on their nationality or place of residence.
(2) The provider of a service may not, in the general conditions of access to a service which the provider makes available to the public at large, include discriminatory provisions relating to the place of residence of recipients who are individuals.
(3) Paragraph (2) does not apply to differences in conditions of access which are directly justified by objective criteria.
The Provision of Services Regulations are the UK’s implementation of EU directive 2006/123/EC, commonly known as the EU Service Directive. Article 20 enacts non-discrimination in the provision of services:
- Member States shall ensure that the recipient is not made subject to discriminatory requirements based on his nationality or place of residence.
- Member States shall ensure that the general conditions of access to a service, which are made available to the public at large by the provider, do not contain discriminatory provisions relating to the nationality or place of residence of the recipient, but without precluding the possibility of providing for differences in the conditions of access where those differences are directly justified by objective criteria.
Within both the EU “parent” law and the UK’s domestic implementation, you can see that little chink of light:
“Differences in conditions of access which are directly justified by objective criteria”
“Differences in the conditions of access where those differences are directly justified by objective criteria”
Do the administrative burdens of the Place of Supply reforms constitute “objective criteria”? To put the question another way, why wouldn’t they? It seemingly never occurred to the EU that the problems which might cause a business to seek to discriminate on the grounds of place of residence might be due to another EU directive. Nor is it the first time EU directives, and their domestic implementations, find themselves in direct conflict even on a single web page.
“One of the possible reasons for not offering services to all EU customers is if the administrative burden this would impose on the selling business would put an excessive strain on the business. Therefore, small UK businesses selling digital services cross border can refuse to sell to other EU customers if they can show it would impose a disproportionately high burden on the business. More guidance on this can be found from BIS in paragraphs 33 to 35 of the guidance available.”
So if the ‘administrative burden’ ‘would put an excessive strain on your business’, which is what many people are saying VATMOSS is doing, then you can choose to opt out of selling to rest of Europe.
With that in mind, let’s say you do geoblock non-domestic EU purchases, and a potential customer or member state accuses you of discrimination. The worst thing that could happen is that you might end up being asked to explain your decision to what the Regulations call a “competent authority.”
And if there’s anything we have learned from #VATMOSS, it is that there is no such thing as a competent authority:
— Juliet E McKenna (@JulietEMcKenna) May 15, 2015
The entire story of VATMOSS has been the end users – people like you and me – explaining it to the authorities rather than the other way around. So in the unlikely chance that you find yourself being accused of discrimination based on geoblocking, everything the “competent authority” knows about VATMOSS is going to come from you.
I have deliberately restricted this discussion to the possibility of sellers within the EU blocking other EU member states. What about sellers outside the EU looking to block EU sales? It’s a big decision to geoblock an entire continent. You will need to check your own country’s discrimination laws. With Australia, Japan, and Switzerland now reportedly considering their own VATMOSS-style systems, you might want to check those regulations sooner rather than later.
If you do decide to geoblock, a technical problem remains. Geoblocking tends to be done on the basis of IP addresses. EU customers who are determined to buy from you will find a way to do so. And as the supplier, you are still legally and financially responsible for determining those purchasers’ places of supply and remitting the VAT to their national authorities.
Every business owner knows that the number one rule is “don’t bring me problems, bring me solutions.” VATMOSS has created a problem. The EU is offering a solution… possibly… next year, or even the year after that. It’s a sad comment on the pace of those reforms that while they are talking about talking, developers have just gotten on with launching products which automate the process of geoblocking. With an extra-statutory concession nowhere in sight, the politicians behind the Digital Single Market might need to rethink their perceptions of where geoblocking happens – and why.
Afterword: the European Commission spokeswoman for tax and financial services was interviewed about VATMOSS and geoblocking on BBC Radio 4 on 7 June. The segment begins at 13 minutes in and is about four minutes long.
I transcribed the conversation, which was as follows:
Vanessa Mock: “Clearly this has caught some businesses off guard. The rules seem very complex at first sight. They were designed however to be very simple. Instead of having to do a tax return in every country where you might sell an electronic service to, you just go to your one national portal and that’s why the proposal was welcomed, it was actually seen as something to simplify the lives of a lot of businesses. The UK was very very supportive all along of these rules coming into force particularly because they’ll stand to gain back a lot of lost VAT revenue. George Osborne said the UK stood to gain £1.2 billion pounds over the next three years because of these changes, so the big picture is positive, it’s meant to be a level playing field between small and large companies. But that’s not in any way to diminish in any way the difficulties that some companies are now facing.”
Presenter: “But the EU VAT Action campaigners say around a quarter of the companies they surveyed have stopped trading with other EU countries. Now that’s not what the EU or the Digital Single Market is supposed to be about, is it.”
Mock: “Totally, if that’s the case than that is indeed an unintended consequence of the change. That is something we would want to address now that we are reviewing all of this feedback.”
Presenter: “You say you’re doing a review, but what’s actually going to come out of it? What are you going to do to help the people who are in some cases closing their businesses or stopping trading with Europe?”
Mock: “The first stage is the review that is now being started. We are also launching a public consultation that will kick off in September, when we will be urging all interested parties to provide us with their feedback and their ideas, and we have already committed to looking at e-commerce broadly in the EU with a view to simplifying the rules. In our original proposal the EC had wanted a threshold to make life easier for startups and for small businesses. We had pushed for this, we had been very clear about why this would be a very useful and helpful thing to have. Member states decided not to have this threshold. What we would now like to do is propose again a threshold for small companies so that they would be exempt from these rules.”
Presenter: “To change the rules you would have to get every treasury minister in Europe to agree to it, wouldn’t you.”
Mock: “Taxation is one of those areas where you need the unanimity, but our view is that surely it’s everyone’s business to try to make taxation rules simpler and less onerous, less administratively complicated.”
Presenter: “You’re saying it was Europe’s politicians who said no to having a threshold the first time around?”
Mock: “It was a decision from all 28 EU member states, and the UK fully backed the proposal. No member state raised any concerns, nor did the UK treasury, nor did the UK authorities. There were plenty of opportunities to step in and raise the alarm and that wasn’t done. We now have a problem, clearly, with the UK, that we need to resolve.”