US and other ex EU providers of online services to EU consumers should check their VAT position. Thanks to a well-kept secret of a recent EU Directive on ‘Internet services,’ VAT may be chargeable even though the supplier is far beyond Europe’s shores.
VAT on Internet Transactions
The EU rules on the VAT treatment of transactions carried out over the internet are a minefield for non-EU based suppliers.The normal rule that if a suppler is outside the EU there is no VAT liability, does not apply.Non-EU suppliers must register for VAT purposes and charge VAT on transactions with non-business customers based on where their individual customers belong.Recent EU proposals on VAT could dramatically increase compliance costs for EU and non-EU businesses carrying on e-commerce activities.
In July 2005, the EU Commission issued a proposal for a Directive to amend the VAT rules governing the place of supply of telecommunication, broadcasting and electronically supplied services ("digitised services") to private consumers.These changes are designed to bring the supply of digitised services rules into line with the distance selling rules that apply to the supply of goods and prevent businesses effectively "choosing" the rate of VAT they charge on such services.
The EU Commission had proposed that the Directive should enter into force on 1 July 2006. The proposal must first be adopted unanimously by Member States and the timing of adoption is still unclear.
Currently, if a business established in the EU supplies digitised services to a private consumer also resident in the EU, the supply takes place where the business is established. This means that the supplier must charge VAT at the rate applicable in that Member State.
However, if a business is established outside the EU, the supply takes place where the private consumer is resident. So, the supplier must either adopt the single registration scheme or register for VAT in each of the Member States where it has customers but in either case charge VAT at the rate applied in the Member State where the customer is resident.
The EU Commission is concerned that in the absence of harmonisation of VAT rates, the current place of supply rules encourage EU businesses to relocate to Member States with low VAT rates and non-EU businesses to establish a presence in such Member States.
Customer's residence to determine VAT rate
If the proposal is adopted, the place of supply for both EU and non-EU businesses supplying digitised services, will be the place where the EU consumer is resident. Businesses will therefore have to register for, charge and account for VAT in each Member State in which they have customers, creating huge compliance and administrative costs.
The EU Commission believes that the additional compliance obligations that will arise if the change is adopted will be mitigated if the supplier adopts the single registration process.
This process will allow a supplier to register for VAT once only in the supplier's home Member State (or if established outside the EU in a host Member State) and use that VAT registration for all supplies throughout the EU. Further, the process will allow VAT declarations to be submitted electronically to a single portal (which would then distribute the declarations directly to the applicable Member States). However, it remains unclear how the single registration process can operate effectively without full EU-wide harmonisation of the VAT rules.