In particular, non-EU businesses supplying e-commerce services to EU countries are affected by this new legislation and, from today, face a completely different VAT regime.
The Changes
Under the rules that were in force until yesterday, most electronically delivered services were subject to VAT in the country where the supplier of those services belongs.
Electronically delivered services include services such as the supply of web sites or web hosting services, downloaded software or images, text or information, digital books or other electronic publications, downloaded music, films or games and internet service packages.
This means that if you are a non-EU supplier of electronically delivered services, you did not have to charge VAT on supplies to EU customers. However, this has now changed.
From today, electronically delivered services supplied by non-EU businesses to EU private customers and non-business organisations (B2C) have to be charged VAT which must be accounted for by the supplier of the service in the country where the private customer or non-business organisation belongs.
However, most electronically delivered services (excluding services such as pure internet access) sold by non-EU businesses to EU businesses (B2B) will be subject to VAT in accordance with the VAT reverse charge mechanism under which it is the EU business customer receiving the electronically delivered services from an overseas supplier, rather than the overseas supplier, who must account for VAT on these supplies and remit any VAT to its tax authorities. For business to business in most cases the compliance liability therefore remains with the customer.
Non-EU suppliers will have to charge VAT in respect of all electronically delivered services sold to EU private consumers (B2C) at the rate applicable in the jurisdiction in which the supply is treated as made (i.e. where the customer belongs).
In practice this could result, for example, in a US business selling downloaded music to customers in France, the UK and Sweden, having to charge and account for VAT on these sales in France at the local rate of 19.6%, in the UK at the local rate of 17.5% and in Sweden at the local rate of 25%.
In order to apply the correct VAT rate, non-EU businesses shall have to put in place procedures for ascertaining the location and status of their private customers, which may involve businesses having to install expensive software to be able to do so.
Assessing the status of the customer, i.e. that the customer really is a business or not, can be done by checking that the customer has quoted a valid VAT registration number (there is an on-line verification system allowing businesses to check this). As regards, ascertaining the location of private customers, self-declaration by the customer combined with a reasonable level of verification is considered acceptable.
Special Regime
If you are a non-EU business supplying electronically delivered services to private individuals or non-business organisations in the EU, you may likely have to register and account for VAT with effect from 1st July 2003 in every EU Member State where you sell your services.
However, to make matters slightly easier, a simplified special scheme provides that you may register electronically in one Member State of your choice and account for VAT quarterly on an electronic VAT return.
The VAT return together with the VAT collected must then be remitted to the tax authority in your place of registration, after which that tax authority will distribute the VAT to the Member States where the electronically delivered services are consumed.
Please note that if you are a non-EU business supplying electronically delivered services (with the exception of services such as telecommunication services including pure internet access) to EU businesses only and not to EU private customers you do not have to register or account for VAT in the EU (because of the reverse charge as explained above).
Effects
The new legislation may involve a large cost and administrative burden on businesses having to comply with the special regime. In addition, businesses can experience logistical difficulties in collecting the appropriate VAT for each transaction and identifying customers and their locations.
Businesses will also have to bear the financial burden of retaining relevant customer and financial data for up to ten years and assist each Member State in which it has had customers in auditing tax returns. Finally, businesses will have to go through a relatively onerous claims procedure to reclaim VAT incurred.
Solution
One solution for non-EU businesses affected by this is to create a business establishment (e.g. subsidiary, branch) within the EU from which electronically delivered services are supplied. This would allow the business to charge VAT at the rate prevailing in its Member State only, since an EU business does not have to charge VAT at the rate applicable to where the supply is made but can charge VAT at the rate where it is established, saving the costly administration arrangements of the special scheme described above.
Masons, the international law firm behind OUT-LAW.COM, can advise and assist in the implementation of a UK branch and the associated administrative requirements of such a solution, which will produce a uniform rate of VAT to be applied throughout the EU.
The European Commission has also published an FAQ on the new Directive, available here If you have any questions or would like help with these issues, please contact our tax partner, Stephen D Lane, at Pinsent Masons' London office on 020 7490 6000 or e-mail [email protected].