VAT AND E-COMMERCE DIRECTIVE
December 16, 2002
The Value Added Tax (VAT) and E-Commerce Directive will take effect starting on 1 July 2003. This legislation will have a major impact on non-European Union suppliers of broadcasting and electronic services who supply such services to EU-based customers, forcing suppliers to levy up to 25 per cent VAT on sales which imposes a significant administrative burden.
The affected businesses will include the following:
- Internet service providers
- Providers of online content services and databases
- Sellers of online software applications and upgrades
- Suppliers of websites and web hosting facilities
The new law requires all non-EU suppliers of such services to charge and account for VAT on all sales to private individuals and other customers who are not registered for VAT (or not liable to register) and are resident in the European Union, even though such suppliers have no place of establishment in the European Union. There is no de minimis sales threshold.
This legislation will have a significant impact on the competitiveness of non-EU businesses that manufacture such supplies in the European Union. The new rules do address the current competitive distortion that enables non-EU suppliers to provide services VAT free to EU customers where, on a like for like transaction, an EU trader would have to levy VAT. Yet the new rules go further and now prejudice non-EU suppliers in a number of respects.
The directive applies to a range of electronic services. An illustrative list set out in the directive refers specifically to the digital delivery of software and software upgrades, website supply and web hosting, the sale of downloadable computer games as well as distance maintenance of programmes and equipment and access to databases. Online information and entertainment services are also included, as are subscription-based and pay-per-view radio and television broadcasting. However, the illustrative list is far from expansive and undoubtedly there will be a degree of confusion as to the precise scope of the new rules. Currently no standardised ruling procedure exists to deal with marginal cases.
The legal effect of the directive is to change the place of supply of broadcasting and electronic services where such services are supplied for consumption in the European Union.
Under current law, such services are treated as supplied where the supplier belongs. This means that non-EU suppliers do not have to charge VAT whereas EU suppliers must do so, even on exports.
Under the new regime, electronic and broadcasting services will be treated as supplied in the country where the customer belongs, meaning that, for example, a US supplier of a software upgrade to a customer who is a UK resident private individual will have to charge 17.5 per cent VAT in addition to the sale price.
Where a non-EU supplier makes a supply of broadcasting or electronic services and the place of consumption is within the European Union, the operation of the new rules will have the following consequences:
- where such supplies are made to private individuals in the European Union or other EU customers who are not registered for VAT (or not liable to register), the non-EU supplier will be required to register and account for VAT on such sales
- where such supplies are made to EU business customers those customers must account for VAT under the reverse-charge mechanism
- exports of broadcasting and electronic services from the European Union will no longer carry VAT
Theoretically, if a non-EU supplier sells supplies to private individuals in all 15 member states, it will be required to file VAT returns in all member states. The directive deals with this by way of an optional special interim scheme for non-EU businesses that supply electronic services to private individuals or other non-VAT registered customers.
The scheme will operate for three years starting in 1 July 2003 and will allow such suppliers to register electronically in the member state of their choice. Details of the VAT charged in each member state will be entered on quarterly returns and then allocated by the state in which the supplier is registered to the member states where the charges arose. Returns are required even if no such supplies are made. It is intended that at the end of the interim period a fully electronic system will be in place which will automatically charge, collect and allocate VAT to each member state.
Notwithstanding the simplification measure outlined above, non-EU suppliers will face a number of practical difficulties in implementing the directive. For example, non-EU suppliers need to determine whether they are dealing with private individuals (or other non-VAT registered customers) or businesses. If they are dealing with a private individual, they will then need to determine the EU member state in which that individual resides in order to apply the relevant rate of VAT. If dealing with a business customer, the supplier will need to ascertain the VAT number of the business. Eliciting such information will require the modification of suppliers' websites. Websites will also need to be able to apply the appropriate rate of VAT to the transaction and to calculate the relevant amount.
The new rules were formulated to end the competitive advantage currently afforded to non-EU suppliers of electronic services. However, the new rules appear to go further than achieving competitive parity between EU and non-EU suppliers. There are two potentially discriminatory elements in the directive. The first deals with the recovery of input tax. EU suppliers can generally recover VAT they incur at the same time and on the same tax return as they account for VAT on their outbound supplies. However, non-EU suppliers will have to make a specific refund claim under the VIIIth Directive to the tax authority of each member state in which input tax is incurred. The VIIIth Directive procedure will inevitably involve a delay of between six months and a year in recovering the input VAT. In certain countries the refund of such input VAT can take more than two years.
Secondly, EU suppliers of electronic services will still charge the rate of VAT applicable in the member state in which the supplier belongs. So a German business supplying a software upgrade to a Swedish customer would charge 16 per cent VAT whereas under the directive a non-EU supplier of the same service would be obliged to charge the rate of VAT applicable in Sweden, namely 25 per cent. Clearly it will be possible for EU suppliers in territories with relatively low rates of VAT to obtain a competitive advantage here, both in respect of suppliers in member states with high rates of VAT and as against non-EU suppliers.
In the light of this continuing disparity, non-EU suppliers may wish to consider VAT planning opportunities where they establish themselves and provide services from an EU member state with a lower rate of VAT (although obviously there will be other commercial considerations in point).
