The companies which have customers in the European countries have to determine the state in which their income is subject to VAT and related consequences with respect to the indirect tax.
The supply of “services” is defined as something that is not a “commodity”. Each supply of services should be analyzed in the light of the rules of the place of delivery in order to ensure the right accounting of VAT by the right person in the proper jurisdiction. It is especially important on making global sales that may lead to VAT obligations, and the rules of the place of delivery are the starting point for this.
As in the case of goods, there are different rules for determining the place of delivery (as well as, accordingly, the place of their taxation) for the services provided to the business (B2B) and services to the end user (B2C).
As a general rule, the provision of B2B services is taxed at the location of the client. In this case, the customer must provide the VAT number to the service provider, otherwise such a transaction is considered as B2C. If the client is a resident of a third country (not EU Member State) and does not have a European VAT number, he must provide documents confirming the conduct of his economic and business activities for his consideration as a business client.
The provision of B2C services (for end users), as in the case of the supply of goods, is subject to VAT at the place of registration of the supplier.
The mechanism for the tax collection in the case when the country of the supplier does not coincide with the country where the service is provided is similar to that mechanism that is used for the delivery of goods: when the B2B service is provided, the supplier issues a VAT invoice at a rate of 0%, and the customer reports on VAT by means of the reverse charge mechanism. When the B2C service is delivered, the supplier issues a VAT invoice at the rate of his country.
It is important to explain what the reverse charge mechanism is. This mechanism was created to simplify VAT reporting in 1993, when the European VAT was reformed to launch a single market. Its essence is that the responsibility for VAT accounting is shifted from the seller to the buyer. The recipient of the goods/services is obliged to declare both his purchase (input VAT), as well as the supplier’s sales (output VAT). That is, he displays in his declaration the amount of VAT (at the rate of his country) to pay and the same amount of VAT to deduct. Thus, two postings cancel each other in terms of cash flow. However, from the point of view of regulatory authorities, this is the way to report for this transaction. This information is also displayed in reports on the supply of goods or services for cross-border supplies (EU Sales List).
The mechanism for accounting and payment of VAT for various transactions is shown in the following table below:
Exceptions are electronic, telecommunication, TV and radio broadcasting services B2C, when the obligation on VAT in the customer’s country lies with the supplier. In this case, he can use Mini One Stop Shop (MOSS). We will discuss this topic in details in one of our following blogs.
In order to ensure VAT revenues in the country of actual consumption of the service, special tax rules were introduced at the place of effective use and consumption of the service:
- B2C services provided by the intermediary are taxed at the place where the main transaction is taxed in which the intermediary participates. For example, a private owner of a villa in Spain wants to move furniture to his house in Germany, for this purpose he asks the intermediary to find a company that will carry out the transportation. Regardless of where the intermediary is registered, a Spanish tax will be levied for the commission, since the place of departure is the place of taxation within the European transportation of goods.
- B2B and B2C services related to real estate are taxed at the location of this property.
- Passenger transportation services (both B2B and B2C) are subject to VAT in proportion to the distance along the route in the territory of each country. For example, the price of a ticket for a bus trip from Poland to France via Germany will include VAT in Poland, Germany and France, which is proportional to the distance traveled in each of these countries. If the route passes through Switzerland, VAT will not be charged for the distance traveled in this country, since Switzerland is not a member of the EU.
- Intra-European transport of goods B2C (goods departing from one Member State and arriving in another) are taxed at the place of departure.
- Subsidiary to cargo services B2C services, such as loading and unloading services, are taxed in the Member State where these services are physically performed.
- Services B2B and B2C for short-term lease of vehicles (up to 30 days, in case of vessels – up to 90 days) are taxed at the place where the vehicle is actually transferred to the client’s disposal.
- Long-term rental services for vehicles B2C will be taxed at the place where a private customer is registered, he has a permanent address or usually resides, except for the cases when the service provider for renting a pleasure craft is registered in the same Member State in which he transfers the vessel to the customer.
- Services for holding cultural, artistic, sports, scientific, educational, entertainment and similar events, both B2B and B2C, are taxed at the place where these events take place.
- Restaurant and catering services of B2B and B2C are subject to VAT at the place where the services are physically performed. When these services are delivered in passenger transport operating within the EU, the tax is paid at the place of departure.
- Electronic services B2C provided by suppliers from third countries to the customers in the EU should be taxed at the location or residence of the customer. For example, if an individual living in Hungary uses an American online library, the Hungarian VAT must be paid for the amount of the service of the American company.
- Telecommunication, TV and radio broadcasting services B2C will be taxed at the place where the customer is registered, he has a permanent address or usually resides. If these services are provided by the suppliers from third countries to private customers in the EU, they are taxed at the place where the private customer uses this service. For example, a German private customer with a Swiss telephone service provider using his mobile phone in Germany will pay German VAT. When using his mobile phone during his holidays in Cyprus, Cypriot VAT will will be charged for his calls from Greece.
Each EU Member State is responsible for implementing a rule for the effective use and consumption of the service. In this regard, Member States have the right to decide on a change in the location of the provision of services (both within and outside their territory) for vehicle rental services or certain B2C services for the customers outside the EU if the place of service provision in accordance with the rules of the place of effective use and consumption differs from the place of service in accordance with the general rule. Such an opportunity is provided to EU Member States to prevent double taxation, tax evasion or distortion of competition.
As you can see, it is necessary to understand the nature of this service and the status of the client for the correct definition of the rule for the taxation of the service. But it is often not enough, as pan-European rules are just the tip of the iceberg. Since the VAT rules of each individual European country can differ significantly, in order to plan adequately the activities of a specific company with specific counterparties, it is necessary to study the practice of law enforcement in the relevant jurisdictions.