The format and methods of delivery of many goods refer them to the category of services, especially if they are transmitted over the Internet, such as e-books, music downloads, streaming of content. The regime of VAT for this particular subcategory of services provided electronically has undergone significant changes lately. In this blog, we will consider the requirements of the current European legislation, and we will try to cover the coming changes in this area in the next ones.
In accordance with the European legislation, came into effect from January 1, 2015, telecommunications, television and radio broadcasting, as well as electronic services, are subject to VAT at the location of the client, whether it is a business or a consumer, located in or outside the EU .
However, in order to ensure the correct taxation of these services, the supplier needs to determine the status of his client (whether he is a VAT payer), as well as his location.
The easiest and most reliable way to define whether a customer is a business or a consumer is to ask him for a VAT number. Suppliers can check the VAT numbers of their customers using the website of the VAT Information Exchange System (VIES): http://ec.europa.eu/taxation_customs/vies.
The location for the business (VAT payer) is defined as the country of registration or the country in which it has a permanent location and receives the service. The country of registration or the country in which territory he has a permanent address or usually resides is the location for the consumer (not a VAT payer).
If everything is more or less clear with telecommunications and broadcasting, but we should consider the concept of electronic services in more detail, since we face it more often than we think. In the European legislation, electronic services are defined as services provided through the Internet or electronic network, the nature of which makes their provision automated with minimal human intervention, as well as the provision of which is impossible in the absence of information technology.
There is rather extensive list of electronic services, but we list only the main ones:
- digital products in general, including software and updates to it;
- provision or maintenance of the presence of business or personal presence in an electronic network, such as a website or web page;
- e-mail, automatically created from the computer;
- hosting of web sites and web pages;
- administration of remote systems;
- online data storage, where specific data is stored and retrieved electronically;
- access or uploading of photos, graphics or screen savers;
- digitized content of books and other electronic publications;
- subscription to online newspapers and magazines;
- blogs and website statistics;
- online news, traffic information and meteorological reports;
- provision of advertising platforms, including advertising banners on the website / web page;
- use of search engines and Internet directories;
- access or download of music, movies, games on computers and mobile phones.
In order to declare and pay VAT (both in the EU and outside), a supplier can use the online declaration / payment method via Mini One Stop Shop (“MOOS”) by registering on the relevant web portal in the EU country, where he is registered as the VAT payer. It should be noted at once that this scheme is not an obligatory, but a simplifying measure. It allows taxable persons not to be registered in each of the Member States where their customers are located.
In practice, according to this scheme, a taxpayer registered in the MOOS in the EU Member State (state of identification) electronically submits a quarterly MOOS declaration which lists the supply of services to tax-exempt persons in other EU member states (consuming states) together with VAT subject to withholding. These declarations together with the VAT paid are transferred then by the State of identification to the appropriate consuming States through a secure communications network.
When cross-border services are provided to business, a client from another EU country (relative to the supplier) will independently pay the tax in the framework of the reverse charge mechanism. This system allows the buyer of the service to calculate the tax at the rate of his country and report on it by indicating the amount of tax payable in the declaration and the same amount of tax to the deduction. Actual cash flow does not occur, but the controlling bodies receive information about the movement of services within the EU.
The rules of VAT on the taxation of electronic services, telecommunications services, as well as television and radio broadcasting services can be visually presented as follows
The exception to the general rule is the rule of effective use and consumption. It is used when:
- the place of delivery is in the European Union, but the services are consumed outside;
- the place of delivery is outside the EU, but services are consumed in the EU.
Efficient use and consumption take place when the client actually consumes the services not at the location, regardless of contractual terms and payment.
For example, the services for the provision of banner advertising on the website of the publication, provided by the company in Germany for business in the United States, as a general rule, are taxed at the customer’s place of registration, and, accordingly, the European VAT is not charged. However, if the website of the publication is used for an advertising campaign within Germany, the German competent authorities, using the rule of effective use and consumption, may decide that VAT is levied in Germany.
So, the essence of the legislative requirements for levying VAT from electronic, telecommunications, and television and radio broadcasting services is to ensure the suppliers to pay VAT for such services in each EU country in which they provide them. It may lead for many companies to a legal requirement to register VAT by the payers separately in each EU country where they have clients. This is the reason why the MOSS system has been created, by which the declaration and payment of VAT on several European countries can be made through a single electronic declaration submitted to the local tax authority.