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European VAT on Digital Sales delivered from non-EU businesses

April 22, 2014 - by Nida U.

Further and below in the text you can see the most important aspects about the EU "E-Business Directive understand how and if it affects your business.

Digital goods and services has become an important part of the daily life of the modern European consumer and the market is still growing. „Electronic”, „digital” or „intangible” are the terms the usually refers to the digital sales. Digital goods and services do not require tangible medium to be delivered and can be easily transmitted from a distance through the internet. Such products as a song, a film, a software program, a book, or any other electronic documents can be bought in a digital format and instantly delivered to a customer. This way removing the need to go to a local shop to make a purchase and the seller can be situated in any other country and operate through an online shop.

The directive explains and guides how VAT is levied when a European consumer buys a digital book for his e-book reader, a music album for his portable media player or an application for his smartphone from an online store in the United States or elsewhere outside the EU.

VAT Definition

(As defined by the European Commission`s Taxation and Customs Union)

Value Added Tax (VAT) is a general consumption tax assessed on the value added to goods and services.

It is a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services. It is a consumption tax because it is borne ultimately by the final consumer. It is not a charge on companies. It is charged as a percentage of price, which means that the actual tax burden is visible at each stage in the production and distribution chain. It is collected fractionally, via a system of deductions whereby taxable persons (i.e., VAT-registered businesses) can deduct from their VAT liability the amount of tax they have paid to other taxable persons on purchases for their business activities. This mechanism ensures that the tax is neutral regardless of how many transactions are involved.

The EU E-Business Directive

The European Commission welcomed the Council`s adoption of a Directive and a Regulation to amend the existing VAT legislation on 7th May, 2002. This proposal came into effect from 1st July, 2003. It is a directive which requires non-EU resident vendors to apply VAT when selling “digital goods” in the EU.

These rules are based on Commissions proposals of 7th June 2000 and the main objective of this Directive is to introduce new harmonised rules as well we eliminate distortions in competition for radio and television broadcasting services and electronically supplied services within the EU, basically these rules are supposed to counter an “unfair advantage” enjoyed by non-EU traders.

Electronically supplied services (ESS)

As per the guidelines from the European Commission`s Taxation and Customs Union ESS include services such as cultural, artistic, sporting, scientific, educational, entertainment, information and similar services as well as software, video games and computer services generally. The result is that:
• for specified electronically delivered services, when supplied by a non-EU operator to an EU customer, the place of taxation is within the EU and accordingly they are subject to VAT;
• when these services are provided by an EU operator to a non-EU customer, the place of taxation is where the customer is located and they are not subject to EU VAT;
• when an EU operator provides these services to a business in another Member State, the place of supply is the place where the business customer is established;
• where the EU operator provides these services to a private individual in the EU or to a taxable person in the same Member State, the place of supply continues to be where the supplier is located;

ESS definition

(Art.7. in EU Regulation 2011/282)
‘Electronically supplied services’ [...] shall include services which are:
1. delivered over the Internet or an electronic network and
2. the nature of which renders their supply essentially automated and
3. involving minimal human intervention, and
4. impossible to ensure in the absence of information technology.

When electronic networks are used solely for the purpose of communication, it does not itself mean that supplied service is ESS. For example, when supplier and customer use e-mail for the purpose of communication, it itself does not mean that a supplied service becomes ESS.

Illustrative list of ESS

• 1. Website supply, web-hosting, distance maintenance of programmes and equipment.
• 2. Supply of software and updating thereof.
• 3. Supply of images, text and information, and making databases available.
• 4. Supply of music, films and games, including games of chance and gambling games, and of political, cultural, artistic, sporting, scientific and entertainment broadcasts and events.
• 5. Supply of distance teaching.

LIST OF VAT RATES APPLIED IN THE MEMBER STATES

(Situation at 1st July 2013as per records from the European Commission`s Taxation and Customs Union)
These are standard VAT rates, special, reduced and super-reduced VAT rates are applied in several countries for several services. (Full list of VAT rates available here: http://ec.europa.eu/taxation_customs/resources/documents/taxation/vat/how_vat_works/rates/vat_rates_en.pdf ).

Member States Code Standard Rate
BelgiumBE21
BulgariaBG20
Czech RepublicCZ21
DenmarkDK25
GermanyDE19
EstoniaEE20
GreeceEL23
SpainES21
FranceFR19,6
CroatiaHR25
IrelandIE23
ItalyIT21
CyprusCY18
LatviaLV21
LithuaniaLT21
LuxembourgLU15
HungaryHU27
MaltaMT18
NetherlandsNL21
AustriaAT20
PolandPL23
PortugalPT23
RomaniaRO24
SloveniaSI22
SlovakiaSK20
FinlandFI24
SwedenSE25
United KingdomUK20

How does it affect your trading business?

Business-to-business (B2B) and business-to-consumer (B2C)

In reality non-EU operators are required to register for VAT purposes only when their business involves sales to final consumers (B2C).

In the case of B2B supplies (where the destination principle applies without exception), tax assessment and collection obligations are simply shifted to the business customer under the reverse charge mechanism, which actually applies to all cross-border supplies of services to taxable persons (Art 196 of the EU VAT Directive, as amended by Council Directive 2008/8). In practice, supplies are zero-rated and business customers are liable for correctly assessing and spontaneously remitting the correct amount of tax due on their acquisitions to their own tax administration through periodic returns.

“VAT shall be payable by any taxable person, or non-taxable legal person identified for VAT purposes, to whom the services referred to in Article 44 are supplied, if the services are supplied by a taxable person not established within the territory of the Member State.’ Art 44 refers to the supply of services to taxable persons.”

Options in case of B2C:

1. “One Stop Shop Scheme”

In business-to-consumer supplies, reverse charging is not an option because consumers are not registered and have neither the skills to voluntarily proceed to the remittance of the tax nor any incentive to do so given that, unlike businesses, they have to bear the economic burden of the tax without any possibility of recovering it.

A simplified registration framework, introduced by Directive 2002/38/EC63 and later was moved to Chapter 6 of Recast VAT Directive, therefore applies, known as the ‘one-stop-scheme’ or ‘one-stop-shop’. Under this simplified scheme, suppliers may, as an alternative to registering in all the Member States in which they have private consumers, register and obtain a VAT identification number in one single Member State (‘Member State of identification’) in which all their VAT obligations related to their electronically supplied services to EU private consumers will be centralised. The suppliers are required to charge VAT to non-business customers in the EU according to the standard tax rate in the Member State where the customer lives. The state of identification, in its turn, will return taxes to the appropriate Member State (the state of consumption). The system is optional and multiple registrations are always possible. The Special Scheme is available only for non-EU businesses who supply ESS for EU private customers.

In case when non-EU supplier decides to opt for the one-stop-scheme, all the procedures they need to attend to (registration, payment and reporting) will be handled through the tax administration that they have selected, which will also give them guidance on how to meet their obligations.

This single registration model therefore makes it possible for suppliers of electronically supplied services to engage into cross-border transactions with EU consumers without the need for a fiscal representative or any physical presence in the EU.

Probably the most prominent characteristic of the Special Scheme is that suppliers can register and submit all necessary reports solely by using electronic means. Thus, the whole process can be made online without the necessity to leave the home-country.

2. Subsidiary in EU:

Establishing a subsidiary in a Member State where VAT is low and/or there are other fiscal or operational advantages. Further, if a company doesn’t sell more than export threshold set for certain country, this company would not be obliged to register as VAT payer even in the country where the company is registered. This could be one way how the need for clarifying location of each consumer would be avoided, as local VAT regulations would apply and the subsidiary would be regarded as a normal EU enterprise for tax purposes.

Case study

Scenario

Mr. X is a Russian citizen and resident, new writer, who has launched a website on his biography and for his online e-book downloads, in order to introduce his work to readers who have yet not heard about him. Since the numbers of visitors and the number of downloads has grown significantly, he decided to use the opportunity to profit from the sale of his e-books. Mr X`s clientele is from most of European member states.

Problem

Achieving efficient structure in terms of taxation for commercial purpose for the website Mr. X owns as an individual.

Solution I

Fidelity Corporate Services proposes Mr X to create BVI Business Company, and for a better confidentiality premium package BVI (with BVI based nominee director and BVI based nominee shareholder) Company is selected in this case. And to choose one EU member state which will be their VAT registration point using the “One Stop Shop Scheme”.

Explained:

Non-EU supplier can choose on of all EU member states to be their VAT registration point. Subsequently they the seller has to apply for VAT registration in this member state, through their chosen accountants (Firm or an individual). Mr X will have to pay the accountant for all the accountancy, reporting and One-Stop-Shop registration, as well as VAT returns to the rest of member states where he will be selling his goods. Regarding VAT application, the seller will have to collect VAT from consumers depending on their location.

It is always advisable for a client to seek professional tax advisors assistance in deciding best options for the kind of business they run, as well as to get an opinion in order to find better local accountant in their chosen member state.

Solution II

Fidelity Corporate Services proposes to set up an offshore company located in British Virgin Islands (BVI) and one company based in EU. The shareholder and director of the EU Company would be the BVI Company. For a better confidentiality premium package BVI (with BVI based nominee director and BVI based nominee shareholder) Company is selected in this case.

European VAT

Explained:

EU Company should be chosen depending on VAT rate on applicable services, local taxation rules and laws in regards to sending royalties, dividends management fees to non-EU Company and offshore companies. (Some of the most popular choices are Luxembourg Company, Cyprus Company, Irish Company, Netherlands Company, Dutch Company or Latvian Company).

EU Company will be the company selling the e-books, collecting the payment for the sales and subsequently paying dividends, management fees and royalties (if any applies) to the BVI Company.

Here we have to deal with the EU E-Business Directive, which came into force on 1st July 2013. Current rules in this regard are that all non-EU companies that provide internet delivered information or services (electronic services) within EU, have to charge VAT in the EU country where that consumer belongs (is registered, has their permanent address or usually lives).

Therefore we offer to establish subsidiary in EU Member State.

And because in our case EU subsidiary is involved, other rules apply. The rules state that when supplying a consumer in the EU, supplier must charge VAT in the EU country where the business is based, no matter where the consumer belongs.

This is an option for larger scale suppliers, since local taxation will apply, tax will have to be paid on all profit after the deduction of costs.

Therefore it is always advisable to a client to consider the pros and cons of establishing EU subsidiary and seek professional tax advisors assistance in deciding best options for the kind of business they run.

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