(photo credit: INGIMAGE)
The June 2018 Wayfair Case in the US has led to sales tax in many US states on Internet goods trading.
The European Union imposes value-added tax on most goods imported from outside the EU at the customs stage. In addition, there are rules for non-EU businesses that supply digital services to consumers in the EU. As in the US, the EU rules apply the destination principle – VAT applies at the VAT rate in the customer’s country.
EU digital service rules
The EU has VAT rules for “telecommunications, broadcasting and electronic services” (TBE). These rules cover digital services.
The EU rules distinguish between B2B (business to business) and B2C (business to consumer) services.
In the case of B2B, non-EU businesses supplying to EU businesses normally need to take no action. Instead, the EU business customer must account for the VAT to its own national VAT authority at the VAT rate prevailing in its own country. This is known as the reverse-charge mechanism. So if an Israeli company provides digital services to a French business, the French business accounts for VAT to the French VAT authority.
In the case of B2C TBE transactions, the non-EU business must charge VAT in the EU country where the customer belongs. However, there is no need to register for VAT purposes in each EU country, it is enough to register in one country at a so-called MOSS (Mini One Stop Shop).
VAT rates vary across the EU member states and typically range from 17% to 25%. Reduced rates of 2.1% to 5.5% are available for e-books and e-newspapers supplied to customers in France and 4% for e-books supplied to customers in Italy.
Electronically supplied services
Electronically supplied services include services that are delivered over the Internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention.
For these purposes, digital services electronically supplied include broadcasting, telecommunications or e-services, for example video on demand, downloaded apps, music downloads, gaming, e-books, anti-virus software or online auctions where the service is automated.
Using the Internet, or other electronic means just to communicate or facilitate trading, does not always mean that a business is supplying TBE digital services.
Using the Internet for the following doesn’t count: supplies of goods, where the order and processing is done electronically; supplies of physical books, newsletters, newspapers or journals; services of lawyers and financial consultants who advise clients through email; booking services or tickets to entertainment events, hotel accommodations or car hires; educational or professional courses, where the content is delivered by a teacher over the Internet or an electronic network; offline physical repair services of computer equipment; advertising services in newspapers, on posters and on television.
How do you know if it is B2C?
If a non-EU business supplies digital services and the customer doesn’t provide an EU VAT registration number, then the business should treat it as a B2C supply and charge the VAT due in the customer’s EU country. If the customer claims they are “in business” but not VAT registered, e.g. because they are below their country’s VAT registration threshold, the supplier can consider accepting other evidence of the customer’s business status, such as a link to the customer’s business website or other commercial documents.
Where is the consumer?
A digital service supplier should obtain and keep two pieces of information to evidence where a consumer normally lives. This demonstrates that the correct rate of VAT has been charged and will be accounted for to the correct EU country – for example from the customer and the payment service provide.
The EU Mini One Stop Shop scheme is optional. It enables non-EU companies to register with just one of the 28 member states’ tax authorities, and submit all filings and payments to that tax office. However, the business must apply the scheme to all relevant member states. For example, a non-business consumer living in Barcelona pays an Israeli company for a digital service. The Israeli company must charge the customer Spanish VAT.
Any VAT on business expenses incurred in the member state of consumption cannot be offset against supplies declared on the MOSS VAT return. Such VAT may be claimed via the 13th VAT Directive. Alternatively, register for VAT in one of the EU member states, or use a local VAT registered subsidiary.
Changes are being formulated by the EU and OECD, as well as additional digital service levy proposals in the UK and France.
As always, consult experienced tax advisers in each country at an early stage in specific cases. The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd. Leon@h2cat.com.
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