European VAT on Digital Sales delivered from non-EU businesses

August 22, 2013 - by Nida U.
European VAT on Digital Sales delivered from non-EU businesses

Experience shows that many clients who establish offshore companies for trading purposes, at some point decide to let go the company as they cannot understand the right way to operate it when selling their digital services to consumers based in EU.

I have been doing some research in order to understand this side of VAT rules and want to share this with you!

The rule is:
If the digital goods are delivered from outside EU to a consumer based in EU, VAT has to be charged depending on country where customer belongs.
This is
How to identify the location of EU consumer? Please use this link in order to identify the location of EU consumer, this is a very detailed and
informative blog written by Tom Borec*.

The above rule applies to the below activities:
• Radio or television broadcasting services solely broadcast over the Internet or a similar electronic network
• Electronically supplied services, i.e. Website supply, web-hosting or distance maintenance of programs and equipment
• Software and software updates
• Electronic images, text, information or database
• Music, films, games and webcasting of events
• Distance teaching of an automated nature

What is VAT?

The Value Added Tax (aka VAT) in the EU is a general, broadly based consumption tax assessed on the value added to goods and services. It applies more or less to all goods and services that are bought and sold for use or consumption in the Community. Thus, goods which are sold for export or services which are sold to customers abroad are normally not subject to VAT. Conversely imports are taxed to keep the system fair for EU producers so that they can compete on equal terms on the European market with suppliers situated outside the European Union.

What are electronically supplied services?:
(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.

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 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. How to identify who are B2C customers for VAT purposes? (One more detailed and informative blog by Tom Borec*).

These rules are yet to change!

From 1 January 2015, telecommunications, broadcasting and electronic services will always be taxed in the country where the customer belongs*
– whether customer is a business or consumer
– whether supplier based in the EU or outside
* For a business (taxable person) = either the country where it is registered or the country where it has fixed premises receiving the service.
* For a consumer (non-taxable person) = the country where they are registered, have their permanent address or usually live.

FYI: I have prepared extended and much more detailed information, which will be sent our as a newsletter to all our existing clients and those who have subscribed to our newsletter.

*Tom Borec is a Senior Tax Manager with more than ten years of tax experience. He started his career in the EU and is currently located in Switzerland. As an international tax advisor he is specialized in the area of the VAT and international tax planning. He successfully managed to combine his interest in computers and internet with his job and is spearheading the ebiz and ecommerce tax initiative at PwC. He is a member of the PwC’s B2C working group and founder and editor of PwC’s global ebiz & ecommerce portal.

Thank you for reading my post! And you are welcome to leave comments, feedback, suggestions for other posts or contact me for more information.

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