RSS feedsOn 17 October last year the European Council of Ministers adopted a European Union VAT Regulation laying down implementing measures in the field of EU VAT. The Regulation will come into force in all 25 EU member states on 1 July 2006, although one specific provision came into force on 1 January 2006, which has the specific aim of preventing retailers from using “merchant charges” arrangements.
As part of the European Commission’s plan to create a level playing field for businesses throughout the EU, the objective of the new regulation is to ensure a uniform interpretation of the Sixth EU VAT Directive in a number of specific areas, including electronically supplied services, distance selling and the VAT taxation of certain specific categories of goods and services.
Applying consistency
In the view of the European Council, the different interpretations currently applied by the individual EU member states could create obstacles for traders operating within the internal market of the EU. As a result, the regulation helps to ensure that all EU member states apply the rules laid down in the Sixth EU VAT Directive consistently.
The new regulation gives legal force to guidelines in the field of e-commerce that were drawn up in 2003 by experts from member states working with the European Commission in the advisory “VAT Committee” and provides for a definition of “electronically supplied services”.
Under Article 11 of the Directive, “electronically supplied services” includes services, which are delivered over the internet, or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention and, in the absence of information technology, is impossible to ensure.
The following services will, where delivered over the internet, or an electronic network, be covered by the regulation:
• The supply of digitised products, including software and changes to or upgrades of software;
• Services providing or supporting a business or personal presence on an electronic network, such as a website or a web page;
• Services automatically generated from a computer via the internet or electronic network, in response to specific data input by the recipient;
• The transfer for consideration of the right to put goods or services up for sale on an internet site operating as an online market on which potential buyers make their bids by an automated procedure and on which the parties are notified of a sale by electronic mail automatically generated from a computer;
• Internet Service Packages (ISP) of information in which the telecommunications component forms an ancillary and subordinate part.
The regulation also contains a non-exhaustive list of services, which, when delivered over the internet or an electronic network, are defined as electronically supplied services. The regulation also mentions a number of supplies or services that are, for EU VAT purposes, not considered electronically supplied services. These include: Radio and television broadcasting services; Telecommunications services; and supplies of the following goods and services:
• Goods where the order and processing is done electronically;
• CD-ROMs, floppy disks and similar tangible media;
• Services of professionals, such as lawyers and financial consultants, who advise clients by email;
• Teaching services, where the course content is delivered by a teacher over the internet or an electronic network;
• Offline physical repair services of computer equipment;
• Offline data warehousing services;
• Telephone helpdesk services;
• Telephone services with a video component;
• Access to the internet and World Wide Web;
• Telephone services provided through the internet.
Rules for e-commerce
The regulation also addresses some specific VAT payment and VAT reporting rules for non-EU e-commerce service providers that are registered for the special EU VAT regime for e-commerce.
The regulation clarifies the EU VAT rules for distance sales that determine that cross-border sales of goods to private (and similar) consumers within the EU are taxed with VAT in the member state of arrival of the goods. Supplies of goods are taxed with VAT in the member state of arrival of the goods if the applicable threshold applied by that member state is exceeded.
Supplies of goods that are made before the applicable distance sales threshold is exceeded are not affected by the breach of that threshold. The supplies that are affected, though, are:
• The supply that leads to the breach of the distance sales threshold;
• The subsequent supplies to that EU member state; and
• Any supplies in the following calendar year to that member state.
The regulation mentions that the sale of options can, under some circumstances, be considered a relevant transaction for VAT purposes. If so, this sale is to be regarded as a supply of services separate from the underlying operation(s) to which the option relates.
The regulation further contains a specific provision for situations where an error has been made in the application of the EU VAT rules for intra-community supplies. According to the regulation, an incorrect VAT treatment in the EU member state of supply shall not affect the correct application of the VAT rules by the EU member state of arrival of the goods. This means that the member state of arrival of the goods should, if all requirements are met, tax the arrival of the goods regardless of the VAT treatment of the transaction in the EU member state of the supplier.
The regulation also clarifies that European Economic Interest Groupings (EEIG) -a form of association between companies or other legal bodies, firms or individuals from different EU countries that need to operate together across national frontiers are -VAT entrepreneurs when making supplies of services or goods for consideration for its members or third parties.
