Risk & Economy » Tax » Directive clarifies digital VAT

On 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.