ago 14 2009
Internet & VAT
Internet & VAT
About VAT
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.
Internet & European VAT (EU VAT)
What is the EU E-Business Directive?
The EU “E-Business Directive” (Council Directive 2002/38/EC) came into effect on 1st July 2003. The effect of this directive is to implement the imposition of VAT in on Internet delivered information or services within the EU. This amounts to a tariff of between 13 and 25 per cent on items such as software or music downloads, any transactions as part of online auctions and subscriptions to internet service providers, sold over the internet anywhere within the European Union.
Does it affect you?
This Directive applies to non-EU companies and thus if your company is based outside the EU and providing Internet delivered information or services within the EU you should read this as failure to register and account for VAT could render you or your company liable to criminal prosecution for tax evasion, money laundering, false accounting or similar offences.
What activities fall within the Directive?
The Directive applies to the following 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 databases.
Music, films, games and webcasting of events.
Distance teaching of an automated nature.
Whilst the following activities fall outside of the Directive they create VAT issues:
Soliciting and/or taking orders.
Issuing invoices to customers.
Procuring goods and services.
EU VAT Registration
Non-EU vendors must register for VAT in one of the European Union Member States.
The VAT authorities of the Member State in which the Non-EU vendor has registered will remit VAT collected to the states in which sales have been made.
The rate of VAT and rules relating to VAT vary from state to state. Sample rates of VAT:
Madeira 15%
Luxembourg 15%
UK and the Isle of Man 15%
Sweden 25%
Denmark 25%
The home address of every customer will need to be obtained, the rate of VAT applied will be dependent on that information and records would have to be maintained for the VAT authorities. Establishing the location of all customers and their VAT status could be an administrative nightmare.
The advantages of establishing a Subsidiary within the EU
An option for Non-EU vendors lacking an EU subsidiary or a fiscally inconvenient EU subsidiary is to establish a subsidiary in a Member State where VAT is low or there exists other fiscal or operational advantages.
The establishment of a subsidiary within the EU circumvents the need to clarify the location of each customer as local VAT regulations would apply and the subsidiary would be regarded as a normal EU enterprise.
UK
VOES (“VAT On e-Services”) is a special VAT scheme for non-EU businesses providing electronically supplied services to EU consumers (that is, private individuals and non-business organisations). The scheme provides an optional, simplified means of registering and accounting electronically for EU VAT with effect from 1 July 2003. To prevent the need for such non-EU businesses registering in every EU member state where they supply customers, this special scheme allows them to register and account for EU VAT in a single EU member state of their choice.
