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VAT, Sales and Use Tax on Electronically Supplied Services

Supplying services over the internet is not a new business model, although its use has become easier and more prolific with advancements in technology.  The question of whether and where such services are subject to VAT and sales and use tax has yet to be definitively answered. The general rule was that the VAT and sales and use tax were where the services supplier is located.  But subsequent EU Directives, starting in 2002, changed that general rule.  The 2006 EU VAT Directive, Annex 11 defines “electronically supplied services” to include website supply, web-hosting, distance maintenance of programs and equipment, supply of software and updates, supply of images, text and information, and making databases available, supply of music, films and games of all kinds, and of political, cultural, artistic, sporting, scientific and entertainment broadcasts and events, and supply of distance teaching, but, significantly, excludes instances in which the services supplier and its customer communicate be means of email.  Article 7 of Council Implementing Regulation of 15th March 2011.

Therefore, it seems internet communication generally regarding commercial transactions, facilitating trading or other communications that take the place of telephone or fax are not subject to the VAT or sales and use tax rules.  The difficulty arises when the services supplied provide include both electronic communication and other components.

The EU, since 2010 has implemented the VAT Place of Supply of Services rules to more accurately impose VAT and level the playing field for EU businesses.  Where the services are provided to business located in the EU, VAT would be charged at the place where the customer has its business.  If the business customer is located outside the EU, then no VAT charge would be triggered.

If the services are supplied to a consumer within the EU, then VAT is charged in the place where the services supplier is located.  If the consumer is located outside of the EU, then no VAT is charged.  Alternatively, if the services are supplied by a business located outside of the EU and the consumer is located in any EU Member State, then VAT is charged.  This is specifically provided for in Section 34(l) VAT Consolidation Act 2010 transposed from Article 58 of the 2006 VAT Directive. However, there will be a fundamental change, as of January 1, 2015, the place of supply of electronic services will be the place where the customer is established, regardless of where the services supplier is located.

For example, if a US business electronically supplies services to an German consumer the place of supply (and of taxation) is Germany. The US business must then register and remit VAT.  There is program, designed to reduce the registration and complexity, that allows a non-EU business to register in one Member State only.  Then charge and remit VAT for all supplies of services to private consumers made within the EU.

Before making electronic services available over the internet, determine whether that supply of services will be subject to VAT or any other sales and use tax.  If your services will be subject to VAT or other sales and use tax, register and include it in the fee for services.  Remember in the EU, the fee charged to a private consumer must include the VAT charge as an inclusive price.

 

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