Value Added Tax for e-services? Why bother when there is no company presence?

Specific regulations for charging and reporting Value Added Tax (“VAT”) apply to U.S. companies that provide electronic services (e.g., cloud computing, software, server facilities, online films, music, books, etc.) to non-taxable private individuals based in the European Union ("EU"). This impacts all companies – whether these companies have a presence in the EU or not. 

What are e-services?

Any services supplied digitally are considered electronic services (e-services). This includes the following:

  • Cloud computing;
  • Servers for websites and data storage;
  • Subscriptions to internet games, newspapers; and
  • Downloads of text, pictures, music or videos (e.g., apps).

When must the VAT regulations on e-services be considered?

These regulations are already in force for non-EU companies. However, new rules with simplifications will apply on January 1, 2015, for EU companies. With this in mind, the local Tax Authorities may investigate non-EU companies to ensure that they are charging VAT when providing e-services to private individuals. 

Why bother with European VAT?

There are potential adverse consequences to not complying with the EU VAT provisions, which include: 

  • It is considered tax evasion if a company ignores the local VAT requirements and significant penalties could apply.
  • The local tax authority will likely not come to the U.S. and knock on your door; however, they will go public – therefore, there is reputation at risk.
  • The collaboration between the various local European tax authorities is improving including tracking offenders and they have the motivation to do so.

What are the consequences?

Companies performing e-services to private individuals have to register for VAT in each country where their customers are resident. Then, the company must charge local VAT on the service provided and must declare it on a local VAT return.

An alternative could be the so called “Mini One Stop Shop” (“MOSS”). This alternative enables businesses to register for VAT in one single country of the European Union, submit quarterly VAT returns in that country and pay their total VAT liability in this country. The company will still have to report the amount of VAT due per country of their customers’ residency; however, the centralized MOSS authority will remit the tax to the other EU countries according to the declaration report.

Know your customer 

The new EU VAT rules beginning January 1, 2015, will introduce some additional compliance requirements that will need to be followed by all e-businesses – European as well as non-EU. Among other things, these businesses will need to provide:  

  • Identification of the customers – business to business or business to consumer in the EU;
  • Identification of the country of residence for the business to consumer supplies;
  • For business to consumer supplies, charge VAT at the local VAT rate where the customer resides; and
  • Identification of business to consumer supplies outside of the EU (e.g., Norway and Switzerland) and comply with the local VAT regulations.

What about countries outside of the EU?

If non-EU countries are involved, the applicable local VAT regulations have to be considered. For example, Norway and Switzerland operate similar EU type VAT systems. As with the EU, e-businesses performing e-services to private individuals have to register for VAT and charge local VAT at the local VAT rate which has to be declared with the local tax authority. 

Summary

On January 1, 2015, new VAT rules on e-services to private individuals (business to consumer) will become effective in the EU. U.S. companies which do not have any presence in the EU but are providing e-services will be impacted and should be aware of the following:

  • Local VAT registration is required in every single country with a business to consumer supply;
  • Local VAT has to be charged and reported with the local tax authority;
  • Simplification is possible by registering only in one EU country (Mini-One-Stop-Shop);
  • Know-your-client is getting more and more important; and
  • VAT regulations of countries outside the EU must also be considered as similar regulations may apply.

Andersen Tax has the expertise and resources to assist with VAT planning and compliance.