EU VAT registration: issues for US companies explored

EU VAT registration should be high on the agenda of any non-EU digital service supplier as the deadline looms for compliance. Against this backdrop Taxamo hosted the third in a series of webinars focusing on the tax implications for US digital companies ahead of the January 2015 EU VAT rule change.

The webinar featured Taxamo CEO John McCarthy and EU VAT expert Esteban van Goor, of Baker McKenzie. The following is the transcript of the Q&A session section of the webinar.

What is the difference between sales tax in the U.S., and value-added-tax (VAT) in the EU?

Esteban van Goor (EvG): Sales tax is levied at a retail level and VAT is levied at all levels within the supply chain. To give an example, sales tax is deemed to be taxed to the end consumer only – there is no accumulation within the supply chain. With VAT there is an accumulation within the supply chain.

However, VAT is neutral: as soon as you are a VAT-taxable person – for example, you are the content provider and you supply your service to a gateway such as an aggregator – then that aggregator will provide your services and these services are VAT-taxable. But, any VAT due on those services are recoverable. With sales tax if you actual establish that the person you are selling to is not the end user, then no sales tax is charged. If the consumer is the end user then you will charge sales tax.

We are a US and Swiss-registered company, do we need to pay VAT in this new scheme?

EvG: We’re presuming in this example that this company supplies services B2C to customers in the EU. If that is the case then yes, this scheme applies. As soon as you supply as a non-EU taxable person [company] to EU non-taxable persons [private individuals] you are obiliged to follow these new rules.

This company can register for MOSS. In principle you will need to register in each EU Member State in which you have customers. Then, this company – as a non-EU company with no EU registration – is free to choose any EU Member State with which to register with for MOSS purposes.

John McCarthy (JMc): These new regulations were brought in to – in effect – level the playing field between EU businesses and non-EU businesses. Heretofore, EU businesses were obliged to charge VAT based on where they were based. For US businesses, where they don’t charge VAT, there is a natural competition issue between EU businesses and non-EU businesses. From that perspective the tax authorities will look for you to pay VAT so as to level the playing field, no matter where the company is based.

The information I have been able to find addresses compliance for companies with a ‘permanent establishment’ in the EU. What about companies with websites owned and hosted solely in the US?

EvG: The concept of a permanent establishment is a little bit different. As soon as you have a fixed place of business in the EU, with enough substance (technical resources, personnel) to supply the service itself then that might qualify as a permanent establishment. What that means is that establishment by itself can perform services within the EU. As soon as you have that then that establishment is deemed to be the main place of establishment for VAT purposes. So, you have one main place of establishment.

Obviously, these companies are incorporated in the US, as soon as you deviate from it then you have your secondary place of establishment, and that is the permanent establishment.

It is totally different then for compliance via an EU VAT registration or MOSS. Because for a VAT registration, or application of MOSS, you don’t need a presence in the EU. As soon as you supply services to non-VAT taxable persons in the EU – even without a presence – you will still need to comply.

Are we likely to see less US businesses set up establishments in Europe, such as the common practice of establishing a base in Luxembourg to avail of low VAT rates?

EvG: With respect to VAT rates, yes – as it is a level playing field there is no distinction anymore. Currently, there is a distinction as you apply the VAT at the place of establishment of the service provider. So, if the service provider establishes themselves in Luxembourg then they pay a lower VAT rate.

As of January 1, 2015, that changes and it is the same for everyone. Companies will, however, seek corporate income tax solutions.

Can I register for MOSS in more than one EU Member State?

EvG: That will not be possible, as soon as you register for MOSS you pick your Member State of choice (any one of the 28). You cannot apply for MOSS in multiple jurisdictions – it is a one-stop shop.

[slideshare id=42967831&doc=2015euvatchallenge-141223100114-conversion-gate01]

Under what legal authority is the EU requiring compliance with EU VAT regulations from websites owned and hosted solely in the US? How will the EU chase law-breakers from the US?

EvG: So, the legal authority is basic. In order to establish where an electronically-supplied service supply is taxable, according to EU VAT regulations, you will need:

1. A VAT-taxable person, as soon as you have content which you sell online (e.g. downloads) and if you charge remuneration. At that moment EU law is applicable and the VAT legislation is only there to give sovereignty to EU Member States. As soon as it established that you have an EU-based customer then that EU Member State where the customer is located has sovereignty to charge VAT. That is based on EU VAT law. You cannot neglect that.
2. We have established that we have an EU VAT regulation in place. That regulation shows that we should follow the EU place of supply rules applicable for these services. As soon as you do not comply and don’t pay VAT at all then you are an EU VAT law-breaker. Tax authorities will request the US to provide more information and they will work together so as to be able to collect the VAT debt. If you do not comply it does not mean you are safe in the US. The EU can chase you via the IRS by way of co-operation. We do not see this happening a lot at the moment but, in the future, it will happen more often. It is part of the EU Member State’s taxable income. As soon as they spot that they are actually allowed to levy then their attitude will harden. In the end it is their tax revenue. This attitude towards co-operation is a recent development which is also being researched by the OECD. Indeed, it is being recommended for other countries to implement, in order to ensure that the other country where the VAT is due is always able to collect its VAT debts.

JMc: In relation to the second question, it is not up to the EU to chase these debts it is up to EU Member States. Germany or France, for example, will look at existing bilateral treaties with the US and see what codes have been broken and then seek to pursue businesses under those codes. This will be a co-ordinated approach from EU countries.

It is not something that is going to go away as the OECD have been very clear that what is happening in the EU is being looked at as something that other countries can also deploy. Internet commerce is growing year-on-year and it does not make sense that there are big sections of the economy effectively untaxed. We have all seen in the press the increased level of co-operation towards tax avoidance. The largest amount of tax forfeited by countries is through tax avoidance. Expect to see a lot more focus on this front between EU Member States and the US.

EvG: It’s not only the EU, other countries and continents are looking at taxing electronically-supplied services, incoming supplied services. Similar to the EU legislation in 2003 in which the EU obliged to actually charge VAT on electronically-supplied services provided by non-EU service suppliers.

This is a trend and the OECD is really focused on the digital economy. Digitalised goods – as mentioned in OCED guidelines – are taxable at the place of destination, the place of consumption. In order to meet that principle you will need better guidelines. This is the first step, but you will also need co-operation on a global level. Within the EU itself you will not solve it. At a global level you will see countries working more and more together to ensure that VAT is collected in relation to the supply of these services.

These rules have been in existence since 2003 for US companies and I haven’t complied, why should I do so now?

EvG: If they want to comply now, but have not been complying? That’s a tricky one because you have multiple EU Member States which are – in principle – allowed to levy, assuming you have customers throughout the EU. It is not possible to just go to one EU Member State and say ‘hey, I didn’t comply. I do want to comply but I only want to deal with this specific Member State’. What you will need to do is comply and contact 28 different tax authorities to try and solve this.

If you didn’t comply, fine, but as mentioned before there will be a lot of development in this area over the next few years and you could get hit with fines and penalties.

Can I stop selling to EU customers?

EvG: Of course, no problem – that’s a business decision. There’s no EU regulation to stop selling. The only difficulty, I think, would be to actually exclude EU customers. I have clients operational in a specific area and they are considering shutting down certain EU Member States just because they need a licence to be operational in those Member States and, currently, they do not have a licence.

They are not there illegally, as they make use of the freedom of providing services within the EU.

They think that as soon as we are going to report VAT there then we show that we are actually present there. They want to prevent any discussion in relation to this. They don’t want to jeopardise any future licence that they are currently requesting.

What do I do if my Payment Service Provider (PSP) is not set up to collect the necessary evidence to identify where my EU customer is located?

JMc: There are a couple of different options. What you need to look at is what information you collect from your consumer. If you are like most e-service businesses you probably won’t collect a lot of evidence.

If you are having difficulty. What I would suggest is for you to look at www.taxamo.com. It gives you some ideas and tips on how you either use our solution, or you can do it yourself.

PLEASE REMEMBER THAT THIS INFORMATION HAS BEEN PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND IS NOT PRESENTED AS SPECIFIC TAX OR LEGAL ADVICE. ALWAYS CONSULT A QUALIFIED TAX OR LEGAL ADVISOR BEFORE TAKING ANY ACTION BASED ON THIS INFORMATION. VERTEX INC. ACCEPTS NO LIABILITY FOR ANY LOSS RESULTING FROM ANY PERSON ACTING OR REFRAINING FROM ACTION AS A RESULT OF THIS INFORMATION.