VAT in an E-environment

The Organisation for Economic Co-Operation and Development (OECD) and the European Commission (EC) have been taking forward the tax issues raised by e-commerce:
(a) Neutrality - as between conventional and electronic forms of commerce. (b) Fairness - the right amount of tax should be produced at the right time; minimising the potential for tax avoidance. (c) Certainty and simplicity - the rules should be clear and the taxpayer should be able to anticipate the tax consequences in advance of a transaction, including knowing when, where and how the tax is to be accounted. (d) Efficiency and flexibility - compliance costs should be minimised and systems for the taxation of e-commerce should be dynamic to keep pace with technological and commercial developments.

Meeting of European finance ministers (ECOFIN)
The EU first looked at the impact of e-commerce on VAT and customs duties in June 1997.

The Commission fed its views into the OECD Ministerial conference in Ottawa in 1998 when it produced guidelines that included:
(a) There is no need for new taxes on e-commerce at this stage.
(b) Products supplied in digital format, eg CDs which can be downloaded over the internet should be treated as services for VAT purposes.
(c) Services supplied for consumption within the EU should be taxed within the EU and those supplied for consumption outside the EU should not attract EU VAT.
(d) Compliance should be made as simple as possible.
(e) Tax administration should be facilitated by, for example, further development of electronic invoicing.
(f) Businesses should be able to discharge their fiscal obligations by rendering their returns and making their payments electronically.

Commission's proposals
The European Commission is now close to publishing its draft Directive on the application of VAT to e-commerce. Even then, it is unlikely to become official before 2002 and not until 2003 will national legislation reflect the changes.

At a general level, we understand that the objectives of the common system are to be replaced by four new objectives; simplification, modernisation, more harmonised application, and the reinforcement of administrative co-operation.

There has been a lot of speculation about whether non EU suppliers providing electronic services in the EU will be required to register for VAT in the EU. It appears that the draft Directive will propose VAT registration in one Member State only.

Conclusion
E-business is bringing about some interesting challenges to the existing legislation, but it is also acting as the catalyst for change and modernisation of the legal framework governing VAT. This can only be for the good, to enable businesses to proceed with certainty in the how, when and where of accounting for VAT. But until the system is modernised, businesses still have a lot to do to ensure that their new ways of doing business are not in breach of the conventional VAT rules. nteresa.ahern@uk.pwcglobal.com

The key VAT issues facing policymakers
In the context of the 'modernisation' objective, the main e-business issues for VAT policymakers arise in international trading and fall into two categories:
(a) Physical goods ordered over the internet delivered to both business and private customers; and
(b) Services, including digitised products, provided on-line to business and private customers. The issues concern who charges VAT, when and where.

Goods or services?
For VAT purposes it will continue to be important to know if you are supplying goods or services over the internet. The supply of goods means the transfer of the right to dispose of tangible property as owner. Anything which is not a supply of goods is a supply of services.

Place of supply of goods
The rules for the place of supply of goods depend upon where the goods are located, where they are going and the status of the customer.

VAT is due if the goods stay in the Member State or are sold to a private EU customer, and no VAT is due if the goods leave the Member State and are sold to anyone else.

Where a non-EU supplier supplies goods into the EU, he is required to register for VAT on the sale if the goods are in the EU at the time title passes to the customer.

Internet trading
The vast majority of sales over the internet result in supplies of physical products. In general, the existing rules ensure that the tax accrues in the country into which the goods are delivered and so there are no significant new problems for VAT.
Acquisition VAT will apply on intra-EU deliveries and import VAT will be collected on deliveries from outside the EU. However, the distance selling of digitised products by non-EU suppliers to private consumers will require some change.

Currently, it is possible to download CDs, films, sound and books from non EU suppliers without VAT. Clearly this is leading to distortion of competition since EU suppliers have to charge VAT. All Member States have agreed that such products should be treated as services.

Place of supply of services
The rules relating to the place of supply of services are complex and are contained in Article 9 of the EC Sixth VAT Directive.
Article 9 (1)
The place of supply is where the supplier is established. Thus VAT, at the rate applicable in the supplier's Member State will be charged irrespective of where the customer belongs or whether the customer is in business or not.

The leasing of all forms of means of transport fall in here, as well as the supply of certain internet-related services, eg web site design and hosting.

However, there are exceptions for means of transport applicable in some Member States. Where the actual 'use and enjoyment' of the means of transport is outside the EU, Member States may allow the lessor not to charge any VAT.

The rules work the other way too and would, for example, catch a non-EU lessor leasing cars into the EU. In this case, the customer, if in business, could self-assess the VAT under the reverse charge, or if the customer were private, the lessor would have to register for local Member State VAT.

However, when certain of these services are provided by non-EU suppliers, they escape VAT altogether, eg web hosting. Thus, while an EU supplier would be required to charge VAT, non-EU providers are currently gaining a VAT advantage.

Article 9 (2) (c)
The services included in this Article are designed to put the place of supply where the services are consumed. They include cultural, artistic, entertaining and educational services, as well as valuations of movable tangible property and work on such property. Thus if they involve the carrying out of work on goods, or the provision of training, the place of supply is where the work or training is physically carried out. The rule is that the supplier has to register and charge VAT in the country where the services are performed.

For most of the services in this article, electronic transmission does not have a VAT impact. However, some of the services need to be reconsidered because they can be delivered electronically to paying customers. Thus the time and place of consumption may be different from the time and place of performance.

A solution proposed by the Commission is that where such services are delivered electronically the place of supply is where the services are consumed - perhaps where the customer belongs or resides.

This would ensure that any services consumed in the EU would be taxed within the EU, and where supplied by an EU operator for consumption outside the EU, that they are not taxed. This approach would do two things:

Article 9 (2)(e)
The aim of Article 9 (2) (e) is to tax the various services listed at the place where they are received using the tests of where the customer is established, has a fixed establishment, or usual residence.

Effectively, therefore, the place of supply of these services is where they are consumed, unless the customer is a private consumer within the EU. There is a wider use of the reverse charge for services falling in this category.

The services listed are those of an intellectual or intangible nature, eg advertising, licences, services of consultants, the provision of information, financial and banking services and leasing (excluding leasing of all forms of transport). From June 17, 1999, telecommunications services are also included.

CDs and videos downloaded over the internet are also considered to fall into this list because they are no longer 'goods' in the commonly accepted international sense since they are not physically delivered across borders.

This part of the legislation produces a result where EU and non-EU supplies to EU business customers are subject to the reverse charge in the hands of the customer, and supplies to non EU customers are not taxed at all in the EU.

However, one of the VAT issues arising from this is that the legislators did not envisage the impact of the internet and that there would or could be such wide scale supplies of these services from outside the EU to private customers. Thus, for the time being, non-EU suppliers have yet another E-advantage over and above their EU counterparts leading to further distortions of competition.

Article 9 (3)
Article 9 (3) allows Member States to adapt their local rules relating to the article 9 (2) (e) services plus the article 9 (1) services relating to the hiring out of means of transport, to eliminate distortions of competition.

In practice, the rule is used only in relation to car leasing, equipment leasing and telecomms and it all hinges on the test of 'use and enjoyment'. Thus, for example, where a non-EU lessor supplies car leasing services to a business customer in the EU, the supply should escape VAT altogether. Instead, Member States bring the service within their country if the lease is 'consumed' there. But it is mandatory for non-EU telecoms providers to register for VAT in the EU if the services are used and consumed in the EU by a private consumer.

There has been much discussion on the practicalities of registering the non-EU supplier such as registration in one Member State, or in each jurisdiction in which they transact. The first of these options is the one more likely to be pursued. This will obviously pave the way for a more general single EU VAT registration.

Summary of vat modernisation programme
The areas where the Commission is likely to modernise the VAT system may be summarised as follows:
(a) A new basic rule for the place of supply of services is required to deal with the place of consumption of electronically delivered services such as educational, entertaining and the downloading of digitised products, eg CDs and videos. This may result in adopting the place of consumption of the services as the general rule.
(b) The place of consumption of e-business services to business customers would in general be the country where the business customer is established. The place of consumption for e-business services to private consumers would be the country where that person is usually resident.
(c) The reverse charge would be used more widely for services received from outside the EU by business customers in the EU, to embrace those imported services such as web hosting which currently escape VAT and to deal with certain other electronically delivered services, such as cultural and educational services.
(d) Where non-EU suppliers are providing electronically delivered services to private customers in the EU, they currently escape VAT altogether. The new rules would require the VAT registration of the overseas supplier in the country where the services are consumed.
Steps would be taken to facilitate such registrations by allowing them to account for their VAT on line.

Electronic invoicing
Electronic invoicing is a 'hot topic' at the moment and the Commission is preparing a Directive on the subject. The invoice fulfils many functions; it is not just an invitation to pay, it serves as confirmation of an oral agreement, evidence of a trade agreement and protection for the customer.

Electronic invoicing simply means that the seller generates an invoice automatically based on an order received from a customer, also electronically. The invoice is then sent to the system of the buyer by EDI and there is no paper.

The problem is that Member States have different invoicing requirements and within the EU millions of invoices are still recorded manually. The invoices need to be checked by the person preparing them and inevitably errors arise. Eliminating manual processing would cut costs and reduce the number of mistakes.

Businesses are eager to introduce electronic invoicing, but there are VAT hurdles. Many Member States are addressing the issue but often in isolation. The UK allows electronic invoicing, but it still requires control reports to be printed, not to mention that Customs must be given one month's notice and that the approval can be withdrawn.

E-procurement
This involves using a central website for all employees of the group, in any country, to order goods through a central procurement company (CPC). If demand is high enough, another website can be attached where the orders are aggregated and displayed for potential suppliers to bid for in real-time.

These websites are huge market places - for example, the trade exchanges formed by some of the large motor manufacturers. The model allows the channelling of orders through one point and, of course, enables the procurement company to obtain significant discounts.

Some of the key VAT issues to consider will be the management of the on line catalogue to ensure it holds all the correct information for VAT, eg relating to invoicing, tax points and pricing. Will the supplier have sufficient information to raise the correct invoice to the recipient of the goods in any country?

Will the procurement entity be acting as an agent or as an undisclosed agent? If it were to buy and sell in its own name, it could have a liability to register for VAT in every country in which it purchases the goods. It would then need to be able to deal with the invoicing and other issues itself.