Overview of the new rules
On 12 February 2008 the EU Council of Finance Ministers adopted the "VAT package," which includes major changes to the rules governing the place of supply of services, and introduces simplified compliance requirements for businesses providing services in multiple member states.
The changes to the VAT rules are designed to ensure that VAT on services accrues to the country where the services are used, and are part of a complex political compromise to obtain the support of Luxembourg, whose low VAT rate (15 percent) has made it a favored location for online business to consumer (B2C) service providers.
Apart from the place-of-supply changes, the VAT package contains:
- a "one stop shop"arrangement for telecom, broadcasting, and electronic services provided to non taxable persons, allowing businesses to report VAT in multiple EU jurisdictions through one tax authority;
- new procedures for VAT refunds to EU businesses outside their home country; and
- additional arrangements for the exchange of information between member states' tax authorities, to allow them to keep control under the new rules.
The changes mostly enter into force on 1 January 2010, except for the implementation of some specific items.
General place of supply rules
Currently, the place of supply for services under the general rule is where the service provider is established. However the general rule is subject to many exceptions.
As from 2010, the first question to ask is whether the recipient of the service is a business or a private consumer. Services provided to businesses (B2B) will take place where the customer is established, or where the establishment is based for which the services are provided. Services provided to non business clients (B2C) will be located where the service provider is established, or where the establishment is based from where the services are provided. In order to allow service providers to distinguish between these two categories, all recipients having a VAT number are considered as business clients, even if they also have a partial non-business activity (e.g. public authorities).
Some exceptions remain
On these two general rules for locating services, a limited list of clearly defined exceptions still applies. We brieﬂy highlight the most important service categories in this section.
Hiring of vehicles
Under the current rules, leasing of means of transport is taxed in the EU member state where the lessor is established. This allows for the lease of cars from other member states with a potentially lower VAT rate or higher VAT recovery ratio. In some cases, it even allows completely VAT free cross border leasing arrangements.
With the new place-of-supply rules, the European legislation puts an end to such schemes by taxing leasing of vehicles with the VAT of the member state where the customer is established or where the vehicle is put at the disposal of the customer. The new rules distinguish between short term and other leasing services. Short term leasing is for a maximum of 30 continuous days (90 days for vessels). As of 2010, short term leasing services will be taxed where the vehicle is actually put at the disposal of the customer.
Long term vehicle leasing services provided to business clients will be taxed as of 2010 where the customer is established (general B2B rule). The same rule will apply if provided to non taxable persons, but only as of 2013. Until the end of 2012, long term leasing for non-business customers will continue to be taxed where the supplier is located, allowing them to benefit until then from the above mentioned optimisation schemes. A particular rule applies as of 2013 for the long term hiring of pleasure boats to non taxable persons. This will be located where the boat is actually put at the disposal of the customer, but only under the condition that the service is actually provided by the supplier from his place of business or a fixed establishment in that place. If this is not the case, the hiring will be taxed where the customer is located.
Work on tangible property
As from 2010, valuation of and work on tangible property provided to businesses will be taxed where the customer is established, according to the general B2B rule. It is no longer of importance whether the goods leave the member state where they were treated. If such services are rendered to non-business customers, however, an exception rule applies: the services will be located where they are physically carried out.
Transport of goods
The new place-of-supply rules may have their biggest impact in the transport sector, which has faced a particularly complex set of VAT rules since the VAT changes in 1993.
As from 2010, both the transport of goods and the ancillary services, which are provided to taxable persons, will be located where the customer is established (general B2B rule), regardless if it is an intra-community or domestic transport. This is clearly an improvement for transporters providing local transports in member states where they are not established. At the same time this ends the discussion on national transports which should or should not be treated as directly linked to intra-community transport.
When transport services are provided to non taxable persons, a specific place of supply rule applies: the services will be taxed in the member state of departure if it is an intra-community transport or in the country/countries where the transport takes place if it is a domestic or an extra-community transport.
Fairs and exhibitions
Until the end of 2010, no changes are foreseen for services rendered in the framework of fairs and exhibitions. They are taxable where the services are physically carried out.
As from 2011, more distinctions need to be made:
- services in respect of admission to fairs and exhibitions will be located where the event actually takes place;
- other services relating to fairs and exhibitions will be located where the customer is established if the customer is a taxable person (general B2B rule);
- other services relating to fairs and exhibitions which are rendered to non-taxable persons will be located where these activities actually take place.
Other exceptions concern
- Services rendered by intermediaries working for non taxable persons;
- Services connected with immovable property;
- Passenger transport;
- Supply of cultural, artistic, sporting, scientific, educational, entertainment and similar services;
- Restaurant and catering services;
- Electronic services to consumers.
Is this really a simplification?
Apart from the exceptions, services provided to other businesses will going forward be taxed in a uniform way in the country where the customer is established. At the same time, these services are covered by a reverse charge provision applicable to all services located under the general B2B rule, obliging customers to report the VAT due if the service provider is not established in their member state or if the supplier's establishment in that territory does not intervene in the service.
For all those services that some member states today treat as an exception while others apply the general rule, the new regulations will certainly result in a simplification. This is for example the case for management services or other unnamed services provided within corporate groups. As of 2010, these will always be located where the customer is established. For a lot of services this will finally end discussions between member states on who is entitled to the VAT as well as the double taxation risk that many companies faced as a result.
Also, services as a rule will be taxed in the country of establishment of the business customer, drastically reducing the VAT incurred by businesses outside of their country of establishment. As a consequence, the cash ﬂow impact and administrative burden associated with foreign VAT recovery will largely disappear.
And for some specific service providers, like transport companies or agents and intermediaries, who are currently faced with a maze of different location rules, the new rules significantly reduce the parameters they need to take into account when making their tax decisions.
What's the catch?
An end to low tax locations
While the new rules will in general facilitate cross border service provision, they are tailored particularly to ensure taxation of certain B2C services in the member state where the private customer is established. This concerns in particular the provision of telecom, broadcasting and electronic services, meaning that, amongst other things, the online software and entertainment sectors will be heavily affected.
The benefit of establishing one's business in an EU member state with a low VAT rate such as Luxembourg or Madeira will, subject to the European Commission reporting back on the feasibility of the new rules, fall away in the future. This is likely to mean that VAT will no longer be a major driver in determining the location of the business. The new rules will create a more level playing field, for both EU and non-EU business locations.
That being said, the entry into force of the particular rules for B2C telecom, broadcasting and electronic services has been delayed until 2015, leaving proper lead time for any changes to business models that need to be implemented.
New EU compliance obligation
As the new rules will mean, in a B2B context, that services will be exchanged cross border without VAT being applied on the invoice, the tax authorities will have a specific tool to follow up on this trade. All services provided to other taxpayers under the general B2B rule, where the customer is liable to report the VAT under a reverse charge mechanism, will need to be reported by the service provider in a recapitulative statement, similar to the European Sales Listing (ESL) currently used to report intra-community supplies of goods.
This listing constitutes a new compliance obligation for service companies generally not accustomed to European Sales Listings. The listing should only include those services that are actually taxed in the customer's member state, so VAT exempt services in e.g. the financial services industry are not subject to this obligation. But it will be necessary for service providers in this industry to have a clear view on the VAT regime applicable to their services in the customer's member state.
The threat of use and enjoyment rules
While services provided to non-EU business clients fully benefit from the new rules, it is still to be seen whether member states will use the possibility they have to apply "use and enjoyment rules." member states have the right to consider that services, which based on the new rules would be located outside the EU, take place in their territory and are subject to local VAT if the effective use and enjoyment of these services takes place in that member state.
Currently, such use and enjoyment rules only apply on EU-level to a limited set of services and just a few member states, such as Italy and Spain, have implemented them on a larger scale. However, member states may consider a broader application in order to keep control of extra-community services, which cannot be covered through the above mentioned listing obligation.
The developments in this field will largely determine to what extent the new rules will really simplify trade, as use and enjoyment rules lead to complex tax determination decisions and increased risk of error for service providers.