For many U.S. businesses (and European ones, for that matter), the European value-added tax (VAT) system is an extremely complex regime to master and bears little resemblance to the sales tax system to which they are accustomed. It is often the case that U.S. businesses making supplies of goods or services in Europe inadvertently fall into the “VAT net” and do not realize that they have an obligation to register and charge local VAT. Interest and penalties may therefore become payable as a result, and simplification regimes requiring a good track record are not available. But it is not compliance concerns that most often trigger a look at European VAT by U.S. businesses; it is mostly the realization that not considering VAT has become an expensive cost of doing business in Europe.
The aim of this item is to highlight awareness of the aspects of the VAT system that apply directly to overseas businesses so that they can seek professional advice at the correct time, thereby avoiding noncompliance and unexpected costs. This item also looks at changes in the rules regarding place of supply of services that will affect U.S. businesses starting in 2010.
Place of Supply: Services
A fundamental principle of the VAT system is that VAT is due in the territory where the supply is deemed to take place. Where services are concerned, many U.S. businesses will not have to worry, as services provided to a European customer will either be:
- Deemed to be taxable where the supplier is based (i.e., the United States), in which case no VAT is due; or
- Reverse chargeable in the member of the European Union (European member state) where the customer is based. This means that it is the customer who is obliged to account for the VAT due and not the U.S. supplier. Examples of such services are consultancy, assignment of licenses and trademarks, and advertising.
However, some services are deemed to be subject to VAT where those services are physically carried out. The most common of these are:
- Supplies of land-related services;
- Services relating to exhibitions, conferences, or meetings and any services ancillary to (including organizing) these services; and
- Supplies of goods with installation services.
Of these services, U.S. businesses are most likely to supply goods with installation to European Union (EU) customers, and it is this scenario that can lead to an unexpected VAT cost.
Supply of Goods with Installation
Whereas a U.S. business exporting goods to the European Community (EC) will have no VAT liability (unless it acts as importer of the goods into the United Kingdom (for example) for onward supply), if the business also arranges for installation of those goods, a VAT issue arises. This is because if goods are installed or assembled at a place in the EC, the place of supply for VAT purposes is the European member state of installation. This means that a U.S. business could have a liability to register and charge VAT in that European member state.
Fortunately, some European member states offer a simplification procedure whereby the customer may account for any VAT due. For example, the current position in the United Kingdom is that, by concession, there will be no requirement for a U.S. business to register for VAT in the United Kingdom if the following conditions are met:
- The supply is a one-off and no further U.K. business is anticipated;
- The goods are imported from outside the EU; and
- The customer acts as importer and shows the full value of the goods—including installation and assembly costs—on the import entry.
The precise rules and procedures differ across the European member states, and it is essential that U.S. businesses seek advice in advance of carrying out any supply with installation in a European member state.
Representative Offices and Branches
A U.S. business may have a presence in a European member state in the form of a branch, representative office, or registered office. If the office has both the technical and human resources necessary for providing and receiving services, the local tax authorities may treat the U.S. business as having a “fixed establishment” in that European member state. The question then is, what service is that fixed establishment providing?
If the function of the office/branch is to provide marketing services to the U.S. head office, this should be disregarded for VAT purposes because it is a “supply” within the same legal entity. However, if the fixed establishment has the necessary human and technical resources and it supplies services to third-party customers, the U.S. business may have an obligation to register and account for VAT in the European member state of establishment. It is essential that a proper analysis of the supplies being made by the office or branch is carried out, and VAT advice sought, to determine whether there is a liability to register for VAT in any member state. The same also applies if the U.S. head office intends to set up a subsidiary company in one or more member states.
In February 2008, a package of VAT measures (Directive 2008/8/EC) was agreed on by the European Council (the highest political body of the EU). The measures contain fundamental changes to the VAT system, which will be as significant for U.S. businesses doing business in Europe as they are for EU-based businesses.
For a U.S. business with one or more places in the European Union from which it makes supplies, a key change starting January 1, 2010, will be that it will no longer be required to charge VAT on supplies to other VAT-registered businesses in other European member states. Instead, the customer should account for the VAT due in the European member state in which it belongs under the reverse-charge procedure.
For business-to-consumer supplies of services, the general rule for the place of taxation will continue to be where the supplier is established, subject to some exceptions. Furthermore, the VAT package contains “special schemes” that may be used by U.S. suppliers both with and without a business journal in the EU. These special schemes are applicable to supplies of telecommunications, broadcasting, and electronically supplied services, all of which are covered below.
There is no binding definition of an electronically supplied service, but agreement has been reached among European member states that the essential characteristics are as follows:
- The service is delivered over the internet or an electronic network in the first instance; and
- The nature of the service is heavily dependent on information technology (e.g., the service is essentially automated and requires minimal human input).
Examples of electronic services include website supply, website hosting, distance maintenance of programs and equipment, software, and making databases available (Directive 2002/38/EC). The place of supply of these services is normally the country where the customer belongs, subject, in certain circumstances, to where the services are effectively used and enjoyed. Consequently, if a U.S. supplier has nonbusiness customers in multiple European member states, it would have an obligation to register and charge VAT in each of those European member states if the value of services provided is above the VAT registration threshold in the applicable European member state.
Fortunately, a special scheme is in place for non-EU suppliers of electronic services, which avoids the need to operate multiple VAT registrations. This “one-stop shop” system can currently be used only by U.S. businesses that do not have a fixed establishment in an EC country from which it makes supplies of goods or services (this will change starting January 1, 2015).
Telecommunications or Broadcasting
Currently, if telecommunication or broadcasting services are provided, no special scheme akin to a one-stop shop exists for non-EC suppliers. This means that the U.S. supplier must register in every European member state where it has nonbusiness customers once it exceeds the relevant VAT-registration threshold.
Recovery of European VAT
Finally, a word about VAT incurred in Europe: Although the current one-stop shop for electronic services and the schemes set to take effect in 2015 are extremely useful in minimizing compliance obligations for a U.S. supplier, the schemes do not permit recovery of VAT incurred on purchases used in making supplies. Instead, a U.S. business must rely on the rules contained within the Thirteenth VAT Directive (Directive 86/560/EC) to recover this VAT. This means that individual claims, within strict deadlines, must be submitted to each European member state in which VAT was incurred. This procedure can be complex and often includes protracted negotiations with the European member states concerned.
Anthony S. Bakale is with Cohen & Company, Ltd. Baker Tilly International in Cleveland, OH
Unless otherwise noted, contributors are members of or associated with Baker Tilly International.
If you would like additional information about these items, contact Mr. Bakale at (216) 579-1040 or firstname.lastname@example.org.