| Niall Campbell comments on forthcoming EU rules for the place of supply of services and new procedures for VAT refunds. |
In February, the ECOFIN Council adopted EU Directives on the new so-called VAT package rules, some of which will come into effect on 1 January 2010. The intention of the new rules, in relation to the place of supply of services, is to provide a more level playing field for businesses supplying services throughout Europe by ensuring that VAT will be paid in the country where the services are consumed rather than where the supplier is located.
What are the rules?
Place of supply – Business to Business (‘B2B’): Under the current system, the general rule is that, subject to certain exceptions, services are supplied where the supplier is located. From 1 January 2010, for B2B suppliers, VAT will generally be paid by the purchaser under the reverse charge mechanism, based on the country where the purchaser is located.
Place of supply – Business to Consumer (‘B2C’): For B2C supplies of services, the place of taxation will continue to be where the supplier is established. However, there will be a number of important exceptions including supplies of telecoms, broadcasting and electronically supplied services, where the place of supply will shift to where the consumer resides. In relation to supplies of these latter services, the supplier will continue to charge VAT but the rate applicable will be the VAT rate in the country where the consumer is located and the suppliers of these services will be able to discharge their VAT obligations using a ‘one-stop shop’ mechanism.
This will enable them to fulfil a single set of VAT administration obligations, such as registration, declaration and payments, in their home member state which will cover services provided in other member states where they are not established. VAT revenue will then be transferred from their home country to the State where the customer is situated, whose VAT rates and controls will be applicable.
The following are a number of transitional arrangements in relation to B2C supplies of telecoms, broadcasting and electronically supplied services:
- Application of the new rules for B2C supplies of these services and the One-Stop-Shop will be deferred until 1 January 2015;
- As the new rules are phased in, the Member States of establishment will, until 1 January 2019, retain a decreasing proportion of VAT receipts collected through the One-Stop-Shop scheme.
VAT refund procedures and exchange of information
The new rules will introduce, with effect from 1 January 2010, a fully electronic refund procedure under which companies that incur VAT, in Member States in which they are not established, will be able to reclaim the foreign VAT from their own Member States’ tax authority. Companies will therefore no longer have to file VAT refund claims in each Member State in which they incur VAT. Instead their home country will forward the VAT refund claims electronically to the Member States concerned. Moreover, there is provision for the payment of interest by Member States for late refunds of VAT.
As part of the exchange of information between Member States, suppliers of B2B services to other Member States will be required to submit a monthly statement outlining the details of each customer to which he has supplied services which fall under the reverse charge mechanism. This provision, which is intended to help Member States battle carousel fraud, will add an additional administrative burden on to compliant taxpayers.
Impact of the new rules
The proposed changes will have a significant impact on both B2C and B2B transactions and therefore affects all businesses.
For B2B supplies, the changes may provide some simplification through the shifting of the VAT accounting responsibility from supplier to recipient on most services. However, this will also create significant issues.
For example, in the financial services sector, the changes are likely to effectively broaden the tax base of recipients of services as the starting point will be to subject services to reverse charge VAT unless it can be shown that they are exempt or outside the scope of VAT (under domestic law). This will require changes to systems to correctly capture transactions to comply with the new rules and may result in additional VAT costs. Any resultant change in VAT liabilities will have pricing ramifications. These will impact services currently contracted which continue to be provided after the new rules come into effect.
All businesses should benefit from the proposed fully electronic EU VAT refund system which should ensure a quicker and easier international VAT refund process. The current paper system is extremely burdensome and it can take 6 months or more to obtain VAT refunds from other countries. The fact that businesses are to be paid interest if Member States are late making refunds should surely provide incentives for EU VAT administrations to speed up
the process.
And in the meantime…
Although this may seem like a long lead time, the changes are fundamental and careful thought needs to be given to their impact and the extent to which changes will be required to VAT compliance systems. Finally, the Commission will be reporting on the feasibility of the new B2C rules before implementation and it is important that businesses evaluate the impact and provide feedback to this process. |
Niall Campbell is a tax partner at KPMG.
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| Article appeared in the June 2008 issue.
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