The European Union (EU) is closing a loophole that gives non-member e-commerce companies a key competitive advantage. At present, the lack of geographic and legal constraints means non-EU companies trading over the internet are exempt from value-added tax (VAT) on electronically delivered services to EU private consumers. Under a directive now in front of the European parliament and council, VAT rules would apply across the board.
The directive, which is awaiting approval from the 15 EU member states, addresses a new business concern: the supply of electronically delivered services and broadcasting services for which the recipient pays. However, the proposal does not apply to services for which no charge is made, such as free internet access or free downloads. The directive covers the following services:
- Cultural, artistic, sporting, scientific, educational, entertainment or similar services, including the activities of organizers of such activities, and where appropriate the supply of ancillary services, including all forms of broadcasting as well as other sound and images released and delivered by electronic means;
- Software;
- Data processing, including computer services such as web-hosting, web-design or similar services;
- and the supply of information.
What does this mean for Asian companies?
Colin Farrell, PricewaterhouseCooper's (PwC) E-Business services Asian Pacific leader, says the EU's proposal would create a new compliance burden for Asian companies supplying EU private consumers.
"From a pure Hong Kong and Asian perspective, of course, in the short term the policy objective of a level EU playing field will not necessarily be welcome," he says. "The proposed new rules will mean that non-EU companies with annual sales above the E100,000 threshold must make sure that not only do they understand the single place of registration rules once they are adopted but also, where they have a choice, decide which country to register in." They must then make sure that their business can cope with the new VAT compliance requirements. Farrell adds: "These could be particular burdens for those companies new to the EU VAT system."
Compliance obligations
Asian companies would need to know whether their customers were registered for VAT in a EU member country. Where the supply is to a final private consumer, the company will be obliged to charge and account for VAT. But where the supply is to a taxable person or business, the current reverse charge system for business to business (B2B) transactions will continue. That is, the recipient would account for the tax. Therefore, the onus would be on Asian companies to distinguish between business customers (taxable persons) and final private consumers (non-taxable persons). Where an Asian company supplies to a recipient established outside the EU, no VAT will be charged.
To ease the potential compliance headaches, the VAT information exchange system (VIES) will provide traders with information on companies that were registered. To determine if the private consumer is within the jurisdiction of the EU, the EU Commission says that companies should request a verifiable credit card billing address from the consumer.
To charge and account for VAT, a non-EU e-commerce operator must register for VAT in only one single member state and be able to discharge all its obligation by dealing with a single tax administration.
But Farrell of PwC believes that this may not go far enough for many EU companies. "It is difficult to see why anyone should register outside of, say, Luxembourg with 15% VAT rate," he says. "Member states with higher VAT rates may need some persuading by the Commission to adopt this part of the proposal."
Where there is non-compliance from a non-EU operator, the directive warns that the debt would continue "to hover over the businessà [and] the presence of such a liability is furthermore hardly likely to assist in access to legitimate capital or funding sources." In addition, the directive states: "The risk of punitive tax is also high."
