2015 EU Place of Supply Change for Electronically Supplied Services

With the recent publication of Council Implementation Regulation No 1042/2013 in the Official Journal of the European Union, we are reminded that the 2015 place of supply change for electronically supplied services is rapidly approaching. This leads us to ask many pressing questions. How will the supply of electronically supplied services be sourced, come January 2015? What exactly is an electronically supplied service? Do businesses providing these services to non-taxable persons have to submit a VAT return in every Member State where their consumers are located?  The complex nature of the place of supply change requires that these issues be addressed well in advance to ensure businesses transacting in the EU are prepared and remain compliant with their VAT obligations. Electronically supplied services from an EU business to a non-taxable person in another Member State are currently sourced to where the seller is established. That means VAT is collected from the customer based on the rate at the seller’s location.  Beginning 1 January 2015, all electronic services supplied to a non-taxable person will be taxed in the Member State in which the consumer is established, regardless of where the business supplying the services is established. At this point in time, the seller will collect and remit VAT at the rate where the customer is located. This upcoming place of supply change eliminates the tax advantage for the seller established in a lower VAT rate EU jurisdiction. Council Implementing Regulation (EU) No 282/2011 defines electronically supplied services as “services which are delivered over the Internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of information technology.” Electronically supplied services include the supply of digital products, including software and changes or upgrades to software; services providing or supporting a business or personal presence on an electronic network such as a website; website and webpage hosting; the accessing or downloading of music, films, games to computers or mobile phones; and subscriptions to online newspapers and journals. While not an exhaustive list, these enumerated supplies fall within this definition of electronically supplied services and will be affected by the 2015 place of supply change. Absent a Union Simplification Scheme, the EU seller would have to register and remit in every Member State in which it supplies electronic services to consumers. Luckily, to simplify VAT compliance, the EU is instituting a Union Scheme of reporting for supplies subject to the 2015 change. The scheme, also referred to as the Mini One Stop Shop (“MOSS”), allows a business to submit a single VAT Return to the Member State where the business has identified. This Return accounts for the VAT due on electronically supplied services in all the different Member States where the consumers of the services are located and VAT due is broken down by Member State of consumption. Use of the Union Scheme Return eliminates the need to file domestically in every single Member State of consumption. Be aware that there are some restrictions on how this simplification applies. The Union Scheme is available to any EU based taxable person providing electronically supplied services to non-taxable persons in Member States where they are not established.  While the use of the Union Scheme is optional, if a business chooses to register for the Union Scheme it must use the reporting scheme for every Member State of consumption in which it is not established.  For supplies to Member States where the taxable person has an establishment, supplies of electronic services must be declared on the domestic VAT return for that Member State. Union Scheme VAT Returns are due every calendar quarter and must be submitted even if no sales of electronically supplied services have taken place. The actual payment of VAT is due when the Return is submitted, or, at the latest, before the relevant VAT Return deadline.  Once the Union Scheme Return has been submitted to the Member State of identification, the Return is split by Member State of consumption and is forwarded to the appropriate Member State along with the money due. Until 31 December 2018, the Member State of identification will retain a percentage of the money collected under the Scheme. It is important to note that businesses cannot deduct business expenses incurred in the Member State of consumption on the Union Scheme Return. The business can, however, claim these expenses in a number of other ways. If the business is registered but not established in the Member State of consumption, they may deduct expenses via the domestic VAT Return in the Member State of consumption. Otherwise, the business may file a claim for a refund with the Member State of consumption. More information on the Union Scheme and its implementation can be found in the European Commission’s publication “Guide to the VAT mini One Stop Shop,” published 23 October 2013.