VAT on services for consumers: new EU plans

At present, when a trader supplies a service to a private consumer, the trader is responsible for applying VAT at the rate of the country where he has his place of establishment. However, the Commission is concerned that, with the increasing supply of services across borders, this rule no longer always ensures that the tax accrues to the Member State of consumption.

It can also cause problems of distortions of competition, as companies have an incentive to locate their activities in Member States with low VAT rates in order to be able to charge that rate to their customers.

In particular, suppliers of digital products from outside the EU are required to charge VAT on sales to private consumers at the rate applicable in the Member State where the customer is resident, but this rule does not currently apply where non-EU suppliers establish themselves within the EU. Nor does it apply to EU or non-EU suppliers of other services capable of being supplied at a distance (such as distance teaching).

The Council is already working on another Commission proposal to change the rules for the supply of services to businesses. When implemented, there would be practical difficulties for businesses if there were no corresponding changes to the rules governing the place of supply of services to consumers.

So the Commission is proposing several exceptions to the existing rules. These are:

• For certain services capable of being supplied at a distance, including e-services and distance teaching, the place of taxation would become the place where the customer is established.
• Restaurant and catering services would become taxable at the place where the service is physically carried out, except for those services supplied on board of a means of transport, which would be taxable at the place of departure of the transport service.
• The short term hiring of means of transport would become taxable at the place where the means of transport is actually put at the disposal of the customer.
• Long term leasing would become taxable at the place where the customer is established.
• All services rendered by intermediaries would become taxable at the place where the main transaction in which they intervene takes place.

The proposed changes would mean that traders supplying these services to private customers in other Member States would have VAT compliance obligations in those other Member States – a daunting prospect if the trader is not fully acquainted with the language and legislation of that other country.

The Commission says these obligations would be greatly simplified if the Council adopts an earlier Commission proposal setting out a VAT One-Stop-Shop, which would effectively allow all companies to levy VAT at their place of origin (or establishment), with the revenues then being reallocated to the appropriate Member State.

"The economic potential of telecom services, broadcasting, and e-services makes it imperative to ensure that the VAT revenues from such services accrue to the Member State where those services are consumed," said László Kovács, European Commissioner for Taxation. "This proposal is designed both to ensure that Member States are better able to collect VAT on services consumed by their residents and to make the application of VAT to services simpler and fairer for traders."