EU Adopts New Rules For VAT On Services

by Lorys Charalambous, for LawAndTax-News.com

18 February 2008

The European Council on Thursday adopted a package of measures on value-added tax (VAT), which includes a change in the rules on the place of supply of services, in order to ensure that most types of services are taxed in the member state of consumption.

At the same time, the package introduces the possibility for taxpayers who perform certain services to fulfil their EU-wide VAT reporting obligations in one single member state (using a "mini one-stop shop") and thus reduce their compliance costs.

The package, which includes two draft directives and a draft regulation, also provides for improved mechanisms for cooperation between member states, in order to prevent unauthorised tax avoidance under the new system.

Adoption of the package by the Council follows political agreement reached during the Portuguese EU presidency, at a meeting on December 4th, 2007.

The VAT package will, as a general rule, enter into force on January 1st, 2010. The main features of the new rules are as follows:

• For business-to-business services, taxation will be at the place where the customer is situated, and no longer at the place where the service provider is established, as is currently the case;
• For business-to-consumer services: for most services, the place of taxation will continue to be that where the supplier is established, as at present;
• However, in certain circumstances, taxation of business-to-consumer services will be at the place of consumption in order to prevent distortions of competition between member states operating different VAT rates. This category includes: restaurant services; the hiring of means of transport; cultural, sporting, scientific and educational services; and telecommunications, broadcasting and electronic services;
• A "one-stop shop" system will be introduced for telecoms, broadcasting and electronic services in order to simplify arrangements made necessary by the new rules. The "one-stop shop" will enable service providers to fulfil in their home member state a single set of obligations for VAT registrations, declarations and payments, covering services provided in member states where they are not established. VAT revenue will then be transferred from the country where the supplier is located to that where the customer is situated, whose VAT rates and controls will be applicable;
• For business-to-consumer supplies of telecoms, broadcasting and electronic services, application of the new rules and the one-stop shop scheme will be deferred to January 1st, 2015. The member state of establishment will, until January 1st, 2019, retain a proportion of VAT receipts collected through the one-stop shop scheme. This proportion will amount to 30% from January 1st, 2015 until December 31st, 2016, 15% from January 1st, 2017 until December 31st, 2018 and 0% from January 1st, 2019 onwards.

The VAT package contains:

• A draft directive on the place of supply of services;
• A draft directive on procedures for VAT refunds to non-established businesses;
• A draft regulation on improved administrative cooperation as regards VAT and the exchange of information between member states.

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