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EU Commission Proposes Changes To Place Of Taxation Of Services

by Ulrike Lomas, Tax-News.com, Brussels

25 December 2003


The European Commission has presented a proposal to change the place of supply of services for VAT (Value Added Tax) purposes where the customer is a trader which will in most cases shift the taxation from the location of the supplier to that of the customer and will require an extension of electronic information exchange system between member states.

"The Internal Market, globalisation, deregulation and technology change have all combined to create enormous changes in the volume and pattern of trade in services in Europe" commented Frits Bolkestein, European Commissioner for Taxation and the Internal Market. "This proposal will make the application of VAT to services acquired by business simpler and fairer, balancing the need to minimise administrative obligations for traders with the control needs of tax administrations."

The proposal would ensure that the main rule for services provided to traders would be that the customer rather than the supplier would be responsible for paying the VAT on services supplied to him on a self-assessment ("reverse charge") basis. In other words, the rules for applying VAT to services supplied to a business customer in another EU country would be modeled on the current rules for VAT on goods sold to a business in another Member State.

This proposed general rule would be subject to certain exceptions, essentially for administrative reasons and to ensure that taxation takes place at the place of consumption. These exceptions, which are largely identical to exceptions to the present general rule on the place of supply of services, would be as follows:

• Services connected with immovable property (such as estate agency services), would continue to be taxable at the place where the property is situated. The existing arrangement is reasonably straightforward and generally results in taxation where the service is consumed.

• Passenger transport services would remain taxable at the place where the transport takes place. It would be very difficult to make a change in the present rule for traders only so the Commission proposes to address this issue in a follow-up proposal concerning the place of supply of services to private consumers and bodies not subject to VAT, currently scheduled for 2005.

• Cultural, artistic, sporting, entertainment or similar services would continue to be treated as supplied, and therefore taxable, where the services are physically carried out. Again the existing rule generally results in taxation where consumption occurs.

• Services that are tangible in nature, such as restaurant services, are obviously supplied for immediate consumption at a readily identifiable location so it is appropriate for the supplier to apply VAT.

This proposal would limit the instances where a supplier would, as is often the case at present, be required to register for VAT purposes when performing services in a Member State other than where he is established. Furthermore, it would increase the reliance on the reverse charge mechanism (i.e. self-assessment) where a taxable person receives services from a person not established in the same country. Both of these effects can be regarded as major simplifications of VAT compliance obligations.

In addition, as the changes would bring the VAT rules more into line with rules concerning the taxation of supplies of services in many non-EU jurisdictions that apply consumption taxes, there would be less risk of double or non-taxation in the case of international supplies of services.

Since such a change would mean that a service provided to a business in another country would be exempted from VAT in the Member State of the supplier, information exchange between Member States' tax administrations would be important to ensure that the VAT is actually accounted for by the receiving trader. Therefore, the Commission also believes that a change to the place of supply rules warrants an extension of the system of electronic information exchange used between tax authorities, known as the "VAT Information Exchange System" or "VIES". VIES allows tax authorities, for example, to verify whether a VAT number provided by a given trader is genuine.

The Commission intends to review the technical functioning of the present VIES system and make improvements that would make the system generally simpler, faster and more reliable. The review will commence in January 2004 with a view to extending the reporting obligations to include services from January 2008 onwards.

The proposal only deals with supplies between traders. Supplies to a customer who is an individual or entity not subject to VAT (i.e. a non-taxable person) will be addressed in a subsequent initiative, work on which will commence in 2004.


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