US based web businesses which
have no real presence in the EU, but do have customers there,
could be forgiven for assuming that the collection of the EU’s
"Value Added Tax" or "VAT" is not their concern. Surprisingly,
that would not be a safe assumption.
VAT is an EU tax
on the supply of goods and services. It is charged at
different rates in different EU states, varying from 15% to
25%. Businesses are liable to pay VAT, which in practice is
collected from customers through pricing.
The surprising
aspect of this for a US based business with no real EU
presence can be that it potentially has VAT obligations and
liabilities where non-business customers in the EU are
serviced through the web. These obligations and liabilities
will arise wherever local thresholds for minimal levels of
"taxable" sales are breached in a particular EU state. In the
UK, that threshold is currently £73,000. In some other
countries, the threshold is €100,000, but it can be much,
much, lower.
Once this
threshold has been breached, the US business would become
liable to collect VAT in the relevant state and account for
the VAT (whether or not actually collected) to the relevant
local tax authority. Failure to comply would attract penalties
and interest.
Affected
businesses have a choice. They can simplify compliance by
registering under a "special scheme" in a single EU state, and
account for their EU VAT liabilities to the relevant tax
authority. Alternatively, where there is a significant volume
of EU business, they could consider establishing a real
trading presence, and registering for VAT, in a chosen single
EU state. The result should then be that e-supplies to
non-business customers made from that establishment would be
subject to VAT at the local rate in the chosen state,
regardless of where EU customers are situated. Common
choices for such establishments are Luxembourg (where the rate
of VAT is currently 15%), and the International Business
Centre at Madeira (Portugal) (where the rate is 16%). The
relatively low establishment costs and low marginal corporate
tax burden can be outweighed by a significant pricing
advantage when supplying to a customer in, say, Denmark,
Sweden or Hungary, where the local rate of VAT is 25%.
Many affected
businesses are unaware of these issues, and some choose to
ignore them. However, the potential consequences of failure to
comply are serious, and not only for those businesses with
future plans for "on-the-ground" expansion into the EU or
those looking to raise funds from investors who are typically
more aware of these issues.
If you would
like to know more, Nick
Thornton (+44 20 7862 4612) or Will
Gay (+44 20 7862 4762) of Orrick’s London tax team
can
help.