Software Business

Information on Value Added Tax

When talking about VAT, one should know that The Value Added Tax, or VAT is generally perceived as an indirect tax, a tax that is collected from someone other than the person who actually bears the cost of the tax; in other words, it is a general consumption tax charged on the value added to goods and services. It applies more or less to all goods and services that are bought and sold for use or consumption in EU and non-EU member states.

But in order to better understand how VAT applies, a deeper explanation of what 'electronically supplied service' means, is necessary. It is generally agreed that this kind of service is one that is delivered over the internet and through electronic network and includes the provision of digitalized products like software on an electronic network like the world wide web.

Starting with July 1st 2003, the Council Directive 2002/38/EC (PDF), amends the EU rules for charging VAT concerning e-commerce. To eliminate any inequity between EU and non-EU countries, the new directive ensures that all suppliers of “electronic services” or “electronically supplied services” are subject to the same VAT rules, when they are providing services to EU customers.

Nevertheless, sales to corporate customers are not affected. Corporate customers are usually identified through their valid VAT ID number and are not charged VAT. In any case, the existence of a VAT id is not an absolute prerequisite – paying customers can later receive a VAT refund from their tax authorities.

Major changes introduced by the directive for non-EU entities:

1. The VAT rate charged is between 15% and 25% and is determined by the customer’s country of residence in EU. The supplier has the obligation to check if the corporate customer has a VAT registration number and decide whether or not a contract should be charged with VAT. Customers with valid VAT ID should not be charged by the supplier.
   
   If a VAT registration number cannot be presented when a contract is signed, the supplier can charge VAT, and the customer can later receive a VAT refund from his tax authorities. To ease suppliers’ efforts in determining the status of a customer, the Commission set off a project to modernize and enhance the VAT information exchange system (VIES) network, to allow for on-line real time confirmation of VAT status.
   
   
2. Private customers (consumers) in EU countries must be charged VAT for electronically supplied services and products, both by EU and non-EU providers. The trader will collect VAT from their EU private customer, at rates according to the regulations in the country where the customer is located.
   
   
3. EU suppliers of electronically delivered products and electronic services are no longer obliged to charge VAT, for customers located outside EU.
   
   
4. Electronic invoices and cross-border electronic invoicing, as well as electronic storage are recognized. Many EU states were forbidding electronic invoicing or requested to be accompanied by parallel transmission of paper invoices. VAT invoicing is amended by the Directive 2001/115/EC(PDF), starting with 1st January 2004.
   
   Each Member State had different rules concerning the obligatory information to be included in invoices, so the Directive imposed a simplified set of rules on invoicing, valid throughout the EU, replacing fifteen different sets of legislation. The main purpose of changing regulations on VAT invoicing is to reduce administrative costs, in particular for medium-sized and small companies, and also to have more efficient tools in fighting electronic fraud.

Vat Registration

Non-EU companies that trade with European consumers (private customers) need to register and account for VAT. A simplified scheme has been designed to offer easier and more efficient means for these suppliers to meet their fiscal obligations. The registration is simpler and is based on a set of harmonized tax obligations.

The Directive offers the trader the possibility of charging VAT at the rate of the Member State of consumption. The trader (seller) has the possibility to establish within the EU or to register as a non-established supplier in each Member State of the EU where taxable activities are conducted. He also has the possibility to register with a single VAT authority in a Member State of his choice. In a nut-shell, each non-EU business is required to register separately and account for VAT in each and every Member State in which it supplies goods.

Another option: eligible non-EU companies can register electronically in a single chosen Member State and pay the VAT tax for their sales to all EU consumers on a single electronic VAT declaration offering details of VAT which are bound to be applied in each Member State.

What must suppliers state in their declaration?

1. the total value of all supplies in the period excluding any VAT
2. the VAT rate which applies and
3. the total amount of VAT payable.

But how do most developers actually handle the European VAT?

Most of the time they resort to a 3rd party e-commerce provider in order to avoid solving this problem. While some providers do not handle VAT taxation, the ones that do handle, find themselves in front of three possibilities: adding VAT where it applies, paying the VAT to the EU in the country they're registered in and making an invoice to the store to actually get the money at the end of the month provided that the store is in the EU (in the case of American stores it isn’t necessary).

In other words, for better understanding, here is the following scheme featuring the relation between the provider (invoice issuer) and the invoiced part (consumer) and their relation in terms of VAT application.

Also, note that if you are not registered for VAT in your country of origin, you do not need to (nor are you allowed to charge VAT on sales to anyone.

When to register for VAT?

You might be under the obligation to register for VAT if you receive taxable services from abroad or if you are a foreign trader doing business in the USA.

Companies or taxable persons have to register for VAT, provided that the amount of receipts excluding VAT exceeds a certain annual sum of money which may differ from country to country. For instance, in UK, the annual limit for a company is approximately of £64,000. The three factors which are crucial in determining whether you need or not to register are: taxable supplies, distance sales and acquisitions.

For more comprehensive explanations you should consider the Guide to Value Added Tax which is available from any tax office.

Other specifications

What is worth mentioning is also the difference between an e-commerce provider and a reseller: e-commerce providers forward all receipts to the software developers, since they act as a payment processors only, but resellers deal with all shopper invoices and accounting issues. Also, the advantage of the latter is also that customers always receive invoices with the transactions made; all the hard work is taken by the e-commerce providers on behalf of the software developers.

Conclusions

The purpose of that set of regulations imposed by the European Union was to simplify and ensure a more uniform submission of VAT. The primary objective was to assure equal opportunities for all competitors on this market and to improve the functioning of the Single Market.

The result: actually it did. These rules regarding e-commerce actually ensured a healthy competition on the European market. The fierce competition has had as a result the availability on the part of most e-commerce providers to deal with VAT taxation in their attempt to come more and more in the help of the authors of electronically supplied services and products.