The EU "E-Business Directive" (Council Directive 2002/38/EC) came into effect
on 1st July 2003. The effect of this directive is to implement the imposition of
VAT in on Internet delivered information or services within the EU. This amounts
to a tariff of between 13 and 25 percent on items such as software or music
downloads, any transactions as part of online auctions and subscriptions to
internet service providers, sold over the internet anywhere within the European
This Directive applies to non-EU companies and thus if your company is based
outside the EU and providing Internet delivered information or services within
the EU you should read this as failure to register and account for VAT could
render you or your company liable to criminal prosecution for tax evasion, money
laundering, false accounting or similar offences.
The Directive applies to the following activities:
Whilst the following activities fall outside of the Directive they create VAT
Value Added Tax (VAT) is a general consumption tax assessed on the value
added to goods and services.
It is a general tax that applies, in principle, to all commercial activities
involving the production and distribution of goods and the provision of
services. It is a consumption tax because it is borne ultimately by the final
consumer. It is not a charge on companies. It is charged as a percentage of
price, which means that the actual tax burden is visible at each stage in the
production and distribution chain. It is collected fractionally, via a system of
deductions whereby taxable persons (i.e. VAT-registered businesses) can deduct
from their VAT liability the amount of tax they have paid to other taxable
persons on purchases for their business activities. This mechanism ensures that
the tax is neutral regardless of how many transactions are involved.
Non-EU vendors must register for VAT in one of the European Union Member
The VAT authorities of the Member State in which the Non-EU vendor has
registered will remit VAT collected to the states in which sales have been made.
The rate of VAT and rules relating to VAT vary from state to state. Sample
rates of VAT:
The home address of every customer will need to be obtained, the rate of VAT
applied will be dependent on that information and records would have to be
maintained for the VAT authorities. Establishing the location of all customers
and their VAT status could be an administrative nightmare.
Mike Lambourne, VAT director at accountant Ernst & Young, says: "The EU
directive is quite specific about what hoops a company must jump through to
qualify for single registration. It can't be just a brassplate operation."
An option for Non-EU vendors lacking an EU subsidiary or a fiscally
inconvenient EU subsidiary is to establish a subsidiary in a Member State where
VAT is low or there exists other fiscal or operational advantages.
The establishment of a subsidiary within the EU circumvents the need to
clarify the location of each customer as local VAT regulations would apply and
the subsidiary would be regarded as a normal EU enterprise.
All our solutions are provided by OCRA Worldwide offices, each of which has
practical experience in implementing solutions for EU VAT and Internet Delivery.
If you are interested in exploring how your business can take advantage of
OCRA Worldwide's EU VAT and Internet Delivery Solutions, contact the office of
your choice in the countries listed below.
Should you prefer to speak with consultant who speaks your language,
click here for a full list of our office contact details.
Madeira, where we employ over 40 staff, with a VAT rate of 15%, an attractive
fiscal regime and appropriate Internet infrastructure and bandwidth provides an
Virgin.net and Freeserve have already opened offices on the island, and BT is
looking at moving Openworld, its internet service, to Madeira next year. A
clutch of other websites, companies and even some American universities are now
planning to set up on the Island.
Freeserve opened premises in the capital Funchal for it's Anytime operation
late last year, and is now understood to be paying € 2 m to the Portuguese
government in VAT each month. Freeserve is now paying less VAT per product sold
than AOL, which has opted for single registration in Luxembourg, where the VAT
rate is two percentage points higher.
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AOL and Amazon have business units in Luxembourg, which has one of the lowest
rates of VAT in Europe at 15 per cent.
Luxembourg benefits from a stable political and financial situation and a
highly skilled and multilingual workforce, many international e-commerce
companies are already transferring or are considering transferring their
e-commerce activities to Luxembourg, which will give them a considerable
The Isle of Man has benefited from long-term political and economic
stability. By relocating your e-business to the Isle of Man, you can benefit
from low rate of taxation, as well as VAT and customs unions with the European
Union. The Island has an excellent communications network. E-businesses that
relocate to the Isle of Man may also be eligible for government grants.
VOES ("VAT On e-Services") is a special VAT scheme for non-EU businesses
providing electronically supplied services to EU consumers (that is, private
individuals and non-business organisations). The scheme provides an optional,
simplified means of registering and accounting electronically for EU VAT with
effect from 1 July 2003. To prevent the need for such non-EU businesses
registering in every EU member state where they supply customers, this special
scheme allows them to register and account for EU VAT in a single EU member
state of their choice.