Brian Keenan Senior Manager Indirect Tax Services

These new proposals concerning VAT will affect those supplying e-services, distance teaching and short-term hire of means of transport to private consumers and long-term hire of means of transport to business customers.

The European Commission has issued its proposals to revise the rules for charging VAT on services supplied cross-border. The Commission would like to see the new rules come into effect from 1 July 2006, although implementation of the proposals depends on obtaining agreement from all 25 Member States. The date of 1 July 2006 is undoubtedly convenient for the Commission in terms of its dovetailing with other events, such as the coming to an end of the special regime for non-EU suppliers of electronic services.

As a general principal, the Commission considers that supplies of services should be taxed where the services are 'consumed'. Therefore, for business to business supplies, the Commission proposes that VAT should apply in the Member State where the customer is established or has a fixed establishment to which the service is supplied unless an exception applies.

Under this rule, EU taxable persons will be obliged to self-assess for VAT on cross-border services received from non-residents (commonly referred to as the 'reverse charge'). The 'reverse charge' cannot be used for supplies to non-taxable persons. In these circumstances, the supplies should continue to be taxed where the supplier is established.

As with most things in VAT, the interest arises from the exceptions to the rule. The proposals in respect of cross-border services do not differ in this regard. The key exceptions proposed are as follows:

• For certain services capable of being supplied at a distance, including e-services and distance teaching, the place of taxation would become the place where the customer is established.
  
• Restaurant and catering services will become taxable at the place where the service is physically carried out, except for those services supplied on board means of transport which would be taxable at the place of departure of the transport service.
  
• The short-term hiring of means of transport would become taxable at the place where the means of transport is actually put at the disposal of the customer.
  
• Long-term leasing (hire for a continuous period of more than 30 days) would become taxable at the place where the customer is established.
  
• All services rendered by intermediaries would become taxable at the place where the main transaction in which they act as intermediaries takes place.

The proposed changes will mean that the supply of certain services will be taxed where the customer is established. Therefore, suppliers will be required to charge VAT in every Member State where they have customers. Naturally, this could prove extremely burdensome for those involved.

However, the Commission believes that the 'one-stop-shop' proposals for a single point of registration will reduce the burden on those businesses that are required to charge VAT in every Member State where they have customers (see article 'One-Stop-Shop proposals on VAT' for details).

Comment
The proposals have important implications for a range of businesses that provide services to non-taxable persons in the EU Member States.

If you are involved in renting or leasing means of transport or supply services at a distance (e-learning), consideration should be given to the VAT compliance obligations in the Member States in which you have customers, as well as to the taxable status of your customers and the invoicing requirements.