Wednesday, 5 August 2015

EU VAT chargeable on electronic supplies (TBES) from 2015

The background to TBES

For several years, VAT registered suppliers in all EU countries have been obliged to charge their domestic rate of VAT to their non VAT-registered customers living elsewhere in the European Union. This also applied to TBES (telecommunications, broadcasting and electronically supplied services) which were bound by the same rules.  This lead to certain multinationals choosing countries with the lowest VAT rate e.g. Luxemburg with its then 15% rate compared to, say, Hungary with its 27% rate.

The problem

From 1st of January 2015 it became obligatory for businesses to charge VAT at the customers domestic rate. In theory requiring even the smallest business to have to account to 28 different VAT offices at least quarterly. Quite simply, this is an administrative nightmare. Added to which countries such as UK with high VAT registration thresholds (currently £82,000) are obliged to account for VAT on ALL sales to other EU countries even though they are not obliged to register for sales to domestic customers… The EU’s Commissions ‘reasoning’ for not allowing the same threshold exemptions was that 'the UK had a high threshold for registration' … a somewhat specious and circular argument.  In order to ‘simplify’ the collection of VAT EU wide: it is possible to register for 'MOSS' a supposed ‘One Stop Shop’ whereby individual  businesses  calculate the VAT due across all 28 member states and pay it to their local VAT office who presumably settle up with the other 27. So much for the EU cutting red tape! For obvious reasons, a number of small businesses have ceased selling to consumers outside their own territory.

How to avoid being caught up in this bureaucracy 

With only a small amount of lateral thinking, the solution is obvious.  - Sell electronic supplies from outside the EU. The EU, like the USA, enjoys imposing extra-territorial legislation and then tries to claim that non EU companies selling to European consumers ‘must’ register for VAT. This is completely unenforceable and only companies, which have some kind of presence in Europe, have been persuaded to ‘voluntarily’ register for European VAT. The first example of this back in the ‘90s was CompuServe a US company offering email and dialup internet services.  The vast majority of non-EU sellers of electronic services (largely US based) do not register for VAT nor have any interest in doing so, any more then they would register for Singapore’s GST (VAT equivalent) for electronic sales they make there.

The practical solution

There are a number of countries located in ‘respectable jurisdictions’ where VAT either does not exist at all or is a localised form with no connection to European VAT. This blog is primarily about avoiding the onerous obligations of the European VAT scheme rather than reducing tax bills (although that is also possible). Assuming that the reader is already selling  an electronic service his first question is (or should be) ‘If I transfer my business abroad what will my local tax office do?’. For this reason we would suggest structuring this properly. Let us take for example an SEO service that is fully automated – analysing websites and producing SEO reports in return for a monthly subscription. This is just the kind of business that is caught under the new regulations.

An owner of such software could licence it to a third party - at commercial rates and paying tax on the licence income so received.  The licensee would have a sales agreement allowing sales to all territories other than the home territory of the licensor. The licensee company would be formed in a low tax country outside the EU (e.g. Hong Kong, Singapore or possibly even RAK in the UAE).   The licensee would pay either a licence fee to the licensor OR hold the non-local rights outright for, say a one off fee or even an annual fee.  The choices are almost limitless.

Provided the transfer of the IP (intellectual property) is a fair value there would be few grounds on which to challenge the transfer as it could be commercially justified.  If tax saving were also a goal, then the Licensee company might be well advised to operate at arm's length (with the licensor not 'connected' to the licensee in any way).   Management & Control of the Licensee Company would also need to be considered.   

At its most basic, the EU based Licensor would exchange huge amounts of paperwork and variable pricing, for a simple monthly, quarterly etc receipt of a licence fee.  Using the example of a service being charged at £10 per, month + VAT (which from the EU would cost the European consumer variously between £11.70 and £12.70), the Licensee would sell at £10 making the service much more attractive.  

A 'win - win' situation perhaps?

Please contact James at Tai Pain International to discuss informally your particular requirements, or visit our website