New VAT rules regarding international services.

• Author: Bakale, Anthony S.
• Position: Value-added tax

As U.S. closely held businesses expand their operations overseas, they are likely to encounter value-added tax (VAT). Many foreign countries already have VAT systems in place. This item focuses on recent European Union (EU) VAT legislative changes (EU Council Directive 2008/8/EC) and how they will affect the provision of international services. U.S. legislators have discussed implementing a VAT system, so VAT may become an issue that U.S. businesses will have to grapple with at some stage.

Key Concepts

There are several key concepts that are paramount to the accountability of VAT.

Goods versus services: In general, a good is a physical product, the ownership of which is transferred from a supplier to a customer, with an invoice raised and payment received. The rule of thumb is that if it is not a supply of goods, it is a supply of services. (In general there is no VAT payable on free services.)

Place of supply of services: Unlike the supply of goods, the determination of the place of supply of services is crucial because this determines in which country the VAT is due. It is important to understand that not only is the place of supply in the customer's country but the supply itself is deemed to be by the customer, not the actual supplier.

For example, if the service provider is U.K. based but the place of supply is in another EU country (e.g., France), either VAT will be payable in France at the French VAT rate via the reverse charge mechanism (see below) or the U.K. company will have to register for VAT in France. However, if the service provider is based in the United Kingdom but the place of supply is in the United States, no VAT is chargeable because the supply is outside the scope of VAT (because the United States does not have a VAT system).

VAT and International Services: Old Rules

Before January 1, 2010, if a U.K. company supplied services in the United Kingdom to either a business-to-business (B2B) or a business-to-customer (B2C) customer, appropriate U.K. VAT was required to be charged on the work. The general rule was that the customer's location had no impact, but there were some very important exceptions to this general rule (e.g., the place of supply for services provided for land is always where the land is located).

VAT and International Services: New Rules

Since December 31, 2009, the general rule has gradually been replaced by the exceptional rule. A company now has to determine whether the supply of services is a B2B or...