The ‘VAT package’ changes - what should businesses do now ?

Earlier this year, a new set of European VAT rules, generally referred to as the ‘VAT Package’, was adopted 1 .
The new rules involve: changes to the place of supply rules for services, the introduction of a new administrative obligation (i.e. an electronic sales listing for services),
changes to the procedures for VAT refunds for EU businesses (i.e. 8 ^th Directive refund claim) and changes to the place of supply rules for electronically supplied services.
Most of these rules take effect on January 1, 2010.

This article does not intend to provide an in-depth or comprehensive analysis of all the changes. It aims at putting emphasis on the need for businesses to timely consider what the impact of the new rules could be for them. This article further focuses on the impact of the changes for services rendered to businesses. For the new VAT rules relating to business-to-consumer electronically supplied services, reference can be made to “Connexion”, 2nd quarter 2008 page 23.

New basic rule for the place of supply of a service to a business (B2B supply)

For VAT purposes, the place of supply is a concept that determines the country entitled to levy VAT. Currently, the basic rule is that the place of supply of a service is deemed to be where the supplier is established. However, there are a lot of exceptions to this general rule. The new rules for B2B supplies of services aim at creating more legal certainty and at facilitating the application of VAT mainly by implementing a new “main rule” according to which VAT has to be declared by the customer in his country of establishment, except for overriding exceptions for certain services.

Impact for businesses

Increased application of the VAT of the country of the customer
The new main rule will bring a broader range of services to fall within the scope of the VAT of the country of the recipient of the service and will see a broadening of the application of the ‘reverse charge’ mechanism (self-accounting of the VAT due by the recipient of the service in his VAT return).

The new rule will, therefore, bring changes for services that are at present taxed where the supplier is established. For example, based on the new main rule, starting January 1, 2010, the place of supply of management services rendered to a business will be taxable at the place where the recipient of the services is established. For services such as the so-called “intellectual” services 2 which are currently already taxable in the country of the recipient (based on an exception to the current general rule), in practice, no change should occur 3 .

Exceptions remain for some services
To reflect the principle of taxation at the place of consumption, certain services will not be subject to the new main rule. This is for example the case for services relating to immovable property for which the place of taxation will remain unmodified, i.e. where the property is located.

Point of attention for holding companies
The new Directive 2008/8/EC specifies that the main rule will also apply to legal persons who are not a business from a VAT perspective (such as most holding companies) but who are identified for VAT. Based on this Directive, a Luxembourg holding company which renders also taxable services (such as management services) will have to self-account for Luxembourg VAT on all taxable services received from foreign companies and where, based on the new main rule, the place of supply is in Luxembourg.

Simplified VAT refund procedures for non-registered EU businesses
The current rules regarding the place of supply of services frequently imply that local VAT is charged on the invoice, which needs to be recovered through administratively burdensome refund claims
(8 ^th Directive refund claim). Under the new rules, VAT will more often be levied via the reverse charge mechanism in the Member State of the customer. The compliance burden linked to the filing of refund claims should therefore decrease. Where the new rules still require the charging of local VAT that cannot be recovered in a locally filed VAT return, a simplified process will be implemented for EU businesses, allowing them to file an electronic refund request for VAT incurred in other EU Member States via their Member State of establishment.
This new procedure should be effective on January 1, 2010.

New reporting obligations for services
The overall compliance burden for businesses may nonetheless not decrease. Indeed, businesses making intra-EU supplies of services will have to file recapitulative statements of all their supplies to which the reverse charge applies in the recipient’s Member State.

Supplies that are exempt from VAT in the customer’s Member State need not be reported. The new listing could therefore be especially burdensome for banks and other financial services institutions
due to the diversity of the services performed and of the differences of their VAT treatment in the 27 Member States.

What should businesses do now?

Businesses need to foresee and embrace the upcoming changes. They must assess and adjust their current processes so as to be ready when the new rules enter into force. For example,
the new VAT logic will need to be built into accounting systems and the systems will have to be adapted to generate the above mentioned recapitulative statement.

For holding companies (and other non taxable persons from a VAT perspective such as public bodies), the new rules may trigger additional costs of non-recoverable VAT due to the obligation
to reverse charge VAT on a number of services as soon as the company is registered (e.g. to account for an intra-Community acquisition of goods). They will therefore need to analyze the impact
of the new rules on their individual situation.

1. Council Directive (CD) 2008/8/EC, CD 2008/9/EC, Council Regulation (EC) N°143/2008 of 12 February 2008, published in the Official Journal of the European Union on February, 20, 2008.
2. “Intellectual” services include lawyer, adviser and consultancy services, banking and financial services, etc.
3. It should however be noted that, in some cases, a Member State can, in order to prevent double taxation, non-taxation or distortion of competition, opt to tax the service in the country
of ‘effective use and enjoyment’ instead of the country of establishment of the customer. This scenario can only apply to relations with a non-EU based party.

Disclaimer : This article is based on legislation and documentation available on August 18 ^th , 2008. It is meant for general information purposes only. It cannot be regarded as binding legal, financial, tax
or any other advice. No action should be taken before liaising with a specialist consultant.