EU agrees to overhaul VAT on digital services

Downloads of software, ringtones, games, music and movies sold to consumers will be taxed where the consumer is located instead of where the supplier is based with effect from 2015 under changes to Europe's VAT regime agreed on Tuesday.

The Council of Ministers of the EU reached political agreement on two draft Directives and a draft Regulation that reform Europe's regime for charging Value Added Tax on services, including electronic services. The changes are intended to prevent distortions of competition between member states that operate different VAT rates.

General rules have been agreed: services supplied to businesses will be charged at the VAT rate where the customer is located (currently VAT is charged according to where the supplier is based); and the place of taxation for services supplied to consumers will be the place where the supplier is established. The change will take effect from 2010.

However, these general rules do not apply to business-to-consumer supplies of telecoms, broadcasting and electronic services. In these cases, taxation will be determined by the place of consumption. VAT will therefore be payable in the EU member state where the consumer is based at the rate prevailing in that state. Business-to-business supplies of telecoms and electronic services will not be affected by the changes as these are already taxed by reference to where the customer is located.

To reduce the administrative burden for business-to-consumer providers of telecoms, broadcasting and electronic services, a 'one-stop' system will be introduced to enable them to fulfil in their home member state a single set of obligations for registrations, declarations and payments, including for services provided in other member states where they are not established. VAT revenue will then be transferred from the country where the supplier is located to that where the customer is situated.

The business-to-consumer changes will not come into force until 2015. In addition the transfer of VAT revenues will be phased. From 2015, the state where the supplier is based will be able to keep 30% of VAT revenue. That share will decrease to zero by 2019.

At present, Luxembourg attracts some internet and telecoms businesses, including AOL, Skype, Amazon and Paypal, because it has the EU's lowest VAT rate, at 15%. The highest rate is Sweden's, at 25%. Luxembourg had resisted the EU reforms for several years, because it enjoys a significant VAT income from the supplies of internet companies, but it reached agreement on Tuesday after negotiating the compromise of phasing in the reforms over the next 12 years.