eCommerce and Value Added Tax





eCommerce and Value Added Tax



Mike Loten is a partner in Andersen's Indirect Tax Consulting practice. He specialises in international VAT for multinationals, particularly in the high-tech sector. For more information on how he could help your business address VAT and eCommerce issues, contact Mike on or via e-mail: mike.loten.	eCommerce and Value Added Tax eCommerce is making globalisation a day-to-day business reality. However, there are a number of tax and legislative hurdles a business must overcome (or at least be aware of) in the dash to go electronic. Ignore them at your peril... Electronic invoicing: keep your paper handy Differing requirements across the EU The cost of getting it wrong Other major challenges Progress forward?


	The rise of global sales over the Internet means that companies are dealing with foreign jurisdictions (and related indirect tax issues) more than ever before. On the Internet, purchases are a click away, and UK businesses can deal just as easily with US companies as with those in France or Germany.

As businesses push to automate more of their low value, high volume transaction processing, for example through shared service centres, a natural progression is to move towards electronic invoicing.	This poses real challenges to traditional indirect tax systems, which raise significant sums for their respective governments. In the UK, for example, it is estimated that 40 per cent of all tax revenue comes from Value Added Tax (VAT). And with the rise in global sales comes a rise in complexity for cross-border tax issues. VAT is a 30-year-old transaction tax that is not designed for the new economy where, for supplier and customer, geography is largely irrelevant. Unfortunately, there is a high cost to getting VAT wrong: not only penalties and interest charges, but potentially worse still, an inability to recover (from either the customer or the authorities) the taxes themselves. This could add 17.5 per cent to the cost of a UK transaction. So let's look at one of the unexpected ways that VAT is hindering the paperless office...

	Electronic invoicing: keep your paper handy The benefits of electronic invoicing make it commercially attractive. As businesses push to automate more of their low value, high volume transaction processing, for example through shared service centres, a natural progression is to move towards electronic invoicing. Yet electronic invoicing is a good example of the practical issues that existing tax regimes are struggling to cope with. At present, no European Union (EU) country permits the unconditional use of electronic invoicing: most will only accept electronic invoices as valid for VAT purposes if you can also produce a paper invoice. This somewhat negates the financial and commercial advantages of creating a paper-free office, and means that accounts payable departments throughout the EU are full of these paper records (which must be kept for up to 10 years). Part of the problem is a lack of enthusiasm on the part of tax authorities for electronic invoicing. They are more comfortable with tangible paper documentation that they view as lessto manipulation and which does not require them to understand complex computer systems.	^ Back to top

	Differing requirements across the EU Electronic invoicing runs into different problems in different EU Member States. All of them impose additional administration. Hard copies Most EU countries require the ability to produce hard copies promptly for inspection (in Italy you must produce them instantly) to evidence past transactions going back anywhere between three to ten years. Sometimes records must be held in special formats. Advance authorisation Permission to begin electronic invoicing must be sought in advance from the authorities. Agreement will usually only be given on a case-by-case basis and often will require specific consent from customers. Belgium and The Netherlands both issue electronic invoicing 'licenses', which are temporary and revocable. In the case of The Netherlands, these are only issued after an appropriate trial period. Belgium also requires a formal contractual agreement between the supplier and the customer over the use of electronic invoicing. Audits and reviews In most cases, the authorities will want to conduct audits and systems checks and will often require up to 30 days' notice of any changes in the computer systems and processes.	^ Back to top

	Many require additional administrative steps for an electronic invoice to be used as evidence to deduct input tax. The UK, for example, requires time-consuming, specific cross-checking. Domestic scope Unfortunately, the few rules that do exist tend to focus on domestic electronic invoicing when, commercially, invoicing is just as likely to be international. In France and Spain the operators of electronic invoicing systems, their customers and the server must all be resident/based in the territory. Problems with electronic invoicing are not just theoretical - they are creating competitive distortion in the EU marketplace. For example, companies buying services from non-resident suppliers may find they are unable to recover reverse charge or acquisition VAT because of the absence of a paper invoice. However, had they received an electronic invoice from a domestic supplier they would have been able to recover the VAT. This is the case in Germany, where the authorities will accept an electronic invoice issued by an accredited German supplier showing a German VAT charge but not from suppliers resident elsewhere in the EU (where the German VAT must be self-assessed). Outside the EU, the uncertainty over the use of electronic invoicing increases further, although newer indirect tax systems have addressed some of these issues. Australia, for example, allows the electronic issuing and holding of Goods and Services Tax (GST)-related documents.

	The cost of getting it wrong From the customer's perspective, the electronic invoice is not always accepted as evidence for deduction of the VAT paid. With standard rates of VAT falling between 15 and 25 per cent in the EU, this creates a significant pricing disincentive that could lead to business customers refusing to accept electronic invoicing. If customers discover a problem after the event and find themselves facing penalties and interest charges because they have not received paper invoices, there is a natural risk of damage to customer goodwill.	^ Back to top

	Other major challenges There is consensus among the authorities that digitally delivered products should be treated as supply of services. However, there are fundamental differences in the VAT (and Intrastat) treatment of supplies of goods and services.	^ Back to top

Problems with electronic invoicing are not just theoretical: they are creating competitive distortion in the EU marketplace.	This can result in some strange anomalies. For example, French consumers pay 2.1 per cent VAT on newspapers purchased at a kiosk, but 19.6 per cent VAT for newspaper 'services' purchased online. A recent UK case confirmed that VAT was due on a newsletter sent by fax or e-mail, whilst the same newsletter printed and posted to clients could be zero rated. In the recently proposed EU directive, online services are defined to include digital downloads (eg games, music, films), as well as data processing, information supply, website hosting and design, and television broadcasts over the web. Classification as services also creates a difference in treatment depending on whether the recipient is a business or individual. Business customers must apply reverse charge VAT: the company receiving the supply accounts for VAT to its local authorities at its local rate, and at the same time claims a deduction for the VAT so incurred. By contrast, individual customers can currently buy VAT-free from a non-EU vendor, but must pay the suppliers local VAT if the vendor is EU resident. So, a UK supplier of software will charge 17.5 per cent UK VAT on software downloaded by a Swedish customer, but is likely to need to charge 25 per cent Swedish VAT if the software is sent on disk. If the customer is a business the supplier need not charge VAT, but the customer must self-assess the 25 per cent Swedish VAT. A US competitor can supply VAT-free, but Swedish VAT may be levied at import if a disk is sent. Confused? As digitised supplies increasingly supplant traditional delivery, this inequity caused by the variety of potentially different treatments cannot be sustainable. The proposed EU directive offers a potential solution to the difficult question of whether the customer is in business or not. However, it does not resolve distortions between digital and traditional modes of delivery.

	Progress forward? So what's being done to move forward on electronic invoicing and the other issues above? Not enough, in our opinion. The OECD has tried to take the lead and there has been much discussion, much defining of terms, much holding forth of opinions. Overall, business is being hampered by slow decision making. The EU and the OECD have spent enough time agreeing principles and defining services. The time has come for action: the politicians need to hammer out a workable compromise and the authorities need to get new approaches to eCommerce up and running. A balance must be struck between the desire to implement a simple administrative management system, and the interests of each European operator and their Treasury.	^ Back to top

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