As a result of the e-commerce VAT Directive (2002), the general VAT place of supply rule for services (namely that VAT arises where the supplier of the service is located) ceased to apply to e-commerce transactions such as the supply and hosting of web sites, the electronic supply of software and images, database access etc. This change was considered necessary as the general rule created unfair competition by non-EU providers who could thus invoice without charging VAT.
The e-commerce VAT Directive had the effect of (temporarily) providing, in the circumstances of an ecommerce transaction that:
- in a business to business (B2B) service, VAT would be charged in the Member State where the business customer is established, provided he or she is established in a different Member State to that of the service supplier (if the service is used and enjoyed in the EU). If the business customer is established outside the EU, the service would be deemed to be located outside the EU, so that no VAT would be chargeable (provided such service is also used and enjoyed outside the EU).
- in a business to consumer (B2C) service, the general VAT rule (place where the supplier is established) would still apply provided the supplier is established in the EU. So if the consumer is in the EU, the EU supplier would have to charge VAT in its Member State. If the consumer is located outside the EU, the supply of services would be deemed to be located outside the EU, thus no VAT would be charged by the EU supplier. If the supplier is not established in the EU, its service would be deemed to be made in the EU if received by a non business consumer located in the EU. EU VAT would then be chargeable in the Member State in which the non business consumer is located. This is subject to an optional special EU registration regime to assist non-EU suppliers in this respect.
Given that the Directive was set to expire in 2006, another Directive (the EC Directive 2008/8/EC) was introduced to extend the abovementioned 2002 VAT rules as well as introducing some amendments to take effect, as permanent rules, after the respective expiration dates.
The 2008 Directive extended the 2002 temporary provisions for B2C transactions until 31 December 2014 and for B2B transactions until 31 December 2009. However, some fundamental amendments, to take effect after the respective expiration dates, have been introduced as well.
- For business to business (B2B) services, the (new) rule that is to be generally applicable to any kind of B2B services including e-services will, as of 1 January 2010, be that the place of supply is the place where the business consumer is established rather than the place the supplier is established. The end result is the same as mentioned above for e-services, but will no longer be an exception or temporary rule.
- For business to consumer (B2C) services, however, the changes are more fundamental. As of 1 January 2015, the place of supply of electronic services will be the place where the customer is established. This is the opposite of the rule introduced in 2002 in relation to supplies by EU suppliers to EU non-business customers.