VAT: Digital services or downloadable products

The EC Digital Services Directive became effective from 1 July 2003.

  • Non-EU vendors of digital products and services (e.g. music, software, games, images, films, etc) were previously not required to register for VAT or to charge VAT to EU consumers and other non-businesses (non-taxable persons). However, EU-established vendors of such digital products were required to charge VAT to their customers. Therefore, EU-based suppliers suffered from a competitive disadvantage.
  • The purpose of the Directive is to level the playing field between EU and non-EU based suppliers. From 1 July 2003, non-EU based vendors of digital products and services to consumers in the Community will have to register for VAT in the EU. VAT must be charged at the standard rates prevailing in the Member States in which the services are consumed. Conversely, EU based vendors will not have to charge VAT if their services are consumed outside the Community. In short, if digital services are “consumed” within the Community, then there will be VAT on them, irrespective of whether the supplier is established in the EU or outside.
  • What are “digital products and services”? Basically, it is “content” whose delivery can be automated and which can downloaded by the recipient over the Internet. Examples include: web site supply, web hosting, software downloads & its upgrading, distance teaching (fully automated), images, ebooks, database & search engine access, music, films, webcasts, games (incl games of chance & gambling), on-line auction services, etc.
  • “Digital products and services” do not include services merely dependent on the Internet for their transmission, but otherwise rely on substantial human intervention. For example:
    – advice given by email by a lawyer or tax consultant;
    – interactive teaching (classroom & phone), but the course content is delivered via the Internet;
    – software or music on CD-ROMs: these are goods not services (but contrast this with the tax position if basic information (e.g help files etc) are shipped out on CD-ROM, but the valuable encryption keys are available for downloads – how do you price the product for VAT purposes?).
    – radio & TV broadcasting services (e.g SKY) provided over the Internet, but simultaneously broadcast over traditional radio or TV networks – taxed differently.
    – Access to the internet & www, IP telephony, videophone services: these are telecommunication services and are taxed on a different basis.

Special Scheme

Potentially, non-EU vendors are required in register for VAT in all the Member States in which they do business with consumers. However, for administrative convenience they can opt to register in one Member State only, provided the conditions of the Special Scheme are met. Under this scheme, they only have to file VAT returns to the tax authority of their chosen country, but they still have to calculate the VAT on sales in all their customers’ countries. The country of registration collects the total EU-wide VAT and re-distributes it to its fellow Member States.

Special Scheme VAT returns must be filed within 20 days following the end of the return periods which are calendar quarters. They are to be in euros for euro-zone countries. For the UK, both returns and payments must be in pounds sterling. VAT input tax cannot be recovered on this return, but separate 13th Directive claims can be made.

For further information on the Digital Services Directive contact us or read the articles below.