In recent years, electronic trade has gained widespread acceptance and currently includes:
- Online sales of physical goods and services, as well as sales of digital products (downloadable music, e-books, downloaded virtual products, and games);
- Electronic banking and insurance services;
- Online auctions;
- Electronically supplied telecommunication services;
- Remote development and servicing of programs and equipment;
- Distance education, training and advice.
In this article only electronic services will be discussed, i.e. electronically-supplied services. Please note that online physical goods stores are outside the scope of electronic services.
In Estonia, electronic service is defined in the Value-Added Tax Act, which lists the following as electronically supplied services:
- website supply;
- distance maintenance of programs and equipment;
- transfer and updating of software transmitted by electronic means;
- images, text and information transmitted by electronic means, as well as making available any electronic databases;
- music, films and games, including gambling games, transmitted by electronic means;
- political, cultural, sporting, scientific and entertainment broadcasts transmitted by electronic means;
- distance education and other services similar to the services specified above.
It is important to note that a service cannot be deemed an electronic one on the mere grounds that the person rendering the service and the service recipient communicate by electronic means.
Taxation of electronic services
Basic principles for the taxation of electronic services were developed by the Organisation for Economic Co-operation and Development (OECD).
Traditional taxes fall into two classes: direct and indirect.
Direct taxes include income tax. In Estonia, undistributed company profits are tax-exempt. Tax is paid only on profit distribution as dividends. In contrast with the countries with levied corporate income tax, the business environment in Estonia features a competitive advantage, giving the possibility of legal tax optimisation.
Indirect taxes involve consumption taxes. In Estonia, this is value-added tax (VAT), käibemaks in Estonian, levied at the rate of 20%. Starting from 2018, the threshold for obligatory registration as a VAT-taxpayer is 40 000 EUR per annum. However, in the case of electronic services, the duty of VAT-registration arises for a business immediately.With e-trade, it is not the location of the seller deemed to be the place of sale but that of the customer. As is generally accepted in the EU, e-services are to be taxed in the EU member state where the customer is located at the rate of this EU member state. To charge the tax properly, it is necessary to know the customer’s location and this information shall be obtained from the customer.
To render e-services to EU natural persons, a business shall register as a taxpayer in the country where the service customer is located. The duty to register assumes there is maintenance of accounting and tax records in all countries and the filing of tax declarations in all EU countries where the business has its customers.
For businesses offering their e-services in EU countries, the easiest option is to register for the MOSS scheme. MOSS, or Mini One Stop Shop, is the procedure of collecting VAT from the e-services supplied in other EU countries. When employing the special MOSS Scheme, there is no need for VAT registration separately in several EU countries, it being sufficient to register in only one EU state.For an Estonian business to employ the MOSS procedure, it shall first register as a VAT-payer in Estonia. Then the application for MOSS registration can be filed through the electronic environment of the Estonian Tax and Customs Board (e-maksuamet).
MOSS declaration has the same format for all EU countries and is to be filed electronically on a quarterly basis by the 20th day of the month in addition to the VAT declaration. In the MOSS declaration, the services supplied are to be stated for each country in which the taxation arises, with the rates of the country where the customer is established to be applied.
When the MOSS procedure is used, it is necessary to know which transaction-related information shall be recorded and kept for 10 years:
- the EU member state to which the service is supplied
- the type of service supplied
- the date of the supply of the service
- the taxable amount, indicating the currency used
- any subsequent increase or reduction of the taxable amount
- the VAT rate applied
- the amount of VAT payable, indicating the currency used
- the date and amount of payments received
- any payments on account received before the supply of the service
- where an invoice is issued, the information contained on the invoice
- the name of the customer, where known to the taxable person
- the information used to determine the place where the customer is established or has their permanent address, or usually resides.
This threshold of 10 000 EUR means that an Estonian business supplying cross-border electronic services to their customers from other EU countries will have the right to tax the services they render at the Estonian VAT rate of 20% and file the declaration only in Estonia.
Starting from January 1st, 2019 a new regulation comes in force in Estonia for businesses whose annual turnover is lower than 10 000 EUR.
This approach will make the life of small entrepreneurs easier, for there will be no necessity to employ the special MOSS procedure or to have a separate VAT registration in each EU country.
Customer’s place of establishment or residence
There may be difficulties in determining the place of the service recipient’s residence or location. The European Commission has developed a special regulation of an advisory nature, whose purpose is to assist the e-service supplier in determining the place the customer is established, permanently resides, or lives.
In the case of electronic services, the IP-address cannot be used for determining the customer’s country when issuing the invoice. However, it can be used by the supplier of the service for the customer’s identification.
If the business has several sources of information contradicting each other regarding the natural person’s location, preferably the place of residence of the person shall be used as proof, whereas the location is to be used upon confirmation that the services are used there.
HandelsHaus assists Electronic Services companies with VAT registration and accounting.
For more information, please contact us.