Anyone selling goods or services in the EU needs to think about value added tax (VAT), even if they do not have a physical presence here.
VAT is an EU wide sales tax that is charged on every step in the supply chain. It applies to sales of goods and services to other businesses and to consumers. The VAT code is complex and often produces surprising results. Nothing illustrates this more vividly than the special rules that apply to e-commerce.
If a US business sells software to consumers in the UK then it has to charge and collect VAT, even if it has no physical presence in the UK. However, if the same US business sells the same software to a UK-based business then it does not have to charge VAT. Instead it becomes the UK business’s problem. Similar issues arise on sales of a wide range of electronic services, from digital music and films to website hosting.
US businesses that buy electronic services from the EU also need to watch out for VAT. Whether they have to pay VAT depends upon where the services are used. Take, for example, an electronic database. If the US business only uses the database in the US then it should not be charged VAT. However, if it wants to share the database with its EU branch then it might get charged VAT.
This is the second article in a six-part series called 'Bridging the Atlantic: Why tax makes the UK Europe’s business gateway', which focuses on UK tax issues that affect US businesses.