United States

Germany on the offensive–pursuing non-resident suppliers of eservices


Suppliers of electronic services (eservices) use the internet primarily to provide their services and consequently can establish their business operations pretty much anywhere in the world and still serve a global customer base.  This means that revenue earned might not be taxed at the point of consumption – a point that has not been missed by many tax authorities.  Generally, tax authorities rely on the supplier to voluntarily register, charge, collect and remit tax in accordance with local rules where their customers are located, but Germany is taking this a step further and is using software to identify potential non-compliance and furthermore is looking to establish any historic revenue that needs to be brought to account.

Value-added tax (VAT) is charged on the value of a transaction and eservices are clearly subject to VAT.  Suppliers of eservices established in certain countries are obliged to charge VAT on domestic supplies and so, in order to keep the playing field level, a growing list of countries now require non-resident companies to do the same.  The European Union (EU) has had rules in place for non-EU suppliers since 2003, but extended those rules to EU providers in 2015.  Germany is attempting  to identify non-EU, non-compliance and try to bring those suppliers to account for periods that predate the January 2015 EU rule change.  With a current VAT rate of 19 percent the amount of undeclared tax could be a significant financial burden on any exposed companies. For each $10,000 of revenue, $1,600 of VAT could be payable.

It is not clear at present whether the German tax authorities would also seek to apply penalties in addition to the unpaid tax, but generally the best way to mitigate penalties is to voluntarily disclose the liability.  Taxpayers providing eservices to German residents should consider the impact of this proposal.


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