Member Article

Can the location of your website create a VAT liability?

A senior lawyer of the European Court has given the opinion that ‘bought in’ facilities may create a VAT liability in another country.

This specific case concerned an internet auction site operated in Poland, but with the seller of the right to take part in the auction (i.e. bids), established in Cyprus albeit using infrastructure based in Poland. The Polish tax authority decided that as the infrastructure was based in Poland, then the Cypriot company had a fixed establishment there with the fee paid for the use of the infrastructure being subject to Polish VAT.

The Advocate General’s (AG) considered view seems to be that, while the Cypriot company would need to have both ‘human and technical resources’ in Poland to have a VAT presence there, potentially the provision of those resources by a third party may create that presence if the local infrastructure can be used as if it belonged to the overseas company.

It is important to note that this is an ‘opinion’ only, and so we’ll need to wait for the full judgement of the European Court. It has been known for the Court to disagree, or to give a ruling on a completely different basis.

However, in times of austerity it’s not surprising that some countries seek higher tax revenues in their own country rather than being paid in other member states, with Greece, Italy and Romania in particular deeming that the existence of one company constitutes an establishment of another.

This is the first VAT case that we are aware of that looks at the modern day question of where websites are based for VAT purposes, and it could, if the Court agrees, have significant impact on others.

Online gaming, asset leasing and tourism often have a company established and managed in one country, but sell to customers in many different countries using local resources and infrastructure as part of the sales and delivery processes. Similarly, global contracts delivered via local affiliates could, if the Court follows the AG, result in a company in country A having a local establishment for VAT purposes in country B.

Let us hope that European Court comes up with a sensible solution. The last thing we need is for UK companies, using local resources in other member states, to have to register and account for VAT in those other member states.

By David Wilson, VAT Associate Director at Baker Tilly.

This was posted in Bdaily's Members' News section by Baker Tilly .