A few months ago we have started to monitor the up-time and reliability of the VAT Information Exchange System (VIES) hosted by the European Commission. There are some reasons why we felt obliged to do so and we are happy to explain these to you.
What is the VAT Information Exchange System (VIES) and how does it work?
It is an electronic means of transmitting information relating to VAT-registration (= validity of VAT-numbers) of companies registered in EU. Furthermore, information relating to (tax exempt) intra-Community supplies between Member States’ administrations is also transmitted via VIES. … The information relating to VAT-registration data is captured by the national administrations and fed into national databases. … The data is real-time. Each time you make a request, a message is sent to the Member State which issued the VAT identification number asking if the number quoted is valid.
It is best practice for any company that is selling its goods or services cross-border to business clients in the EU to verify their EU VAT numbers as applicable – but this exceeds the scope of today’s article.
Why must online software suppliers ask for a VAT identification number of their B2B customers?
Anyone selling eservices to EU based customers must either charge VAT to them or verify that the customer is a VAT taxable person so that VAT must not to be charged by the supplier, but rather make it the liability of the recipient. This can be easiest verified by obtaining the customer’s VAT number and verify it via the VIES application.
Why are we monitoring the VIES application?
A functional and reliable VIES application is the key for any future VAT compliance for the sales of eservices to EU based B2B customers.
In case of traditional sales a downtime of the VIES application might not be so critical in practice; there is usually sufficient time available for a follow up and to retry the customer’s VAT verification once VIES application is running again (as usually it is not available only for a few minutes or hours). Or alternatively, as it usually takes some time (e.g. days) to pass between the submission of an order and competition of the supply, the VAT status verification of the customer can be carried out by other means (e.g. by requesting a scan of the customer’s VAT registration certificate).
In case of sales of eservices (e.g. software, file downloads, antivirus, web-hosting, upgrades, database access …) the order submission, sale and supply happen instantly. This means that the vendor needs to verify customer’s VAT status immediately and has only one chance to decide whether or not to charge VAT. Currently the only way to do this is by querying the official VIES application.
Issues related to VIES
During our last B2C 2015 working group meeting was reconfirmed that the VIES data relies upon the information provided by the national tax authorities and that the VIES application was originally not planned to be available 100% of the time. There are therefore the following two main issues to be considered:
- As VIES is relies on the data of the national tax authorities of all EU countries the VIES output is only as good as the input provided by the 28 different national tax authorities. If it takes them long for to update their databases, or they do not provide a permanent working connection between VIES and their database, then the VIES output is not 100% reliable.
- Another issue is that the VIES application is not available online all the time. For various reasons it is occasionally inaccessible. While the downtime usually does not last longer than a few minutes it can sometimes take longer (longest downtime since we started with the monitoring in May 2013 occurred on 25 May 2013 and lasted for 4 hours and 48 minutes). To be fair and objective, the VIES application is up and running in average in excess of 99% of the total time.
- Last but not least, the current VAT verification setup seems vulnerable to Internet attacks (please note, that this is only a speculation). A successful DOS attack (or any other kind of hack against the Commission’s hardware/software hosting the VIES application) would result in a downed VIES application and would essentially make it impossible for any online vendor to conduct B2B business in a VAT compliant way.
Issues for the ecommerce vendors
Based to the feedback we have received during our last B2C 2015 working group meeting in June 2013 dealing with the implications of the 1% downtime of the VIES application causes more work for the ecommerce vendors than the rest of the 99% of time when everything works as planned. The reason for this is simple – an online vendor (when not able to verify the VAT status of a new B2B EU customer in real time via VIES) has to instantly decide what to do about the VAT charge:
- If the ecommerce vendor incorrectly charges the VAT (because the customer is a VAT taxable person) then the customer might complain and request a reimbursement of unduly charged VAT; the vendor will have to address this manually on a case-by-case basis which takes time and resources. We can assume that a legitimate B2B customer will most probably complain to the vendor due to the fact that the local tax authorities will not allow for a reimbursement of the VAT which has been charged unduly by the vendor.
- If the ecommerce vendor does not charge VAT (assuming that the customer is telling the truth about his VAT status) then the vendor is risking that he will have to pay the VAT out of his pocket (as we can assume that the customer which has supplied incorrect data about his VAT status will most probably not be willing to pay the VAT surcharge after the eservice has been already provided).
- The third alternative for the vendor is to reject all sales to EU based B2B customers during the VIES downtime. A personal comment: I have yet to meet a vendor that has turned down a sales opportunity due to the VIES downtime.
What does this mean for you?
VIES is the only official and EU wide recognized application that can be used for the verification of the VAT numbers of the EU based B2B customers. One should therefore plan for the occasions, when the VIES application is not available. As a backup-plan there might be locally available tools in some of the EU countries (here is a link to the German application) which might or might not be recognized by the other EU tax authorities. For this reason a strategy is required on how to handle such sales during the VIES downtime.
In order to know whether VIES application is running or not it is necessary to monitor the VIES page for its up- and downtime. This is what we are (among others) doing and why we will be publishing these reports from time to time.
If you will have issues with tax authorities in the EU and will try to argue with them that you were not able to verify your B2B customer’s VAT number due to “force major” (i.e. the downtime of the VIES application) you now have means to do so. Contact us and we will be happy to help you.
The VIES reports for June and July 2013
I am glad that we have sorted out the usefulness of the VIES reports – let’s take a look at them in some more details for months June and July 2013.
In June 2013 the VIES application was inaccessible for 10 hours and 15 minutes or 1.42% of time. The longest downtime occurred on 11 June and lasted for 1 hour and 51 minutes. In total 58 downtimes occurred during the whole month.
July was a much better month for the VIES. The application was inaccessible only 5 times for a total of 49 minutes or 0.11% of the total time. The longest downtime occurred on 31 July and lasted for 24 minutes.
That’s it until September, when we will present the VIES August downtime report. Should you have any further questions in this regard, please contact us as usuall.