January 1, 2015 will mark the entry into force of changes to the taxation of telecommunications services, radio and broadcasting (“broadcasting”) services and electronically supplied services across the European Union. This change, which will essentially complete the transition to taxation in the country of consumption, will impact the VAT liability of cross-border supplies of telecommunications, broadcasting and electronically supplied services to private consumers (B2C), as well as the reporting obligations of persons operating in these areas.

Today, EU B2C telecommunications, broadcasting and electronic services are treated for VAT purposes as supplied in the country in which the supplier is established, requiring EU operators to charge VAT at the applicable rate in the country where they themselves are established, irrespective of the location of their customer. An exception to this rule currently applies to electronic services when supplied to EU consumers by non-EU suppliers, who are required to charge and collect VAT in the country of their customer.

As of January 1, 2015, telecommunications, broadcasting and electronic services supplied by EU and non-EU operators alike to private consumers within the EU will become taxable in the country where the consumer is located. This means that suppliers of these services, wherever located, will in principle have to charge 18 per cent VAT to Maltese consumers, 20 per cent VAT to UK consumers, 25 per cent VAT to Swedish consumers, and so on. To an operator having customers across the EU, this means a shift from one VAT rate to 28 different VAT rates for the same ‘product’, and, for those currently established in a jurisdiction having a lower standard VAT rate (such as say Luxembourg, 15 per cent) , a potentially significant VAT rate increase.

While the terms “telecommunications”, “radio and broadcasting” and “electronically supplied services” may appear obvious and self-explanatory, as in all things VAT, interpretations may vary from one member state to another, and such variations may prove to be the first, and definitely not the last, of the issues which cross-border operators may face when adapting to the 2015 changes. The existing and proposed draft legislation does contain definitions of the terms. However, these are non-exhaustive, and in particular in the case of electronically-supplied services, leave room for varying interpretations.

The 2015 changes will affect a number of factors, which are currently possibly only considered relevant by operators from a commercial perspective, but also relevant - if not to say key - from a VAT perspective.

In the context of overall VAT exposure the changes will inevitably impact pricing and, consequently, margins, where a single VAT-inclusive price is set for all EU customers.

From an operational perspective, service providers will need to identify the status of their customer (business or consumer) and in the case of private consumers, where they are located, specifically where the customer has his “permanent address or usually resides”.

The EU Commission has proposed legislative provisions which provide guidance on the criteria to be followed when determining a customer’s location, and in certain cases shifts the place of supply to the member state where the service is used and enjoyed rather than where the customer resides.

It also deals with particular situations such as use of pre-paid credit on a SIM card and the supply of electronic services through a telecoms network (e.g. marketplace for apps). The proposed provisions also list evidentiary details which may be relied upon for the purposes of determining the customer’s location, such as bank details or an IP address. Operators will also need to identify the VAT treatment of their service in the EU member state of the customer. Harmonisation of VAT across the EU is not absolute in practical terms and certain electronic services relating to gambling, finance and education, for example, may be treated as VAT exempt in certain jurisdictions and taxable in others.

The administrative issues resulting from the 2015 changes are not inconsequential, the foremost being the obligation to register for VAT in the EU member state where the supply takes place. No threshold has been introduced, which means that one single supply to a consumer in another member state, even if that supply is of negligible value, would trigger the obligation to charge and collect VAT there, and to comply with local invoicing and reporting requirements.

The potential administrative burden that multiple VAT registrations would bring about is addressed by the introduction of the so-called Mini One Stop Shop, an optional scheme which permits B2C suppliers of telecommunications, broadcasting and electronically supplied services within the EU to register for VAT in one EU member state and to report and pay all of the EU VAT charged and collected in one single return which will be submitted to the member state of registration. The member state of registration will then distribute the VAT received to the various EU member states of consumption. Notwithstanding the simplified reporting option, VAT compliance will take on an entirely new dimension, and the added administrative burden, and resulting cost, cannot be avoided.

The EU legislative framework for the 2015 changes to the VAT rules for telecommunications, broadcasting and electronic services is, for the most part, in place, and member states are required to have their Mini One Stop Shop system up and running by October 14, 2014.

Of course, the practical issues and considerations will only come to the fore as and when the legislation enters into force and operators begin to comply.

January 1 2015 may seem like a long way away, but the potential significance of the changes to service providers from an operational perspective, including the impact on pricing and margins and the required changes to accounting systems and billing, are such that at this stage, it is definitely not too early to start gearing up for the changes.

saquilina@deloitte.com.mt

Deloitte Malta is organising a half-day seminar on the 2015 changes to the VAT rules which will be held on November 28 at the Westin Dragonara Resort. For further information on the 2015 changes to the VAT rules and on the upcoming event visit www.deloitte.com/mt/vat2015.

Sarah Aquilina is a senior manager, specialising in indirect tax at Deloitte Malta.

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