Over the past year, the upcoming change in the deemed ‘place of supply’ rules governing the provision of telecommunication, broadcasting and electronically-supplied services for VAT purposes has been the source of much discussion and debate in the aforementioned business sectors.

The effect of this change is clear: as from January 1, 2015, all telecommunication, broadcasting and electronically supplied services provided to final consumers within the EU shall be subjected to VAT in the jurisdiction where the final consumer is established, has his/her permanent address or usually resides.

This is in direct contrast to existing legislation which prescribes that the place of supply of such services provided to final consumers is the place where the supplier is established. This change is based on the principle that VAT is essentially a consumption tax, therefore it is expected that the rules would aim at taxing supplies of goods, services and intangibles within the jurisdiction where consumption takes place.

Non-EU businesses supplying such services to final consumers within the EU have been required to abide by this rule for a number of years now.

The aforementioned supplies effected to business customers are similarly subjected to VAT where the said customer is established (in accordance with the general rule governing the supply of services).

This change will therefore bring the VAT treatment of the relevant supplies provided to final EU consumers in line with the VAT treatment currently affecting business customers; and the relevant supplies provided by EU businesses in line with the VAT treatment currently affecting non-EU suppliers.

As noted above, currently, telecommunication, broadcasting and electronically- supplied services provided to private EU consumers are subject to VAT in the jurisdiction where the supplier is established. Taking the software industry by way of example, software service providers established in Malta and providing private EU consumers with electronic access to software are currently required to charge Maltese VAT at the rate of 18 per cent on their supplies and to comply (solely) with the requirements of the Maltese VAT Act.

As of January 1, 2015, the software company shall become subject to VAT in the EU jurisdiction where their customers are established, resulting in the Maltese software service provider no longer being required to charge a fixed rate of VAT (at 18 per cent) on their sales to private EU consumers but VAT at the rate applicable in the relevant member state where the final consumer is located (assuming that the supply of software over the internet is not deemed to be an exempt service in the relevant member state). Standard VAT rates across the EU currently range from a low of 15 per cent in Luxembourg to 27 per cent in Hungary; therefore the location of their customer may have a substantial impact on such providers’ pricing strategies and margins.

Preparing for change

This change could potentially trigger VAT registration requirements and hence VAT compliance obligations in 28 member states, which would translate into a substantial increase in compliance costs as well as a massive administrative burden (to say the least). In an attempt to minimise this burden, the so-called Mini One Stop Shop (MOSS) scheme currently available to non-EU business providing services to EU final consumers is being extended to such EU business.

The MOSS scheme will enable businesses providing the applicable services to EU private consumers to account for and pay the VAT due to other member states through the MOSS web portal in the member state in which they are identified for VAT purposes.

The e-gaming sector will also be affected by this change, insofar as their business falls within the definition of electronically-supplied services

A major drawback associated with the MOSS is that tax payers registered under the MOSS (in Malta for example) and carrying out supplies which attract the right to claim VAT incurred on their purchases would not be in a position to claim VAT incurred outside Malta in its MOSS VAT return, in the same way it would have had it registered for VAT purposes in that EU jurisdiction.

Having said that, in such a case, the option of requesting a refund of VAT suffered in another member state in terms of Council Directive 2008/09/EC, formerly known as the ‘8th VAT Directive’, would still be available.

As aforementioned, non-EU businesses providing the services in question to EU private consumers have been required to abide by this place of supply rule for a number of years, while EU businesses were not. Therefore, pre-2015, it has been possible for such non-EU entities to incorporate EU subsidiaries in low VAT jurisdictions such as Luxembourg, provide the qualifying supplies through such entities and charge a fixed (low) VAT rate, thereby avoiding multiple VAT registration/MOSS requirements.

Taking Apple as an example, this multinational giant originating and based in the US has incorporated a subsidiary in Luxembourg possibly even for favourable tax reasons, from which European customers downloading a song, television show or app, are billed.

Come January 1, 2015, as far as these business sectors are concerned, Luxembourg shall no longer enjoy a competitive advantage within the EU due to its low VAT rate. The Luxembourg tax revenue seems to be fully aware of the impact this change will have on its VAT income as it plans to increase the Luxembourg standard VAT rate from 15 per cent to 17 per cent and two of its reduced rates ,12 per cent and 6 per cent, to 14 per cent and 8 per cent, respectively, in an attempt to offset the anticipated VAT shortfall. Nevertheless, Luxembourg will still enjoy the lowest VAT rate in the EU, followed closely by Malta.

Going forward, businesses operating within these sectors may start to consider the efficiency of a jurisdiction’s VAT system, rather than its VAT rate, in deciding in which EU member state to set up shop. In particular, they may start to consider the ease with which one may apply for a VAT number, file VAT returns and pay VAT due, the ease and likelihood of obtaining VAT refunds and within the time period prescribed by law, coupled with the approachability and pro-business attitude of the relevant VAT authorities.

The e-gaming sector will also be affected by this change insofar as their business falls within the definition of electronically supplied services. Although the EU VAT Directive provides that all member states shall exempt betting, lotteries and other forms of gambling from VAT, this is subject to the conditions and limitations laid down by each member state.

Therefore, current operators within the e-gaming industry providing services to end customers within different member states have been left with no option but to study the implications associated with their particular sphere of activity in the member state in which their final consumers are located, in order to ascertain whether their activity meets the conditions and limitations established by the relevant member states in order for the exemption to be applicable. If this is indeed the case, the e-gaming company would not have any VAT registration/compliance obligations in that jurisdiction. If, on the other hand, the exemption does not apply and hence the e-gaming activity is deemed to be taxable in a particular jurisdiction/s, this VAT compliance and administrative nightmare may become a reality!

To sum up, the bottom line is that companies operating in the telecommunications, broadcasting and/or e-services field need to carry out preparatory work in order to ensure that their business is ready to accept these changes, particularly:

• Ascertain whether their business activity falls within the legal definition of telecommunications, broadcasting and/or electronically-supplied services;

• Rethink their pricing strategies and margins as the increase in VAT charged on the provision of such services would ultimately lead to sharp increases in prices for the consumers and/or a reduction in profit for the relevant firms;

• Revamp IT and software to cater for multiple rates and internal procedures to cater for varying compliance obligations;

• Since the customer’s location determines the applicable VAT rate, providers of the qualifying services would need to introduce checks and balances to determine, and prove, where each customer is established, has his permanent address or usually resides.

www.mazars.com.mt

Sarah Casolani is the VAT manager at Mazars.

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