TEI comments on EU VAT place of supply rules.

• Position: Tax Executives Institute, value added tax

September 16, 2013

On September 16, TEI submitted a letter to the European Commission recommending areas where additional guidance would help businesses and tax authorities implement recent amendments to Implementing Regulation (EU) No 282/2011. The new rules for determining the place of supply for VAT purposes within the EU for sales for telecommunications, broadcasting, and electronic services will take effect on January 1, 2015. The letter was prepared under the aegis of TEI's European Indirect Tax Committee, whose chair is Jean-Francois Turgeon of Caterpillar SARL. The following members of the Institute's European Indirect Tax Committee also materially contributed to the development of TEI's comments: Julien Brugere of Time Warner, Inc.; Lynne Clare of Sony Corporate Services Europe, Ltd.; Bob Fitzsimmons of Tesco Stores Ltd.; Nina A. Harlamovs of The Walt Disney Company; Signe Hibbert of Electronic Arts Inc.; Bettina Juul of TDC; Jon Lacey of Microsoft Europe (Skype); Fergus Matthews of Microsoft Corporation; and Catherine O'Neill of Amazon. Daniel B. De Jong, TEI Tax Counsel, coordinated the preparation of TEI's letter.

The European Council recently reached political agreement on amendments to Implementing Regulation (EU) No 282/2011 (the "Implementing Regulation") that will significantly alter the rules for determining the place of supply for VAT purposes within the European Union. The new rules for supplying telecommunications, broadcasting, and electronic services to EU-based customers will take effect on 1 January 2015 and will challenge both businesses and tax administrators. Recognizing the need for further clarification on the practical implications of the various rule changes, the Council working with the Commission plans to draft explanatory notes to the Implementing Regulation ("Explanatory Notes"). Tax Executives Institute ("TEI") applauds the Commission for soliciting comments from businesses in advance of drafting the Explanatory Notes. This will ensure that necessary guidance can be produced in advance of the 1 January 2015 effective date and will address the key issues where clarification is most needed. We agree with the Commission's view that the guidance should focus on practical implications and clearly describe how the rules should be applied.

TEI was founded in 1944 to serve the professional needs of business tax professionals. In 1999, TEI chartered a chapter in Europe, which encompasses a cross-section of European and multinational companies. Today the organisation has 55 chapters throughout the world. As the preeminent international association of in-house tax professionals, TEI has a significant interest in promoting sound tax policy, as well as in the fair and efficient administration of the tax laws, at all levels of government. Our nearly 7,000 members represent 3,000 of the largest companies in Europe, the United States, Canada, and Asia. The Institute is included in the EU Interest Representative Register (Register ID number 52413445902-12; TEI's address is 1200 G Street, N.W., Suite 300, Washington, D.C., U.S.A., 20005-3814).

TEI members are accountants, lawyers, and other corporate and business employees responsible for the tax affairs of their employers in an executive, administrative, or managerial capacity. The Institute espouses organisational values and goals that include integrity, effectiveness and efficiency, and dedication to improving the tax system for the benefit of taxpayers and tax administrators alike.

Suggested Areas of Focus for the Explanatory Notes

Today, the place of taxation for VAT on telecommunication, broadcasting, and electronic services when supplied by EU businesses to EU-based consumers is the country in which the supplier of those services is established. Effective 1 January 2015, the amended Implementing Regulation changes the place of taxation to the country where the end consumer is established, has their permanent address, or usually resides. The amended Implementing Regulation also provides a number of rules governing the methods businesses must use to identify the place of taxation and the documentation that can be used to support those determinations.

Our comments focus on five areas where the Explanatory Notes would assist businesses and tax authorities with guidance concerning the amendments to the Implementing Regulation:

1. Determining the person responsible for declaring the VAT (new Article 9a of the amended Implementing Regulation);

2. Invoicing issues;

3. Evidence requirements to substantiate the place of supply;

4. Transitional rules for transactions overlapping the effective date of the amendments to the Implementing Regulation (Article 2 of the Implementing Regulation); and

5. Miscellaneous Issues.

1. Determining the Person Responsible for Declaring the VAT (New Article 9a of the Implementing Regulation)

   The existing EU legal landscape (including the Implementing Regulation prior to the recent amendments) has resulted in a patchwork of inconsistent rules for determining which taxable persons must declare the VAT associated with supplies of electronic services. Some Member States require operators of mobile telecommunications networks to account for VAT on all electronic services purchased through their networks by their subscribers. Other Member States, despite obvious advantages to collecting VAT from a few large taxpayers, employ various other rules for determining which taxable person must declare VAT on those transactions.

   Member States also apply inconsistent rules for determining VAT liability where multiple suppliers are involved in the supply chain. The number of links in the distribution chain for electronic services between producer and final customer varies widely. In some instances, the transaction occurs directly between the owner of the electronic content and the ultimate consumer (e.g., an individual purchases a song directly from an independent artist on the artist's website). Other situations involve transactions between multiple intermediaries. For example, in the case of a ringtone, the content owner may enter into a licensing agreement with an aggregator of ring tones that enters into agreements with mobile telecommunications providers that sell the ringtones to their mobile customers. Similar arrangements exist with app stores where app creators contract with, for example, Apple's App Store or the Google Play platform, and customers purchase the apps they download by paying Apple or Google.

   The greater the number of links in a given supply chain, the less control content owners can generally exert over the final sale of the electronic service to the ultimate consumer. Content owners have a documented legal relationship only with the aggregator with which they have contracted. While a contract might require the aggregator to utilize similar terms in its relationships further along the supply chain, each link added to the chain of transactions for a supply of electronic services weakens the ability of the content owner to control the terms of those transactions.

   New Article 9a of the Implementing Regulation provides helpful general guidance in assigning VAT declaration responsibilities for businesses engaged in chains of transactions related to electronic services and specific rules where those services are provided through mobile telecommunications networks. The new rules should result in a more consistent approach throughout the EU. To aid in ensuring a common interpretation of the provisions in new Article 9a, we urge the Commission to include Explanatory Notes addressing the issues below.

   1. Premium Rate SMS Text Messages

      A premium rate SMS operates by requiring a mobile telecommunications customer to text a unique "short code" to a specially assigned number. The "short code" can consist of words, letters, or numbers. Those text messages are directed by this "short code" to trigger a particular response (e.g., your bank account balance, horoscope, or football scores delivered via a return text message). As the name indicates, premium rate SMS text messages are subject to a separate charge to which VAT may apply as an electronic service.

      Some mobile telecommunications operators object to declaring the VAT for premium rate SMSs arguing that they do not always know what is being supplied to the end customer and thus cannot be responsible for correctly calculating the applicable VAT. Clearly, where the mobile telecommunications operator knows the content of the premium rate SMS, it is in the best position to accurately determine the place of supply for the electronic service supplied through the premium rate SMS and to declare the applicable VAT. Even where the underlying service being provided is unknown, it seems a reasonable imposition to require that the mobile telecommunications operator obtain sufficient information from the provider of the service to enable a VAT decision to be made.

      The mobile telecommunications operator should, at a minimum, be able to access information allowing it to determine whether the premium rate SMS is providing an electronic service or some other type of supply (e.g., a supply of goods). Under the VAT Directive, all electronic services are subject to the same VAT rate, and, under the Implementing Regulation, the same place of supply...