Background: a big change on the VAT rules applicable to telecommunication, broadcasting and electronic services
On January 1st, 2015 the VAT rules applicable to telecommunication, broadcasting and electronic services will be changed. As from that date, such services will always be taxable in the Member State where the recipient of such services is located. This rule will be applicable regardless the nature of the recipient, i.e., if it is an entrepreneur – a taxable person – (B2B) – or end consumer (B2C).
This legal change is going to have a tremendous impact for EU and Non – EU companies providing these services. This post focuses in the implications for non EU companies which are not established in any particular EU country, which is the standard scenario for most business except very large multinational companies.
Currently, Non EU companies do not charge VAT in B2B transactions to their customers. Instead, the customer accounts for the VAT in his own country under the reverse charge mechanism. This scheme remains unchanged as from January 1st, 2015.
The big impact is on B2C transactions, that is, when the customer is not a taxable person but an end consumer. Currently, Non EU suppliers of telecommunication, broadcasting and electronic services are obliged to register for VAT in a member State and charge the VAT in force in the country of registration. This rule has encouraged that these suppliers register in UE countries with the lowest tax rates, unfairly reducing the tax revenue of other EU countries. Note that VAT is an indirect tax and as such should be paid where the consumption of the services takes place. For instance, a Swiss telecom company registered for VAT in Luxemburg had to charge to all its EU consumers – nontaxable persons – the VAT of Luxemburg.
This would no longer be the case as from January 2015. Then, VAT will have to be paid to the countries where the consumers reside. In the example above, the services to a Spanish customer of the Swiss telecom company, registered for VAT in Luxemburg, will be subject to Spanish VAT. In principle, non EU suppliers would have to register and submit VAT returns in every EU country where they have customers. However and to avoid the high compliance cost that this multiple registration VAT scheme would imply for non EU businesses a one-time registration scheme has been set up.
Under the one time registration scheme (so-called Mini One Stop Shop or MOSS) both EU and non-EU businesses will only use a web portal in the EU country where they are VAT-registered to declare and pay the VAT due in their customer’s EU country. Of course, the businesses should charge the VAT applicable to their customer’s country and related obligations (for instance, regarding invoicing). Please refer to our post on Spanish invoices for more information about the issue.
The General Directorate of Taxation of the European Commision has issued an explanatory note which intends to facilitate and serve as guidance for the correct application of the new rules and that goes in great detail in several complex issues arising thereof. Plese click in this link to access to the VAT explanatory note of the European Commision.
What are telecommunication, broadcasting and electronic services
As the name suggests these services comprise, fixed and mobile telephone services for the transmission and switching of voice, data and video, including videophone services, even if they are provided through the Internet, such as (VoIP). Access to Internet is also considered a telecommunication service
Is the distribution of television or radio programs via traditional TV or radio networks or the Internet. In this latter case, the distribution of a program is viewed as a broadcasting service as long as the vision is simultaneous to the event. If not it is considered an electronic service, which may have in impact in the tax rate applicable in certain EU Member States.
Electronically supplied services include services which are delivered over the Internet essentially in an automated way and involving minimal human intervention. These services include the supply of digitized products (e-books, software …), creation of webpages, e-commerce, website hosting; online data warehousing ,online newspapers, downloading photo, video, music, games or films, online information (for instance, stock market data, weather reports…), internet advertising space (for instance, banners),on line gaming, on line courses …
It is important to distinguish these services from other services which are booked on line but provided off line. For instance, car hire, reservation of restaurants or hotels, buying air tickets etc. Likewise, professional services like the ones provided by lawyers, accountants… are never considered electronic services even if they are provided via email or online.
Why Spain is a good location to register for VAT for non EU business
Currently, non EU suppliers of telecommunication, broadcasting and electronic services select the country of VAT registration based on the tax rates applicable to these services in the country of registration. Countries with the lower tax rates for these services have a competitive advantage over the others. This – unfair- advantage will disappear as from January 2015 providing a so called level playing field within the EU.
In this respect, other criteria will have to be used to select an EU country for VAT registration. In my opinion, the key criteria to consider as from 2015 are:
- Compliance cost
- Refund of input VAT to non EU non established entrepreneurs
The first item is self-explaining. For instance, in Spain the average hourly cost for a senior tax practitioner involved in VAT compliance rarely exceeds EUR 50. This cost is in sheer contrast with other EU countries with a much higher standard of living, especially those of the north of Europe.
Currency is also an important issue, because dealing in currencies other than the Euro will trigger exchange losses, slippage and other cost. Some “cheap” countries have the disadvantage of non-having the EURO as currency. It also makes quite difficult the tax compliance itself.
Regarding the refund of VAT, note that non EU business, not being established in the country of VAT registration, must apply for the refund of input VAT according to the special procedure stablished for them. Although this VAT should not be very relevant, it is sometimes unavoidable and it is important to have a practical procedure to get the refund within a reasonable time and with minimal cost. In this respect, some EU countries never refund the VAT to foreign business (even from other EU countries) or take years to do so. We all know which are these countries, but I will not mention them.
Spain, however, has recently amended its regulations to make the procedure to get the refund easier. For instance, the previous requisite that obliged the non EU business to demonstrate that in their home country the Tax Authorities refunded VAT to foreign entrepreneurs (reciprocity ,in short) has been dropped off. Now the refund is automatic, just submitting the invoices.
Finally, a large population means a big market. It makes sense to be registered in a country where a business has a relevant customer base. In this sense, big countries, like Spain should be favored over others with tiny markets.
For the reasons explained above, Spain should become a relevant player for VAT registration and compliance for non EU suppliers involved in telecommunication, broadcasting and electronic services to end consumers from 2015 onwards. And,of course, for non EU business of Spanish speaking countries the Spanish route is the only sensible one.
This article has been written by Emilio Alvarez