MALTA: EU VAT taxation rules to shift focus on customer location
With EU rules changing, suppliers of telecommunications, broadcasting and electronic services are set to face new challenges in determining correct VAT taxation in 2015.
The current legislation follows the general place of supply rules that apply to EU to EU-B2C transactions, that is, the place of supply would be where the supplier is established. On the other hand, in the case of a non-EU taxable person supplying an EU consumer, currently the place of supply would shift to where the customer is located.
Where is the customer established?
In the case of a customer being a taxable person, the general rule applies: The taxable person is established where he or she is registered or where the fixed establishment the service is being given to is located.
When the customer is a non-taxable person, his place of establishment may be more difficult to determine. As a general rule, however, this should either be where the customer is established, has his/her permanent address, or usually resides.
Changes taking effect on January 1, 2015
With the new place of supply rules kicking in, the supply is always taxed where the customer is established, irrespective of whether the customer is a business or a consumer, and irrespective of whether the supplier is based in the EU or outside the EU.
Until the end of 2014, jurisdictions with a lower VAT rate have an advantage over businesses either located outside the community or in a higher VAT rate jurisdiction. The new stipulations will lead to uniformity in VAT rates applied to B2C transactions.
Under the present regulation, e.g. an Italian non-taxable person subscribing to broadcasting services by a US service provider will be charged Italian VAT (22%) on the supply given. If the same consumer subscribes to the same type of services but provided by another EU country – say Malta – Maltese VAT (18%) will apply. As of 2015, Italian VAT will apply, irrespective of where the supplier is located.
Issues arising from the new place of supply rules
-> Electronic and telephone supply services: Are they provided through the internet and supplied by an intermediary?
In the case of an intermediary in a business transaction, verifying the role of the intermediary will be key. If the intermediary is undertaking the transaction with the final consumer on his own behalf, it would be his duty to verify the location of the customer and charge VAT accordingly. This will generally depend on how the contract of each transaction is drawn up and, for instance, how invoicing is structured between the Electronic Service Provider, the intermediary and the final consumer.
-> Status of customer: Is it B2B or B2C?
Be it a B2B or a B2C transaction, the new place of supply where the customer is established will not make a difference. So is it necessary to verify the customer’s status? Yes, it is: Status verification is necessary mainly due to VAT liability collection. In the case of any B2C supply or a B2B supply (within the same member state), the liability shifts onto the supplier, whereas in the case of a B2B supply (with different member states) the liability is on the customer using the reverse charge mechanism (and reported in the recapitulative statement by the supplier).
-> Location of customer: Where is the customer established or residing?
In order to apply the correct VAT rate to a transaction, the supplier needs to establish the location of the final consumer. Issues arise where a customer is deemed to reside in more than one country, or the service is being provided in a particular fixed establishment. A few examples include: a WiFi hotspot in a hotel lobby (the place of supply would be where the location of the hotspot is); on board a passenger transport aircraft (the place of supply would be the country of departure); a mobile network (the place of supply would be the country code of the SIM card used when receiving those services).
More issues are expected to arise with the new place of supply rules; they can only be resolved through case law and court decisions over time. Furthermore, explanatory notes on the subject matter have been issued and we recommend them as preliminary guidelines on the new place of supply rules. Such explanatory notes are also meant to assist taxable persons in different member states in adopting a consistent approach towards different types of services which may or may not fall under these definitions in order to avoid the possibility of double taxation or non-taxation.
ECOVIS Malta Consultants Limited/Mdina Trust Services Limited, Balzan, Malta
ECOVIS AG Steuerberatungsgesellschaft
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