To make the fulfilment of tax obligations as easy as possible, EU service providers will have the opportunity to fulfil their tax obligations under the One Stop Shop system to be launched next year (and already tested successfully on e-service providers established outside the EU): tax registration and tax return filing in one member state for all service supplied in the EU.
Although the deadline of next January may seem far, preparation should start in time as the accurate fulfilment of tax obligations not only concerns accounting and tax but a number of other areas also from IT through sales (pricing, product development) to risk management. In the first issue of our series of posts dedicated to this matter we provide an overview of the practical issues important for service providers.
Tax rates, tax returns, exchange rates
Due to the altered place of supply rules, enterprises providing telecommunication, broadcasting or e-services will have to invoice services provided to customers who are not taxable persons charging tax at the rate of the state in which the establishment (in the case of legal persons) or the permanent address or place of stay (in the case of natural persons) of their customer is located. Accordingly, the One Stop Shop system does not reduce the number of tax rates applicable but makes the fulfilment of tax registration and tax return filing obligations easier.
One Stop Shop tax returns will have to be filed quarterly, until the 20th of the month following the given quarter with the tax authority of the member state issuing the One Stop Shop tax number. It is, therefore, possible that the service provider will have to file monthly tax returns on transactions (supplied in the member state of the service provider’s seat) not covered in the quarterly One Stop Shop returns on telecommunication, broadcasting and e-services.
By the main rule, tax returns have to be filed and taxes have to be paid in euros but the member states outside the Euro-zone (all 10 member states) were authorized to have One Stop Shop returns prepared (and to collect all payable taxes) in their national currencies. If the currency of the tax return is different from the currency of the invoices, the exchange rate of the European Central Bank for the last day of the given quarter shall be applied for conversion.
Under the One Stop Shop system, the total quarterly tax amount is payable to the tax authority of only one member state and this member state will be responsible for the distribution of the tax collected. The tax authorities of the places of supply will have the right of control over the tax returns. Companies should, therefore, not only get familiar with the various tax rates but also with versatile practice of the EU in terms of imposing penalties and penalty rates. One Stop Shop returns will also have to be returned if no tax is payable.
Place of supply – challengeable opinions and non-contradicting pieces of evidence
As telecommunication, broadcasting and e-services are, by their nature, highly mobile, EU rules simplify the definition of the place of supply of services by applying the following, deemed place of supply rules:
- in the case of services supplied in a phone-booth, a Wi-Fi hotspot, in an internet café, a restaurant or in a hotel lobby, the deemed place of supply is the state in which the service is actually used;
- in the case of services used aboard a ship or airplane performing intra-Community passenger transport, the deemed place of supply will be the state of departure of the passenger transport service;
- in the case of services provided through phone landlines, the deemed place of supply is the state in which the landline is located;
- in the case of services supplied through the mobile network, the deemed place of supply is the state corresponding to the country code of the SIM card used;
- in the case of services provided through a decoder, the deemed place of supply will be the state in which the decoder is located or, if the location of the decoder is not known, the state to which the decoder was sent for use.
The definition of the place of supply is more difficult in the cases not listed above and the possibility of errors increases. The regulation on the execution of the EU VAT Directive prescribes the obtaining of at least two pieces of non-contradicting evidence for the service provider for determining the place of supply. Such evidence may be the invoicing address, the IP address, the bank data or other, commercially relevant data of the customer. The gathering of such data may raise a number of practical issues and tasks – just think of the list of data to be requested from customers, the dropping appeal of services as ordering becoming rather difficult (UX) or contradicting data. Service providers will also have to consider and carefully plan how the information necessary for determining the applicable VAT rate will be selected from the collected data.
On top of it all, even the above deemed place of supply rules may be overruled by the enterprise and the tax authorities. For this, the service provider will need three non-contradicting pieces of evidence that the user of the service is established or has his permanent address or place of stay in a different state. The tax authority, on the other hand, may overrule a deemed place of supply if an abuse or non-compliance can be assumed.
E-services are typically acquired by the end users through a number of players in a supply chain: a good example is the downloading and use of the applications developed for smartphones. The altered place of supply rules effective from 2015 only apply to the services provided to non-taxable-person customers. Business-to-business telecommunication, broadcasting and e-services will remain subject to the EU reverse VAT system next year also. According to the main rule of the execution regulation, the intermediary will have to be regarded as the supplier of the service (and consequently, the One Stop Shop tax return will also have to be filed by the intermediary) unless the e-service provider different from the intermediary is indicated on the invoice.
Another important rules is that the enterprise which approves the charging of the fees of e-services or approves the provision of the service or defines general service terms and conditions, may not name another person as the e-service provider.
Companies should therefore, examine in due time who is the actual provider of e-services to non-taxable-person end-users and who is concerned by the changes.
Pricing – is real time fast enough?
One of the most important practical tasks of the preparation for next year’s changes is making sure that the VAT rate relating to a given order is already available during the order process (i.e. at the time when the data provided by the non-taxable-person customer have not yet been entered in the service provider’s corporate management system). This will not only improve companies’ competitiveness through the ability of immediately modifying net price data depending on the applicable VAT rate but also give customer’s more comfort. The time requirement of the relating development tasks will also have to be taken into account in the preparation for next year’s changes.
Price competition in 28 states
In the market of telecommunication, broadcasting and e-services provided to non-taxable-person customers, the current barriers and differences represented by the VAT rates of member states will disappear next year: all service providers will be faced with the same conditions in all 28 member states. The time of services offered throughout the EU at the same gross price due to the VAT rate applied in the member state of the service provider’s seat and therefore generating the same margin everywhere will be over next year. Due to the altered place of supply rules, net service fees will be subject to VAT rates of 3% to 27% irrespective of the location of the service provider’s seat. The service providers whose seat is in a member state which applies a low VAT rate will have to accept a drop in revenues in the states having higher VAT rates if they wish to maintain their current standard gross fees (same gross fee, higher VAT). However, the service providers having their seat in a member state with a higher VAT rate will be able to provide services at a higher profit at the same gross price in the states in which the rate of VAT is lower and may even win markets with their competitive prices.
The need to adjust is strong as net service fees adjusted to VAT rates and gross fees optimized specifically for the twenty-eight member states will represent the real competitive advantage. From this perspective, it is easy to see why it is important that the answer to the question in the title is 3 percent.