Opinion of the Economic and Social Committee on the 'Proposal for a Council Directive amending Directive 77/388/EEC as regards the value added tax arrangements applicable to telecommunications services` () (97/C 287/08)

On 4 March 1997, the Council decided to consult the Economic and Social Committee, under Article 99 of the Treaty establishing the European Community, on the above-mentioned proposal.

The Section for Economic, Financial and Monetary Questions, which was responsible for the preparatory work, adopted its Opinion on 13 May 1997. The rapporteur working without a study group was Mr Walker.

At its 346th Plenary Session of 28 and 29 May 1997 (meeting of 28 May 1997) the Economic and Social Committee adopted the following opinion by 92 votes to 2 with 4 abstentions.

1. Introduction

The situation in relation to the levy of VAT on telecommunications services is highly complex. At present, these fall within the scope of Article 9(1) of the Sixth Directive but all fifteen Member States have applied for, and been granted, an identical derogation (). The text of this derogation is set out in Appendix 1. It will come into force variously in April or July in different Member States (but may be applied retrospectively to 1 January 1997 at the discretion of each Member State) and will have the effect of removing telecommunications services from the purview of Article 9(1) and bringing them within the scope of Article 9(2)(e) and, therefore, of Article 9(3)(b). The proposed Directive would create a new Article 9(2)(f) governing the supply of telecommunications services and would thereby remove them from the ambit of Article 9(2)(e) and hence from Article 9(3)(b). It would, in turn, be superseded in due course by the proposed new common system of VAT, when and if that came into force. There are thus four distinct stages envisaged in the development of VAT regulations on telecommunications services in the next few years. The ways in which these changing requirements will impact suppliers and consumers over that period are set out in Appendix 2.

2. The present system

2.1. The Commission proposal has been drafted from the standpoint that the rules currently in force do not take account of technological progress in the provision of telecommunications services and that amendments are necessary in order to prevent loss of tax and distortions of competition resulting from the current legislation. The ESC accepts this proposition.

2.2. Article 9(1) establishes the place of supply as being the place where the supplier is located. Where a supplier is based outside the EU, no VAT is payable on services supplied to customers within the EU. However, companies based in the EU are required to charge VAT at the effective rate in their Member State on supplies of services made to customers outside the EU. Where the customer is a registered trader, this VAT may be recovered by a claim under the 13th Directive but this procedure is cumbersome and likely to deter potential customers; private subscribers have no redress. The tax, therefore, constitutes a major distortion of competition and places EU telecommunications companies at a competitive disadvantage in relation to non-EU suppliers.

2.2.1. Recent advances in telecommunications technology mean that a full range of services can be provided to both business and domestic consumers without any need for the supplier to have a physical presence in the consumer's country. For example, it is now possible to make a (free) call to a location outside the EU which will automatically generate a return call from that location. This can then be used to route a call to any part of the world, including a number located within the subscriber's own country but, because the call originates outside the EU, it escapes VAT.

2.2.2. The tax advantages to the private user and to businesses, such as banks, which are unable to recover or fully recover the tax as input tax deductions, are of such magnitude that the provision of these services has proliferated rapidly and this process can be expected to continue and intensify. Apart from constituting a major distortion of competition, this results in serious reductions in the aggregate VAT revenues of Member States.

2.3. For these reasons, the ESC accepts the need for an improved system.

3. The derogation

3.1. It is these considerations also, which have prompted the Member States to seek the derogation set out in Appendix 1. This derogation has already come into force in some Member States and will do so in all of them by July of this year. It will remain in effect until 31 December 1999 or until such time as the proposed Directive enters into force, whichever shall be the earlier.

3.2. The derogation specifies the place of supply as being the location of the customer and puts telecommunications services on a par with other services such as those supplied by lawyers, accountants, consultants and engineers in this respect. It removes the requirement for EU-based telecommunications companies to charge VAT on the supply of services to locations outside the EU and thus constitutes a major improvement on the existing system.

3.3. Where a taxable service is provided by a supplier in one Member State to a registered trader located in another Member State, the consumer pays VAT to its own Member State on a 'reverse charge` basis but can then deduct this as input tax rather than having to make a claim under the 8th Directive procedure, as at present, which is a complex and protracted process. This represents a further significant advantage.

3.4. Where a supplier based outside the EU provides services to a registered trader located in the EU, the derogation applies the same 'reverse charge` procedure. The ESC accepts this as a logical development but questions how practical it will be to police this requirement effectively, given that suppliers located outside the EU and having no trading presence therein could not be compelled to provide the tax authorities with details of supplies made to EU-based consumers. It would appear that the authorities will be heavily reliant on the willingness of subscribers to declare their obligation, although it will be possible to examine the accounting records of partly-exempt businesses.

3.5. When a supplier located outside the EU made supplies to private users located in the EU, the supplier could be required to register in every Member State in which it made such supplies where the Member States concerned invoked the powers given to them under Article 9(3)(b).

3.5.1. Article 9(2)(e) is qualified by Article 9(3)(b), which states that, in order to avoid double taxation, non-taxation and distortion of competition, Member States can, if they deem it appropriate, consider the place of supply of services which, under the article, would be situated outside the EU to be in the territory of the country in which the use or enjoyment of the services takes place. Because this wording is open to interpretation, it gives rise to the possibility that Member States may apply the article differently in similar circumstances. This would be likely to create distortion of competition rather than preventing it and, to that extent, the provision is unsatisfactory.

3.5.2. It would appear that this requirement would also be very difficult to enforce if, as seems likely, suppliers with no physical presence in the EU declined to comply with it. In that event, some other method of computing and collecting the tax would need to be instituted.

3.6. On the whole, the ESC regards the situation which will pertain under the derogation as being a definite improvement over the present system, while still containing serious drawbacks.

4. The proposed Directive

4.1. The proposed Directive would remove telecommunications services from the remit of Article 9(2)(e), and hence from 9(3)(b), and place them under the regulation of a new Article 9(2)(f). This, in effect, determines the place of supply as being the place where the customer is located if either the supplier or the customer are based outside the EU but the place where the supplier is located if both the customer and the supplier are based in the EU, whether or not they are located in the same Member State.

4.2. Where the customer and supplier are located in the same Member State, the practical situation would be the same as now under both the derogation and the proposed Directive.

4.3. Where the customer and supplier are both located in the EU but in different Member States the position of private users would again remain unaltered but registered traders would pay VAT to the supplier's Member State rather than to their own Member State and would therefore have to recover it by way of an 8th Directive claim rather than by way of an input tax deduction.

4.3.1. This would be a serious disadvantage for businesses because the 8th Directive procedure is more complicated and time-consuming but, on the other hand, it would probably result in more tax being paid because, where the supplier levies the VAT, it is easier for the authorities to monitor than under the 'reverse charge` procedure and the incidence of tax evasion is likely to be reduced.

4.3.2. It should be noted that, both under the derogation and under the proposed Directive, as under the present system, private users would pay VAT to the supplier and, as they are not in a position to recover this in any way, it would accrue to the supplier's Member State. This is inconsistent with the concept of VAT as a tax on consumption, since the consumption quite clearly takes place in the Member State of the consumer, but is probably unavoidable in practical terms.

4.4. The case where the supplier is based outside the EU but the subscriber is located within the EU is not fundamentally different under the proposed Directive from that subsisting under the derogation except that Article 9(3)(b) would no longer apply and there would therefore no longer be a possibility of variations in treatment between Member States because they had elected to invoke or not invoke the powers granted to them under this article in any given situation. This must be regarded as an improvement.

4.5. The comments made in 3.5.2 above concerning the practical difficulties which are likely to be encountered under the derogation in compelling suppliers to register when they have no physical presence in the EU, apply with equal force in this case. Under the proposed Directive, however, they would only be required to register in a single Member State and that registration would cover all of their transactions in the EU, whereas under the derogation they would be required to register separately in each Member State in which they had private clients. This is, again, an improvement and might conceivably persuade more suppliers to comply with the requirement but the tax relating to transactions in all fifteen Member States would accrue to the country of registration.

5. The new common system

5.1. Because of the central pooling of VAT revenues envisaged by the proposals for a new common system, registered traders based in the EU and receiving services from a supplier located in another Member State would be able to recover the VAT paid from their own Member State as an input tax deduction rather than having to make an 8th Directive claim from the supplier's Member State. This would greatly simplify the process for businesses and would therefore constitute a significant advantage. The fact that the tax was being paid to the 'wrong` Member State would no longer matter since all VAT revenues would go into a central pool.

5.2. The problems in ensuring compliance with the registration requirements by suppliers having no physical presence in the EU would remain and this is an inherent weakness in the system which might have to be addressed.

6. Conclusion

On balance, the ESC considers that the proposed Directive offers a sufficient advantage over the position pertaining under the existing derogation to constitute a worthwhile improvement and it therefore gives its approval to this proposal.

Brussels, 28 May 1997.

The President of the Economic and Social Committee

Tom JENKINS

() OJ C 78, 12. 3. 1997, p. 22.

() Council decisions of 17. 3. 1997 (OJ L 86, 28. 3. 1997).

APPENDIX I

Main articles of the council decisions of 17 March 1997 granting a derogation

Article 1

By way of derogation from Article 9(1) of Directive 77/388/EEC, the (Member State) is authorized to include, within Article 9(2)(e) of the Directive, telecommunications services. In the case of a Member State making use of this facility, the provisions of Article 9(3)(b) of the Directive will also apply to these services.

Telecommunications services shall be deemed to be services relating to the transmission, emission or reception of signals, writing, images and sounds or information of any nature by wire, radio, optical or other electromagnetic systems, including the transfer or assignment of the right to use capacity for such transmission, emission or reception.

Article 2

This Decision may be applied to telecommunications services in respect of which the chargeable event took place from 1 January 1997. It will also apply to prepayments made in respect of telecommunications services paid for before the date of implementation of this Decision by the Member State insofar as these prepayments cover supplies of telecommunications services which are performed after the date of implementation.

Article 3

The authorization specified in this Decision shall apply until 31 December 1999, or if the Directive altering the place of taxation of telecommunications services enters into force at an earlier date, until that date.

APPENDIX II

>TABLE>