Proposal for a COUNCIL DIRECTIVE amending Directive 77/388/EEC as regards the value added tax arrangements applicable to telecommunications services
Date: 1997-01-29
Institutions: European Commission
Subjects: VAT, competition, provision of services, single market, telecommunications

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 29.01.1997 
COM(97)4final 

97/0030 (CNS) 

Proposal for a 

COUNCIL DIRECTIVE 

amending Directive 77/388/EEC 
as regards the value added tax arrangements 
applicable to telecommunications services 

(presented by the Commission) 

EXPLANATORY MEMORANDUM 

I. Introduction 

The aim of this proposal is to amend the VAT rules applicable to telecommunications services. 
The amendments are necessary  in order  to  prevent  distortions  of competition  resulting from 
the current legislation. 

The  fiscal  rules  currently  in  force  do  not  take  account  of  technological  progress  in 
telecommunications,  with  it  now  being  possible  to  provide  services  from  anywhere  in  the 
European Union or the rest of the world.  Community legislation should therefore be adapted 
to this new situation in order to restore the neutrality of the tax. 

Problems to be resolved 

Today,  telecommunications  services  are  taxed  at  the  place  of  establishment  of  the  service 
provider, which is generally the place where the telecommunications company has established 
its business or has a fixed establishment.  This definition of the place of taxation (Article 9(1) of 
the Sixth Directive) gives rise to two sets of problems: 

The first difficulty  has to do with the influence  of the VAT system  on the competitiveness of 
Community  operators.  If establishment  in the  Community  is the  only  condition  making an 
operator  liable  for  Community  VAT  on  any  telecommunications  service  he  provides, 
irrespective  of  whether  the  service  is  provided  inside  or  outside  the  Community  and 
irrespective  of the status of his customer, then that  operator  will clearly  always be subject  to 
Community VAT, whereas competitors established in third countries will not. 

The other problem  is that  it is impossible at  present  effectively  to  tax  all  telecommunications 
services  consumed  within  the  Community.  All  a  customer  in  the  Community  has  to  do in 
order  to  escape  payment  of  VAT  is to  use  the  services  of  a  telecommunications  company 
established  in  a third  country.  The  liberalisation  of the  telecommunications  sector  together 
with  technical  facilities  make  this  even  easier  for  him.  These  practices  are  causing  major 
revenue losses to Member States' budgets. 

The situation can therefore  be summed up as follows: the current  VAT system  disadvantages 
Community  operators who are handicapped  by not being able to  compete  with  third-country 
operators  on  markets  outside  the  Union,  whereas  technical  arrangements  are  enabling 
third-country operators to take advantage of the fact  that  they are not  subject  to  Community 
VAT, and this is reducing the  tax collected.  Moreover,  Community firms which do not have 
the right to deduct  in full  the VAT they pay on their purchases (such as banks and insurance 
companies) can reduce their costs in this way, at the expense of competitors who purchase the 
same services from a Community operator. 

What approach should be taken? 

Since VAT is a general tax on consumption,  any amendment  of existing legislation must more 
effectively  capture  consumption  in  the  Community,  while  preventing  the  distortions  of 
competition that currently take place. 

The mobile nature  of telecommunications  services  combined  with  the  technical  potential  for 
physically locating or relocating the service anywhere in the world rule out an approach based 
on  the  place  where  the  service  is  physically  performed.  Since  the  current  arrangements 
focusing  on the place of establishment  of the service provider  have proved  inadequate  in the 
cases of telecommunications  services "imported" from or "exported"  to third  countries, there 
is  no  alternative  but  to  look  to  the  customer  with  a  view  to  defining  more  precisely  the 
consumption of a service within or outside the Community.  Consumption can thus be deemed 
to  take  place from the  moment  when  the  customer  receives  the  routed  signal  or  when  the 
emitted signal is routed on his behalf. 

Conclusion:  To  determine  whether  a  telecommunication  service  falls  within  the  scope  of 
Community VAT  and in order to  avoid  distortions  of competition  between  Community and 
non-Community  suppliers  of  telecommunication  services  one  has  to  consider  the  place  of 
establishment of the recipient.. 

Analysis of technical options 

Shifting the place of taxation from the place of establishment  of the service provider to that of 
the customer has implications which need to be looked into in greater detail: 

(a) Providers established within the Community 

Once the  place  of taxation  is determined  by the  place  of establishment  of the  customer,  the 
general  rules  governing  VAT  would  require  the  service  provider  to  be  identified  for  VAT 
purposes in all Member States where he has customers.  Compared with the present  situation, 
in which the service provider fulfils  all his VAT obligations  in the Member State where  he is 
established, this would be a retrograde  step and would add to the difficulties  which prompted 
the Commission  to  draw  up  a  programme  for  introducing  the  definitive  VAT  system  (doc 
COM(96 328  final). 

Conclusion:  The solution  sketched  out  for  the future  VAT system  should  be applied  at this 
stage: telecommunications service providers should be identified  for VAT purposes in a single 
Member State for all the services they provide in the European Union. 

(h) Providers established outside the Community 

Service  providers  who  do  not  have  a  fixed  establishment  within  the  Community  should 
normally be subject to the same constraints as  Community operators. If a solution is sought to 
avoid Community operators having to be identified for VAT purposes in each Member State in 
which  they  have  customers,  then  the  same  reasoning  should  apply  to  non-Community 
operators. 

Conclusion: The principle of a single VAT identification  within  the European Union  should 
also apply to operators who are not established within the Union. 

(c) "Reverse charge" and procedure for  refunding tax 

The advantage to a service provider of having to be identified  for  VAT purposes in only one 
Member State  would  be  counterbalanced  by  the  difficulties  faced  by  the  customer  in 
recovering  the  VAT  he  has  paid  on  telecommunications  services.  If  the  customer  is  not 
established  in the  same Member State  as the  service  provider,  he will  have to  apply  for  the 
VAT  to  be  refunded  in  accordance  with  the  procedure  established  by  the  Eighth  VAT 
Directive.  The  desire to  avoid  the  need  for  such  formalities  is one  of  the  reasons  why  the 
"reverse charge" mechanism (whereby the taxable person acquiring the services becomes liable 
for the tax and has to fulfil  all the tax obligations instead of the service provider) is applied to 
the intangible services listed  in Article 9(2)(e).  There are, however,  fundamental  reasons for 
not applying such a mechanism to telecommunications services. 

The main argument is based on the principle of equity in taxation.  While the "reverse charge" 
mechanism  can  offer  advantages  in  eliminating  procedures  for  the  refund  of  VAT  on 
purchases,  it  also  has  drawbacks  in  terms  of  the  scope  for  monitoring  non-Community 
operators and the incentive for them to declare all the services they provide to customers in the 
Community.  The  "reverse  charge"  mechanism  would  release  non-Community  service 
providers  from  all  tax  obligations  in  so  far  as  their  customers  were  taxable  persons;  they 
would, on the other hand, still be subject to the full extent of these obligations when providing 
services to  non-taxable persons.  Since the tax administration  has little  scope for  monitoring 
non-taxable persons, it must  have greater  means of supervising  service providers;  hence the 
need for non-Community operators to declare all their taxable transactions in the Community. 
Without such a requirement, amending the VAT rules for telecommunications  services would 
have an impact only on taxable persons who are not entitled to deduct input tax in full, namely 
banks and insurance companies, and would  achieve only incomplete taxation  of consumption 
in the Community, with the taxation  of consumption  by private individuals remaining  a dead 
letter. 

A practical consideration is also worth mentioning: it is virtually impossible for an operator in a 
third country to ascertain and check whether or not  his customer  ranks as a taxable person. 
This  is  because  the  system  put  in  place  in  the  Community  under  the  transitional  VAT 
arrangements  for  identifying  taxable  persons  is  not  available  outside  the  Union.  But  the 
distinction between taxable and non-taxable persons would  determine the tax  rules applicable 
and  the  tax  obligations  incumbent  on  non-Community  operators.  Moreover,  the  current 
application of Article 9(2)(e) to intangible services takes account of this difficulty  by ruling out 
taxation  of non-taxable persons and thereby avoiding the imposition  of any tax  obligation on 
non-Community operators. 

Lastly,  non-application  of the  "reverse  charge"  mechanism  would  not  result  in a particularly 
heavy burden on customers who are taxable persons, since the situation would not differ from 
that  currently  prevailing  within  the  Community.  The  way  in which  Article 9(1)  is currently 
applied has the same consequences. 

Conclusion: A "reverse charge" mechanism should not be applied. 

(d) Transmission and Terminal charges 

The  only  area  where  application  of  the  procedures  for  refunding  VAT  can  create  major 
problems  is  the  invoicing  of  routing  and  terminal  charges  between  operators  of  different 
telecommunications  networks.  What  is involved  here is the  settlement  of accounts  between 
different telecommunications companies in respect of their involvement in a service provided to 
a customer.  A telephone call from Luxembourg to the United States can thus involve several 
telecommunications  operators  in addition  to the Luxembourg  postal  and  telecommunications 
administration,  e.g.  the  Belgian,  UK  and  American  telecommunications  companies,  or  the 
French  and  American  telecommunications  companies,  or  others  still,  according  to  how  the 
signal  is actually  routed.  With  each  company  billing for  its  involvement  in  the  service,  the 
consequence  of  applying  VAT  would  be  that  large  amounts  of  tax  would  have  to  be  paid 
before  they  could  be  recovered,  some  time  later,  via  the  refund  procedures.  To  avoid 
difficulties  of this kind, the Melbourne Convention suggests exemption from the tax.  Although 
exemption  would  depart  from  usual  practice  and  would  be  difficult  to  integrate  into  the 
Community's  existing  VAT  arrangements,  it  appears  to  offer  an  appropriate  solution  to  the 
problem,  except  that  the  "reverse  charge"  mechanism  should  not  be  applied,  for  the  other 
reasons set out earlier. 

Conclusion: Routing and termination services provided between different  telecommunications 
companies should be exempted from the tax. 

(e) Definition of telecommunications sendees 

In  applying  the  proposed  rules  it  is  necessary  to  have  a  definition  of  telecommunication 
services. It is important  that this definition  covers only the telecommunication  "transmission" 
service itself and  not  the  content  which  is transmitted  because,  otherwise,  this  could  lead  to 
different  treatment of the "content" according to the mode of transmission  (telecommunication 
or other). 

In principle it would be preferable  to use an existing definition  of telecommunication  services 
such as that relevant to legislation in the telecommunications  sector  itself based  on  Article 90 
and  100-A of the Treaty.  However  it  is apparent  that  this definition  was  not  established  for 
fiscal  purposes and gives rise to  certain problems. Alternatively there is the definition  used in 
the Melbourne Convention which has the advantage of being accepted  at international  level, a 
point  which  is important  for  a system  which  is to  be  applied  equally  to  telecommunications 
providers not established in the Community. 

Conclusion: For the purposes  of this proposal,  the definition  of telecommunication  services 
contained in the Melbourne Convention is the most appropriate. 

General Conclusions 

The new regime for the taxation  of telecommunication  services provides the same conditions 
and  fiscal  framework  for  all  telecommunication  providers  having  activities  within  the 
Community independent of the place of establishment of those operators (within or outside the 
Community). 

This Directive deals only with telecommunication  in the strict sense and not with the so-called 
"value added" services. 

n.  Comments on individual articles 

Article 1 

Point 1 

Place of taxation and definition of telecommunications services 

Specific  rules for  determining  the place  of  taxation  for  the  supply  of  telecommunications 
services are laid down in point  1.  They are designed to adjust  the territorial  scope of VAT 
by replacing the criterion of the place of establishment of the service provider  with  that of 
the  acquirer  of  the  service  for  telecommunication  services  other  than  those  supplied  by 
Community operators to their Community customers. 

Consequently,  services supplied  by Community  service providers  to customers  established 
outside the Community are no longer subject  to the tax (first  subparagraph).  On  the other 
hand, since the second paragraph provides that the place of taxation for  telecommunications 
services  supplied  by  a  service  provider  established  outside  the  Community  to  customers 
established  within  the  Community  (whether  taxable  persons  or  private  individuals)  is the 
place of establishment  of  the customer,  all consumption  within  the Community  is brought 
within  the  scope  of  the  tax.  The  rules  on  the  place  of  taxation  for  telecommunications 
services  supplied  by  Community  operators  to  Community  customers  remain  unchanged 
(Article 9(1)). 

The  new  approach  would  normally  require  a  third-country  operator  to  be  identified  for 
VAT purposes in the Member State of his customer.  To avoid the need for  multiple VAT 
identifications  in  the Community,  a  non-Community  operator  is deemed  to  be  established 
within  the Community  once  he  is  identified  for  VAT purposes  in one  Member State  (last 
sentence of the second indent). 

The  definition  of  telecommunications  services  reproduces  the  definition  used  in  the 
Melbourne  Convention  with  an  additional  clarification.  That  definition  includes  the 
provision of networks and infrastructures  such as cables or  satellites used for  the  purposes 
of telecommunication, of access to Internet and of electronic courier networks. 

Point 2&3 

Full exemption for terminal charges 

As  envisaged  in  me  Melbourne  Convention,  charges  for  supply  of  services  related  to 
routing  and  terminating  telephone  calls  are  exempted  from  VAT,  although  the  right  to 
deduct input tax is maintained. 

Point 4 

Deletion of point 5 in Annex F 

Point 5  of  Annex F  has  become  obsolete  since  all  Member States  now  tax  supplies  of 
telecommunications services.  It is therefore repealed. 

These are standard provisions. 

Articles 2 to 4 

Proposal for a 
COUNCIL DIRECTIVE 
amending Directive 77/388/EEC 
as regards the value added tax arrangements 
applicable to telecommunications services 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European Community, and in particular Article 99 
thereof, 

Having regard to the proposal from the Commission, 

Having regard to the opinion of the European Parliament, 

Having regard to the opinion of the Economic and Social Committee, 

Whereas  Article 7a  of  the  Treaty  defines  the  internal  market  as  an  area  without  internal 
frontiers in  which  the free movement  of  goods,  persons,  services  and  capital  is  ensured  in 
accordance with the provisions of the Treaty; 

Whereas the rules currently applicable to VAT on telecommunications  services are inadequate 
for taxing all such services consumed  within the Community  and for  preventing distortions of 
competition in this area; 

Whereas, in the interests of the proper functioning  of the internal market, such distortions must 
be eliminated and new harmonised rules introduced for this type of activity; 

Whereas action should be taken to ensure that telecommunications services used by customers 
established within the European Union are taxed; 

Whereas, for  the purpose of establishing a special  rule for  determining the place of supply of 
telecommunications services, these services need to be defined; whereas such definition  should 
draw on definitions already adopted at international level, which include international telephone 
call routing and termination services; 

Whereas it has been agreed at international  level, under the Melbourne Convention, to exempt 
telecommunications  services  supplied  between  telecommunications  network  operators; 
whereas this approach should be followed  at Community level, 

HAS ADOPTED THIS DIRECTIVE: 

Directive 77/388/EEC is hereby amended as follows: 

Article 1 

1. 

In  Article 9(2)  the  stop  is  replaced  by  a  semi-colon  and  the  following  section  is 
added: 

"(f) 

the  place  of  supply  of  telecommunications  services  is  the  place 
where  the  customer  has  established  his  business  or  has  a  fixed 
establishment for which the service is supplied or,  in the absence of 
such a place of business or fixed establishment,  the place where he 
has his permanent address or usually resides,  if that place is outside 
the Community; 

the  place  of  supply  of  telecommunication  services  provided  by  a 
supplier  established  outside  the community  to a customer  who has 
established  his  business  or has a fixed  establishment  for  which  the 
service  is supplied or,  in the absence of  such a place of  business or 
fixed  establishment, the place where he has his permanent address or 
usually  resides  within  the  Community,  is  the  place  where  the 
customer is established.  If a service provider established outside the 
Community  is  identified  for  VAT  purposes  in  a  Member State on 
account of  having  supplied  a  telecommunications  service  there,  he 
shall be deemed, for the purposes of this Article, to be established in 
that Member State; 

telecommunications  services shall be deemed to be services relating 
to the transmission, emission or reception of signs,  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. " 

2. 

In  Article  13(B),  the  stop  is  replaced  by  a  semi-colon  and  the  following  point  is 
added: 

the 

supply,  between 

of 
"(i) 
telecommunications  services  relating  to  the  routing  and  termination  of  telephone 
calls. " 

telecommunications  network  operators, 

3. 

In  Article 28f(l),  "13(BXi),"  is  inserted  in  Article  17(3)(b)  after  the  words 
".. .pursuant to Article". 

4. 

In Annex F, point 5 is deleted. 

10 

Article  2 

1. 

Member States  shall  bring  into  force  the  laws,  regulations  and  administrative 
provisions  necessary  to  comply  with  this  Directive  by  1 January  1999  at  the  latest. 
They shall inform the Commission  thereof. 

When  Member States  adopt  these  measures,  they  shall  contain  a  reference  to  this 
Directive  or  shall  be  accompanied  by  such  reference  at  the  time  of  their  official 
publication.  The procedure for such reference shall be adopted by Member States. 

2. 

Member States  shall  communicate  to  the  Commission  the  text  of  the  provisions  of 
domestic law which they adopt in the field covered by this Directive. 

Article  3 

This Directive  shall enter into force  on the day of its publication  in the Official Journal  of the 
European  Communities. 

This Directive is addressed to the Member States. 

Article  4 

Done at Brussels, 

For the Council 
The President 

11 

FINANCIAL  STATEMENT 

The proposal for a Directive will, once adopted, have the effect  of increasing the Community's 
VAT own resources base. 

Changing  the  place  of  taxation  for  telecommunications  should  make  it  possible  to  bring  the 
consumption  of this type of services in the European Union  more effectively  within the  scope 
of the tax,  since the  transactions  that  will  become  taxable  will  be  more  numerous  than  those 
that  will  cease  to  be  taxable  because  they  are  deemed  to  be  supplied  outside  Community 
territory. 

However,  the  increase  in  own  resources  cannot  be  estimated  precisely  in  view  of  the  huge 
difficulty  of  quantifying  all  the  variables  that  will  influence  the  net  result:  turnover  in  the 
transactions  concerned,  input VAT,  services  supplied by  service  providers  established  in third 
countries, breakdown between customers who are taxable persons with or without the right to 
deduct and customers who are not taxable persons. 

12 

ISSN 0254-1475 

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