Clarification of VAT regime on re-sale of telecommunication services
The General Financial Directorate (GFD) decided to respond to frequent inquiries regarding the purchase and sale of electronic communication services and issued a clarifying appendix to its already-published information. The application of a different regime before the appendix’s effective date should not be challenged by the financial administration if the regime has been applied in good faith and in mutual agreement of both parties.
The first part of the appendix specifies the conditions that must be met to apply the reverse-charge mechanism. The second part describes specific examples. Apart from a basic condition under which both the service provider and the service recipient must be VAT payers, the appendix points out that both parties to a transaction must also operate in the electronic communication sector. A business entity is an entity that purchases services with the intention of subsequently selling them for profit (no matter whether it succeeds). An increase of the price by potentially necessary administrative costs associated with the re-sale is not considered an intention to generate profit.
Consequently, a relatively narrow group of transactions is subject to the reverse-charge mechanism. The purchase of electronic communication services by one mobile operator from another mobile operator and their subsequent re-sale to generate profit is a typical example to which the reverse-charge mechanism applies.
In contrast, the purchase of telecommunication services from an operator for its own consumption or for the purpose of allowing other end users to consume these services will be invoiced by the operator including VAT (i.e. the reverse-charge regime does not apply). These involve purchases of telecommunication services by:
- employers who subsequently re-invoice private calls to employees without a margin;
- parent companies that subsequently re-invoice part of these services to their subsidiaries without a margin;
- municipalities that subsequently re-invoice the purchase price of these services to nursery schools;
- owners of real property who re-invoice these services to lessees along with lease payments without a margin;
- airport operators who provide free-of-charge access to Wi-Fi connections to passengers.
The reverse-charge mechanism should be applied to the taxable supply as a whole in cases where a business entity operating in electronic communications purchases telecommunication services for both its own consumption and to allow other end users to consume the services and to re-sell the services for profit. To enhance certainty, the GFD recommends operators request written declarations from service recipients confirming the purpose for which telecommunication services are procured.
Where the application of a VAT regime in a specific case is disputable, it is possible to use the legal fiction that the supply is subject to the reverse-charge regime, but only if the regime is applied by both parties. It is also possible to apply for a binding ruling by the GFD.