GFD’s information on reverse-charge application on telecommunication services: some questions remain
The reverse-charge regime has been applied to selected electronic communication services since 1 October 2016. The General Financial Directorate (the "GFD") has published information that should have clarified reverse-charge application conditions. Nevertheless, some application aspects remain unclear.
According to the government decree, from 1 October 2016 the reverse-charge mechanism should apply to the provision of electronic communication services:
(i) via access to electronic communication networks;
(ii) via interconnection of electronic communication networks; or
(iii) based on purchases or sales of these services;
in compliance with Act No. 127/2005 Coll., on Electronic Communication.
According to the GFD, the first two points relate to the provision of electronic communication services based on contracts for access to electronic communication networks or contracts for the interconnection of electronic communication networks under the conditions set by the Act on Electronic Communication. These should only apply to a limited scope of entities operating on a wholesale basis.
The last point raises the largest number of questions. According to the GFD, services involved should be those provided based on contractual relationships between two business entities operating in electronic communication (VAT payers) not regulated by a contract for networks interconnection or a contract of access under the Act on Electronic Communication, whereas the actual electronic communication services being re-sold do have the nature of supplies intended for access or interconnection.
Therefore, the majority of companies purchasing electronic communication services will have to determine whether they qualify as businesses operating in electronic communication and purchasing services for re-sale purposes or as end consumers. In the first case, purchases of these services would be subject to the reverse-charge mechanism; in the other case, a standard VAT regime shall apply.
The GFD specifically states that, for instance, where electronic communication services are purchased for re-sale within a holding of companies or for the re-sale of services rendered by companies engaged in procurement centralisation, the reverse-charge regime should apply. However, the GFD remains silent about the purchase of electronic communication services for re-sale to their own employees or their family members. As a result, tax advisors are currently attempting to clarify the approach to the application of reverse-charge in these situations directly with the GFD’s representatives.
We believe that the definition of a business entity operating in electronic communication services is crucial for the application of a correct VAT regime. Since the Act on Electronic Communication mainly defines general conditions for doing business in electronic communication, the Civil Code should help us define such a business entity. One of the basic features pertaining to business activities is the intention to generate profit. As a result, we are of the opinion that, in the case of the re-sale of telecommunication services to employees without a margin, employers that are business entities should not apply the reverse-charge mechanism on the purchase of these services.
Similar arguments can be used to deal with purchases of electronic communication services for the purpose of their subsequent re-sale without a margin within a holding of companies or to other group entities. In such cases, it is quite essential to consider carefully the setting of transactions between related parties, taking into account transfer pricing and the overall profitability of cooperation.