VAT and roaming services

The CJEU has held that Member States may apply the "use and enjoyment" override to require VAT to be accounted for on roaming services used within the EU: SK Telecom v Finanzamt Graz-Stadt (Case C‑593/19). This remains the case even where the overseas provider of telecoms to the customer also charges a local tax equivalent to VAT on those roaming services.

The decision will have important consequences for third country telecom operators that charge roaming fees to their customers for the use of mobile services in the EU, where the local EU country applies the use and enjoyment rules. In principle, third country providers will need to register for VAT in the Member State where the services are used and enjoyed or will need to take advantage of the simplified accounting offered by the EU VAT MOSS system.

There may also be wider consequences for the application of use and enjoyment to other services consumed within the EU.

Background

SK Telecom is a company established in South Korea, which, in 2011, supplied mobile phone services to its local South Korean based customers by way of roaming services allowing the use of the Austrian mobile communications network. For these purposes, an Austrian mobile communications network operator made its network available to SK Telecom in exchange for the payment of a user fee plus Austrian VAT at 20%. SK Telecom invoiced its customers roaming charges for using the Austrian mobile communications network during their temporary stays on Austrian territory. SK Telecom applied to the Tax Office for a refund of the VAT invoiced to it by the Austrian mobile communications network operator, under domestic provisions implementing the Thirteenth VAT Directive.

The Austrian Tax Office rejected SK's application for a refund of VAT. It was a condition of the refund that SK did not carry out taxable transactions in Austria, but the Tax Office took the view that SK's supply of roaming services to its customers took place in Austria (rather than outside the EU). In particular, Austria had implemented in its Transfer Regulation the "use and enjoyment override" provisions allowed for within the VAT Directives in relation to the place of supply of telecommunications, broadcasting and television services. This provided that supplies of such services would be treated as taking place in Austria where they were "used and enjoyed" in Austria.

Article 59b of the Principal VAT Directive (PVD) requires the application of the use and enjoyment override in relation to the supply of telecommunications services supplied by a business outside the EU to a non-taxable customer who is "established in a Member State, or who have their permanent address or usually reside in a Member State". More generally, the wider use and enjoyment override provision relies on the Article 59a of the Principal VAT Directive which, as part of its preamble, states that its purpose is "'to prevent double taxation, non-taxation or distortion of competition".

SK appealed that ruling and eventually the Austrian courts referred to the CJEU the question of the scope of the "use and enjoyment" override provision.

Decision of the CJEU

The CJEU first noted that the underlying logic of the provisions of the PVD concerning the place where a service is deemed to be supplied is that services should be taxed as far as possible at the place of consumption.

Secondly, the CJEU confirmed that, whilst Article 59b requires the application of the "use and enjoyment override" to supplies to non-taxable customers based in the EU, that provision should not be seen as limiting the application of Article 59a. There was nothing in Article 59b which would prevent Member States applying the "use and enjoyment override" to telecom services used by non-taxable persons inside the EU, even where they are not based inside the EU. In principle, therefore, it was open to Austria to treat the place of supply of telecom services supplied by SK to its South Korean customers as being in Austria where they were used and enjoyed in Austria.

The CJEU went on to confirm that roaming services, in these circumstances, should be regarded as used and enjoyed in the local jurisdiction (ie Austria in this case). In essence, a roaming service consists in the service supplied by a mobile communications service provider to its customers, allowing them to use their mobile device on a mobile communications network other than that of that provider, as a result of agreements concluded between the operators of those networks. In the present case, the purpose of the roaming services was to allow customers of SK, where they are outside the reach of the mobile communications network operated by SK, to use mobile phone services via the mobile communications network of an Austrian operator. As such, roaming services provided to persons who are temporarily staying in the territory of a Member State are distinct and independent from other mobile communications services received by those persons. This conclusion was reinforced by the fact that the roaming services were distinctly identified by SK and subject to separate fees, namely roaming charges, which were separately invoiced to the customers supplied with those services.

SK, however, pointed out that its charges to its customers for roaming services were also taxed at 10% in South Korea. This was a tax equivalent to VAT and therefore the pre-condition for the application of Article 59a (non-taxation) was not met. The CJEU has rejected this argument.

Firstly, the CJEU noted that the relevant wording of the PVD indicated that "it is open to Member States to make use of the option... where that use has the sole effect of remedying a situation of non-taxation within the European Union", which was the case with the roaming services in this case.

Moreover, the CJEU agreed with the Advocate General that for the purpose of applying that provision, the possible cases of double taxation, non-taxation or distortion of competition are to be assessed by reference to the tax treatment of the services concerned in the Member States, without it being necessary to take account of the tax regime to which those services are subject in the third country concerned. The CJEU pointed out that any other approach would mean that the application of EU VAT rules would be dependent on the third country's domestic tax law. "In the absence of any indication to that effect, it cannot be presumed that that was the intention of the EU legislature." This view was also backed by analysis that had been published by the EU VAT Committee.

Comment

Whilst this particular decision relates to the recovery of input VAT by SK Telecom, the CJEU decision makes it clear that charges made by a third country telecom operator to its local customers for roaming services provided in a Member State should be subject to VAT in that Member State where the use and enjoyment override has been implemented. This is an important decision and means, in principle, that overseas telecom operators will need to register and account for VAT in the relevant Member State or otherwise make use of the EU MOSS system for accounting for VAT.

The decision appears to depend on the third country supplier charging a distinct roaming fee for such services, separate to its normal charges for mobile services. Accordingly, it may be that the decision will not apply where there is a mutual agreement between the third country and the relevant Member State such that any fee for roaming services is simply bundled as part of the regular payment for mobile services.

Interestingly, the decision does not touch on the VAT liability of the B2B supply from the Austrian network provider to SK. However, it is not entirely clear why that supply was subject to local Austrian VAT as opposed to being treated as supplied (as per the normal B2B place of supply rule) where the business customer was located (ie outside the EU). Was the service received by SK also "used and enjoyed" in Austria and so subject to the override?

The decision also contains an ambiguous reference to the possibility of national agreements overriding the position. In relation to the application of the "use and enjoyment override" in these circumstances, the CJEU stated that "It is true that an international agreement concluded with that third country in that respect could provide otherwise. Nevertheless, the request for a preliminary ruling and the observations submitted to the Court do not refer to any such agreement." It is true that the use and enjoyment override is an optional aspect of the PVD and Member States may choose to apply it to specified supplies (except where it is mandates, as with Article 59b), but the use of a bilateral agreement to restrict its application in relation to some, but not all, third country suppliers would be highly unusual to say the least.

It should be noted that the equivalent use and enjoyment override in the UK only applies to supplies of telecom services supplied to business persons. Whilst the CJEU decision will not be binding in the UK post-Brexit, the decision however remains persuasive of the application of the UK use and enjoyment provision.

Telecoms operators will need to consider the implications arising from this decision, and how they will manage the risk of local European tax authorities (which apply use and enjoyment) assessing for retrospective and prospective VAT on roaming charges.