Telecoms Services & VAT

In the European Union (EU), the services of connection to the Internet are taxed differently, for VAT purposes, to content provision services. Internet access provision is a telecommunications service in the EU – this is a rather different treatment to that in the United States, where Internet access is generally not regarded as a telecommunications service for sales/use tax purposes.

Since the issue of the Telecoms Derogation in March 1997, non-EU Telcos and ISPs providing Internet access services to EU private individuals, will probably be aware that these services are taxable in the EU member state in which they are consumed. The Telecoms Directive published in June 1999 effectively formalised the rules in the Derogations. Therefore, if a non-EU provider is doing business with private individuals (non-taxable persons) in all 27 member states, it has a potential VAT registration and reporting responsibility in each of those states. This obviously raises the level of compliance obligations and cost significantly.

An alternative might be to go “local” in one EU member state, for example, by forming a subsidiary company there, and invoicing to non-taxable EU customers with local VAT from that location. However, it may be necessary to demonstrate substance and a definite physical presence to obtain such a local VAT registration. There are also pitfalls to be wary of – in some member states a local VAT registration may trigger a direct tax liability as the local entity may be regarded as a permanent establishment. However, with proper planning there are a number of opportunities to take advantage of the different compliance levels, different VAT rates and different interpretation of the rules in the various EU countries.

Our Telecoms Services include:

* Assistance with setting up UK or European subsidiaries or other entities.
* Managing VAT compliance, accounting and direct tax compliance.
* Providing tax planning advice regarding both VAT and direct taxes (such as corportate tax, income tax, etc)

For further information / consultation please contact us or read the articles below.