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The shift to VAT taxation at the point of consumption

Global tax policy and trends are seeing a focus on digital supplies and a drive toward ensuring appropriate taxation at the point of consumption. In the area of indirect taxation, specifically, VAT, the drive toward taxation at the place of consumption will culminate into a significant change for digital supplies consumed within the EU effective as of 1 January 2015. This date will mark the entry into force of changes to the taxation of electronically supplied services within the European Union, which were announced back in 2008 (Directive 2008/8). This change, which will essentially complete the transition to taxation in the country of consumption, will impact the VAT liability of cross-border supplies of electronically supplied services, which, by definition, include online gambling games and games of chance.

Today, EU B2C supplies of electronic services are treated for VAT purposes as supplied in the country in which the supplier is established, therefore the VAT rules and rates applicable in the country of the operator determines the VAT treatment of such supplies, irrespective of the location of their customer. An exception to this rule currently applies to electronic services when supplied to EU consumers by non- EU suppliers, who are required to charge and collect VAT in the country of their customer.

As of 1 January 2015, electronic services supplied by EU and non-EU operators alike to private consumers within the EU will become taxable in the country where the consumer is located. This means that the VAT treatment of the relevant electronic services in the country of the supplier will no longer be relevant, and suppliers of these services, wherever located, will in principle have to charge VAT at the rate applicable in the Member State of consumption, unless an exemption applies in that Member State. To a Malta-based online gambling operator having customers across the EU, this means a shift from a VAT exemption on ‘sales’ to potentially VAT (at different VAT rates) for the same service in any one or more of the 27 other Member States. Whilst in terms of the EC VAT Directive, an exemption applies to gambling and betting activities, Member States are permitted to apply such limitations and conditions to the exemption as they deem fit. A review of the VAT treatment of online as they deem fit. A review of the VAT treatment of online gambling and betting activities across the EU has shown that not all Member States apply an outright VAT exemption for online gambling and betting, with certain (limited) Member States levying VAT on most categories of online gambling and betting.

Whilst the term “Electronically Supplied Services” may appear obvious and self-explanatory, as in all things VAT, interpretations may vary from one Member State to another, and such a variation may prove to be the first, and definitely not the last, of the issues which cross-border operators may face when adapting to the 2015 changes. The existing and proposed draft legislation does contain definitions of the terms however, these are non-exhaustive, and in particular in the case of electronically supplied services, leave room for varying interpretations. The current definition expressly brings within the scope of ‘electronically supplied services’, services relating to gambling games and games of chance. Notwithstanding the drive toward the harmonisation of interpretations across the EU Member States, whether any or all categories of online betting and gambling would classify as an electronically supplied service in a given EU Member State, ultimately depends upon the interpretation applied by that Member State.

For online gambling and betting operators, the 2015 changes will require an assessment as to whether their activities classify as electronically supplied services in the EU markets within which they operate as well as the VAT treatment in those Member States. If VAT is chargeable on services supplied to players in a given Member State, the question of the ‘taxable base’ arises, one which may not be straightforward, given the difficulty in identifying the ‘turnover’ derived from such activities. Once again, this may vary from Member State to Member State, since ultimately it is the rules and practices in force in the country of consumption which would apply.

The 2015 changes will render a number of factors, which are currently possibly only considered relevant by operators from a commercial perspective, relevant, if not to say key, from a VAT perspective. In the context of overall VAT exposure, the changes could, for certain markets, impact pricing and margins. From an operational perspective, service providers will need to identify where their players are located, specifically where the customer has his “permanent address 0r usually resides”. The EU Commission has proposed legislative provisions which provide guidance on the criteria to be followed when determining a customer’s location, and the proposed provisions also list evidentiary details which may be relied upon for the purposes of determining the customer’s location, such as bank details or an IP address.

The administrative issues resulting from the 2015 changes are not inconsequential, the foremost being the obligation to register for VAT in the EU Member State where the supply takes place. No threshold has been introduced, which means that one single taxable (and not exempt) supply to a consumer in another Member State, even if that supply is of negligible value, would trigger the obligation to charge and collect VAT there, and to comply with local invoicing and reporting requirements. The potential administrative burden that multiple VAT registrations would bring about, is addressed by the introduction of the so-called Mini One Stop Shop, an optional scheme which permits B2C suppliers of electronically supplied services within the EU to register for VAT in one EU Member State and to report and pay all of the EU VAT charged and collected in one single Return which will be submitted to the Member State of registration. The Member State of registration will then distribute the VAT received to the various EU Member States of consumption. Notwithstanding the simplified reporting option, VAT compliance will take on an entirely new dimension, and the added administrative burden, and resulting cost, cannot be avoided.

The EU legislative framework for the 2015 changes to the VAT rules is, for the most part, in place, and Member States should now already have their Mini One Stop Shop system up and running (by October 2014). Of course, the practical issues and considerations will only come to the fore as and when the legislation enters into force and operators begin to

The 2015 changes to the VAT rules invariably add a completely new dimension to the VAT reality currently enjoyed by Malta-based online gambling operators (and those established in other EU jurisdictions). Whilst these changes will essentially extend, to EU-based operators, the rules which have already applied to non-EU operators for a number of years, the new legislation and guidance concerning the compliance system and the audit process is expected to result in an enhanced level of monitoring of supplies of electronic services to EU consumers, with a view to collecting any VAT due thereon, thus arguably rendering the 2015 changes to the VAT rules for electronic services equally as relevant to non-EU operators.

Dr. Sarah Aquilina is a Senior Manager, specialising in indirect tax at Deloitte Malta [saquilina@deloitte.com.mt]. For further information on the 2015 changes to the VAT rules visit http://www.deloitte.com/mt/vat2015.

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