European Court of Justice’s (ECJ) Decision on the interpretation of point (b) of the first paragraph of Article 59a of the Council Directive 2006/112/EC of 28 November 2006: “Roaming services, effective use and enjoyment, VAT refund”  

On the 15th of April 2021, the Court of Justice of the European Union (“ECJ”) issued its judgement on the C-598/19 case (SK Telecom Co. vs Tax Office of the City of Graz, Austria) regarding the refund of input value added tax (VAT) paid by SK Telecom Co., in relation to a supply of telecommunications services for the 2011 tax year.  

1. Brief facts of the case

• SK Telecom Co. is a company established in South Korea, which supplies mobile phone services to customers, who were also established, had their permanent address or usually resided in South Korea. Customers temporarily staying in Austria, could use the mobile phone services by way of roaming services.
• An Austrian mobile communications network operator made its network available to SK Telecom Co., in exchange for the payment of a user fee plus Austrian VAT (20%), so as those customers to be able to use their mobile phones during their stay in Austria.
• SK Telecom Co. subsequently charged its customers roaming charges for using the Austrian mobile network.
• SK Telecom Co. applied to the Tax Office of the City of Graz, Austria for a VAT refund, invoiced by the Austrian mobile communications network operator.
• The Tax Office of Austria denied the application for VAT refund, arguing that SK Telecom Co. should have charged Austrian VAT on its roaming fees, since otherwise the telecommunications services supplied would not be subject to tax in the third country (i.e., those telecommunication services were not subject to a tax in South Korea), leading to double non-taxation.

2. The main questions

The court was in essence called to examine whether the use of roaming services in a Member State, supplied by a mobile phone operator established in a third country, must be considered to be “effectively used and enjoyed” within that Member State, so that the Member State may consider the place of supply of these roaming services being within its territory, when such services are not subject to a tax treatment in that third country, that is comparable to the charging of VAT.

3. Summary of the ECJ decision

The ECJ was called to interpret the aforementioned transactions, in the context of the Article 59(a) of the VAT Directive:
“In order to prevent double taxation, non-taxation or distortion of competition, Member States (MS) may, with regard to services the place of supply of which is governed by Articles 44, 45, 56, 58 and 59:
…
b) consider the place of supply of any or all of those services, if situated outside the Community, as being situated within their territory if the effective use and enjoyment of the services takes place within their territory.”

a. The underlying principle of the VAT Directive concerning the place where the service is deemed to be supplied, is that services should be taxed as far as possible at the place of consumption. 

The roaming services, being telecommunications services within the meaning of Article 24(2) of that directive, since are supplied to non-taxable persons who are established, have their permanent address or usually reside outside the European Union, are considered to be supplied where those persons are established, have their permanent address or usually reside (i.e., South Korea).

b. Derogation as per point (b) of the first paragraph of Article 59a of the VAT Directive

However, under point (b) of the first paragraph of Article 59a, the VAT Directive allows MS, to consider that the place of supply, which is in principle situated outside the European Union, to be situated within their territory, if the effective use and enjoyment of those services takes place within their territory.

c. Article 59a does not lay down any conditions relating to the length of stay in the territory of Member State

The court stated that Article 59a does not provide for any conditions relating to the length of stay in the territory of MS. Therefore, if the MS will exercise the option given by Article 59a, it is important to assess whether roaming services, are indeed effectively used and enjoyed within the territory of the Member State, which wishes to have the relevant taxing rights.

d. The second paragraph of Article 1 of the VAT Directive provides that every transaction must normally be regarded as distinct and independent.

The court pointed out that the roaming services, such as those at issue in the main proceedings, 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, supported by the fact that these services were also subject to separate fees.
Taking into account that the purpose of the roaming services was to allow customers of SK Telecom Co. to use mobile phone services via the mobile communications network of an Austrian operator, and also the fact the such services are distinct and independent, the court concluded that the effective use and enjoyment of those services necessarily takes place within the territory of the Member State concerned during SK Telecom’s customers’ temporary stays in that territory (i.e., Austria).

e. MS can make use of the option provided under point (b) of the first paragraph of Article 59a of the VAT Directive, only in so far as that use has the effect of preventing double taxation, non-taxation or distortion of competition.

The court stressed out that the taxation of all telecommunications services consumed within the European Union reflects the intention of the European Legislation to prevent distortion of competition and also to avoid, conflicts of jurisdiction which may result either in double taxation or double non-taxation.
Therefore, MS can make use of the option provided under point (b) of the first paragraph of Article 59a of that directive, where that use has the only purpose of alleviating a situation of non-taxation within the European Union.
According to the information available to the Court, this was the case with the roaming services at issue in the main proceedings.

4. Further considerations related to the judgement:

• The present judgement highlighted the fact that in order to be able to establish whether telecommunication services are indeed effectively used and enjoyed within the territory of a Member State, it is important to take into account the very nature of the services, and whether such services are distinct and independent.
• The present judgement also pointed out that the length of stay in a Member State territory, might deemed to be irrelevant for the purpose of establishing whether telecommunication services are effectively used and enjoyed within that territory.
• The judgement also underlined that the MS may make use of the option provided under point (b) of the first paragraph of Article 59a of the VAT Directive, without having to consider the taxation of those services under the domestic tax law of the third country.

• The fact that a service may be taxed in a third country under the national legislation of that country, should not prevent a Member State from taxing that service in its territory, if it is effectively used and enjoyed there.

How KINANIS LLC can assist

• VAT advice on identification of the place of supply of services received / provided
• VAT advice on VAT refunds
• VAT Rulings
• Ongoing VAT advice on identification of VAT implications of any nature of contract
• Assistance on the VAT recovery in co-operation with the VAT authorities

AUTHOR
Antonia Hadjiantoniou
Associate – Accounting & VAT Department
VAT@kinanis.com