Telecoms firms hail move to plug VAT loophole for good

Date: 04/03/1999

By Peter Chapman

EU MEMBER states are considering perma-nent changes to the Union's system for charging value added tax on telecom services.

Industry experts say the move could stop European firms losing out to foreign rivals offering cut-price services to private customers in the Union.

The German presidency is leading the campaign to make permanent the temporary measures which were approved by EU governments in 1997 and are due to expire at the end of this year. This would involve an amendment to the Union's sixth VAT directive of 1977 which currently regulates the tax across the Union.

The temporary measures were introduced in response to concern that European firms were being forced to collect and pay VAT on services, while foreign rivals with customers in the Union were not.

"Under the old system, a supplier outside the EU, for example from America, would have to apply the rules in force in the US. He would never have to pay VAT here," explained a European Commission tax expert.

This meant that foreign firms could escape a surcharge on their bills ranging from 15-25%, and could therefore charge Union customers far lower prices on some services than their EU-based rivals which were obliged to pay VAT.

At the same time, Union operators had to add the local rate of VAT to their services, regardless of where they were supplied, putting them - in the words of the Commission official - at a "double disadvantage".

The measures agreed in 1997 were designed to close this loophole, which gave a huge advantage to suppliers of 'call-back' services offered to private customers, mainly by firms in the US.

These services were heavily advertised to business executives and members of the public tired of paying excessive bills for long-distance calls at a time when the EU's telecoms markets were not fully open to competition.

Call-back allows customers to bypass EU taxes and higher prices by making international calls through the US networks. To access them, users ring an American number and then key the international number they wish to dial. The US operator immediately 'calls back' with the international connection.

When they closed the VAT loophole, Union governments agreed that a non-Union supplier of such facilities to private customers would have to register for VAT in the member state where they were taken up. Alternatively, firms could open an office in a EU member state and pay the rate of VAT applying in that country.

The 1997 measures also reduced the red tape faced by foreign firms offering services to business customers in the EU. In this case, the European client, rather than the foreign supplier, deals with the VAT directly with his or her own tax authority and the foreign firm need not register for tax.

But in a controversial move, member states went further than the Commission had proposed when they approved the changes to the telecoms VAT regime, by deciding to allow EU operators to escape paying the tax on services which were 'enjoyed' outside the Union. This meant EU residents on business outside Europe could make VAT-free calls through Union-based operators.

The Commission argued that this should only have been done through a permanent change to the VAT system, and not through a temporary move.

A German tax diplomat said it was too early to say when plans to make the temporary measures permanent would be approved by EU governments, or what shape they would take. However, Commission experts say they expect member states to unveil their common position on the telecoms regime at a meeting of Union finance ministers in May.

Marco de Putter, a tax expert with Dutch telecoms operator KPN, said the company would welcome plans to make the changes to the tax regime permanent, adding: "The EU industry is quite happy with the way it is working."

But he warned the German presidency to stick as closely to the 1997 formula as possible, saying industry had got used to this regime and would not welcome small changes which could prompt a complex debate dragging on beyond the end of this year.