In its submission to the hearing, the European Commission adopted the approach favored by Lebara Ltd, suggesting that in such circumstances the supply by the TelCo (i.e. the card issuer) is liable to reverse charge VAT in the distributor’s country, and that the onward supply by the distributor to the end user is subject to local VAT in the Member State where the distributor is established.
The UK First Tier Tribunal decided to refer questions to the ECJ in this case, which concerns the VAT treatment of phone cards sold by a UK company to distributors in other EU countries.
In summary, the Lebara Ltd did not account for VAT on the sale of phone cards to distributors in other EU countries on the ground that the transaction was a supply of telecoms services, which took place in the Member State where the distributor is established, therefore it was the distributor who was due to pay VAT under the reverse charge mechanism. Actual use of the card did not involve a provision of services by the Lebara Ltd to the end user.
UK tax authorities considered that the Lebara Ltd was due to pay VAT in the UK, on the basis that it supplied two services; the first at the point of sale of the card to the distributor, and the second on redemption, when the card was actually used by the end user. UK tax authorities’ view is that EU countries are free to tax either the first or second such supply (in the UK, it is the second supply that is taxed). The taxable amount is the part of the sum paid by the distributor to the taxpayer, which represents the use actually made of the card by the end user as a proportion of the face value of the card.
The questions referred are as follows:
“Where a taxable person (“Trader A”) sells phone cards representing the right to receive telecommunications services from that person, is Article 2( 1) of the Sixth VAT Directive to be interpreted so as to mean that Trader A makes two supplies for VAT purposes: one at the time of the initial sale of the phone card by Trader A to another taxable person (“Trader B”) and one at the time of its redemption (i.e. its use by a person – “the End User” – to make telephone calls)?
If so, how (consistently with EU VAT legislation) is VAT to be applied through the chain of supply where Trader A sells the phone card to Trader B, Trader B resells the phone card in Member State B and it is eventually purchased by the End User in Member State B, and the End User then uses the phone card to make telephone calls?”
Submissions to the Hearing
In submissions made to the ECJ, the European Commission adopted the approach favoured by the Lebara Ltd, suggesting that in such circumstances, the supply by the card issuer is liable to reverse charge VAT in the distributor’s country, and that the onward supply by the distributor to the end user is liable to local VAT in the Member State where the distributor is established.
The Netherlands suggested that the card issuer makes a single supply of telecoms services to the end user, and that the initial supply of the phone card to the distributor does not constitute a supply within the meaning of Article 2(1) of the Sixth Directive. The card issuer is therefore liable to account for VAT on supplies made to end users in the country in which he is established. In addition, the distributor supplies ‘distribution services’ to the card issuer and is liable to account for VAT in respect of that supply in the Member State in which he is established.
Greece suggested that only one supply is made and, although it is not clear from the submission by whom, the most likely interpretation is from the card issuer to the end user.
What does this means for you?
This EU VAT court case was recently referred to the European Court of Justice (“ECJ”) and concerns the supplies, which take place when a prepaid phone card issued by a TelCo from one EU country is sold to a distributor in another EU country and ultimately to an end user from that second EU country. The end user can then use the phone card to acquire telecoms services from the TelCo (i.e. makes calls, send messages, transfers data, etc.).
The eventual judgment of the ECJ in this case will be awaited with interest by all businesses involved in telecoms services and supplies of phone cards. If your company is buying, selling or issuing phone cards (or similar items) the outcome of this ECJ judgment will have important consequences for your business.
We suggest you to already now prove which rules your business is following in the various EU countries and prepare for the eventuality that the outcome of this case will be opposite of what you are doing now – for example:
- If you are now applying reverse-charge rules for the cross-border sales of the cards, you should consider the implications in case that ECJ follows the interpretation proposed by the UK tax authorities.
- If you are currently charging VAT for the cross-border sales of phone cards, you may be able to recover the VAT which you have unnecessarily charged, should the ECJ follow the suggestion of the European Commission and Lebara Ltd. On the other hand, you may be in this case faced with requests from your foreign distributors to return the unduly charged VAT to them.
- If you are a distributor, to whom TelCos have been charging VAT for the cross-border sales of phone cards, you might be able to reclaim this VAT back from them. On the other hand, if you have recovered this VAT by the means of the VAT refund procedure (i.e. based on the 8th or 13th Directive) you might be facing claims from the foreign tax authorities to reimburse this VAT back to them.
We will monitor the proceeding and keep you up to date with the developments and the decision of the ECJ.