Value added tax (VAT) is a complex cross-border tax discipline and very often you will hear “it depends” as the first answer on any VAT-related question. While the need for the level of complexity can be debated, what is inescapable is that VAT is a matter with which companies need to contend in conducting business in most countries of the world. Companies need to understand the applicable local VAT rules and conduct business in such a manner that is compliant with these rules. Following are discussions centered around what the place of supply rules mean and what the changes are that have been introduced with the 2010 European VAT Package; the contracting options available to the various members of the mobility supply chain and how they affect the VAT treatment of the given transactions; and the practical implications of the changes in the 2010 European VAT Package, as well as an example identifying the cash flow benefits of various contracting options.
Place of Supply Rules
The Council Directive 2006/112/EC (hereinafter the “Directive”) establishes the common system of VAT in the EU. To establish the correct VAT treatment of taxable supplies, it is necessary to determine the “place of supply” (i.e., the place where supplies are deemed to be performed). Once the place of supply is established, the VAT treatment of the respective transaction should follow the local legislation of the country where the transaction takes place (i.e., if the place of the taxable transaction is in Ireland, the transaction is subject to Irish VAT and the Irish VAT legislation applies).
To determine the place where a taxable transaction is affected, it needs to be determined whether the supply relates to goods or services. Depending on the nature of the services, each scenario will be subject to different VAT treatment.
The Directive stipulates a set of rules for determining the place of supply. Effective January 1, 2010, the place of supply of services rules significantly changed with the implementation of the 2010 European VAT Package. Following are extracts of the relevant parts of the EU legislation valid before January 1, 2010, as well as extracts of the relevant parts of the current EU legislation that became effective as of January 1, 2010.
The table below summarizes the place of supply rules in respect to services provided to fully taxable persons, which are then described below:
Place of Supply of Services—General Rule:
Before January 1, 2010: Article 43 of the Directive established that the place of supply of services shall be deemed to be the place where the supplier has established his business or has a fixed establishment from which the service is supplied or, in the absence of such a place of business or fixed establishment, the place where he has his permanent address or usually resides.
As of January 1, 2010: Article 44 of the Directive now stipulates that the place of supply of services supplied to taxable persons acting as such shall be the place where that person has established his business.
Place of Supply of Services—Services Connected with Immovable Property:
Before January 1, 2010: Article 45 of the Directive established that the place of supply of services connected with immovable property, including the services of real estate agents and experts, and services for the preparation and coordination of construction work, such as the services of architects and of firms providing onsite supervision, shall be the place where the property is located.
As of January 1, 2010: Article 45 of the Directive was not modified as of January 1, 2010, so the place of supply rule does not change in respect to services connected with immovable property and remains to be the place where the property is located.
Place of Supply of Services—Transport Services:
Before January 1, 2010: Article 46 of the Directive established that the place of supply of transport services other than the intra-Community transport of goods shall be the place where the transport takes place, proportionately in terms of distances covered.
Article 47 of the Directive established that, where an intra-Community transport of goods takes place, the place of supply is the place of departure of the transport. However, exceptions exist where the transport is supplied to a VATregistered person (i.e., if a person is VAT registered in a different Member State than the state of the departure of the transport). In that instance, the place of supply shall be deemed to be the place within the Member State that issued the VAT number to the taxable person.
As of January 1, 2010: Article 44 of the Directive now stipulates that the place of supply for transport services is the country where the customer has established his business.
Place of Supply of Services—Cultural and Similar Activities:
Before January 1, 2010: Article 52 (a) of the Directive established that the place of supply of cultural, artistic, sporting, scientific, educational, entertainment, or similar activities, including the activities of organizers of such activities shall be the place where the activities are physically carried out.
As of January 1, 2010: Article 53 of the Directive now stipulates that the place of supply of services and ancillary services relating to cultural, artistic, sporting, scientific, educational, entertainment, or similar activities, such as fairs and exhibitions including the supply of services of the organizers of such activities, shall be the place where those activities are physically carried out.
Place of Supply of Services—Consultancy Services:
Before January 1, 2010: Article 56 (c) of the Directive established that the place of supply of consultancy services to customers established outside of the Community, or taxable persons established in the Community but not in the same country as the supplier, shall be the place where the customer has established his business.
As of January 1, 2010: Article 56 (c) of the Directive was not modified as of January 1, 2010, so consultancy services continue to fall under the general rule whereby the place of supply is the country where the customer has established his business.
Place of Supply of Services—Provision of Information:
Before January 1, 2010: Article 56 (c) of the Directive established that the place of supply of provision of information to customers established outside of the Community, or taxable persons established in the Community but not in the same country as the supplier, shall be the place where the customer has established his business.
As of January 1, 2010: Article 56 (c) of the Directive was not modified as of January 1, 2010, so the provision of information continues to fall under the general rule whereby the place of supply of the service is the country where the customer has established his business.
Another key component in identifying the correct invoicing procedures for European VAT is the contractual relationship between the various parties involved in the transaction. In our discussions with various mobility companies, there were two distinct approaches to contracting and invoicing and the associated treatment of VAT, which are named below. Also spelled out below is a third option that can be used in specific circumstances.
The Principal Approach. The Principal Approach is where the contractual relationship is between the Corporate Client (Client) and the Relocation Service Provider (RSP). The Client-RSP contract states that the RSP is responsible for delivery of all mobility services (i.e., policy counseling, expense management, removals, destination services, visa, and the like.). The RSP then sub-contracts with Sub-Service Providers (SSP) to provide some or all of the mobility services in the particular countries required by the Client. An individual destination service provider, household goods removal firm, or language provider would be examples of SSPs. The key component of the RSP SSP contract is that the RSP is responsible for the payment of SSP invoices irrespective of whether the Client pays the RSP.
The VAT implications of the Principal Approach are that the SSPs will be invoicing the RSP and will need to include VAT on the invoice in accordance with the countryspecific place of supply rules based on the services provided by the SSP. The RSP then in turn will invoice the Client and will charge VAT where applicable based on the nature of service provided and the respective VAT legislation. The SSP would not contract directly with the Client.
With the growth of outsourcing, it generally is the intention of the Client to streamline and rationalize their supply chains and this usually means they wish to contract with the RSP directly and have a single point of contact with the RSP.
The introduction of the 2010 European VAT Package can be very beneficial to RSPs, as there is a large shift toward the place of supply being where the customer is established and this shift could eliminate the VAT registration obligations of RSPs provided there are no services related to immovable property rendered by the SSP or RSP for which the place of supply is where the property is located.
The Agent Approach. The Agent Approach is where the RSP is acting as an agent for the Client as a coordination point for all services provided by the SSPs. In this instance, the Client is ultimately responsible for the payment of the invoice issued by an SSP.
One of the presumptions for the agent approach is that SSPs would invoice the Client directly but the RSP would receive the invoices, settle the payments against the SSP, and recharge or disburse the costs to the Client. To use the Agent Approach, it is essential that the RSP acts as an agent for the Client in entering into the contracts between the Client and the SSP and that the actual contracts are between the Client and the SSP.
All of the following conditions would need to be cumulatively fulfilled to treat costs as disbursements from a VAT perspective:
- the RSP paid the SSP on behalf of the Client and acted as agent for the Client;
- the Client received, used, or had the benefit of the goods or services that the RSP paid for on behalf of the Client;
- it was the Client’s responsibility to pay for the goods or services, not the responsibility of the RSP;
- the RSP had permission from the Client to make the payment to the SSP;
- the Client knew that the goods or services were provided by the SSP, not by the RSP;
- the RSP shows the relevant costs separately on its invoice to the Client;
- the RSP passes on the exact amount of each cost to the Client on its invoice; and
- the goods and services paid for are additional to whatever the RSP is billing the Client for services rendered by the RSP.
Normally, it is an advantage to treat any costs that did not originally include VAT as disbursements, however, this approach also may be beneficial for the RSP because it allows the RSP to avoid VAT registration obligations in countries where they onward charge for services that have place of supply in the respective Member States.
It is crucial to note that costs the RSP incurs in the course of supplying services to its Clients are not disbursements from a VAT perspective. For instance, if the RSP has the mobility contract with the Client, the RSP cannot simply choose to disburse any SSP costs at will, regardless of how those costs appear on the RSP’s invoice to the Client. Theoretically, it should be possible to pass through these costs as disbursements if the actual mobility contracts are drawn up between the Client and the SSP.
If the contracts for the services are between the RSP and the SSP, any costs from the SSP will be deemed to be part of the RSP’s service. This could lead to a VAT registration liability in the Member States where the RSP onward charges for services with a place of supply in those respective countries where VAT should be charged on the invoice to the Client.
If the contracts for the services are between the Client and the SSP and the RSP acts as an agent for the Client in entering into those contracts on behalf of the Client, the RSP may, as a general rule, treat any costs from the SSP as disbursements. Any agent/commission fees would, in most cases, be deemed to be treated as intermediary services, which, before January 1, 2010, would as a general rule have same place of supply as the underlying transaction and thus this could lead to a VAT registration liability in the respective Member States. However, as of January 1, 2010, any supply of business-to-business (B2B) intermediary services fall under the general rule (i.e., the place of supply is where the customer is established).
With the change in legislation as of January 1, 2010, with regard to intermediary services in respect of B2B transactions, the major drawback of this approach is gone, however, it is still essential that the RSP act as an agent for the Client and consequently the contracts must be between the Client and SSP directly in order for this approach to work. We recommend that the relevant contracts be thoroughly reviewed by VAT experts before using this approach. Further, all of the conditions outlined above should be fulfilled to ensure that the disbursements have the correct VAT treatment.
One potential limitation with this approach is that it does not provide an opportunity for the RSP to collect referral fees in a net-pay fashion as is currently the practice in the mobility industry. Referral fees need to be invoiced by the RSP to the SSP separately with the associated administration costs. The VAT implications of this practice are that the SSP invoices the Client directly in accordance with the relevant place of supply rules between the SSP and the Client and the VAT is reclaimed by the Client through their corporate recovery process (or local returns where the Client is VAT registered in the respective country). This approach eliminates the requirement for VAT registration for the RSP but is dependent on the proper contractual arrangements being in place.
Another potential limitation with this approach is that it would require the RSP to enter into separate contracts with the SSP for each Client. Currently, the RSP may enter into a master contract with the SSP pursuant to which the SSP provides services to the RSP with regard to multiple clients. If the RSP is acting as agent for a particular Client in entering into a contract with the SSP, separate contracts for each Client would appear to be advisable.
The Bundled Approach. Taking into account the range of services that RSPs render, it may be possible to establish that the RSP supplies one service consisting of the whole package of the various mobility components rather than multiple supplies of separate services for each of the components.
The Directive does not define when a transaction should be considered as a single supply or as multiple supplies, however, the European Court of Justice (ECJ) has provided guidelines on the VAT treatment of single or multiple supplies in its decision in the case C-349/96 (Card Protection Plan).
In this case, the ECJ decided that every transaction must be regarded normally as distinct and independent. On the other hand, a transaction that comprises a single supply from an economic point of view should not be artificially split. A single supply exists where one or more elements are to be regarded as constituting the principal supply, while one or more elements are to be regarded as ancillary to the principal supply and thus share the same VAT treatment as the principal supply. A service must be regarded as an ancillary service to a principal service if it does not constitute for customers an aim in itself but a means of better enjoying the principal service supplied.
For a proper determination of VAT treatment, it is vital to identify the predominant element of the respective supply. There are many factors and further case law to help determine the predominant element, however, at this stage please note that the invoicing arrangements (i.e., whether separate prices are agreed for individual elements of the supply) are not per se a decisive factor in determining the proper VAT treatment.
This issue would need to be investigated on a country-by-country basis, if, based on the country specific VAT legislation and based on the exact services supplied within a particular country, all of the services could fall under the new general place of supply rule where the place of supply is where the customer is established and thus the VAT registration liability of the RSPs would not become an issue.
It should be noted that the VAT authorities in the respective countries may each have a different approach with respect to whether the services supplied should be treated as a single or multiple supply and further, whether the services supplied may be services that are in connection with immovable property or whether the services fall within the new general place of supply rule.
Onward Supply and Reverse Charging
Irrespective of which of the three approaches discussed above is used, the updated VAT invoicing table is valid and lays out the requirements under the Directive for what is required on a VAT compliant invoice. Practically, the VAT changes that were effective as of January 1, 2010, are very significant when looking at services being delivered across national borders.
The table at left summarizes the changes as a result of the 2010 European VAT Package where the RSP is established in a different country than the SSP.The only categories where mobility services would have local VAT is where the place of supply of the service is seen as relating to immovable property. Further, language training and cultural training also may have associated local VAT. In those cases, local VAT is chargeable.
If a country deems DSP services to be related to immovable property and deems language training and cultural training to be supplied where physically carried out and not falling under the general rule, Worldwide ERC® may wish to seek a binding ruling from the respective tax administrations and seek to have the general rule apply to these services.
The table also applies to the invoices that the RSP will send to a Client where the Client is established in a different country than the RSP.
Where the column titled “Local VAT” indicates “No,” VAT is reverse charged to the recipient of the invoice. Under this reverse charge process, the recipient of the invoice is responsible for accounting for the VAT in its local VAT returns.
As an example, a Belgian SSP invoices an Irish RSP for a settling-in service that is valued at €1,000. The Belgian SSP will invoice the Irish RSP for the total €1,000 and will not show any VAT on the invoice. The invoice will state that the service is subject to the reverse charge mechanism. The Irish RSP will then account for the service as follows (see chart at the top of this page):
The two lines for 210 EUR are reported on the RSP’s local Irish VAT return. Prior to the 2010 European VAT Package, the invoice from the Belgian SSP would have had Belgian VAT and the RSP either (a) would have had to register in Belgium for VAT and put Belgian VAT on its invoice to the Client or (b) if the RSP was unable to register in Belgium for VAT, the RSP would have had to reclaim the VAT through the 8th directive that was very cumbersome and subject to long delays. Now with the adoption of the 2010 European VAT Package, there is no cash flow impact on the RSP in respect to VAT.
To regulate the changes brought about through the 2010 European VAT Package, the RSP will have to additionally prepare and submit to the local VAT authorities a European Sales List where the RSP will report the total sales that it has reverse charged to each Client (only in respect to services provide Clients which are EU VAT registered) broken down by the Client’s VAT numbers.
VAT is a complex subject and rules can vary on a country-by-country basis. The changes to European VAT that are effective as of January 1, 2010, under the 2010 European VAT package are an attempt to simplify the rules that may prove beneficial to companies delivering services across national borders. Clearly, the effect of these new rules will take time to settle down and be fully assessed.
RSPs must clearly identify the correct place of supply rule that applies to the services they are providing, both directly and through any SSPs.
The nature of the contractual relationships that the RSPs enter into with their Clients will have a significant direct impact on the VAT obligations of the RSPs. The RSPs should review their existing contracts with both their Clients and their SSPs to identify whether they are (or wish to be) acting as a principal or as an agent for a Client and how that agency status affects the way they process VAT.
The RSP should review its systems and processes to ensure that the invoices they generate contain all the information that is required to comply with the Directive and that they are able to produce the necessary European Sales Lists.
Finally, RSPs, SSPs, and Clients should always consult their own tax advisors before taking any action.
As a sponsor of the VAT Task Force, Worldwide ERC® will continue to monitor developments related to European VAT and provide information to members by advisories and through specific sessions at Worldwide ERC® conferences regarding this important topic.
Johannes Laxafoss is senior VAT manager for Meridian Global Services, Dublin, Ireland. He can be reached at +353 1 4000519 or e-mail email@example.com.
Peggy Smith, SCRP, SGMS, is CEO of Worldwide ERC®, Arlington, VA. She can be reached at +1 703 842 3400 or e-mail firstname.lastname@example.org.
Joseph Morabito, SCRP, is president of Paragon Global Resources, Rancho Santa Margarita, CA. He can be reached at +1 949 635 6000 or e-mail email@example.com.