Virtual Activities: EU VAT’s Effort to Recompose the Broken ‘Unity of Action, Time and Place’ – Part II
January 5, 2022
The first part of this two-piece article titled “Virtual Activities: EU VAT’s Effort to Recompose the Broken ‘Unity of Action, Time and Place’ – Part I” provided an overview of the new place of supply rules for services relating to virtual activities introduced in the VAT Directive by the compromise text for updates on VAT rates agreed upon by the EU Council on 7 December 2021. The first part also explained the relevant legal background surrounding these changes. This second part will instead host the author’s comments and critical reflections on the new place of supply rules for services relating to virtual activities.
Author’s Comments on the New Place of Supply Rules for Virtual Activities
The updates on the EU VAT place of supply rules aim to establish a feasible approach for determining the place of supply of services relating to virtual activities. This issue is quite pressing since entertaining virtual events such as online conferences, live-stream lectures, on-demand training courses, sport live sessions are all booming during the COVID-19 pandemic. Unlike in face-to-face events, there is no event location where the host and participants meet virtually. The EU legislative initiative in this regard is therefore welcome.
However, the author submits that some elements in the current compromise text are critical and should be attentively examined before receiving final approval by the EU Council.
- Point 10a of the compromise text excludes the application of Article 53 of the VAT Directive to services relating to ‘admission to the events … where the attendance is virtual’. It follows from this exclusion that the relevant place of supply for B2B services relating to events attended virtually is Article 44 of the VAT Directive, i.e., the general place of supply rule for B2B transactions. Accordingly, the place of supply is found at the business customer’s location pursuant to Article 44 rather than where those events actually take place pursuant to Article 53. In practice, the new paragraph added to Article 53 disqualifies the admission to virtual events for the purposes of Article 53. Hence, the scope of application of Article 53 appears quite limited since it covers only services relating to admission to physical events. With effect from 1 January 2011, B2B services, other than admission, relating to cultural, artistic, sporting, scientific, educational, entertainment or similar events, such as fairs and exhibitions, are subject to the general B2B place of supply rule of Article 44. It is also curious that the exclusionary provision for admission to virtual events was inserted in the text of the VAT Directive and not in Council Regulation (EU) No 282/2011 of 15 March 2011 (the VAT Implementing Regulation). Notably, Article 32 of the VAT Implementing Regulation contains a specification of the concept of ‘admission’, which leads to excluding certain activities from the scope of Article 53 of the VAT Directive. In particular, Article 32(3) of the VAT Implementing Regulation specifies that the concept of ‘admission’ ‘shall not cover the use of facilities such as gymnastics halls and suchlike, in exchange for the payment of a fee’. The author wonders why the exclusion for services relating to admission to virtual events was not inserted in Article 32 of the VAT Implementing Regulation, either on the ground that the granting of the right of admission to a virtual event does not qualify as ‘admission’ for VAT purposes, or, more broadly, since a ‘virtual event’ is not an ‘event’ for VAT purposes.
- Paragraph 10b of the compromise text introduces a subparagraph in Article 54(1) of the VAT Directive, which pinpoints the place of supply at the private customer’s location in the case of services relating to ‘activities which are streamed or otherwise made virtually available’. The wording of this provision appears quite broad since it does cover all B2C entertainment activities supplied by digital means. Therefore, the provision is not limited to live-streamed activities, which presuppose specific interactions between the host and participants to the virtual event (e.g., Q&As during online conferences or inputs during online sport coaching classes). This consideration calls into question the boundary lines between B2C services relating to virtual activities covered by the new provision under Article 54 of the VAT Directive on the one hand and the B2C supply of telecommunications, broadcasting and electronic (TBE) services under Article 58 of the VAT Directive on the other. Arguably, as also the EU Commission assumes, this latter provision should only apply to services relating to virtual activities (generally, not including live-streamed events) where there is only minimal human interaction among the supplier and the customer, as required by the very narrow definition of electronically supplied services under Article 7(1) of the VAT Implementing Regulation. Indeed, both provisions (i.e., Articles 54(1), second paragraph, and 58 of the VAT Directive) implement the destination principle (i.e., taxation at the private customer’s place). Moreover, since 1 July 2021, the MOSS has been extended to all types of B2C services (i.e., the MOSS is no longer limited to TBE services only). However, the VAT treatment of services under the two provisions is not necessarily the same. For instance, the threshold of EUR 10 000 for micro-business laid down in Article 59c of the VAT Directive applies only to TBE services under Article 58 of the VAT Directive. Consequently, based on the current rules, a micro-business established in an EU country cannot extend the same VAT treatment of its domestic supplies to cross-border services relating to virtual activities, even if the relevant turnover is below the said threshold. Instead, the supplier must register in each and every Member State where its customers are located or, in the alternative, register on the MOSS and pay VAT through the online portal. Limitations also entail the application of the presumptions laid down in Article 9a of the VAT Implementing Regulation, which applies only to ‘electronically supplied services … supplied through a telecommunications network, an interface or a portal such as a marketplace for applications’. Services relating to virtual activities supplied through a marketplace or platform are instead outrightly excluded from the scope of Article 9a of the VAT Implementing Regulation. The author wonders about the rationale of maintaining such a paper-thin distinction between virtual entertainment activities and electronically supplied services based on the artificial concept of ‘minimal human intervention’ under Article 7(1) of the VAT Implementing Regulation.
- Paragraph 10c of the compromise text extends the application of the use and enjoyment rule under Article 59a of the VAT Directive also to services relating to ‘activities which are streamed or otherwise made virtually available’ under Article 54(1), second subparagraph of the VAT Directive. In brief, the use and enjoyment rule of Article 59a of the VAT Directive, according to the current wording that came into force on 1 January 2010, functions as an override provision, which, to prevent double taxation, non-taxation or distortions of competition, enable each Member State to shift the place of taxation from a location outside the EU to its territory, where the services are (allegedly) effectively used and enjoyed. A specular opposite rule is also provided, based on which each Member State has an option (a separate and different one) to shift the place of taxation of a service from its territory to a place outside the EU where the services are (allegedly) effectively used and enjoyed. The issue is that there are no definitive criteria under EU VAT legislation to establish whether a specific service is effectively used and enjoyed inside or outside the territory of a Member State, as also shown by the CJEU’s decision in SK Telecom (Case C-593/19). The author cannot conjecture based on which concrete evidence the EU Member States may decide to resort to the overriding rule of Article 59a of the VAT Directive and claim that the ‘effective use and enjoyment’ of services relating to an online activity took place in their territory rather than outside the EU (e.g., could possible evidence be the location of the organiser or the broadcaster of the virtual event?).
- A final remark common to all the provisions analysed above relates to the case of hybrid activities, which entails a combination of online and offline events. In such circumstances, it is unclear which place of supply rules should prevail, i.e., the provisions for services relating to on-premises activities (i.e., Articles 53 or 54 of the VAT Directive) or those for services relating to virtual events (i.e., Articles 44 or 54(1), second paragraph of the VAT Directive). The possibility to apply or not the use and enjoyment rule of Article 59a of the VAT Directive also depends on the prior determination of the relevant place of supply rule. If one has to follow the approach adopted by the VAT Committee in its Guidelines, concerning an event that takes place in multiple Member States, the hybrid activities should be split, and different place of supply rules will apply to each part, depending on whether that part specifically concerns a physical or virtual event. This approach, however, is not feasible in the case where one of the two parts is principal, and the other one is purely ancillary to that essential part. In such circumstances, the principal part’s VAT treatment should also apply to the ancillary part. Whether this approach can effectively be extended to hybrid activities is unclear, and, even if so, it remains to be seen how to make the apportionment between physical and virtual activities (e.g., based on the duration or the value of each of the two activities concerned). The author submits that a common understanding between the EU Member States on how to approach hybrid activities is necessary to avoid situations of double or non-taxation.
The author welcomes the EU VAT’s effort to recompose the broken ‘unity of action, time and place’ – to borrow a reference to classical theatre made by AG Szpunar in his Opinion in Geelen (Case C-568/17, point 17) – in the case of services relating to virtual activities, where the supplier and the customer are located in different places. The author submits that the need to introduce the new place of supply rules for virtual activities is the inevitable consequence of the digitalisation of the economy and the impact of technological developments on the VAT system. As Hans Kogel predicted before the turn of the Millennium, ‘it is to be expected that some services that until recently were only supplied in physical form will be increasingly provided online’, among which we can now include services relating to virtual activities.
 Article 44 of the VAT Directive, in the version actually in force, reads as follows: ‘The place of supply of services to a taxable person acting as such shall be the place where that person has established his business. However, if those services are provided to a fixed establishment of the taxable person located in a place other than the place where he has established his business, the place of supply of those services shall be the place where that fixed establishment is located. In the absence of such place of establishment or fixed establishment, the place of supply of services shall be the place where the taxable person who receives such services has his permanent address or usually resides’.
 See Article 3 of Council Directive 2008/8/EC of 12 February 2008.
 For a discussion of the 2011 update on the place of supply rule of Article 53 of the VAT Directive, see J.J.P. Swinkels, Admission Covers Participation under EU VAT, 22 International VAT Monitor 2 (2011), pp. 94-97.
 Article 32 of the VAT Implementing Regulation, in the version actually in force, reads as follows: ‘1. Services in respect of admission to cultural, artistic, sporting, scientific, educational, entertainment or similar events as referred to in Article 53 of Directive 2006/112/EC shall include the supply of services of which the essential characteristics are the granting of the right of admission to an event in exchange for a ticket or payment, including payment in the form of a subscription, a season ticket or a periodic fee. 2. Paragraph 1 shall apply in particular to: (a) the right of admission to shows, theatrical performances, circus performances, fairs, amusement parks, concerts, exhibitions, and other similar cultural events; (b) the right of admission to sporting events such as matches or competitions; (c) the right of admission to educational and scientific events such as conferences and seminars. 3. Paragraph 1 shall not cover the use of facilities such as gymnastics halls and suchlike, in exchange for the payment of a fee’.
 In Srf Konsulterna (Case C-647/17, paras 27 and 35), the CJEU ruled that the notion of ‘admission’, for the purposes of Article 53 of the VAT Directive, covers both the right of entry and the right to participate in a training course and that advanced registration and payment are irrelevant for the application of Article 53. Further in this regard, see VAT Committee, Working Paper no. 982, taxud.c.1(2019)7743552, p. 4, where the EU Commission reconsidered its previous position on this matter (VAT Committee, Working Paper no. 660, taxus..d.1(2010)140174).
 See VAT Committee’s 118th Meeting’s minutes (Working Paper no. 1019, p. 14), where the EU Commission considered that entertainment virtual activities without human interstation can qualify as electronically supplied services.
 Article 7(1) of the VAT Implementing Regulation, in the version actually in force, reads as follows: ‘“Electronically supplied services” as referred to in Directive 2006/112/EC shall include services which are delivered over the Internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of information technology’.
 The relevant provisions concerning the MOSS are contained in Title XII, Chapter 6, Section 3, Articles 369a-369k of the VAT Directive. For a detailed explanation of the functioning of the MOSS, see EU Commission, Guide to the VAT One Stop Shop (applicable from 1 July 2021), March 2021.
 Article 59c of the VAT Directive, in the version actually in force, reads as follows: ‘1. Point (a) of Article 33 and Article 58 shall not apply, where the following conditions are met: (a) the supplier is established or, in the absence of an establishment, has his permanent address or usually resides only in one Member State; (b) services are supplied to non-taxable persons who are established, have their permanent address or usually reside in any Member State other than the Member State referred to in point (a) or goods are dispatched or transported to a Member State other than the Member State referred to in point (a); and (c) the total value, exclusive of VAT, of the supplies referred to in point (b) does not in the current calendar year exceed EUR 10 000, or the equivalent in national currency, nor did it do so in the course of the preceding calendar year. 2. Where, during a calendar year, the threshold referred to in point (c) of paragraph 1 is exceeded, point (a) of Article 33 and Article 58 shall apply as of that time. 3. The Member State within the territory of which the goods are located at the time when their dispatch or transport begins or where the taxable persons supplying telecommunications, radio and television broadcasting services and electronically supplied services are established shall grant taxable persons carrying out supplies eligible under paragraph 1 the right to opt for the place of supply to be determined in accordance with point (a) of Article 33 and Article 58, which shall in any event cover two calendar years. 4. Member States shall take appropriate measures to monitor the fulfilment by the taxable person of the conditions referred to in paragraphs 1, 2 and 3. 5. The corresponding value in national currency of the amount mentioned in point (c) of paragraph 1 shall be calculated by applying the exchange rate published by the European Central Bank on the date of adoption of Directive (EU) 2017/2455’.
 Article 9a of the VAT Implementing Regulation, in the version actually in force, reads as follows: ‘For the application of Article 28 of Directive 2006/112/EC, where electronically supplied services are supplied through a telecommunications network, an interface or a portal such as a marketplace for applications, a taxable person taking part in that supply shall be presumed to be acting in his own name but on behalf of the provider of those services unless that provider is explicitly indicated as the supplier by that taxable person and that is reflected in the contractual arrangements between the parties. In order to regard the provider of electronically supplied services as being explicitly indicated as the supplier of those services by the taxable person, the following conditions shall be met: (a) the invoice issued or made available by each taxable person taking part in the supply of the electronically supplied services must identify such services and the supplier thereof; (b) the bill or receipt issued or made available to the customer must identify the electronically supplied services and the supplier thereof. For the purposes of this paragraph, a taxable person who, with regard to a supply of electronically supplied services, authorises the charge to the customer or the delivery of the services, or sets the general terms and conditions of the supply, shall not be permitted to explicitly indicate another person as the supplier of those services. 2. Paragraph 1 shall also apply where telephone services provided through the internet, including voice over internet Protocol (VoIP), are supplied through a telecommunications network, an interface or a portal such as a marketplace for applications and are supplied under the same conditions as set out in that paragraph. 3. This Article shall not apply to a taxable person who only provides for processing of payments in respect of electronically supplied services or of telephone services provided through the internet, including voice over internet Protocol (VoIP), and who does not take part in the supply of those electronically supplied services or telephone services’.
 Taking a de lege ferenda approach, the current narrow definition of electronically supplied services could eventually be amended as to include all services (therefore, also services relating to virtual activities) that, due to their digital features, are provided at a distance irrespective of their own nature or main objectives. A similar plea was indeed made by some scholars. See G. Beretta, European VAT and the Sharing Economy (Kluwer Law International 2019), p. 262; M. Lamensch, European Value Added Tax in the Digital Era (IBFD 2015), at para 4.2; M. Merkx, VAT and E-Services: When Human Intervention Is Minimal, 29 International VAT Monitor 1 (2018), p. 21.
 On the effective use and enjoyment rule, see A. van Doesum et al., The New Rules on the Place of Supply of Services in European VAT, 17 EC Tax Review 2 (2008), pp. 78-89. Criticizing the rule on effective use and enjoyment as not being ‘an efficient criterion for taxing services’, T. Ecker, Place of Effective Use and Enjoyment – EU History Repeats Itself, 23 International VAT Monitor 6 (2012), pp. 407-410.
 For a comment on SK Telecom (Case C-593/19), see G. Beretta, SK Telecom. Place of Supply – Effective Use and Enjoyment – Double Taxation, Non-Taxation or Distortion of Competition. Telecommunications Services. Court of Justice, Highlights & Insights on European Taxation 4, 2021.
 VAT Committee, Guidelines resulting from the 114th Meeting of 2 December 2019, Document A – taxud.c.1(2020)2254683 – 986. These guidelines originated from VAT Committee’s Working Paper no. 982, discussing certain issues linked with the CJEU’s decision in Srf Konsulterna (Case C-647/17).
 H. Kogels, VAT @ E-Commerce, 8 EC Tax Review 2 (1999), pp. 117-122, who also recalled a decision by the Netherlands Supreme Court in 1994 (Hoge Raad, 21 September 1994, Case No. 29792, ECLI:NL:HR:1994:AA2965), which ruled that services through which callers can converse via chat boxes or listen to erotic narrative are entertainment services supplied in the country of the caller and so subject to VAT in that country.
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