Background

SK Telecom, a mobile phone company based in South Korea, provided roaming services sourced from an Austrian mobile communications network to its private customers, who were also resident in South Korea. The Austrian network operator charged SK Telecom fees for using the mobile communications network plus 20% Austrian VAT. SK Telecom, for its part, invoiced its customers roaming charges for using the Austrian mobile communications network during their temporary stay on Austrian territory. SK Telecom's application for an input VAT refund on their payments for the Austrian network services was denied because, according to the Austrian tax authorities, the place of supply for the roaming services (by SK Telecom to its customers) shifted from the third country to Austria pursuant to a domestic Austrian Regulation based on Article 59a of the VAT Directive, since the roaming services were "used and enjoyed" in Austria, and the services rendered are not subject to a tax burden in the third country (South Korea) comparable to domestic Austrian VAT. The Austrian Federal Finance Court granted SK Telecom's request for a refund of the VAT, finding that the place of supply of the telecommunications services is situated within the local territory only in regard to those services that are supplied to nontaxable persons who are established and have their permanent address or usually reside within the European Union. The Austrian Supreme Administrative Court instructed the lower Federal Finance Court to clarify whether the concept of "nontaxation," within the meaning of that provision, must be interpreted to mean that the existence in the third country of a tax that is comparable to the VAT provided for by EU law is decisive for a member state to be able to consider the place of supply of the services concerned to be situated within its territory. The proceedings were referred to the European Court of Justice for a preliminary ruling.

The CJEU was asked to consider whether:

• Point (b) of the first paragraph of Article 59a of the VAT Directive must be interpreted to mean that roaming services supplied by a mobile phone operator established in a third country to its customers who usually reside in that third country (allowing them to use the national mobile communications network of the member state in which they are temporarily staying) must be considered to be "effectively used and enjoyed" within the territory of that member state for the purposes of that provision; such that
• The member state may consider the place of supply of those roaming services to be situated within its territory when those services are not subject in that third country to a tax treatment that is comparable to the charging of domestic VAT.

The decision

At the outset, the CJEU recalled that services should be taxed as far as possible at the place of consumption. For telecommunications services supplied to nontaxable persons who are not established in the EU, this place would be outside the EU. However, by way of derogation, paragraph 59a(b) of the VAT Directive allows member states to consider the place of supply of (inter alia) telecommunications services, which is in principle situated outside the EU, to be situated within their territory if the effective use and enjoyment of those services takes place within their territory.

The CJEU therefore considered whether the roaming services are actually used or enjoyed in Austria. According to the court, it already follows "from the nature" of the roaming services that the actual use or exploitation "necessarily" takes place in the member state in which SK Telecom's customers are temporarily present. With regard to the condition for the application of Article 59a of the VAT Directive that double taxation, nontaxation or distortions of competition must be avoided, the court stated that the tax treatment of the respective services must be assessed by reference to the tax treatment of the services concerned in the member states, without it being necessary to take account of the tax regime to which those services are subject in the third country concerned.

Implications

The CJEU largely followed the Advocate General's opinion, but kept its comments rather short, in particular on the interpretation of the terms "effective use and enjoyment," since the roaming services in the case at hand are evidently used in the state in which the customer is temporarily present when using these services. It also remains to be seen how member states will interpret the CJEU's remark that a transaction, which comprises a single supply from an economic point of view, should not be artificially split, so as not to distort the functioning of the VAT system regarding different services that might not be as easily separated as in SK Telecom. While phone service providers customarily differentiate between services rendered domestically and abroad, other service providers (e.g., online services, streaming services, etc.) may not be able to distinguish in a similar fashion. It is not clear from CJEU's remark how far the dogma of a supply from an economic point of view will go in cases where a geographic differentiation is technically challenging and not customary. From a taxpayer's perspective, the biggest risk will probably be that according to the court's ruling, the member states do not have to take into account the tax treatment of the services outside the European Union, hence creating an effective double taxation, which Art 59a VAT Directive tries to prevent.

Impact in other EU member states

For most member states, the decision in SK Telecom represents a change in the jurisprudence of the CJEU, which will impact non-EU businesses operating within the EU member states. Until the decision in SK Telecom, the CJEU has held that "use and enjoyment" must not be applied broadly to activities performed by third country businesses (Athesia Druck, C-1/08). This new case undoubtedly challenges many business operations formerly perceived outside the realm of "use and enjoyment."

While undoubtedly opening up the scope of "use and enjoyment," the CJEU has missed the opportunity to provide some general principles on the meaning and scope of the "use or enjoyment" concept. The CJEU quickly determined that "the actual consumption" of the services occurred within the EU but provided no comprehensible set of criteria to determine the actual place of consumption in less obvious cases. That opens up the decision to a range of possible interpretations, one of which could be that any objective view on the place of actual consumption has to be determined in light of the purposes to avoid double- or nontaxation, to which the clause is only applicable when "actual consumption" within the EU is performed by a final customer or by a business that is not entitled to deduct input VAT. Given the current application of the provision in many member states and the rudimentary comments of the CJEU, many tax authorities (i.e., Spain) will take a different view and also apply the "use and enjoyment" concept in ways that could raise double taxation scenarios.

However, the "use and enjoyment" concept is only optional in the VAT Directive, and while some member states have not introduced any legislation in that regard, the concepts implemented by the individual member states that opted for implementation vary quite significantly. Hence, the impact of the decision will not be homogeneous, but may vary quite significantly depending on the individual member state's implementation and application. An analysis of the eventual impact on non-EU-based operators and service supply chains arising from the decision in SK Telecom has to be done for each member state concerned and should be mapped out in regard to the individual local implementations.