Many activities nowadays are happening in a virtual environment. Various digital artifacts are sold and bought in online games, people are playing in online casinos, take distance educational courses, and use different applications for training and entertainment. Especially after the COVID-19 pandemic, many services traditionally delivered physically are now delivered remotely, such as digital conferences and online fitness classes.
From the VAT perspective, this creates a number of challenges. The first one concerns the jurisdiction to tax remote services. According to the current EU VAT rules, services relating to cultural, sporting, educational and similar activities supplied to non-taxable persons are taxed at the place where these activities actually take place. This rule has been challenged by the digitalization of services resulting in the disruption of the unity of place, time and actors involved in the provision of such services. In Geleen (C-568-17), the Court of Justice had to deal with the imperfection of the VAT Directive’s provisions and decided that live interactive entertainment services should be taxed at the place where their supplier was established. Luckily, in that case this resulted in taxation at the place of consumption since the customers were in the jurisdiction of the supplier.
After this case, the EU legislature changed by virtue of Council Directive 2022/542 the place-of-supply rule for business-to-consumer services relating to cultural and similar activities which are streamed or otherwise made virtually available to be the place where the customer is located. The new rules will apply starting from 1 January 2025. This implies that an organizer of a digital conference or any other virtual event will have to distinguish between business and private customers, and in respect of the latter to pay VAT in the jurisdiction of the customer. To do that, the supplier will have to either register for VAT in all Member States where their private customers are located or, alternatively, register and pay VAT through the one-stop-shop simplification scheme. A task that is far from being easy, considering that the EU VAT legislation does not contain any rules on how to determine the location of the customer in respect of virtual activities. Moreover, the suppliers of services relating to virtual activities are not able to benefit from the simplification for EU small businesses allowing them to pay VAT in the Member State of their establishment subject to EUR 10K annual threshold.
It is common for many events to take place in a hybrid form. For example, a fitness masterclass may be provided at a specifically identified location for a number of participants, whereas some of the participants may enjoy the live-streaming of the event. A hybrid form is quite common for conferences, presentations and other events. As services relating to physical and virtual events will be subject to different place-of-supply rules, the question arises how to determine where to tax services relating to hybrid events. Besides physical and virtual participation options, events may entail different service elements, part of which are provided at a concrete place, while others – virtually. Unfortunately, the current EU VAT legislation does not provide clear rules on how to treat such services, which leads to legal uncertainty and increases compliance burden for taxable persons.
Another issue with the VAT treatment of virtual B2C activities is a thin borderline with the category of electronically supplied services. If provided to non-taxable persons, both will be taxed at the place of the customer’s location. However, these two categories of services may be treated differently for VAT purposes. For example, the VAT Directive contains a number of exemptions relating to sport and physical education, educational and cultural services. These exemptions do not necessarily apply to services falling within the category of electronically supplied services. Likewise, the above-mentioned simplification for small businesses applies to electronically supplied services, but not to virtual activities that do not fall within this category. The electronically supplied services are characterized by being essentially automated and involving minimal human intervention. Virtual activities may also be characterized as electronically supplied services if, for example, pre-recorded. All these classification issues create an additional administrative burden for taxable persons.
Yet another challenge for the EU legislature is that many virtual activities that could potentially constitute a VAT base will most likely remain untaxed. Let us take an example of virtual fitness classes, an industry which is expected to grow to nearly 80 billion by 2026. Nowadays, many digital platforms facilitate the provision of live fitness classes to consumers by providing a virtual space for their live-streaming, as well as related services. The EU VAT legislation does not have an effective mechanism to tax such services. To note, the solution for the platform economy, which has been finally agreed by the Council on 5 November as part of the “VAT in the digital age” package only covers short-time accommodation rentals and passenger transport services. This may result in distortion of competition between untaxed virtual fitness classes and similar services provided by gyms and alike entities.
The segment of diverse services provided in a virtual environment continues to grow, creating a potential broadening for the VAT base. However, the EU VAT rules are not keeping pace with this development, leading to outdated and ambiguous rules or the absence of rules at all. It may be questioned whether the criterion of “essentially automated and requiring the minimum human intervention,” which is a characteristic of electronically supplied services, is still relevant in a digital economy considering the emergence of other remote services, such as virtual events.
Mariya Senyk
Pufendorf Institute
Theme DIGITAX
