The EU VAT Directive; A Gaming Perspective

As from 1st January 2015, the EU will implement a number of changes in the place of supply rules, which will shift the place of supply to the country of consumption of electronically supplied services, amongst others. Since online gaming is included within the definition of the electronically supplied services, VAT could become chargeable in accordance with the regulations of the Member State where the customer is established.

Even though the EU VAT Directive expressly exempts gambling from VAT, the Directive allows Member States to apply such conditions and limitations as they deem fit, to the application of the exemption. This freedom granted by the Directive to the Member States has created a severely inconsistent application of the exemption throughout the EU.  In fact there are a number of Member States where gaming is not exempt, partly exempt or exempt subject to a number of conditions, such as the holding of a gambling licence in that jurisdiction or the payment of gambling taxes in that jurisdiction.

Malta, being a primary hub of online gambling operators in the EU, will undoubtedly face a number of challenges in this regard, and consequently the Lotteries and Gaming Authority in conjunction with the Director General – VAT and representatives from the industry is spearheading a number of changes to the local VAT regulations, as well as a number of cross border initiatives to mitigate some of the effects of these changes. The solutions that were sought were not to stop VAT from being charged in other Member States, but solutions to address other adverse effects which are likely to hit the industry as a result to these changes.

This action group has identified an issue with the current legislation, which exists even at the level of the EU VAT Directive that could lead to the undesirable situation of having an operator providing a taxable service and therefore attracting output VAT, whilst not being able to reclaim credits for input tax.  In this regard a proposal has been forwarded to the Government to unilaterally amend the specific article within the Maltese VAT Act, which leads to this situation.  This amendment would see Maltese gaming companies, who will be paying output tax in other member states, having the option to move away from the current ‘Exempt Without Credit’ status, and register for credits of input tax under the partial attribution methodology. The partial attribution formula to be applied in these circumstances would need to be agreed upon with the local VAT authorities in advance.

Under normal circumstances, when providing cross border taxable services where the place of supply is deemed to be in the Member State of consumption, the operator would be required to obtain a VAT registration in each and every Member State where that supplier is providing the service.

However, acknowledging that this would have been a significant administrative burden to businesses which could hinder cross-border trading of the affected services, the European Commission has introduced the Mini One-Stop Shop (also known as “MOSS”). This system, which has already been implemented and can be registered for in anticipation of the 1st January, will enable the operators who opt to operate the MOSS to retain one VAT registration number, and report the supplies made to customers established or residing in other Member States through the electronic completion of the MOSS return. Payment of all the VAT due would be made to the Member State of Registration.

Licenced gaming operators are urged to look into the countries where customers reside to obtain specific VAT advice on the following points:

• Is online gaming wholly/partially or not exempt within the specific Member State;
• If partly exempt, establish what aspects of online gaming would be considered exempt;
• Establish if special conditions apply to qualify for the exemption, and what those conditions are;
• If partially exempt / not exempt, establish what would be the taxable base to calculate the VAT element of an online gaming transaction?

Such information is being sought through inter-governmental communications, and is being handled by the Maltese financial attachés in Brussels. Further developments are expected in the coming days.