Communications Newsalert

7 May 2009

Welcome to the first issue of our PwC Communications Newsalert, which is designed to keep you abreast of recent and upcoming activities we believe are of interest to the Telecom industry.
In this Newsalert, you will be informed of the most recent developments in the domains of tax, performance improvement, regulatory and compliance issues. You will also read about our tailored Business events, our industry focused surveys and publications, and the new services related to the Telecom industry.

In this issue, we will discuss the following topics:

The latest edition of the PwC Telecom indirect tax alert focuses on VAT treatment of content billing

The “convergence” trend has been set in the Telecom industry. The Communications industry nowadays offers a wide range of services that go far beyond the traditional telecommunication services. Some examples include telecom operators not only providing telephone connectivity but also supplying content (ranging from ringtones to video clips and train tickets), and cable operators not only providing digital television but also telephone and internet connectivity and application services. The various players in the telecom space - fixed, mobile, cable, resellers and even content providers - continually upgrade their offer of services to remain competitive and safeguard their client base. These tendencies are leading to new VAT questions such as: if a content provider is using a third party telecom network to supply its services, which party is liable to account for VAT and to what extent?

Content billing

Forms of content billing can generally be classified as one of the following: ‘below the line’ billing and ‘above the line’ billing.

• ‘Above the line’ means that the telecom company is liable for the VAT on the remuneration received for the total package of services provided (i.e. both telecom services and content) and should account for the VAT due on the total supply and related amount (undisclosed agent in respect of third party content).
• ‘Below the line’ generally results in a remuneration split for VAT purposes, with the telecom company accounting only for the VAT due on the telecommunication and the own branded content services (disclosed agent in respect of third party content). Moreover, the third party content provider is then the principal and the operator is merely acting as an intermediary for payment and service delivery of the telecom service. This principle applies, whether or not the customer is a prepaid or postpaid customer and whether or not the telecom operator issues an invoice to the customer.

Until recently, telecom operators in most countries used the ‘above the line’ approach; they were acting as a reseller of own (branded) or third party content towards the customer.
The complete package of services offered to the customer was treated as one service for VAT purposes, initially taxable with the telecom operator as a telecommunication service. One could say that, towards the consumer and the tax authorities, the role of a telecom operator was similar to that of an undisclosed agent for third party content.
The telecom operator was accounting for the whole package for VAT purposes and was subsequently, if everything was dealt with consistently, invoiced by the third party content provider for the content supplied.

Where do we stand on content billing?

Following recent developments in Belgium on content based billing, PwC’s Global Indirect Tax Telecom Network has performed a high level survey on content based billing & VAT. From this survey, we can derive that most countries still apply the ‘above the line’ billing method.

There are, however, exceptions to this rule, for instance in the Netherlands, where the tax authorities tend to take the view in some cases that the content provider is initially liable to account for VAT (rather than the telecom provider), or in Switzerland and Ghana, where specific conditions should be met in order to apply either below or above the line billing.

The Belgium tax authorities now also seem to be changing their positions from ‘above the line’ billing in favour of ‘below the line’ billing. More information can be found in this alert.

One common denominator can be applied to the regimes in all countries: the actual VAT treatment is in all cases highly dependent on the conditions included in the underlying agreements.

The subject of content billing therefore remains an area that is still ‘under construction’ and thus frequently leads to issues in practice.

Recent developments in Belgium

From ‘above the line’ towards ‘below the line’ VAT treatment for content
As you may know, in 2005 the Belgian tax authorities already set a trend in their fight against VAT fraud with their official position on prepaid cards, announcing that VAT would no longer be due at the point of issue or sale of prepaid cards, but at their point of use.

As a result, the VAT on all the services provided to the end consumers could more easily be assessed and assured in the hands of the telecom operator than in the hands of the resellers of the prepaid cards. The Belgian tax authorities have not yet touched upon the VAT treatment of the services provided to the customers.

This ‘forerunner’s role’ now seems to be continued on the subject of content based billing. Recent developments give reason to assume that the Belgian tax authorities are moving from ‘above the line’ to ‘below the line’ VAT treatment of the services provided by third party content providers over a telecom operator’s network.

This change will have a major impact for non-residential customers, but also residential customers will be impacted. It will not only affect the applicable VAT treatment (VAT rate etc.) but also commercial relations between the various players in the supply chain. All areas of the ‘internal’ organisation of the operator (billing, marketing, sales conditions, IT, accounting, collection) will also be impacted. Based on our contacts, Belgian telecom operators will apply the ‘below the line’ approach as they believe his will safeguard their positions in the market.

Download the latest edition of the PwC Telecom indirect tax alert (pdf)

Sharing resources

For mobile operators facing intensifying market competition and mounting pressures on costs and pricing, the idea of sharing network infrastructure with other providers is highly attractive from various perspectives. Today, with the focus of mobile operators’ market differentiation shifting away from network coverage towards branding and service design, network sharing is more firmly on the agenda than ever. In addition to opening the way to potential reductions in both operating and capital costs, network sharing can help operators focus more effectively on marketing and customer satisfaction by reducing the internal burden of network management.

Yet, despite these attractive qualities, successful network sharing deals remain few and far between, and efforts to set them up remain fraught with pitfalls and barriers.

Read the full article

Mobile Network Sharing

As part of a further discussion on how resources can be shared, read how PwC can help you address the challenges of Mobile Network Sharing and maximise the use of your resources.
 

more

Now available! Communications Review, Volume 14, No. 1, Cultivating Growth

This issue focuses on the communications sector in India and includes a detailed market overview; an examination of the regulatory framework and future; and a look at how Indian mobile operators have been able to achieve high margins on low ARPU. We also have interviews with senior leaders from Bharti Airtel, IDEA Cellular, Sistema Shyam TeleServices, and Tata Teleservices.

We trust that you will find the above information useful. Should you have any questions or any suggestions regarding the content of this Newsalert, please do not hesitate to contact us.

Best regards,