Edited version of your private ruling

Authorisation Number: 1012549841901

Ruling

Subject: GST and telecommunication supplies

Question

Is the supply of Product X a telecommunication supply for GST purposes?

Answer

Yes

Relevant facts and circumstances

You are a company based overseas that is registered for GST.

You supply goods and services, including Product X, to customers located within Australia.

Product X is a server-based Voice over Internet Protocol (VoIP) service. Its primary user base is currently businesses that utilise conference calling features.

Product X can include the following services:

· Instant messaging

· PC-to-PC audio and video calling between Product X users

· The ability to attend web conferences

· Multi-party conferencing

· Content sharing and

· Online meetings for up to XXX people

Product X can be supplied as a stand-alone offering or as part of a bundled package. The provision of Product X and the other products provided as part of the bundled package are currently either hosted on servers located outside Australia or provided to customers by way of download from servers located outside Australia.

The supply of Product X and bundled packages to customers can be made in the following ways:

· On premises: To use Product X software on premises, customers also need to acquire Product X server software for each Product X server and access licences for each user or device to access the Product X Server. The customer downloads the relevant software from your server outside Australia. This generally applies to large enterprise customers acquiring multiple licences.

Under the 'On Premises' option, once the software is installed, the customer is able to use Product X without any further involvement by you. Under this option, you have supplied software to the customer, being the application software, Product X server software and the right to access the software. There is no service provided by you. The features and applications used by the customer are accessed through the provision/licence of the software. The licences are perpetual with a once only payment to you; there is no ongoing subscription payment.

· Online: Product X is also supplied online to customers through a subscription model to use such software hosted on your server outside Australia. The contracts supplying the subscription options available on you online services portal to the customers are concluded online on your servers outside Australia. In addition, such online subscriptions are also available to enterprise customers.

Under the 'Online' option, each user has the right to use Product X online. The features offered in Product X online are similar to the features offered in Product X 'On Premises'.

The supply of Product X can be made directly by you or through one of your channel partners (e.g. a Telco). Where Product X is supplied directly by you, the customer is not required to enter into a supply relationship with your channel partner.

The customer cannot use Product X software for a different VoIP provider. Where Product X is supplied Online, the customer must be connected to your hosted server to use Product X. Where Product X is supplied On Premises, the customer must connect to its own Product X server to run Product X. The original Product X software would be delivered from your server.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5.

A New Tax System (Goods and Services Tax) Act 1999 Section 9-25.

A New Tax System (Goods and Services Tax) Act 1999 Section 85-5.

A New Tax System (Goods and Services Tax) Act 1999 Section 85-10.

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1.

Reasons for decision

Division 85 of the GST Act ensures that Telecommunication supplies that are effectively used or enjoyed in Australia are included in the GST system (regardless of where the supplier has a physical presence). Section 85-5 of the GST Act states:

(1) A *telecommunication supply is connected with Australia if the *recipient of the supply will effectively use or enjoy the supply in Australia.

(2) However, subsection (1) does not apply to a *telecommunication supply, or a telecommunication supply included in a class of telecommunication supplies, if:

(a) the supplier makes the supply through an *enterprise that is not *carried on in Australia; and

(b) the Commissioner determines that collection of GST on that supply or class of supplies would not be administratively feasible.

(3) This section has effect in addition to section 9-25 (which is about when supplies are connected with Australia).

In order to ascertain whether the supply of Product X to Australian customers meet the requirements of section 9-5 of the GST Act, it is necessary to determine what the supply is. In your letter you contend that your supply of Product X is one of software; that the software enables the customer's computer to put data in a form which can be transmitted and received but it is not the supply of the transmission or reception of the data; that this is a supply of 'content' completely separate to the supply which relates to the transmission (or reception) of data and that Product X does not provide the means of transmission.

Section 85-10 of the GST Act defines telecommunication supply:

A telecommunication supply is a supply relating to the transmission, emission or reception of signals, writing, images, sounds or information of any kind by wire, radio, optical or other electromagnetic systems. It includes:

(a) the related transfer or assignment of the right to use capacity for such transmission, emission or reception; and

(b) provision of access to global information networks.

GSTD 2012/10 discusses and clarifies the definition further by referencing The Explanatory Memorandum (EM) to the A New Tax System (Indirect Tax and Consequential Amendments) Bill (No 2) 1999

8. A telecommunication supply⁴ is defined as a supply relating to the transmission, emission or reception of signals, writing, images, sounds or information of any kind by wire, radio, optical or other electromagnetic systems.

9. Telecommunication supplies include the supply of:

· telephone calls;

· transmission element of international data exchange;

· call back services;

· the provision of leased lines, circuits and global networks;

· e-mail and Internet access;

· satellite transmissions;

· the related transfer or assignment of the right to use capacity for the transmission, emission or reception; and

· the provision of access to global information networks.

10. However, telecommunication supplies do not include the following supplies delivered through telecommunication media:

· licences to use intellectual property such as computer software; and

· consultancy services provided via the Internet.

11. The definition of a telecommunication supply captures the means of communication, but not the content, where the supply of that content involves a different type of supply. For example, a separate charge for a pay-per-view sporting event is not consideration for a telecommunication supply

The EM to section 85-10 confirms that the intention is to treat as telecommunication supplies the means of communication but not the content of that communication where that content is a different type of supply. To this end the EM makes it clear that telephone calls and access to emails and access to the internet are all telecommunication supplies. With Product X/VoIP services subscribers are provided with access to a network. Usually the subscribers must already have broadband internet access (a means of communication) to access the server, this access is usually provided by an internet service provider (ISP) and is not part of the supply by you.

The first part of this definition (ie up to "It includes…") is consistent with the definition of telecommunication in Article 2 (2.1) of the Melbourne Agreement, to which Australia is a signatory.

A means of communication or 'content'

It may be contended that services such as e-mail and VoIP services are not telecommunication supplies because they are reliant on an underlying infrastructure (eg the Internet, which may be considered to be the telecommunication supply) and therefore 'content'. The definition in the GST Act is consistent with, and share common origins with, the relevant telecommunication provisions in all the other major GST/VAT taxing jurisdictions. Access to e-mail and other similar supplies are reliant on an underlying telecommunications service but are nevertheless universally considered to be examples of a telecommunications supply. It can be also noted that the Internet itself (eg non cable ADSL) is typically reliant on the underlying telecommunication supply of the legacy copper telephone line network.

The interpretation that a telecommunication service can be (and often is) provided by means of an underlying telecommunication service is not denied in the plain text of 85-10 of the GST Act, and is supported by the EM.

If, for example, a person who has broadband internet access with one provider paid another provider for email access, that supply is a means of communication and thus a telecommunication supply, notwithstanding that it is a supply of email access only, which depends on the person's already existing internet access. In a sense the supply of VoIP services is considered to be similar.

VoIP services allow subscribers for example to share data on a person to person (peer to peer or P2P) network and to otherwise allow subscribers to communicate with each other through this network. Under paragraph 85-10(b) the provision of access to global information networks falls within the definition of a telecommunication supply. Similarly, we consider the supply of Product X which gives access to a communication network is also a telecommunication supply.

VoIP services are a type of telecommunication supply, usually delivered via broadband internet. They are not 'clearly a different type of supply' as mentioned in the EM. There may be two supplies involved (VoIP and broadband), but they are both communication type supplies. This is similar to access to email, access to the Internet and call back services which are separate supplies but are also covered by the definition. Therefore a supply of a subscription to VoIP services is a telecommunication supply per the definition in section 85-10 of the GST Act.

The EM notes that the definition is consistent with the definition enacted by the European Council. It follows that guidance on the definition issued by European authorities would be relevant in interpreting the Australian provision.

Guidance from other jurisdictions

European Council has issued on 6 June 2013 an amending Implementing Regulation (EU) no 282/2011 as regards the place of supply of services

Article 6a

1. Telecommunications services within the meaning of Article 24(2) of Directive 2006/112/EC shall cover, in particular, the following:

(a) fixed and mobile telephone services for the transmission and switching of voice, data and video, including telephone services with an imaging component, otherwise known as videophone services;

(b) telephone services provided through the Internet, including voice over Internet Protocol (VoIP);

(c) voice mail, call waiting, call forwarding, caller identification, three-way calling and other call management services;

(d) paging services;

(e) audiotext services;

(f) facsimile, telegraph and telex;

(g) access to the Internet, including the World Wide Web;

(h) private network connections providing telecommunications links for the exclusive use of the client.

2. Telecommunications services within the meaning of Article 24(2) of Directive 2006/112/EC shall not cover the following:

(a) electronically supplied services;

(b) broadcasting services.

Canada Customs and Revenue Agency provide guidance on electronic commerce in GST/HST Technical Information Bulletin B-090. The Bulletin includes discussion of the definition and interpretation of telecommunication services and an example of voice telephony services provided through the internet:

A supply is generally considered to be a supply of a telecommunication service where its predominant purpose is to:

· provide for the emission, transmission or reception of signs, signals, etc. (e.g., voice or data) through a telecommunications network or similar technical system;

· make available a telecommunications facility for the emission, transmission or reception of signs, signals, etc. through a telecommunications network or similar technical system; or

· provide a means through which other services or intangible personal property (e.g., content in a digitized format) are delivered, rather than to provide the services or intangible personal property.

Example

A consumer pays a fee to a company for long distance "telephone calls" made over the Internet. The consumer is able to place these calls from his or her computer or telephone any place in the world. The calls are routed through the networks that make up the backbone of the Internet.

This is a supply of a telecommunication service. The predominant purpose of the supply is to provide the transmission of voice communication. The supplier of the voice telephony is providing a traditional voice telephone service, except that the service is being provided over the internet.

Guided by the above statements, we consider that the supply of Product X is a telecommunications supply. The supply of Product X is not one of content, rather it the provision of a means of communicating. The content is the data transmitted through Product X by the customer (signals, writing, images, sounds or information) which you do not provide. The purpose of Product X is to enable or provide for communication even if it does not provide the internet access component.

Your contention that you supply of Product X is one of software

Draft Taxation Ruling TR 2013/D2 states that the supply of software is considered a grant of a licence to use intellectual property rights while the provision of hosted access might be thought to be more akin to the provision of a service.

Draft Ruling TR 2013/D2 at paragraphs 116 to 125 states:

116. Software developers historically have contracted with customers by means of granting a licence for installation and use of software on a customer's computer hardware. The software is made available for installation on the customer's hardware by means of CD ROM or internet download. A contractual fee is payable by the customer in consideration for the grant of the licence.

117. An obligation to provide 'additional services' may be bundled with the proprietary licence or provided under separate contract.

118. In either case, the contractual fee may or may not expressly be allocated across the different obligations.

119. Additional services include such things as the provision of updates or upgrades to the software, user support and training.

120. An alternative to acquiring a proprietary licence for installation and execution on a buyer's hardware is remote accessing of software hosted on the software company's server. Such access is commonly achieved via the customer's internet browser but other means are technically possible. The mechanism by which access is obtained is not a material difference for the purposes of determining the point of derivation for income tax purposes.

121. Ordinarily, the access fee is charged on a usage basis for periods of relatively short duration (daily, weekly or monthly) or strictly on a pay as you go basis (that is, an hourly charge for actual use).

122. Hosting arrangements may expressly contemplate the provision of support services by the software company on request or such services may merely be provided on a voluntary basis as a client goodwill gesture. Such support services ordinarily relate only to training or help services as it is an inherent feature of hosted services that upgrades and updates are only necessary to the software on the host's server.

123. Hosting arrangements may amount to 'take it or leave it' contracts whereby no remedy is available to the client for the hosted access being unavailable ('downtime'). Even in cases where both parties have equality of bargaining power, downtime may or may not be a matter expressly contemplated in contract. It suffices to say that contracts exist where remedies do and do not exist for downtime. Where a remedy exists it is ordinarily a refund of a portion of the access fee reflecting the downtime and/or an exposure to contractual breach.

The nature of a licence for granting the right to use proprietary software

124. A licence granting the right to use proprietary software is neither a contract for the supply of goods nor for the provision of services. Rather, the licence is a permission to access and use the proprietary software in a way that would otherwise breach the copyright owner's intellectual property rights (Young v. Odeon Music House Pty Ltd (1976) 10 ALR 153).

The nature of a contract for hosted access of proprietary software

125. The precise nature of hosted access is yet to be judicially considered. Hosted access might be thought to be more akin to the provision of a service rather than a licence. However, it is unnecessary to determine whether it is a service or a licence as this does not alter the point of derivation of the access fee for income tax purposes.

While different characterisations of supplies of software are achievable depending on the precise terms, the type of software and the method of supply, we do not consider that a supply of software is precluded from being characterised as a telecommunications supply.

Your contention that you supply of Product X is a supply of content

In addition to the points raised previously in regard to this contention, The Explanatory Memorandum to the Tax Laws Amendment (2010 GST Administration Measures No. 3) Bill 2010, which introduced Subdivision 38-R, provides some further context to the distinction between the means of a telecommunications transmission and the content of that transmission. Paragraph 2.27 of the EM states:

2.27 The type of telecommunication supply provided to the user of a portable device under a global roaming arrangement is not limited by this amendment. Those supplies include transmission of voice, pictures and text messages, email and Internet access. A variety of information and entertainment services may be delivered by telecommunication suppliers to roaming customers. A charge that is for the content delivered to a portable device as distinct from the transmission service to deliver that content is not covered by this amendment. For example, a separate charge for a pay-per-view sporting event that is delivered to a portable device is not for a telecommunication supply.

In an example in the explanatory memorandum - example 2.3 - it is implicit that a VoIP service is a type of a telecommunications supply.

The distinction between a telecommunication service and a supply of content is similarly illustrated in New Zealand Inland Revenue Operational Statement OS 06/01 GST treatment of supplies of telecommunications services, which states (paragraph 14):

Examples of telecommunications content include information obtained via an 0800 toll free number and images downloaded from an internet server. These do not form part of the "telecommunications services".

We do not agree that the supply of Product X is a supply of content. Although the software may be delivered electronically to customers who download it, the software itself is not the essence or the object of the supply in the way that an entertainment or information service delivered electronically is. Rather, the software is the means to, or part of the infrastructure required, to enable customers to communicate. The objective purpose of the supply is to enable communication whereas the purpose of a supply of content is that content. We also consider that the qualification in the Division 85 explanatory memorandum "where that content is clearly a different type of supply" is instructive. Software that is integral to and enables telecommunications cannot be said to be clearly a different type of supply to a supply relating to telecommunications.

Our view of the nature of the supply of Product X

Product X provides subscribers with instant messaging, VoIP telephony and video conferencing. Focusing on the purpose, Product X customers are paying for access to means of communication. This is not a supply of content. Nor does the fact that Product X software is acquired by licence (a right to use the software) exclude the supply of Product X from being a telecommunications supply under Division 85.

A person (Product X customer) has an internet connection/subscription through an ISP (a telecommunications supply). The customer also wishes to use a conference calling facility and acquires a subscription to Product X. This allows, through the existing internet service, video conferencing with other users. The essence of what is being supplied and what is being sought by the customer is a VoIP conference calling facility. This is also a telecommunications supply.

If the customer ceases to continue to pay for the ongoing licence subscription then the customer loses the ability to communicate via Product X to other customers. Therefore there is a direct nexus between consideration and the telecommunication supply provided by you.

Customers have internet access through an ISP; internet access is not supplied by you. However, you supply in our view, access to a world-wide communication network (connecting Product X users and other users). The supply of Product X is not a different type of supply (as described in the explanatory memorandum). Product X provides a subscriber with the means of communication with other Product X users globally. This falls within the definition of telecommunication supply.

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