10 July 1998 GST/HST Interpretation HQR0001013 - Place of Supply - Telecommunication Services

                                                                        GST/HST Rulings and Interpretations
Place Vanier, Tower C, 9th Floor
25 McArthur Avenue
VANIER, Ontario K1A 0L5

Dear XXXXX

I refer to your letter of December 17, 1997, and the telephone conversation between XXXXX and Mr. Garry Ryhorchuk of my staff on April 22, 1998, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to XXXXX operations.

The following information was provided in your letter and during Mr. Ryhorchuk's conversation with XXXXX:

•   XXXXX is registered for GST/HST purposes and is located in XXXXX a participating province.

•   XXXXX provides wireless communications for clients operating in remote locations not serviced by wire line or tower-based wireless service.

•   XXXXX either owns and operates its own telecommunications facilities, shares facilities with other telecommunications carriers, or distributes the services of other network operators. XXXXX also sells end-user equipment to many of its customers, as well as specialized software or hardware to meet its client's operational communication needs.

•   XXXXX currently provides its customers with global coverage for all major XXXXX classes of service. Your client also provides XXXXX services to the marine and data markets in Canada and provides mobile satellite and data communication services XXXXX[.]

•   XXXXX operates a high frequency radio facility providing service for oceanic users in the XXXXX, as well as providing offshore oil and gas communications in XXXXX[.]

•   The provision of mobile satellite services consists of two types of business: the inbound (remote user to terrestrial network) and the outboard (terrestrial network to remote users).

•   The inbound business provides remote land, marine or aeronautical users with the capability to connect a telecommunication circuit from the remote user's terminal to the terrestrial facilities, thereby allowing end-to-end connection to any voice or data location worldwide. Fo[r] XXXXX service, the XXXXX customer goes through its Land Earth Station (LES) and terminates in a terrestrial system. Remote users are billed either directly by XXXXX or through the distributor that deals with that specific remote user.

•   The outbound business allows terrestrial carriers that are customers of XXXXX to connect to XXXXX in order to allow its customers to connect to mobile users. This outbound business can include both voice and data services such as fax, Internet, e-mail or packet data circuits.

•   Each remote terminal can place an outbound call or receive an inbound call via a satellite in XXXXX[.] The regions overlap as they wrap around the globe. Although it is known at the time the call is placed which satellite is being used, the location of the remote user is not known because the satellites are not country specific. From the satellite, the call then comes to one of two earth stations located either in XXXXX or XXXXX[.]

•   An accounting authority, in the context of international telecommunications service, provides a network of billing agents through which international service providers can obtain payment from their customers operating anywhere in the world. You state that in some countries, accounting authorities are imposed by law as a prerequisite to doing business within that political jurisdiction as a means of controlling activities and deriving the mark-up on the charges. However, in the increasing global markets, more and more customers are dealing directly with their service providers, such as XXXXX to receive their service invoices directly for all services rendered.

The process (in terms of the accounting authority and the billing structure works in the following manner. When a customer purchases a terminal (mobile unit), an accounting authority is assigned. If the unit is purchased from XXXXX the accounting authority is XXXXX[.] Until recently, XXXXX was the assigned accounting authority. If the customer uses another provider's facility, either the other provider bills the customer directly or bills the accounting authority, who then bills the customer. The accounting authority then pays the international service provider on the customer's behalf. The vast majority of third-party accounting authority customers are Canadian. There are, also, a significant number of XXXXX customers, but XXXXX would bill those customers directly as they are not third-party accounting authority customers. Most XXXXX customers use XXXXX directly as a service provider, i.e., there is no need for an accounting authority to intervene as billing agent.

You state in your letter that when XXXXX acts as an accounting authority for an international service provider, the customer makes the payment to XXXXX who pays the international company for the customer. XXXXX assumes the liability for collecting the monies from the Canadian customer.

On April 22, 1998, Mr. Ryhorchuk contacted XXXXX for further clarification on this point. Mr. Ryhorchuk was advised that an international service provider will invoice XXXXX for the service provided to the customer. XXXXX will pay the amount to the international service provider and then invoice its customer for the same amount plus an administration fee (which is identified separately on the invoice). XXXXX is financially at risk for the amount because it assumes the risk of loss if the amount cannot be collected from the customer.

Interpretations Requested

1. What is the application of the GST/HST when a Canadian telecommunications provider acts merely as an accounting authority for an international service provider?

2. Does a Canadian accounting authority deem a non-resident service provider to be carrying on business in Canada?

3. Can the accounting authority's mark-up be treated as an exempt financing charge for GST/HST purposes?

4. What is the application of the GST/HST when the origin or termination (i.e., location of remote user) and billing location are not always known to the service provider, XXXXX[.] In other words, given the nature of this mobile telecommunications service, does the two-out-of-three rule apply or is another proxy necessary to determine the application of the GST/HST?

Interpretations Given

Based on the information contained in your letter and obtained during Mr. Ryhorchuk's telephone conversation with XXXXX, the following interpretations are provided:

1. It appears that XXXXX is purchasing accounts receivable from the international service provider. Accounts receivable are debt securities. Debt securities are financial instruments (paragraph (a) of the definition of "financial instrument" in subsection 123(1) of the Excise Tax Act (Act)). The transfer of ownership of financial instruments is a financial service (paragraph (d) of the definition of "financial service" in subsection 123(1)). Under the provisions of Schedule V, Part VII, section 1 to the Act, a supply of a financial service that is not included in Schedule VI, Part IX to the Act is an exempt supply. Therefore, the international service provider is making a supply of an exempt financial service to XXXXX[.] Please note that the Department has taken the position that the parties involved in the purchase and sale of accounts receivable (i.e., XXXXX and the international service provider) must decide between themselves who will account for the tax (GST or HST) on the original supply provided, of course, that the original supply was subject to tax. The remittance of the tax by one of the parties will discharge the liability for remittance of the tax for both parties.

2. In determining if a non-resident person is carrying on business in Canada, the Department considers various criteria. These criteria are outlined in paragraphs 13 to 19 of the enclosed copy of Chapter 2.5 of the GST Memoranda Series. You will note that, in general, a non-resident person must have a significant presence in Canada to be considered to be carrying on business in Canada. From the information provided, it does not appear that the non-resident service provider has any presence in Canada (e.g., the selling of the accounts receivable would not constitute a presence). Therefore, based on the criteria outlined in Chapter 2.5, I agree with the comments on page 5 of your letter that it would seem that the non-resident service provider is not carrying on business in Canada.

3. The accounting authority's mark-up (i.e., XXXXX mark-up), which XXXXX identified as an administration fee, represents the consideration for the supply of a service from XXXXX to its customer. The supply is deemed to be made in Canada pursuant to paragraph 142(1)(g) of the Act. This supply would be deemed to be made in a participating province pursuant to section 144.1 of the Act and Schedule IX, Part V, paragraph 2(a) to the Act. The supply is, therefore, subject to the HST at 15% under the provisions of subsections 165(1) and (2) of the Act when supplied to a resident. If the recipient of the supply is a non-resident, the supply may qualify for zero-rating under the provisions of Schedule VI, Part V, section 7 to the Act.

4. Section 142.1 of the Act provides the rules for determining if a supply of a telecommunication service is deemed to be made in Canada. If the supply is deemed to be made in Canada, section 144.1 of the Act and Schedule IX, Part VIII provide the rules for determining if a supply is deemed to be made in a participating or non-participating province. Subsection 142.1(2) of the Act sets out the rules for determining if a supply of a telecommunication service is deemed to be made in Canada. This subsection reads, in part, as follows:

"(a) in the case of a telecommunication service of making telecommunications facilities available, the facilities or any part thereof are located in Canada; and

(b) in any other case,

(i) the telecommunication is emitted and received in Canada, or

(ii) the telecommunication is emitted or received in Canada and the billing location for the service is in Canada."

You will note that only subparagraph 142.1(2)(b)(ii) equates to the two-out-of-three rule referred to in your letter.

By issuing the terminal number, XXXXX is making available telecommunications facilities located both in and outside Canada, e.g., XXXXX[.] Therefore, as part of the telecommunications facilities are located in Canada, the telecommunication service of making telecommunications facilities available, supplied by XXXXX to its customers, is deemed to be made in Canada pursuant to paragraph 142.1(2)(a) of the Act. It must now be determined if the supply is made in a participating or non-participating province. Schedule IX, Part VIII, section 1 to the Act reads as follows:

"For the purposes of this Part, the billing location for a telecommunication service supplied to a recipient is in a province if,

(a) where the consideration paid or payable for the service is charged or applied to an account that the recipient has with a person who carries on the business of supplying telecommunication services and the account relates to telecommunications facilities that are used or are available for use by the recipient to obtain telecommunications services, all those telecommunications facilities are ordinarily located in the province; and

(b) in any other case, the telecommunications facility used to initiate the service is located in the province."

Reference must now be made to Schedule IX, Part VIII, section 2 to the Act to determine if the supply is made in a participating or non-participating province. This section reads as follows:

"A supply of a telecommunication service (other than a service referred to in section 3) is made in a province if,

(a) in the case of a telecommunication service of making telecommunications facilities available,

(i) all of those facilities are ordinarily located in the province, or

(ii) where not all of those telecommunications facilities are ordinarily located in the province, the invoice for the supply of the service is sent to an address in the province;

and

(b) in any other case,

(i) the telecommunication is emitted and received in the province,

(ii) the telecommunication is emitted or received in the province and the billing location for the service is in the province, or

(iii) the telecommunication is emitted in the province and is received outside the province and the billing location for the service is not in a province in which the telecommunication is emitted or received."

Only Schedule IX, Part VIII, subparagraph 2(b)(ii) equates to the two-out-of-three rule referred to in your letter.

Although the telephone is mobile and free to go anywhere, the mobile telephone will be considered to be "ordinarily located" at the permanent address of the purchaser subscriber. In addition, the Department will consider that the point where a telecommunication is emitted is the first satellite or XXXXX used when making the call.

If, after applying the above rules, a supply is deemed to be made in a participating province, the supply will be subject to the HST at 15% under the provisions of subsections 165(1) and 165(2).

However, if, after applying the rules in Schedule IX, Part VIII, section 2, the supply is not deemed to be made in a province, section 144.1 provides that the supply will be deemed to be made outside that province. Further, a supply made in Canada that is not made in a participating province is deemed to be made in a non-participating province. As a result, the supply will be subject to the GST at 7% under the provisions of subsection 165(1).

The foregoing comments represent our general views with respect to the subject matter of your letter. Unannounced proposed or future amendments to the Act may result in changes to these interpretations. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Department with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-2488.

Yours truly,

M. Boivin
A/Manager
Border Issues Unit
General Operations and Border Issues Division
GST/HST Rulings and Interpretations Directorate

Encl.