In the world of international education, whether you’re a small business owner or the finance officer at a large organisation, the subject is made even more irksome with the added burden of navigating international sales tax.
But as tax policies constantly change and international study offices are increasingly being asked to act like multinational companies, it’s important to talk about tax. Including all the good things and the bad things that may be.
“New Zealand is one of very few countries in the world where tax is levied on language travel”
Mike Payne, a VAT expert in the UK at Grosvenor VAT Consultants, says the essence of understanding sales tax is looking at the supply chain – who does what for whom, where, when and for how much.
In most countries, education is exempt from sales taxes, but the additional services provided alongside a course and the use of education agents can quickly complicate tax compliance.
Depending on where you are operating, how much tax is levied on education and services – like accommodation, transport and social programmes – can have an impact on your ability to compete internationally.
In Malta, for example, students aren’t required to pay VAT on courses but must pay 5% VAT on books, 7% tax on accommodation, and 18% VAT on leisure activities and transport.
The Federation of English Language Teaching Organisations in Malta has recently renewed its call for more favourable VAT exemptions for the ELT sector, worth €161m annually, to give it a “much needed competitive boost”, chief executive Genevieve Abela has said.
What those favourable exemptions will look like is still “uncharted territory”, says Abela. “FELTOM’s main issue is aimed at trying to draw the government’s attention to the fact that Maltese schools are disadvantaged against UK competition in that they all have to load their services with the respective VAT charge, effectively making them less competitive when comparing the same service in the UK,” she explains.
English language schools in New Zealand also feel burdened by tariffs on English language courses, which carry a 15% sales tax.
“New Zealand is one of very few countries in the world where tax is levied on language travel – an export. This makes us less competitive than our main rivals, Australia and the UK,” explains Kim Renner, executive director of English New Zealand.
VAT victory in UK court
The UK’s position hasn’t always been as fortunate. ELT folklore tells of a watershed victory for the industry in the 1999 Pilgrims Language Courses case brought before the High Court & Court of Appeals. It changed the country’s tax law to allow EFL courses and the services related to those courses to be exempt from VAT charges.
Payne was integral to success of the case. “[HM] Revenue and Customs got blown out of the water on that one,” he says. “As a result of this decision, the majority of EFL providers were able to obtain refunds of overpaid VAT retrospectively for four years and ongoing they were able to deregister for VAT, providing that all their income was exempt.”
Adding education agents to the supply chain makes tax compliance even hairier. For any European language provider or education agent, hearing “reverse charge” will likely send chills up their spine.
The European Union introduced reverse charge legislation to avoid suppliers having to register for VAT in all the EU member states. So the recipients of a supply from a foreign entity pay the reverse charge at the standard 20% tax rate and then are able to recover it, assuming they aren’t tax exempt.
Sales discount vs. commission
To ensure that education agent commissions aren’t seen as an imported service in the school-agent-student supply chain, Payne advises education providers use clear terminology in their contracts with overseas partners.
“The wording of those contracts is important. Some EFL providers have had contracts which were in existence for years and have never been updated,” he recounts.
“The obligation of paying taxes should then be on the overseas institution [and] not the Chinese agency’s company that is just a partner”
“You should look at your paperwork and put these documents in place to make sure that you’ve got the right terminology in your paperwork to back up actually what happens, which is education providers do not make any payments, but rather offset what is really a discount against the sales invoice.”
Tour operator or consultant?
In Europe, education agents are either viewed as tour operators, who sell courses in a packaged deal, or agents, essentially acting under the responsibility of the overseas education provider.
In Germany, tour operators sometimes end up paying tax twice: once, a 19% reverse charge on VATable courses they sell and again via a 19% income tax on commissions they earn. But agents acting on behalf of the schools pay taxes just once – 19% on their commission gains.
How you are classified depends on how you sell. A package with a course plus flights and accommodation would come under the jurisdiction of tour operations, which is how most German education agencies are classified.
In China, depending on the agreement between the school and the agent, the cost of tax on commissions could eventually be paid by the school.
The general manager at an agency member of the Beijing Overseas Study Service Association says when Chinese agencies sign a partnership agreement with an overseas institution to recruit students on their behalf, taxes are worked into the agent’s fee.
“The obligation of paying taxes should then be on the overseas institution [and] not the Chinese agency’s company that is just a partner,” he says.
If the Chinese agency has an overseas office, then they are under the jurisdiction of the local tax laws and negotiate who pays taxes on commissions with their university partners, he adds.
Operating offshore or bilaterally
If taxes are a thorny topic, then higher education exports with their multiple branches and stems are laden with prickly barbs. Things can get especially spiky when higher education supplies are shared between multiple providers in different countries, such as in the instances of twinning programmes or 2+1 degrees.
It could be the case that students pay full tuition fees to the initial institution, which then transfers the overseas partner’s (usually a university in the UK, US or Australia) share. But because the overseas partner is essentially making money in the local market, they might be required to pay a corporate tax in the foreign country as well as income tax at home.
Market entry specialist Sannam S4 advises universities on tax compliance in India. Kapil Dua, co-founder and group CFO, says foreign universities should make clear in their agreements with Indian partners that they aren’t responsible for paying tax and will walk away with the course’s sticker price.
“We advise them to write down specifically in their agreement that any tax payment in India is the responsibility of the Indian institution,” he says.
There is also the issue of overseas liaison offices and paying foreign staff. In the case of India, Dua suggests overseas universities should set up local entities to avoid paying taxes twice on long-term business in the country.
“If they want to employ people in India, they want to receive funds in India, then they have no other choice but to have a legal entity in India,” he says. But then again, the type of entity that would best benefit overseas universities in India depends on what type of business they are likely to carry out.
US schools don’t encounter sales tax roadblocks like the reverse charge in the EU. However, agents receiving commission payments from US-based education providers have to complete a W-8 form in order to be exempt from the 30% tax normally charged domestically. The form is laborious and could require the assistance of a tax professional.
“I think education providers are acting irresponsibly by not addressing it”
“When submitting the form to agents it is important to know if they are acting as individuals (agent) or as an entity (agency) so that they complete the right version of the W8,” says Jean-Marc Aberola, president of Colorado-based Bridge Education Group.
Payne says he regularly battles with HMRC over tax payments on agent commissions, and Huan Japes, deputy chief executive at English UK, says he is aware of several cases over the last five years when schools have been pursued by HMRC for repayment on back taxes.
“The members have successfully argued their case and have managed to either get a refund or not have to pay the money,” recounts Japes. “But those are quite long, complex cases and in both cases what HMRC said was that these are specific to these centres, so it doesn’t imply a precedent.”
It seems unfair to task educators, marketers, or administrators with worrying about international sales tax. But as overseas study becomes more commercial, that’s exactly what’s required of businesses, regardless of scale.
Dua says most higher education institutions aren’t built to be multinational entities. “They don’t even have the resources in-house to look at this monster,” he says.
But it could also be time for a new, head out of the sand, attitude toward international sales tax. “It’s an issue that won’t go away,” observes Payne. “I think education providers are acting irresponsibly by not addressing it.”