EU VAT Principles as Interpretative Aids to EU VAT Rules: The Inherent Paradox

Abstract

The EU VAT system is founded on two basic principles, namely the principle of VAT as a general consumption tax, and the principle of fiscal neutrality. Based on key elements of the VAT system as it was introduced in the 1960s, they have been both developed by the Court as fundamental principles of the system over an extended period, spanning almost five decades. Once exclusions from the tax base, such as exemptions and reduced rates, are introduced, however, these two principles became contradictory. This results in a dialectic struggle, whereby a choice must be made when interpreting VAT rules on exclusions, namely: interpreting these rules in light with the principle of VAT as a tax on consumption, and its corollary, the principle of strict interpretation, will result in a less neutral system; interpreting these rules in line with the principle of fiscal neutrality, will result in further erosion of the tax base, and legal uncertainty. The paper starts by presenting a typology of European VAT principles based upon the jurisprudence of the CJEU. It then assesses that jurisprudence insofar as exclusions from the tax base are concerned, namely rules on VAT exemptions, and rules on VAT reduced rates, highlighting this dialectic struggle, and identifying both the Court’s traditional stand on it, and its more recent approach. An empirical assessment of the hypothesis is then presented, by reviewing a five years sample of cases on the interpretation of the scope of VAT exemptions, and identifying for each case whether the CJEU decided on the basis of the principle of fiscal neutrality, or on the basis of the principle of strict interpretation. Whilst not meant to be taken as an accurate method of determining the Court’s preferences as regards interpretative methods, the exercise demonstrates not only a growing preference for fiscal neutrality, but also the increasingly casuistic nature of interpreting VAT rules on exclusions of the tax base. The paper concludes that these tendencies are likely to continue in the face of new economic realities, and that the challenge for the CJEU will be to reach the right balance between promoting neutrality and eliminating distortions, without creating an environment of legal uncertainty, which will undermine confidence and economic growth.