VAT System Research Articles

New Implementing Regulation 282/2011 for the 2006 VAT Directive

This article seeks to provide a comprehensive summary of Council Regulation 282/2011, which, applicable from 1 July 2011, recasts Council Regulation 1777/2005 and introduces several implementing measures for the 2006 VAT Directive. These are mostly based on guidelines previously agreed by the VAT committee and several relate to the changes introduced by the 2008 VAT package. The new provisions are important and touch upon nearly all areas of the VAT system (scope of application, taxable persons, taxable supplies, place of supply, taxable amount, rates, exemptions, deductions, and taxpayer obligations). As concluding remarks, this article also points at some important weaknesses of the new rules related to the compliance costs, the fixed establishment as paying entity, and the proposed tools that Council Regulation 282/2011 provides to taxable persons in order to implement the new rules governing the place of supply of (electronic) services.

Towards a Simpler, More Robust and Efficient VAT System by Levying VAT at EU Level

At the end of 2010, the European Commission launched a public debate on the future of the EU VAT system. In this article, the authors explain that conversion of the VAT system into a true EU tax is the most appropriate approach. The description of their proposed EU VAT system does not pretend to be complete but gives a good general idea of the authors’ approach. Even if it appears that adoption of the proposed EU VAT system is not possible for political or practical reasons, specific elements of the authors’ proposal are still of use.

A New Defence for Victims of EU Missing-Trader Fraud?

The downside of the system of fractionated remittance of VAT is that it makes the VAT system vulnerable to missing-trader fraud. Despite all anti-fraud measures that have already been taken in the European Union, the phenomenon of missing traders seems not to be under control. However, the accumulated anti-fraud measures and practices of the tax authorities have resulted in unacceptably high compliance burdens and uncertainty for the business community. In this article, the authors explain that newly available legal and technological means could make the burdens of the VAT system on EU businesses proportionate again. If Member States would make full use of its potential, Eurofisc could play a crucial role in the process of restoring the proportionality of the EU VAT system. If necessary, the ECJ could push Member States into the right direction.

Are VAT Exemptions Compatible with Primary EU Law?

The VAT exemptions are probably the most complex aspect of the European VAT system. The official documents and reports that were published at the time VAT was introduced in the European Union and the lack of information on the purposes of the EU legislature in adopting specific VAT exemptions do not make it easy for the Court of Justice of the European Union (ECJ) to delimit the scope of the exemptions. Consequently, the ECJ’s attempts to establish the purposes of specific exemptions are occasionally controversial and arbitrary. In this article, the author presents the history of the VAT exemptions.

VAT Fraud - Technological Solutions

Every VAT/GST allows missing trader fraud. The fraud is simple, and can be simply prevented (with technology). The fraud arises when a business makes a purchase without paying VAT, collects VAT on an onward sale, and then “disappears” without remitting the tax. Missing trader fraud is common in high-value/low-volume goods sold across borders – computer chips and cell phones are the classic examples. But the fraud easily migrates when pursued. It operates well with goods as wide ranging as xenon bulbs, automobiles, and earth moving equipment.The recent appearance of MTIC fraud in tradable CO2 permits and VoIP is a very serious warning for the global VAT system. The size and scope of these frauds make it very clear that this missing trader fraud is huge and it is spreading. The speed with which it spreads is a reflection of the technology that makes it work. In tradable services this fraud has no boundaries.Three technology solutions are presented here. The RTvat and the VNL are applied to all transactions in a VAT system. The RTvat changes the underpinnings of the VAT. Moving it from an invoice to a settlement system. The VLN on the other hand, leaves the basic structure of the VAT untouched, and simply adds an encrypted “tracer code” to every invoice. The D-VAT accomplishes much of what the VLN does, but uses certified tax software. The D-VAT can be applied selectively (to suspect classes of supplies). It is also a voluntary system (admittedly with a number of incentives to get businesses to “sign-up”). The D-VAT is the only solution that can be extended to cover B2C transactions.

The Exemption for Education under EU VAT

Under the EU VAT system, children’s or young people’s education, school or university education, vocational training or retraining provided by bodies governed by public law having such as their aim are exempt from VAT. The author analyses several issues as regards the scope of the exemption for education that have already been brought before the ECJ, such as the VAT treatment of contract research by universities, secondment of teachers by educational institutions and the scope of the exemption for the services of private tutors.

Telecommunications Services and the Neutrality of the EU VAT System

On the basis of the decision of the Court of Justice of the European Union in the fairly bizarre case of EGN, the author discusses two aspects of the principle of neutrality which are related to this case, i.e. the right to recover VAT in cross-border scenarios and the system of taxing telecommunications services. Even under the new refund arrangements that entered into force on 1 January 2010, the situation within the European Union as regards the right to recover VAT in cross-border scenarios continues to be short of neutral, and it is impossible to predict when the situation will improve. By contrast, as regards taxation of telecommunications services, it is clear that it will take another four and a half years until the current complex rules are replaced by a new tax regime, which will be, at least theoretically, in compliance with the principle of tax neutrality.

The Elusiveness of Neutrality – Why Is It So Difficult To Apply VAT to Financial Services?

Under the VAT system of the European Union, domestic supplies of financial services are exempt. That exemption has significant drawbacks, not least of which is that it compromises the neutrality of the tax. In this article, the author indicates how, depending on government policy views, margin-based financial services could be taxed. He also indicates how financial institutions could give new impetus to the discussion on the VAT treatment of the services in that sector.

Cross-Border Entities and EU VAT: A Contradictory Concept?

One of the issues discussed at the Forum of the Confédération Fiscale Européenne (CFE) on 23 April 2009 was the VAT treatment of services exchanged between the various parts of a commercial group or entity that are separated by a national border. In this article, the author gives an overview of the discussions and concludes that, although it solves specific problems for a limited group of businesses, treating services exchanged between dependent parts of an entity or commercial group as being outside the scope of VAT is not consistent with the principles on which the VAT system is based.

Head Office/Branch Relationships from the Perspective of Swiss VAT

In this article, which is derived from his presentation at the Forum of the Confédération Fiscale Européenne (CFE) on 23 April 2009, the author compares the Swiss “separate-entities” approach, under which services exchanged between businesses and their branches abroad are treated as taxable services, and the “single-entity” approach of the Court of Justice of the European Communities (ECJ), under which those services are treated as being outside the scope of VAT. He concludes that, from the perspective of the proper functioning of the VAT system, the ECJ’s approach has no real advantages.

The Phenomenon of VAT Groups under EU Law and Their VAT-Saving Aspects

What started as the principle that Germany should be enabled to maintain its doctrine of Organschaft, i.e. introduction of VAT grouping, has developed into a complex feature of the EU VAT system, which is being abused by the Member States and by businesses for purposes that are not compatible with the principles of the Community. In 1997, the then 15 Member States did not accept the Commission’s proposal to abolish VAT grouping or limit its scope to members that are entitled to full deduction of input tax. They may, however, reconsider that position if the ECJ would force them to apply the VAT grouping arrangements Unionwide.

Rethinking the Place of Consumption: New Issues Under the VAT System, and the Possible Consequences on Third Countries Businesses

30 years have passed since the European VI Directive, which shaped as is it today and still constituting a model (to be followed or not) for many States moving towards a so called Value added taxation system. It's no surprise that after such a considerable time the European bodies (first of all the Commission) felt the necessity to amend very basic aspects of the tax, and more to the point those provisions which didn't stand the test of time. In this respect it was obvious that in a globalised world, with a globalized economy, the first of these would have been those concerning the territoriality rules: namely, the conditions under wich sale of goods or delivery of services are deemed to be relevant for Europe and for (thus taxable in the Old Continent). This conclusion, taken together with the necessity to attract more operations to European taxation urged the EU Commission to prepare the VAT Package. The so called VAT consists of a number of European decisions, including a Directive (Directive 2008/8/EC) recently approved by the Council of Europe implementing significant changes to the recasted rules as per Directive 2006/112/EC. The Package shall come into effect on January 1st 2010 and by that date the member States shall have to introduce in their tax systems acts or regulations consistent with the rules laid out by the EU (Italy did that in July, for instance). The main goals pursued by the Union in 2008 is to update most of the criteria applicable to consider the sale of a good or the delivery of a service taxable in one State or in another, in Europe on not. Basically, the Package concerns the rewriting of the territoriality principle. It could seem, at first glance, a pure European issue, involving EU businesses only: this impression is completely wrong. In the case of delivery of services, in particular, such as advertising and many others, the change of territoriality rules could now make some of these operations taxable in Europe even if delivered by a non EU resident company and, most important of all, even if that service is deemed to be delivered elsewhere (in Australia, for instance) and taxed there accordingly (under the GST system). As a matter of fact, the change of territoriality rules in shall create a significant degree of uncertainty in international relations, eventually giving rise to cases of international double taxation that no DTC can effectively deal with.

Reform of Swiss VAT - the VAT Act from 2010 This article gives a concise overview of the background of the VAT reform and the upcoming changes. Due to the fact that not all information (implementing provisions and administrative notices) is available at this moment, the new legislation will be evaluated at a later stage.

Switzerland is about to implement the biggest reform in the field of VAT since the introduction of the tax in 1995. The new VAT Act 2009, which is envisaged to come into effect on 1 January 2010, is the first step in the direction of the (originally) intended "ideal" VAT system. This article gives a concise overview of the background of the VAT reform and the upcoming changes.

Sharing joint expenses under EU VAT

Since the circumstances under which the sharing of expenses relating to joint investments is outside the scope of the EU VAT system are not entirely clear, the Netherlands Supreme Court has developed standard conditions to fill that lacuna, and labelled its approach as the doctrine of sharing joint expenses. The author explains this doctrine and its Community aspects. He concluded that it may even be more practical not to rely on this concessional doctrine and to treat the sharing of joint expenses as consideration for a supply made by the recharging party.

EC communication on VAT grouping : an attempt to harmonize or to restrict the use of group registration?

The VAT Directive provides the Member States of the European Union with an option to introduce VAT grouping into their national legislation. Group registration has become a source of tax competition between the Member States, which means that it has a potential impact on the functioning of the internal market and on the basic principles of the Community VAT system. The Commission, as the guardian and initiator of Community legislation, has published its views on a number of essential elements of VAT grouping. In this article, the authors summarize the Commission's analysis and specifically comment on the limitation of VAT grouping to taxable persons and the territory of individual Member States.

Modelling value-added tax in the presence of multi-production and differentiated exemptions

We develop a framework for economy-wide modelling of value-added tax systems. Our framework models a number of complexities of VAT systems as implemented by tax agencies. In particular, we model multiple rates, multiple exemptions, multiple degrees of refundability across commodity users, and multi-product enterprises. We use our framework to model what is arguably South East Asia's most complex VAT system: that of Vietnam. We analyse the macroeconomic, industrial and distributional effects of simplifying Vietnam's complex VAT system. We simplify the system via a budget-neutral movement to one rate and removal of discretionary exemptions. This generates an aggregate welfare gain, but adverse distributional effects. Adverse distributional effects can be greatly ameliorated, at small cost to the aggregate welfare gain, via exclusion of paddy and rice from the VAT simplification program.

The Tax liability of public bodies under EU VAT

Public bodies have a special position under the VAT system of the European Union and that position has been the subject of a large number of judgments of the Court of Justice of the European Communities. The author discusses the VAT liability of public bodies and, in particular, the aspect of distortions of competition that may arise from treating public bodies as non-taxable persons for VAT purposes.

VAT in Nigeria : theory and practice

In this article, the author discusses the Nigerian VAT system, which was introduced 15 years ago. He explains that there is quite a difference between the functioning of the VAT system in theory and the actual functioning of VAT in Nigeria. The author highlights the flaws and ambiguities in the Nigerian legal system and the weaknesses of the implementation process.

Transitional restrictions on the right to deduct EU VAT

Restrictions on the right to deduct input VAT are costly features of the VAT system and, for that reason, draw the attention of businesses. The current VAT Directive provides that the Council must determine the expenditure in respect of which VAT is not deductible and adds that VAT is under no circumstances deductible in respect of expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment. This article briefly examines the scope of the exclusions from the right to deduct input VAT, the legal history of that provision, its interpretation by the European Court of Justice (ECJ) and the issues pending before the ECJ.

The new EU place-of-supply rules from a business perspective

From 1 January 2010, new rules apply for the purpose of determining whether or not services are subject to VAT in one of the EU Member States and, if they are, in which Member State the VAT liability arises; in other words, new rules will determine where services are deemed to be supplied for the purposes of the VAT system of the European Union. This article highlights the main issues that, based on a technical analysis and on practical examples, require further guidance and clarification at an EU level to avoid risks such as double taxation and non-taxation.