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Page 1
Legal nature of
VALUE ADDED TAX
in European Union
Tax Law
Page 2
Introduction
concept of the value added tax
scope of application of the Union VAT legislation
definition of taxable persons
taxable transactions
chargeable event and chargeability of the VAT
Page 3
Importance of studying EU tax law and the European VAT regulation
European aspirations of Ukraine
Constantly growing economic relations between
Ukraine and European Union
the Association Agreement with European Union,
and particularly economic part of this treaty
(signed on 27 June 2014).
Page 4
The Ukraine-European Union Association Agreement
The Agreement does not provide for complete harmonization of
VAT regulation in Ukraine since a whole number of clauses of
Council Directive on the common system of value added tax concerns
exclusively EU countries. But nonetheless there are many binding
provisions in relation of harmonization of some elements of VAT legal
structure set forth in our Tax Code. For example, among them are:
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The Ukraine-European Union Association Agreement
Article 349, according to which Parties of the Agreement shall cooperate to enhance
good governance in the tax area, with a view to the further improvement of economic
relations, trade, investment and fair competition;
Article 351 establishes that the Parties shall also enhance and strengthen their
cooperation aimed at the improvement and development of Ukraine's tax system and
administration, including the enhancement of collection and control capacity, with a
specific focus on Value Added Tax (VAT) refund procedures, to avoid
accumulation of arrears, ensure effective tax collection and reinforce the fight
against tax fraud and tax avoidance;
Article 353 provide for gradual approximation to the taxation structure as laid down in
the EU acquis;
Ukraine must undertake to gradually approximate its legislation to the Council Directive
2006/112/EC on the common system of value added tax, Council Directive
2007/74/EC on the exemption from value added tax and excise duty of goods
imported by persons travelling from third countries, the Thirteenth Council Directive
86/560/EEC on the harmonisation of the laws of the Member States relating to
turnover taxes.
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Introduction
The European Union VAT is a value added tax on goods and
services within the EU. The EU's institutions do not collect the tax, but
EU member states are each required to adopt a value added tax that
complies with the EU VAT code. Different rates of VAT apply in
different EU member states, ranging from 15 to 25%. Some of the
VAT collected by member states is used to fund the European Union
as part of the system of "own resources". VAT accounts for just over
10 per cent of the total revenue of the EU common budget.
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Directives on VAT
Number of actDate of
enactment Official title Abbreviated title
Council Directive 2006/112/EC
28 November 2006
On the common system of value added tax VAT Directive
Council Directive 2008/9/EC
12 February 2008
Laying down detailed rules for the refund of value added tax, provided for in Directive 2006/112/EC, to taxable persons not established in the Member State of refund but established in another Member State
VAT Refund – EU Business Directive
13th Council Directive 86/560/E
EC
17 November 1986
on the harmonization of the laws of the Member States relating to turnover taxes - Arrangements for the refund of value added tax to taxable persons not established in Community territory
VAT Refund – non-EU Business
Directive
Council Directive 2009/132/EC
19 October 2009
determining the scope of Article 143(b) and (c) of Directive 2006/112/EC as regards exemption from value added tax on the final importation of certain goods
VAT-free Importation Directive
Council Directive
2006/79/EC5 October 2006
on the exemption from taxes of imports of small consignments of goods of a non-commercialcharacter from third countries
Private Consignments
Directive
Council Directive 2007/74/EC
20 December 2007
on the exemption from value added tax and excise duty of goods imported by persons travellingfrom third countries
Travelers' Allowances Directive
Page 8
The aim of VAT directive
The aim of the EU VAT directive is to harmonize VAT within the EU area, and
specifies that VAT rates must be within a certain range. It has several basic
purposes:
harmonisation of VAT law (content)
harmonisation of content and layout of the VAT declaration
regulation of accounting, providing a common legal accounting
framework
detailed description of invoices and receipts, meaning that member states
have a common invoice framework
regulation of accounts payable
regulation of accounts receivable
standard definition of national accountancy and administrative terms
Binding implementing measures to ensure uniform application of the VAT
Directive can be found in the VAT Implementing Regulation (Council Regulation
(EU) No 282/2011). Those measures are directly applicable without transposition
into national law.
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Derogation from the VAT Directive
Member States may be authorised to derogate from the common VAT rules to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance.
In terms of European Union legislation, a derogation can imply that a member state delays the implementation of an element of an EU Regulation into their legal system over a given timescale;
or that a member state has opted not to enforce a specific provision in a treaty due to internal circumstances (typically a state of emergency).
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Subject Matter
The principle of the common system of VAT entails the application to
goods and services of a general tax on consumption exactly proportional to
the price of the goods and services, however many transactions take place in
the production and distribution process before the stage at which the tax is
charged. On each transaction, VAT, calculated on the price of the goods or
services at the rate applicable to such goods or services, shall be chargeable
after deduction of the amount of VAT borne directly by the various cost
components.
The common system of VAT shall be applied up to and including the retail
trade stage.
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Scope of RDV
The Recast VAT Directive distinguishes between the scope or the field of
application, and under a separate title, the territorial scope.
Subject to value added tax are:
the supply of goods and services effected for consideration* within the
territory of a Member State by a taxable person acting as such.
intra-Community acquisitions of goods for consideration by taxable persons
and by non-taxable persons provided certain conditions are fulfilled as well as
the intra-Community acquisition of new means of transportation by anyone.
the importation of goods by anyone.
_______________________
* Here consideration means a payment or reward.
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Definition of the taxable persons
“taxable person” means anyone who independently carries out in any place any economic activity, whatever the purpose or result of that activity.
Anyone
individual legal person• Private limited company
• Public limited company
• Societas Europaea
Institutions lacking legal personality•Joint venture
•Partnerships
•Co-operations
Page 13
Economic activity
Whether a person is subject to VAT depends on the performance of (taxable)
economic activities within the territory.
An economic activity is specified as comprising all activities of producers, traders
and persons supplying services, including mining and agricultural activities, and
activities of the professions and the exploitation of tangible or intangible property,
whatever their legal form, for the purpose of obtaining income therefrom on a continuing
basis.
The grant of building rights, whereby the grantee was authorized
to use the immovable property for a specified period of time in return
for a consideration, was to be considered to be the exploitation of
tangible property for the purpose of obtaining income therefrom on a
continuing basis. It was therefore an economic activity which
generated a right to deduct input tax.
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Independent activity
The condition in the definition of taxable person that the economic activity be conducted ‘independently’ shall exclude employed and other persons from VAT in so far as they are bound to an employer by a contract of employment or by any other legal ties. Absence of 'independent' capacity of the employee excludes him from the obligation to charge VAT on services provided to their employers. However, where a person lets property to a partnership of which he is a member, this does not prevent him from acting independently.
This situation have been considered by ECJ in Case C-23/98
(Heerma). Having found that the letting of property by a person to the partnership of which he is a member and for which he receives rent constitutes a supply for consideration, the ECJ held that a partner who lets immovable property to the partnership of which he is a member and which is itself a taxable person acts independently.
In another case (van der Steen) the ECJ held that a natural person carrying out all work in the name and on behalf of a company that is a taxable person pursuant to a contract of employment binding him to that company of which he is also the sole shareholder, the sole manager and the sole member of staff, is not himself a taxable person.
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Purposes of the Activity
The Directive mentions any activity “whatever the purpose or result". However, the ECJ has decided certain illegal transactions fall outside the scope of the VAT (such as the importation and supply of drugs).
Not all economic activities associated with receipt of money are taxable. In addition to a direct link between the activity and the payment (i.e. consideration), there must be a legal relationship between the person receiving money and the person paying it.
The ECJ held in a case regarding a Dutch organ grinder that the supply of services effected for consideration does not include an activity consisting of playing music on the public highway, for which no remuneration is stipulated, even if the musician solicits money and receives sums whose amount is, however, neither quantified nor quantifiable.
(such kind of activity is not subject to the scope of the VAT also because that it is not possible to calculate exact taxable amount since there is no fixed price for the service of the musician and any payment to him are not obligatory for listeners; so there is no legal relationships between them).
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Purposes of the Activity curiosity for rest
The organ grinder was a musical street
performer of the 19th century and the early part of
the 20th century, and refers to the operator of a
street organ.
The grinder was often a gentleman of ill repute
or unfortunate representative of the lower classes.
Newspaper reporters would sometimes describe
them as minor extortionists who were paid to keep
silent, given the repetitious nature of the music.
George Orwell wrote of the organ-grinders of
London: " To ask outright for money is a crime, yet
it is perfectly legal to annoy one's fellow citizens
by pretending to entertain them.
Charles Dickens wrote to a friend that he could
not write for more than half an hour without being
disturbed by the most terrible sounds coming in
from barrel organs on the street…
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Purposes of the Activity/ ECJ practice
VAT does not cover some fundraising activity of charitable institutions and political parties.
In KapHag Renditefonds, the ECJ held that the admission of a new partner into a partnership does not constitute a supply of services to him. Since the mere acquisition of financial holdings in other undertakings does not amount to the exploitation of property for the purpose of obtaining income therefrom on a continuing basis because any dividend yielded by that holding is merely the result of ownership of the property.
It follows that the entry of a new partner into a partnership in consideration for a contribution in cash does not constitute an economic activity on the part of the partner. If the taking of shares does not in itself constitutes an economic activity, the same must be true of activities consisting of the transfer of such shares.
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Purposes of the Activity
The ECJ drew the same conclusion regarding the issue of shares for the purpose of raising capital. A company that issues new shares is increasing its assets by acquiring additional capital, whilst granting the new shareholders a right of ownership of part of the capital thus increased. From the issuing company’s point of view, the aim is to raise capital and not to provide services. As far as the shareholder is concerned, payment of the sums necessary for the increase of capital is not a payment of consideration but an investment or an employment of capital.
The ECJ concluded that a share issue does not constitute a supply of goods or services for consideration within the meaning of Article 2(1) of the RVD. Therefore, such a transaction, whether or not carried out in connection with admission of the company to a stock exchange, does not fall within the scope of that Directive.
In addition ECJ decided that company's costs for taking shares are considered among the general costs of production, so they are subjected to deduction of input VAT.
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Abusive practices/ carousel fraud
According to ECJ transactions forming part of a carousel fraud by definition are
not economic activities. According to the EU tax authorities, first, as regards the
purchases, made by fraudulent companies, they received no supplies used for VAT
purposes, so that the amounts of VAT purportedly paid in respect of those purchases
were not input tax. The purchases and the sales, judged objectively, were devoid of
economic substance and thus were not part of any economic activity. So in all cases
any of company which became part of the fraudulent chain is not entitled to any VAT
refund.
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Abusive practices
In Halifax the ECJ found that, in the sphere of VAT, an abusive practice can be found to exist only if: first, the transactions concerned, notwithstanding formal application
of the conditions laid down by the relevant provisions of the VAT Directive and the national legislation, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions.
Second, it must also be apparent from a number of objective factors that the essential aim of the transactions concerned is to obtain a tax advantage.
According to the ECJ, a finding of abusive practice must not lead to a penalty, for which a clear and unambiguous legal basis would be necessary, but rather to an obligation to repay, simply as a consequence of that finding, which rendered undue all or part of the deductions of input VAT. From this the ECJ concluded that transactions involved in an abusive practice must be redefined so as to re-establish the situation that would have prevailed in the absence of such abusive transactions.
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Taxation of the public bodies
Public bodies are normally considered to be non-taxable legal persons in respect of activities engaged in, in that capacity, except if they compete with commercial enterprises.
Annex I to the Directive mentions certain activities in relation to which public bodies must be treated as taxable persons, since they are typically also offered by the private sector, for example, telecommunication services, transportation of goods and passengers, and the supply of water, gas and electricity.
In the case with T-mobile Austria ECJ ruled that the allocation, by auction by the national regulatory authority responsible for spectrum assignment, of rights to use electromagnetic frequencies with the aim to provide the public with mobile telecommunication services does not constitute an economic activity and, consequently, does not fall within the scope of the VAT Directive.
BUT…
In recent cases ECJ seems to narrow the exemption for public bodies and emphasis that it is clear from the scheme and purpose of VAT Directive that any activity of an economic nature is, in principle, to be taxable.
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Taxable persons / Supply of goods
According to article 14 RVD :
a "supply of goods" means the transfer of the right to dispose of tangible property as owner.
Tangible property includes inter alia electric current, gas, heat, refrigeration and the like.
Transfer made in connection with a compulsory transaction (i.e. by order made in the name of public body against payment of compensation), or pursuant to a conditional sale or sale by commission are also supply of goods.
The mere economic conveyance (formal act of delivery) and not the transfer of legal ownership does not prevent transactions to be treated as supplies of goods.
According to the ECJ it is clear from the wording of Article 14 that “supply of goods” does not refer to the transfer of ownership in accordance with the procedures prescribed by the applicable national law but covers any transfer of tangible property by one party which empowers the other party actually to dispose of it as if he were the owner of the property.
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Intra-Community transactions / New means of transport
As a general rule, supplies of goods by taxable persons in one Member State to taxable persons in another Member State are exempt from VAT, with the right to deduction. As the direct counterpart of supplies of goods that are exempted in the country of departure, the corresponding intra-Community acquisitions by taxable persons and non-taxable legal persons are taxable in the country of destination.
Intra-Community supplies of new private vehicles and other new means of
transport are exempt regardless of the status of the acquirer or the vendor.
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PLACE OF TAXABLE TRANSACTIONS
When goods are exported or when an intra-Community supply is made the supply is exempt with the right to deduction (i.e. effectively zero-rated). Validity of this provision directly depends upon the important question where supply takes place.
The general rule – goods that are not dispatched or transported are treated as being supplied at the place where the goods are when the supply takes place (Art. 31 RVD).
The question of allocation will occur only when goods are transported or dispatched, by the seller or purchaser or by a third person. In this case the place of supply is deemed to be the place where the goods are located at the time when dispatch or transport of the goods to the customer begins (Art. 32 RVD).
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Place of supply in the case of distance sales
Acquisitions of goods are normally taxed in the country of purchase, unless the goods are acquired through a distance sale.
In the case of distance selling (i.e. by mail order, teleshopping and any other sale) the place of supply of goods dispatched or transported by or on behalf of the supplier from a Member State other than that of arrival is the place where the goods are at the time when the dispatch or transports ends, in other words the country of destination.
From these rules as to distance sales are excluded:
Sales of new cars and distance sales of goods involving assembly or installation;
Second-hand goods, including cars, works of art, collector's items, antiques;
Cases when the total value of the supplies sent by the distance seller to the same
Member State of arrival does not exceed EUR 100 000.
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Sales on board
When goods are supplied for consumption on passenger board ships, aircraft or trains during trips within the EU area, the place of supply is the location where the goods are at the time of departure of the transport.
place of departure
Page 27
Energy supplies
The new rules ensure that the supply of gas, electricity, heat and cooling energy at the final stage, mainly from distributor to final consumers, will be taxed at the place where the actual consumption takes place. This is necessary, because the consumption of energy does not always take place where the final consumer is established or has his permanent address, whereas the objective of the VAT system is to try to ensure that tax accrues to the Member State of final consumption.
Page 28
The place of supply of services
First principle: – for taxable persons the main rule is that the place of supply of services is the place where the customer-taxable person has established his business or has a fixed establishment to which the service is supplied.
Second principle: – the place of supply of services to non-taxable persons is the place where the supplier has established his business or has a fixed establishment from which the service is supplied.
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Chargeable event and chargeability of tax
The chargeable event is the occurrence by virtue of which the legal conditions necessary to charge VAT are fulfilled.
To be distinguished is the chargeability – that is VAT shall become ‘chargeable’ when the tax authority becomes entitled under the law, at a given moment, to claim the tax from the person liable to pay, even though the time of payment may be deferred.
The question when VAT becomes payable is closely related to the moment of the right to deduction. In a VAT based on the invoice system, the VAT mentioned on an invoice, paid or due, is deductible. If the right to deduct arises earlier than VAT has been paid in by the supplier, the Revenue has to pre-finance VAT. The best solution, therefore, seems to be to link the moment when VAT becomes deductible to the moment the VAT becomes chargeable using the invoice as proof.
Page 30
VAT Invoice
An invoice is a
commercial document
issued by a seller to a
buyer, relating to a sale
transaction and indicating
the products, quantities,
and agreed prices for
products or services the
seller has provided the
buyer.
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Taxable amount
Title VII of the RVD distinguishes between the taxable amount regarding:
supplies of goods or services, intra-Community acquisitions of goods, importation of goods andmiscellaneous subjects.
In VAT, not an objective but a subjective value is applied, since it is the actual private expenditure which VAT aims to tax.
VAT rates are expressed as a percentage of the taxable amount, defined as everything which constitutes consideration, obtained or to be obtained by the supplier from the purchaser, the customer or a third party, including subsidies*** directly linked to the price of such supplies.
*** It should be noted that it is not necessary for the subsidy to correspond exactly to the diminution in the price of the goods supplied, it being sufficient if the relationship between the diminution in price and the subsidy is significant.
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ECJ case on the deposit (as a pledging tool)
About deposit sum (in contrast to advance payment) … ECJ held that a sum paid as a deposit by client in the context of supply of hotel services is to be regarded, where the client exercises the cancelation option available to him and that sum is retained by hotelier, as a fixed cancelation charge paid as compensation for the loss suffered as a result of client default and which has no direct connection with the supply of any service for consideration and, as such, is not subject to VAT.
But…
… there was very interesting opinion of Advocate General Luis Maduro : – that such deposits must be regarded, where the purchaser makes use of the cancelation option available to him and those sums are retained by vendor, as a remuneration for the reservation service and, as such, subject to value added tax.
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Taxable amount / open market value
Separate provisions of RDV deal with self-supplies, i.e. private/non- business use, transfers to other Member States and internal supplies: in general the purchase price or the cost price is applicable; obviously in these situations objective elements must be applied. In the case of a self-supply of services a fully objective value is applied, i.e. the open market value.
According to Article 72 of RDV…
'open market value’ shall mean the full amount that, in order to obtain the goods or services in question at that time, a customer would have to pay, under conditions of fair competition, to a supplier at arm's length within the territory of the Member State in which the supply is subject to tax.
Where no comparable supply of goods or services can be ascertained, ‘open market value’ shall mean the following:
1) in respect of goods, – an amount that is not less than the purchase price of similar goods or, in the absence of it, the cost price, determined at the time of supply;
2) in respect of services, an amount that is not less than the full cost to the taxable person of providing the service.
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Taxable amount / Revaluation of supply
In order to prevent tax evasion or avoidance, Member States may in any of the following cases take measures to ensure that, in respect of the supply of goods or services involving family or other close personal ties, management, ownership, membership, financial or legal ties as defined by the Member State, the taxable amount is to be the open market value:
in the case of an undervaluation where the consideration is lower than the open market value and VAT has been charged and the supplier or recipient of the supply is not entitled to a full right of deduction of VAT; or
in the case of an overvaluation where VAT has been charged and the supplier is not entitled to a full right of deduction of VAT.
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Taxable amount structure
The taxable amount includes:
taxes, duties, levies and charges, excluding VAT itself;
incidental expenses such as commission, packing, transport and insurance cost charged by the supplier to the purchaser or customer.
The taxable amount does not include :
price reductions by way of discount for early payment;
price discounts and rebates granted to the customer and obtained by him at the time of the supply;
amounts received by a taxable person from the customer, as repayment of expenditure incurred in the name and on behalf of the customer, and entered into his books in a suspense account (the so-called disbursements – payments made by a supplier to a third party and then claimed back from the client).
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Rates
Article 93 RVD prescribes that the rate applicable to taxable transactions is that in force at the time of the chargeable event (in general this is a delivery of goods or reception of the services).
However, in the following situations, the rate applicable shall be that in force when VAT becomes chargeable:
in the cases where a payment is to be made on account before the goods or services are supplied;
in the cases where Member States have provided that VAT is to become chargeable, in respect of certain transactions or certain categories of taxable person no later than the time the invoice is issued, the payment is received or within a specified period;
in the case of an intra-Community acquisition of goods, i.e. on issuance of the invoice or, at the latest, on the 15th day of the month following that during which the acquisition took place;
in the cases, concerning the importation of goods, when the provisions in force governing customs duties are applied.
Page 37
Standard rate
Article 96 RVD provides that the standard rate of value added tax must be fixed by each Member State as a percentage of the taxable amount and must be the same for the supply of goods and for the supply of services.
RVD prescribes that the Member States must apply a standard rate which, until 31 December 2015 may not be less than 15%.
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Standard rate
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Reduced rates
Member States may also apply either one or two reduced rates. According to RVD, the reduced rates must be fixed as a percentage of the taxable amount, which may not be less than 5%. The reduced rates may only apply to supplies of the categories of goods and services specified in Annex III. For example:
Foodstuffs (excluding alcoholic beverages) for human and animal consumption; live animals, seeds, plants and ingredients normally intended for use in the preparation of foodstuffs;
supply of water;
pharmaceutical products used for health care, including products used for contraception;
transport of passengers and their accompanying luggage;
supply, including on loan by libraries, of books, newspapers and periodicals, other than material wholly or predominantly devoted to advertising;
admission to shows, theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions and similar cultural events and facilities;
admission to sporting events and use of sporting facilities;
reception of radio and television broadcasting services;
window-cleaning and cleaning in private households;
supply of goods and services by undertakers and cremation services;
hairdressing.
The reduced rates do not apply to the electronically supplied services.
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Rates / particular provisions
Article 102 RVD provides that Member States after consultation of the VAT Committee may apply a reduced rate to the supply of natural gas, of electricity or of district heating.
Member States may provide that the reduced rate, or one of the reduced rates, which they apply is also to apply to the importation of works of art, collectors’ items and antiques.
Portugal may, in the case of transactions carried out in the autonomous regions of the Azores and Madeira and of direct importation into those regions, apply rates lower than those applying on the mainland.
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Thank you for attention
