This presentation has been prepared for the LL.M. in International taxation at the ELTE University of Budapest and discussed on February 9th 2019 with the students. Credits are at the end of the file.

1. European Value Added Tax
Introduction, History, Directives, Landmark Cases and New Concepts
Budapest, February 9th 2019

2. Summary of the Presentation
• Addressing the Value-Added Taxation system: an overall assessment;
• The European Approach to Value added tax: Ways and Means;
• Understanding technicalities:
1. Charging the tax;
2. Taxpayer and taxable base;
3. Territoriality (cross border operations);
• Case Law (selection of decisions);
• Looking at the future: the Commission’s Action plan on VAT
2

3. VAT is Rising ?
• Currently adopted by more than 150 countries, worldwide;
• Accountable for around 20% of the world tax revenue;
• Targeting 4 billion people (70% of the world population);
• Constant support by the IMF, World Bank, OECD, …
• VAT arguably incepted in 1918 as a way to overtake income taxation (C. F. Von
Siemens);
• First European directive in 1967 (1967/227/EEC)
• First comprehensive European directive on VAT in 1977
(1977/388/EEC).
3

4. Continued, VAT in Numbers …
• In terms of Revenue collected equals Income tax and Social Security
contributions in 32 out of the 33 OECD members;
• Revenue share determined by VAT climbed from 1,8% (1965) to 19,2%
of the total revenue (in 2009);
• 75% of the countries with VAT are low or middle income countries
(World Bank Index);
• 2/3 of the least developed countries have VAT.
4

5. Legal Foundations in European Law
• Value added taxation in enshrined in the Treaty of Rome and later in
the Treaty on the Functioning of the European Union (art. 99 EEC Treaty
!):
• Common market demands for a harmonized Turnover tax;
• Intra-EU commerce should be seamless and tax must not be hindrance tot his
goal;
• Taxation must be neutral, irrespective the number of transactions the parties
entered into;
• Multiple stage – turnover Tax matches all these requirements (in appearance).
5

6. VAT for Academics
• Crucial distinction:
• European Model of VAT;
• Theoretical Model of VAT, demanding this tax to be levied:
1. On a broad consumption base, at a single rate;
• Full and immediate deduction of VAT on inputs from the VAT on outputs
2. Through the invoice-credit method;
3. On a destination basis principle;
• The European Model does not perfectly match all the conditions set
above (in particular, (1) and (3)).
6

7. OECD, IMF and World Bank
• “Key features of VAT are that it is a broad based tax levied at multiple
stages on production with … taxes on input credited against taxes on
output. …
• While sellers are required to charge the tax on all their sales, they can
also claim a credit for the taxes they have been charged on their
inputs.
• The advantage … is that revenue is secured by being collected
throughout the process of production (unlike a retail sales tax) but
without distorting production decisions (as turnover tax does)”;
• International Tax Dialogue (IMF, OECD, WorldBank), 2005.
7

8. Evidence from Europe
• Principles are confirmed by Article 1, § 2 of the current 2006/112/EC
Directive (Recasted) in VAT;
• Proportional, general tax on consumption;
• Tax is charged on every transaction;
• VAT Design in the Directive:
• Levied on consumption;
• Collected incrementally throughout the value chain;
• Charged on a destination basis principle.
8

9. Mainstream Economists’ Axioms
1. Consumption is the preferred tax base (vis à vis income);
2. Tax measures are optimal when they do not interfere with market
decisions (they respect the “Invisible hand”);
3. Efficiency should prevail over Equity.
9

10. Why Consumption (and not Income)
• Towards a Consumer-centric tax system:
1. Consumption is a less mobile tax base (if compared to income);
2. Consumption is less volatile in case of fluctuations of the economic cycle;
3. Consumption is a more reliable benchmark for the ability to pay of an
individual (as indicator of his / her welfare);
4. Consumption is simple to administer (in term of time of assessment);
5. Consumption taxation is neutral to savings/investment dichotomy;
6. Consumption taxation does not affect investments decisions.
10

11. Value added Taxation
and Public Finance
• VAT is a “Good” tax also according to Public Finance because:
• It targets consumption (see slides before);
• It basically works on a invoice-credit system.
• Features to be considered:
1. Revenue generation;
2. Neutrality;
3. Efficiency;
4. Growth;
5. Simplicity;
6. Equity;
• See OECD, Consumption tax Trends, 2011;
• Continued …
11

12. VAT and Revenue Generation
• This feature:
• Derives from the multiple-stage system with the invoicing-credit mechanism;
• … according to IMF an increase of 1% of VAT rate would increase revenue
equivalent to 0,5% GDP;
• … under the condition of broad base and extended invoice-credit collection
system;
• VAT is also a low visible tax for taxpayer (no awareness of the tax, less
incentives to evasion).
12

13. VAT and Neutrality
• Consumption, Labour and Investments decisions should be made on
their merits and not on taxation;
• Tax neutrality should prevail because other goals (including equity)
may be pursued using other instruments (spending / deficit spending),
including non-tax mechanisms;
• Neutrality is easy to measure if compared to Equity;
• Neutrality:
1. Of the business structure;
2. Of the goods / services provided;
3. In terms of international trade.
13

14. VAT and Efficiency
• VAT raises revenue with least costs and least economic distortions
relative to other comparable taxes;
• VAT should target only final consumer, leaving business unaffected:
this would facilitate business decisions and efficiency of the
production;
• Efficiency derives also from the incremental and self enforcing nature
of the tax. It is administratively efficient and reduces the cost of
compliance (…on the tax administration ?);
• Positive externalities of the Tax:
• Improvement of the tax administration,
• Replacement of inefficient taxes.
14

15. VAT as Growth Facilitator
• Growth-friendly taxable bases:
1. Immovable property;
2. Consumption;
3. Personal Income tax;
4. Corporate Income tax;
• VAT is refundable under international tax rules, this create an
advantage;
• Suitable to be used in countercyclical policies;
• Disadvantage : expansion of the informal sector (the higher the VAT …)
?
15

16. VAT’s Simplicity
• Actually, only the Theoretical model, see the 2006/112 Directive;
• Need for a well- trained Tax administration;
• Argument: complexity derives from the betrayal of the canons of good
VAT (?);
• Position: simplicity depends on the comparison you make;
• VAT:
• Less taxpayers than income tax;
• Destination basis application (no source vs residence dilemma) vis à vis income
tax.
16

17. VAT’s Equity
• Horizontal equity:
• Same consumption tax rate irrespective of the goods sold / services delivered;
• Neutral to business;
• Vertical Equity:
• VAT not performing well, considering the different attitudes to consumption;
• Poor people consume more of their taxable base while rich people consume
more in absolute term (although a fraction of their taxable base);
• No adjustment for individual circumstances;
• Note: vertical equity justified according to:
• Measure of the ability to pay;
• Benefit principle.
17

18. Playing the Devil’s Advocate
• Different ways to assess ‘Equity’ of VAT:
• Reference to expenditure is not necessary to ‘justify’ VAT;
• VAT should be measured on consumption, not on different income (poor versus
rich is to be made according to respective consumptions);
• Consumption should be measured on lifetime basis and not on annual
timespan.
18

19. Summary / Preliminary Findings
• So far we discussed VAT de iure condendo;
1. Proportional tax;
2. Broad tax base (with one rate);
3. Neutral for the business;
4. Multiple stage;
• Not all these conditions are met by the European VAT:
1. Special systems of applications;
2. Multiple rates / exempt transactions;
3. …
19

20. End of Part 1
20

21. Introducing Part 2
• We will discuss:
• The legal features of the European VAT;
• The consistency of the European Model with the theoretical benchmarks /
models described in Part 1;
• This will help to understand:
• The most significant case law;
• The (proposed) changes by the Commission in the years to come.
21

22. The Cornerstone of the European VAT
• Article 1, 2006/112/EC directive. The tax is charged:
• As a G on consumption on goods and services;
• Proportional to the price of the goods and services no matter how
many transactions take place before the tax is actually charged (on the
consumer) and with the rate pertinent to the good / service;
• Tax is charged on every transaction on the price of the goods/ services
sold, and after the deduction of the amount of it borne by the various
cost components;
• The tax is also applied at the retail stage.
22

23. The Cornerstone of the European VAT
• Article 1, 2006/112/EC directive. The tax is charged:
• As a General Tax on consumption on goods and services;
• Proportional to the price of the goods and services no matter how
many transactions take place before the tax is actually charged (on the
consumer) and with the rate pertinent to the good / service;
• Tax is charged on every transaction on the price of the goods/ services
sold, and after the deduction of the amount of it borne by the various
cost components;
• The tax is also applied at the retail stage.
23

24. The Mechanics of the Tax
• The consumption tax introduced in Europe is a multiple-stage, turnover
system implemented in a way as to:
1. Make liable to tax, under the law, the businesses, but allowing them
to transfer the tax on the commercial counterpart, whoever he/she
is;
2. Allowing businesses only to deduct the input VAT, if they are charged
with that by their supplier;
• In this way, irrespective of the trade, the tax is neutral (for the businesses).
24

25. A basic Example
Price of the goods
Tax paid to the business
Tax paid to the Revenue
For simplicity’sake we assume a VAT rate of 10%
100 300200
2010 30
20-10=1010-0=10 30-20=10
25

26. Scope of the Tax
• Supply of goods and services in consideration, within the territory of
the State as they are made by a taxable person acting as such (Article
2, § 1 a, c);
• After Maastricht treaty:
• including intra-EU purchase of goods by taxable persons and (under some
conditions by non taxable persons) (Article 2, § 1 b);
• Including new means of transportation, no matter the identity of the purchaser
(Article 2, § and Article 3).
26

27. Territorial application of VAT
(Territorial Scope)
• Purchases of goods / services must occur within the territory of the
state;
• Intra-EU purchase of goods must occur within the territory of the state
(the recipient must be …);
• Importation of goods are always charged with VAT irrespective to the
identity of the importer (article 2, § 2);
• Some specific territories are excluded from the scope of the tax (Lake
Lugano …).
27

28. Taxable Persons (Taxpayers)
• Article 9: anyone who independently carries on, in any place, an
economic activity, whatever the purpose / result of the activity.
• Individuals, legal persons, partnerships, Governmental bodies, Trusts, …;
• The lack of legal personality is irrelevant (transparent entities are not …
transparent for VAT purposes …);
• Cases of activity may include:
• Commercial, industrial, trades, exploitation of immovable property (real estate
rentier) or intangible property (IP company), any agricultural activity, any
mining industry;
• Very broad and comprehensive scope.
28

29. The Borders of Taxable Activities
• Illegal activities falls outside the scope of the directive when the
proceedings are against the law;
• Activities whose earning are not in legal consideration for the foods
sold or services delivered;
• Alimony, donations, irrespective of the actual amount, …
• Transfer of shares / participation;
• Purchase of a quota / admission to a partnership;
• Passive management of assets with no interference;
• Pure holding companies with no management activity of shares in the long run
and no interference in the subsidiary (active) company …
29

30. Short digression on
Pure holdings
Edizione srl
Example for didactical purposes only.
Does not necessarily represents Edizione’s legal structure
30

31. End of the Digression
• Complexity in the definition of “business” or “consumer”;
• Need to consider the local definitions and the interaction between tax
law and commercial law;
• Key-role of the European Court of Justice in drawing the limits to the
definition of taxpayers (Business vs. Consumer).
31

32. Continued: the Fraudulent Activity
• VAT charged in a carousel fraud is not deductible, as a matter of
principle, if the transaction did not occur;
• However, if the transaction actually took place in the framework of a
fraud, the tax is deductible as long as the transaction is genuine;
• Sophisticated distinction: need to distinguish a genuine transaction as a part of
a fraud. As long as the transaction is genuine, VAT can be deducted;
• Academic point. Subjective fraudulent activity: the transaction actually
took place, but it has been invoiced by a third party;
• VAT non deductible due to the mismatch between activity and invoice.
32

33. Introducing the Carousel Fraud
VAT exempt,
EU sales
Missing trader
?
Merchandies exits
the carousel
Merchandise goes for
another ride on the
carousel
Buffer ?
33

34. Time Sensitiveness of VAT
• Start-up activity is already considered as business activity for the
application of VAT;
• Possibility to deduct costs incurred for the goodwill creation in the
start-up phase;
• The same goes for the winding-up activity of a company, which is
considered to fall within the scope of VAT;
• Conclusion:
• Possibility to deduct input VAT since a very early stage an till a very late
moment if the taxpayer demonstrates the costs where in connection with the
activity.
34

35. Fraud, Abuse and VAT
• Specific lecture on this point, in the future;
• In a Nutshell: prohibition of abuse of law is applicable in VAT (judge
made rule in Halifax);
• However the doctrine can not be invoked / used is the business
transaction of the case is justified and has good a sound purpose.
• Conditions for the application of the doctrine:
• The essential aim of the transactions concerned is to obtain a tax advantage;
• The prohibition of abuse is not relevant where the economic activity carried out
may have some explanations other than the mere attainment of tax
advantages.
35

36. Occasional Businesses,
Independent Businesses
• Member states are free to decide about the possibility to charge
occasional transactions;
• Independent capacity: employer – employee relation falls outside the
scope of VAT;
• There are borderline situations decided on a case-by-case approach,
depending on the Labour law regulation of the respective country;
• Legal persons can opt for VAT Group system, thus calculating a unitary
taxable base for VAT purposes, and allowing the group deduction of
input VAT:
• Necessity to have unitary direction;
• Necessity for the group to pursue an actual unitary business goal.
36

37. Public Bodies and VAT
• Complex picture, as it depends (also) on domestic Public Law;
• A general, academic Distinction:
• Acta iure imperii (outside the scope of VAT);
• Acta iure privatorum (potentially within the scope of VAT);
• The latter might include:
• Communication facilities, road tolls, waste disposal, supply of water, electricity,
…
• Necessity to preserve fair competition on the market.
37

38. Taxable Transactions
• Supply of (tangible) goods;
• Including energy, Article 14 and article 15 of the 2006/112 Directive
• Delivery of services;
• Including intangible goods that fall into the scope of this provision;
• Intangible properties, “new properties”, …
• Patents, Trade marks, …
38

39. Understanding Supply of Goods
• Transfer of the right to dispose of a property as an owner;
• The will of disposer is not always relevant:
• The case for deprivation of property depending on order of the authority
(where compensation occurs);
• The case of stolen property (no tax);
• The purchase of goods by an Agent in his / her own personal capacity
is intended as an independent supply of goods (Article 14, § 2, Article
28);
• Work of construction may be considered as supply of goods
(depending on the decision by the state).
39

40. The Economic approach
• The actual transfer of property is disregarded for VAT purposes;
• A delivery of goods occurs even if legal ownership is not transferred as
this depend on the domestic law of the case:
• Consensus principle;
• Delivery principle, …;
• Any transfer of property by one party which empowers the other party
actually to dispose of it as if he / she were the actual owner of the
asset (Auto Lease Holland case).
• Rights in rem (especially immovable property) can be considered as
trade of goods, otherwise they are treated as services.
40

41. Focus: Auto Lease Holland case
A
Actual purchaser for ECJ !!!
41

42. Continued: the Self-supply Case
• Self-supply of goods is charged for VAT purposes (Article 16);
• The purchase of a good by a taxable individual ma be done:
1. In this business capacity: right to deduct VAT
2. In his final consumer capacity: no deduction
3. Miscellaneous purpose: deduction pro quota.
• Transfer of goods to another state in the union are treated as sale of
goods for vat purposes:
• See for example the transfer of goods to a permanent establishment in another
country.
42

43. Transfer of a Business
• States are free to exclude the transfer of business from the application
of VAT;
• The case for a sale of an independent branch of the business;
• The case for the VAT treatment of going concern;
• The ECJ considers as overhead expenses incurred by the transferor the
costs relevant for the sale of the business.
• Warning: as the transfer of a business falls outside the scope of VAT, it
might trigger other domestic indirect taxes!
43

44. Intra-EU Sale of Goods
• Business to business transactions within the EU are exempt in the state
of the seller, with the right to deduct VAT (Article 138);
• The very same provision is VAT charged in the state of destination
(Article 2 § 1, b). This is also true if the purchaser is not a taxable legal
person (legal thresholds applies);
• Right to deduction is preserved by the purchaser if it is a taxable
person (Article 20);
• Goods must be dispatched on behalf of the vendor. The formal compliance is
not enough, therefore!
• Remember also the fictitious transfer under Article 17 (to a fixed seat
elsewhere).
44

45. Supply of Services for VAT Purposes
• Supply of services for VAT purposes is essentially defined on a residual
basis under Article 24;
• “Any transaction which is not a supply of goods”;
• Same issues dealt with in Supply of goods are mirrored here (delivery
free of charge, …, service ordered iure imperii, …);
• This equivalence may be derogated by states as long as it does not create
distortion to the market (Article 26).
45

46. Continued: State Incentives
• Multiple conditionalities for the incentives:
• Performance bond, non facere, specific production, …
• Cases of life:
• Incentives to farmer not to milk / cultivate land;
• Incentives to promote organic cropping;
• Incentives to specific manufacturing sectors …
• General rule:
• If the beneficiary is not defined (public interest) the incentive is not charged
with VAT;
• Significant gray area !
46

47. Importation of goods
• Entry into the EU of goods which are not Free in Circulation under
Article 24 EC Treaty;
• Tax is charged upon importation, it’s a factual condition and a change in
juridical status of the goods imported;
• Problems of the practice:
• How to cope with Customs fees (part of the VAT taxable vase);
• How to cope with Royalties which could be embedded to the goods imported,
eventually increasing their value (implicit royalties);
• …
47

48. Dealing with Royalties:
The Geberit Case
A B
p.e.
Intellectual
property
Tax Court of Milan
December 27th 2017 n. 7134
the “Geberit SA” case 48

49. Continued …
A B
p.e.
Intellectual
property
Any possibility to carve out
royalties using TP?
49

50. Finding of the Tax Court
● Taxpayer’s business strategy consistent with the sound business purpose;
● No possibility to use TP regulations as to unbundle from a payment the
amount of it allegedly due to the use of the right to use Intellectual
property;
● What was right in the Tax office approach to the case (yet not enough!):
○ Article 71, § 1, letter c, EU Customs code: it is possible to charged implicit
royalties on the value of an imported good for the purpose of charging it with
customs tariffs and VAT.
50

51. Place of Taxable Transaction
• Place of supply of goods: if goods are not dispatched / transported, the
place is where goods are t the moment of disposal (article 31);
• If they are dispatched, the place is where the journey begins (article
32);
• Exportation of goods:
• Zero rate operation (with right to deduct);
• Triangular cases (in importation):
• Article 32 § 2: the overall operation takes place in the state of importation;
• Special provisions are applicable in this respect.
51

52. Special Cases (Triangulation)
Invoice
Delivery of goods 52

53. Continued: remote sales
(e-commerce and alike)
• Problems to be addressed (Articles 32 and 33):
• Business in State A and consumer in State B purchasing goods via Internet (or
equivalent);
• Difference in tax rates;
• …;
• Remedy:
• Article 34: VAT is charged in the place of destination (with the transport made
on behalf if the supplier). The remedy is available to:
• Businesses;
• Legal entities / consumers beyond the € 100.000 threshold (overall amount of sales in the
state of destination by the same seller) or higher depending on the state of the case.
• Further thresholds are applicable under Article 34 (€ 35.000).
53

54. Energy Supply
• As a general rule, they are charged in the place where the final
consumer is placed;
• Preliminary sales under the scope of VAT, but with a reverse charge
mechanism, as to facilitate compliance of the business involved in the
trading of natural energies;
• See further details at (Article 38 and 39).
54

55. Chain of Sales (aka Triangular Cases)
• Multiple sales of goods with shipment to the final purchaser;
• Basic assumption: the whole operation involves business entities;
• Article 42: all the sales are exempt for VAT purposes (assuming that the
business are resident in three different states, even if the delivery is
made directly to the third party of the transaction;
• The whole operation must be recorded by the three parties engaged;
• Issue of Good faith of the first seller in case of VAT frauds (see Teleos C-
409/94).
55

56. A Teleos alike case (C-409/04)
A
B
CD
Promoter of
the business
Expeditioner
appointed by B
Invoices
Merchandise delivery
Apparent delivery
False transport documents
Black Market Flags might not represent the states in Teleos
56

57. A bit easier: Optigen, Kittel,
2006, C-354/03, alike …
B
C
A
E
Invoices
Merchendise delivery Black market
Apparent delivery
Missing trader
Pretended export
(never occurred)
D
Flags might not represent the states in the relevant ECJ decision
57

58. A case Tax Court of Appeal
(Italy, Bologna n. 1715/18)
1
4
3
2
Invoice Merchandise 58

59. Place of Supply of Services
• First point: service or services ? Not easy to make distinction, as in
everyday life most of the contracts provide for complex (bundled)
services;
• General rule: each service should be treated independently unless it is
in ancillary position vis à vis a “Core” service of the contract;
• When this ancillary situation occurs, the auxiliary service can be “absorbed” by
the principal one in terms of:
1. VAT regime;
2. Rate;
3. Territoriality;
• See ECJ C-349/96 Card Protection Plan.
59

60. Services, General Rule
• Article 44 § 1: a service delivered to a taxable person is supposed to be
delivered where that person has established its business …
• … or where the person has its fixed establishment to whom the service
is performed;
• The place of supply of services to a non taxable person is the place
where the supplier has its own seat or the fixed seat of business from
which the service is delivered;
• Significant changes with the 2008/8 directive, see also Regulation 2011/282.
60

61. Introducing the Fixed Seat of Business
• ‘Fixed establishment’ shall be any establishment, other than the place
of establishment of a business referred to in Article 10 of this
Regulation, characterized by a sufficient degree of permanence and a
suitable structure in terms of human and technical resources to enable
it to provide the services which it supplies (article 11, § 2 Regulation
282/2011;
• Very close to the definition of ‘Permanent establishment’ for income
tax purposes, even if the two concepts do not overlap each other.
61

62. The Aro Lease Case C-190/95 ECJ
ARO
Lease
Cars owned by Aro Lease
Intermediaries
Clients
Permanent establishment ?
62

63. Italian Supreme Court n. 7689/02
Philip Morris Inc.
P.E.
F.
A.T.
ADMINISTRATION
MONOPOLIES OF THE
STATE
INTERTABA
63

64. Territoriality and Services
• A number of derogations to the general rule as specified above are
currently listed in Regulation 282/2011, including:
1. Services delivered to immovable properties;
2. Supply of transport;
3. Supply of cultural, scientific, sport (…) entertainment;
4. Broadcasting, telecommunictions, …
5. …
64

65. Services to Immovable Property
• The place of supply of services connected with immovable property,
including:
1. The services of experts and estate agents;
2. The provision of accommodation in the hotel sector or in sectors with a
similar function, such as holiday camps or sites developed for use as camping
sites;
3. The granting of rights to use immovable property and services for the
preparation and coordination of construction work, such as the services of
architects and of firms providing on-site supervision;
• … shall be the place where the immovable property is located;
• Article 47 of the 2006/112 Directive and Regulation 282/2011
65

66. Transport and Logistics
• The place of supply of passenger transport shall be the place where the
transport takes place, proportionate to the distances covered;
• The place of supply of the transport of goods, other than the intra-
Community transport of goods, to non-taxable persons shall be the
place where the transport takes place, proportionate to the distances
covered;
• The place of supply of the intra-Community transport of goods to non-
taxable persons shall be the place of departure;
• Articles 48, 49 and 50.
66

67. Supply of Cultural, Artistic, Sporting,
Scientific (…) Services
• The place of supply of services in respect of admission to cultural,
artistic, (…) entertainment or similar events, such as fairs and
exhibitions, and of ancillary services related to the admission, supplied
to a taxable person, shall be the place where those events actually take
place;
• The place of supply of services and ancillary services, relating to
cultural, artistic (…) entertainment or similar activities, such as fairs
and exhibitions, including the supply of services of the organizers of
such activities, supplied to a non-taxable person shall be the place
where those activities actually take place;
• Article 53 and 54.
67

68. Hiring of Means of Transportation
• The place of short-term hiring of a means of transport shall be the
place where the means of transport is actually put at the disposal of
the customer;
• ‘Short-term’ shall mean the continuous possession or use of the means of
transport throughout a period of not more than 30 days and, in the case of
vessels, not more than 90 days;
• The place of hiring, other than short-term hiring, of a means of
transport to a non-taxable person shall be the place where the
customer is established, has his permanent address or usually resides;
• Article 56.
68

69. Supply of Telecommunications, (…) and
Electronic Services to Non-taxable Persons
• The place of supply of the following services to a non-taxable person
shall be the place where that person is established, has his permanent
address or usually resides:
A. Telecommunications services;
B. Radio and television broadcasting services;
C. Electronically supplied services, in particular those referred to in Annex II.
• Where the supplier of a service and the customer communicate via
electronic mail, that shall not of itself mean that the service supplied is
an electronically supplied service.
69

70. Supply of Services to non-taxable
persons outside the Community
• The place of supply of the following services to a non-taxable person who is
established (…) outside the EU, shall be the place where that person is established,
has his permanent address or usually resides:
I. Transfers and assignments of copyrights, patents, licenses, trade marks and similar rights;
II. Advertising services;
III. The services of consultants, engineers, consultancy firms, lawyers, accountants and other
similar services, as well as data processing and the provision of information;
IV. Obligations to refrain from pursuing or exercising, in whole or in part, a business activity or a
right referred to in this Article;
V. Banking, financial and insurance transactions including reinsurance, with the exception of
the hire of safes;
VI. The supply of staff;
VII. The hiring out of movable tangible property, with the exception of all means of transport;
• Article 59.
70

71. VAT and Time
• Where a payment is to be made on account before the goods or
services are supplied, VAT shall become chargeable on receipt of the
payment and on the amount received (Article 65);
• By way of derogation from Articles 63, 64 and 65, Member States may
provide that VAT is to become chargeable, in respect of certain
transactions or certain categories of taxable person at one of the
following times:
• No later than the time the invoice is issued;
• No later than the time the payment is received;
• …
• Article 66.
71

72. Assessing the Taxable Amount
• Subjective value is considered for VAT purposes, as a general rule;
• Tax is charged on anything paid in consideration for …
• When the price is not set, the notion of “Open market value” is used
instead (article 72):
• ‘Open market value’ shall mean the full amount that (…) a customer at the
same marketing stage (…), 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.
72

73. Continued … Open Market Value
• Where no comparable supply of goods or services can be ascertained,
‘Open market value’ shall mean the following:
• In respect of goods, an amount that is not less than the purchase price of the
goods or of similar goods or, in the absence of a purchase price, the cost price,
determined at the time of supply;
• In respect of services, an amount that is not less than the full cost to the
taxable person of providing the service.
73

74. Continued: the base …
(Articles 78 and 79)
• The taxable amount shall include the following factors:
A. Taxes, duties, levies and charges, excluding the VAT itself;
B. Incidental expenses, such as commission, packaging, transport and insurance costs,
charged by the supplier to the customer.
• …
• The taxable amount shall not include the following factors:
A. Price reductions by way of discount for early payment;
B. Price discounts and rebates granted to the customer and obtained by him at the
time of the supply;
C. 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 in his
books in a suspense account.
• …
74

75. Transfer Pricing and VAT
• In order to prevent tax evasion …, Member States may … 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’:
a. Where the consideration is lower than the open market value and the recipient of
the supply does not have a full right of deduction under Articles 167 to 171 and
Articles 173 to 177;
b. Where the consideration is lower than the open market value and the supplier does
not have a full right of deduction under Articles 167 to 171 and Articles 173 to 177
and the supply is subject to an exemption under Articles 132, 135, 136, 371, 375,
376, 377, 378(2), 379(2) or Articles 380 to 390c;
c. Where the consideration is higher than the open market value and the supplier
does not have a full right of deduction under Articles 167 to 171 and Articles 173 to
177.
75

76. Continued …
• For the purposes of this provision, legal ties may include the
relationship between an employer and employee or the employee's
family, or any other closely connected persons;
• In comparison to income taxes’ Transfer pricing:
• A much broader scope / field of application;
• Not limited to cross border cases!
76

77. Rates
• VAT is a proportional tax;
• Ordinary rate no less than 15%;
• Reduced rate at no less than 5%;
• Significant leeway for member states as to adjust the amount of the
tax due to the domestic needs;
• Special provisions and derogations applicable to chargeability of rates
in the moment in which the relevant operation takes place.
77

78. Exemptions and VAT (Article 131)
• VAT considers two kinds of exemptions:
• Exemptions with the right to deduct input VAT;
• Generally the justification is on the public interest (article 132);
• This kind of exemptions are outside the “Good” VAT;
• Mostly accepted for historical reasons or in the respect of the
status quo;
• Exemptions without the right to deduct input VAT;
• Mostly for technical reasons (including exportations, …)
78

79. Public Interest and VAT
• Long list of services that shall fall under the exemption:
• Postal services;
• Hospital and medical / paramedical care (healing purpose);
• …
• Welfare and social security services;
• Education, School and vocational training;
• Cultural and physical education;
• NGO-alike organization in the public interest (charities, …)
• Non commercial broadcasting channels;
• …
79

80. Continued …
• Articles 135 and 137 rule on other exempted activities, including:
• Insurance and reinsurance transactions (including the activity of brokers and
intermediaries);
• Negotiation of credits;
• Deposits and current accounts payments, transfer of debts and other
negotiable instruments;
• Transactions concerning currencies and bank notes
• Bitcoins and other Cryptocurrencies are exempted too (C-264/14 Skatteverket v David
Hedqvist);
• Transactions in shares and investment funds as domesticlly regulated;
80

81. Continued …
• Article 135 § 1, exemption is also extended:
• Supply of a building or part of it;
• Supply of land;
• Regulation 282/2011 has given a definition of Immovable property relevant
for VAT purposes (Article 13 (b)):
• Immovable property means, land, and any buildings or fixtures attached to
the land, including:
• Tenements;
• Hereditaments (items of inheritance);
• House buildings, walls, fences;
• Other permanent structures or fixtures, such as pipeline systems for gas, water;
• Sewage;
• Land covered by water, and any estate interest in, or over land.
81

82. One Last Remark !
• Qualified exemptions are not compulsory;
• States enjoy discretion on whether allow the exemption or made the
transaction liable to VAT;
• Article 137 § 1 makes reference inter alia:
1. Supply of building or parts of it;
2. Supply of land;
3. …
• Warning ! If not liable to VAT the transaction might trigger other
indirect domestic taxes.
82

83. Exemptions with the Right to Deduct
• Articles 138 – 142:
• Cross border stales of goods and qualified services delivered in the same
context;
• The exemption is also extended to triangular situations (see above, slide 52)
where goods are delivered directly to the final purchaser.
83

84. Exportations
• Both exportations and services delivered in connection with them (in
particular, transportation) are VAT exempt;
• The exporter preserves the right to deduct input VAT and qualify for
possible special regimes allowing him to enjoy VAT free purchases;
• See Articles 148 … 151 for further details of the services relevant to
this purpose.
84

85. Right to Deduct Input VAT
• One cornerstone of the (European) VAT system;
• In a nutshell:
• Any non consumer has the right to deduct from the tax of which he /
she is liable in respect of his / her supplies the tax invoiced on him /her
for the goods / services supplied (Article 167);
• Right to deduction arises when the tax is chargeable (actual payment is
not relevant to this purpose);
• For example (Article 183), once the invoice is issued, the business which has
been invoiced can deduct the tax as printed on the document and consistent
with the law.
85

86. Conditions for Deduction
• The purchase must be relevant for the business activity;
• The goods must be used in the interest of the business and bot for private
purposes;
• The tax invoiced must be consistent with the law, as excessive charges
do not generally allow deductions for the same amount (exception:
neutrality’s sake);
• Pro rata deduction occurs when the business of the case manages
both ordinary operation and exempt (with no right to deduct)
operations.
86

87. Compliance
• Several compliance duties are in connection with VAT application,
including:
• Invoicing;
• VAT identification (identification in other countries, appointment of a VAT
representative, …);
• VAT annual tax return;
• VAT periodical payments;
• …
• See for further reference: Articles 214 and sub. of the 2006/112
Directive.
87

88. In particular, Invoicing
• Application of VAT is based on subtractive-indirect method;
• Role of the Invoice:
1. Contains data pertinent to the VAT regime of the operation;
2. Allows the control of the competent authority and
3. Constitutes evidence in favour of the taxpayer;
• Concept of invoice: Articles 218 and 219;
• Content and requirements of the invoice: Article 226 and sub.
88

89. Accounting Compliance
• Special book keeping for VAT:
• Article 242 and 243 provides for the necessity to keep logs of the invoices
issued and received;
• Annual tax Return: Article 251;
• Annual recapitulative statements: Article 262 and sub.;
• Lists of the business the taxpayer has been in touch with (has traded), as to facilitate cross
control by Tax offices;
89

90. Special VAT regimes
• Subjects involved:
• Farmers;
• Travel agencies;
• SMEs;
• Goods traded:
• Used / second hand goods;
• Books and newspapers;
• Scrap materials;
• Gold;
• …
90

91. Thanks for your Attention
• marco.greggi@unife.it
• Suggested readings:
1. B. Terra – P. Wattel, European Tax Handbook, Kluwer, 2008.
2. K. James, The Rise of the Value-Added Tax, Cambridge University Press, 2015.
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