VAT deduction and member state sovereignty: (still) a good idea?

ABSTRACT

It is admirable how much work the European Commission is currently doing in the area of VAT. The work of the European Commission, however, does not comprise the rules for VAT deduction. This is an area where Member States have still a lot of competences to set the rules. Because non-deductible VAT is a cost for businesses it will affect a business' competitive position directly and differences in rules on VAT deduction between Member States can positively or negatively impact a business' position. In this article I will address the areas where Member States have competences in the area of VAT deduction and will discuss whether there is a need for more harmonisation in the area of VAT deduction to ensure the proper functioning of the internal market now and in the future. This research is done in light of the 39th recital of the preamble to the VAT Directive which states that the objective of the directive is to harmonise the rules governing deductions to the extent that they affect the actual amounts collected.

KEYWORDS:

• VAT
• deduction
• internal market
• tax law

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 Commission, ‘Proposal for a Council Directive amending Directive 2006/112/EC and Directive 2009/132/EC as regards certain value added tax obligations for supplies of services and distance sales of goods’ COM (2016) 757, 1 December 2016; Commission, ‘Proposal for a Council Regulation amending Implementing Regulation (EU) No 282/2011 laying down implementing measures for Directive 2006/112/EC on the common system of value added tax’ COM (2016) 756, 1 December 2016; Commission, ‘Proposal for a Council Regulation amending Regulation (EU) No 904/2010 on administrative cooperation and combating fraud in the field of value added tax’ COM (2016) 755, 1 December 2016.

2 Council Directive 2017/2455 of 5 December 2017 amending Directive 2006/112/EC and Directive 2009/132/EC as regards certain value added tax obligations for supplies of services and distance sales of goods, OJ L 348/7.

3 Commission, ‘Proposal for a Council Directive amending Directive 2006/112/EC as regards harmonizing and simplifying certain rules in the value added tax system and introducing the definitive system for the taxation of trade between Member States’ COM (2017) 569, 4 October 2017; Commission, ‘Proposal for a Council Implementing Regulation amending Implementing Regulation (EU) No 282/2011 as regards certain exemptions for intra-Community transactions’ COM (2017) 568, 4 October 2017; Commission, ‘Proposal for a Council Regulation amending Regulation (EU) No 904/2010 as regards the certified taxable person’ COM (2017) 567, 4 October 2017.

4 Commission, ‘Amended proposal for a Council Regulation amending Regulation (EU) No 904/2010 as regards to strengthen administrative cooperation in the field of value added tax’ COM (2017) 706, 30 November 2017.

5 Commission, ‘Proposal for a Council Directive amending Directive 2006/112/EC as regards rates of value added tax’ COM (2018) 20, 18 January 2018.

6 Commission, ‘Proposal for a Council Directive amending Directive 2006/112/EC on the common system of value added tax as regards the special scheme for small enterprises’ COM (2018) 21, 18 January 2018.

7 See, e.g. Edwin van Loon, ‘De meetbare Indirect Tax Functie’ (The measurable indirect tax function), (2014) Vakblad Tax Assurance, no. 1.

8 In this respect it should be noted that conditions may affect the amount of VAT to be deducted if a taxable person is unable to meet those conditions. However, the CJEU has in many cases, in respect of VAT deduction particularly in the cases of Senatex (Case C-518/14, Senatex, EU:C:2016:691) and Barlis 06 (Case C-516/14, Barlis 06, EU:C:2016:690) ruled that in case formal requirements are not met, but the taxable person meets the material requirements for e.g. VAT deduction it cannot be refused that right.

9 See, for example, Cases C-177/99 and C-181/99, Ampafrance and Sanofi, EU:C:2000:470.

10 This includes a consistent practice of the public authorities on the basis of a ministerial circular, Case C-409/99, Metropol, EU:C:2002:2. Compare: Case, C-371/07, Danfoss, EU:C:2008:711.

11 Cases, C-40/00, Commission v France, EU:C:2001:338; C-155/01, Cookies World, EU:C:2003:449, para 66; C-414/07, Magoora, EU:C:2008:766. See on the Magoora case: Krzysztof Lasinski-Sulecki, ‘Standstill Provisons under EU VAT – Fuel for Polish Passenger Cars’ (2008) International VAT Monitor January/February, 22-26; Cases C-460/07, Puffer, EU:C:2009:254, para 87; C-124/12, AES-3C Maritza East 1 EOOD, EU:C:2013:488, para 45.

12 Commission v France (n 11); Pawel Selera and Rafal Lipniewicz, ‘Polish VAT on Passenger Cars’ (2012) International VAT Monitor March/April, 120.

13 Case C-345/99, Commission v France, EU:C:2001:334.

14 Commission, ‘Proposal for a sixth Council Directive on the harmonization of Member States concerning turnover taxes’, Bull EC Suppl. 11/73, 18.

15 Cases C-43/96, Commission v France, EU:C:1998:304; C-305/97, Royscot Leasing, EU:C:1999:481.

16 Cases C-538/08 and C-33/09, X Holding and Oracle, EU:C:2010:192, para 44. See also Royscot Leasing (n 15); Cases C-74/08, PARAT, EU:C:2009:261; C-434/03, Charles and Charles-Tijmens, EU:C:2005:463, para 33; C-395/09, Oasis East, EU:C:2010:570; C-438/09, Dankowski, EU:C:2010:818; C-132/16, Iberdrola Inmobiliaria Real Estate Investment, EU:C:2017:683, para 21.

17 For an extensive discussion of art. 176 VAT Directive and the CJEU case law on this provision the author refers to Joep Swinkels, ‘Transitional Restrictions on the Right to Deduct EU VAT’, (2009) International VAT Monitor March/April, 111-119.

18 These exclusions can be found in for example, art. 45 of the Belgian VAT code, section 39 and 42 of the Danish VAT Act, art. 16 of the Dutch VAT Act combined with Deduction Exclusion Decree, section 124 of the Hungarian VAT Act, art. 60 (2) of the Irish VAT Consolidation Act 2010, art. 54 (1) of the Luxembourgian Law Concerning VAT, art. 62 (2) of the Lithuanian Law on VAT and art. 15 and 16 of the Swedish VAT Act. The author also refers to Walter van der Corput, ‘VAT Options to be Exercised by the New Member States’, (2014) International VAT Monitor September/October, 327.

19 Commission, ‘Proposal for a Twelfth Council Directive on the harmonization of the laws of the Member States relating to turnover taxes – Common system of value added tax: expenditure not eligible for deduction of value added tax’ COM (82) 870 final, 2, point 4, 25 January 1983. The proposal of the Commission has been withdrawn on 4 January 1997 with the mere observation that the Council had taken no decision and it was no longer topical, OJ 1997 C 2/2.

20 Commission, ‘Proposal for a Council Directive Amending Directive 77/388/EEC as regards the rules governing the right to deduct VAT’ COM (1998) 377 final, 17 June 1998. The proposal of the Commission has been withdrawn on 17 March 2006 together with many other proposals under the observation that the Member States were unlikely to make further progress in the legislative process or the proposals were found to be no longer topical for objective reasons, OJ 2006, C 64/3.

21 Commission, ‘Proposal for a Council Directive laying down detailed rules for the refund of value added tax, provided for in Directive 77/388/EEC to taxable persons not established in the territory of the country but established in another Member State’ COM (2004) 728 final, 29 October 2004. This proposal was withdrawn in 2014 OJ 2014, C 153/3.

22 Commission (n 19) 2, Commission (n 20) 11.

23 It was then up to Member State to determine whether they would implement a full or partial restriction on the right to deduct VAT and if they chose a partial deduction to what extent VAT would be deductible, the proposed art. 17a. Commission (n 21) 8.

24 This financing advantage was recognised by the CJEU in the Puffer case (Puffer (n 10)). Financing advantages do not accrue to differences in the amount of VAT deduction and are therefore not within the scope of harmonisation of the rules on VAT deduction (see Section 1).

25 Commission (n 21) 8.

26 Case C-204/03, Commission vs Spain, ECLI:EU:C:2005:146, Opinion of AG Poires Maduro. Different: Ben JM Terra/Julie Kajus, ‘A guide to the Recast VAT Directive’, IBFD Database, section 10.3.2.1. who call it a hidden tax burden. See also Ignacio Arias and Antonio Barba, ‘The Impact of Subsidies on the Right to Deduct VAT: the Spanish Experience’ (2004) International VAT Monitor January/February, 15.

27 Case C-204/03, Commission v. Spain, EU:C:2005:588. See also Case C-243/03, Commission v. France, EU:C:2005:589.

28 Case C-25/11, Varzim Sol, EU:C:2012:94.

29 Art. 73 (4) (6) of the Bulgarian VAT Act.

30 Art. 31 (1) of the Greek VAT Act.

31 Art. 60 (1) Lithuanian VAT Act.

32 Art. 65 (2) (b) Slovenian VAT Act.

33 Schedule No. 5 to Act CXXVII of 2007 (2).

34 Art. 300 (6) (b) of the Romania VAT Act.

35 See for example: Dutch Supreme Court 23 February 2018, 16/04051, NL:HR:2018:267 where an institute for higher education could take into account the tuition fees that it received from students as exempt turnover in the deductible proportion, while it was not required to take into account government funds it received for providing education to those students.

36 Already in 1983 the Commission noted that the problems of subsidies under the VAT system needs to be thought out afresh: Commission, ‘First report from the Commission to the Council on the application of the common system of value added tax’ COM (83) 426 final, 39, 14 September 1983.

37 Commission, ‘Proposal of a Sixth Council Directive on the harmonization of Member States concerning turnover taxes’, Bull EC Supplement 11/73, 18.

38 This provision is subject of case C-378/15, Mercedes Benz Italia, EU:C:2016:950.

39 The majority of the VAT Committee is also of the opinion that the methods should be used on the basis of strictly objective criteria, Guidelines resulting from the 13th meeting of 15-16 December 1981, XV/37/82, point 4.

40 Cases C-488/07, Royal Bank of Scotland, EU:C:2008:750, para 24; C-186/15, Kreissparkasse Wiedenbrück, EU:C:2016:452, para 35.

41 Royal Bank of Scotland (n 40) para 26.

42 Cases C-511/10, BLC Baumarkt, EU:C:2012:245, para 24; C-183/13, Banco Mais, EU:C:2014:2056, para 30; C-332/14, Wolfgang und Wilfried Rey, EU:C:2016:417, para 32.

43 Wolfgang und Wilfried Rey (n 42) para 33.

44 Albert H Bomer, ‘From Skandia to Larentia: National Jurisdiction to Deviate from the VAT Directive’ (2016) Intertax vol. 44 8/9, 66o in this respect notes that the CJEU views the exceptions as a more precise provision aimed at achieving the purpose of the main provision.

45 Case C-378/15, Mercedes Benz Italia, EU:C:2016:484, Opinion of AG Saugmandsgaard, para 30.

46 Compare in particular cases BLC Baumarkt (n 42) and Wolfgang und Wilfried Rey (n 42) to Banco Mais (n 42).

47 Cookies World (n 11) para 67.

48 Metropol (n 10) para 61.

49 Case C-228/05, Stradasfalti, EU:C:2006:578, para 30.

50 ibid para 31.

51 Metropol (n 10) paras 68 and 69.

52 VAT Committee, ‘Working Paper 377’ TAXUD/2439/2002, 2, 12 December 2002.

53 Case C-288/05, Stradasfalti, EU:C:2006:425, Opinion of AG Sharpston, para 73.

54 Case C-409/99, Metropol, EU:C:2001:508, Opinion of AG Geelhoed, para 61. I also refer to art. 120 and 121 TFEU. See also: Explanatory Statement of the Committee of Economic and Monetary Affairs to the Resolution of the European Parliament of 17 November 1983 Doc. 1-903/83 (PE84.113/fin), Intertax 1984/8, 310.

55 Consultations of the VAT Committee, <https://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/taxation/vat/key_documents/vat_committee/consultations_vat_committee_en.pdf> accessed 17 January 2018.

56 See, for example, the consultation by Germany, Working paper XV/252/81 of the VAT Committee, consultations by Poland, Working paper 631 of 9 September 2009 of the VAT Committee, TAXUD.d.1.(2009)210167 and Working paper 723 of 7 February 2012 of the VAT Committee, TAXUD.c.1(2012),153021, the consultation by Romania, Working paper 683 of 15 November 2010 of the VAT Committee, TAXUD.c.1(2010)899520 and the consultation by Italy, Working Paper XXI/899/90 of the VAT Committee.

57 See, for example, the consultation by Belgium on the limitation of deduction for investment that is neither job-creating or supplementary, Working paper XV/272/79 of the VAT Committee and the Consultation by Austria, VAT Committee, ‘Working Paper 558’, 15 October 2007, TAXUD/2156/08, 3.

58 Terra/Kajus (n 26) section 10.4.3.

59 Case C-97/90, Lennartz, EU:C:1991:315.

60 Case C-396/16, T-2, EU:C:2018:109.

61 ibid para 35.

62 Cases C-337/13, Almos Agrárkülkereskedelmi, EU:C:2014:328, para 25; C404/16, Lombard, EU:C:2017:759; C-246/16, Di Maura, EU:C:2017:887, para 16.

63 Di Maura (n 62) paras 21 and 22.

64 ibid paras 25 and 27.

65 Case C-396/16, T-2, EU:C:2017:763, Opinion of AG Saugmandsgaard, paras 59-61 and 64.

66 Case C-550/11, PIGI, EU:C:2012:614.

67 Compare: Ivan Vargouleve, ‘The Bulgarian VAT System To Be Evaluated by the ECJ’ (2012) International VAT Monitor January/February, 35.

68 Terra/Kajus (n 26) para 10.6.2.

69 Case C-268/83, Rompelman, EU:C:1985:74.

70 Terra/Kajus (n 26) section 10.6.3.

71 The recent judgment of the CJEU in the Imofloresmira case shows that non-use of a good is not a reason for adjusting the VAT deducted (Case C-672/16, Imofloresmira, EU:C:2018:134).

72 Art. 44 Value Added Tax Act.

73 Art. 32 (4.1) Value Added Tax Act.

74 Art. 64 (1) Value Added Tax Act.

75 Art. 63 (1) Value Added Tax Consolidation Act.

76 Art. 53 (2) Value Added Tax Act.

77 Art. 15a (4) Value Added Tax Act.

78 Art. 15 (4) Value Added Tax Act.

79 Art. 135 (1) Act CXXVII of 2007 on Value Added Tax.

80 Art. 91 (2) Act of 11 March 2004 on Goods and Services Tax.

81 Art. 24 (1) and (2) Value Added Tax Act.

82 Art. 69 (2) Value Added Tax Act

83 For Italy compare art. 19bis2 (2) and (8) Presidential Decree No 633 of 26 October 1972. For Slovak Republic see art. 54 (4) of the Slovakian Value Added Tax Act.

84 Cases C-63/04, Centralan, EU:C:2005:773, para 57; C-234/11, TETS Haskovo, EU:C:2012:644, para 31; C-550/11, Pigi, EU:C:2012:614, para 25; C-107/13, FIRIN, EU:C:2014:151, para 50.

85 Cases C-184/04, Uudenkaupungin Kaupunki, EU:C:2006:214, para 25; C-500/13, Gmina Międzyzdroje, EU:C:2014:1750, para 20; C-229/15, Mateusiak, EU:C:2016:454, para 30.

86 Council Directive 95/7/EC of 10 April 1995 amending Directive 77/388/EEC and introducing new simplification measures with regard to value added tax - scope of certain exemptions and practical arrangements for implementing them, OJ L 102, 0018-0024.

87 9th recital of the preamble of Directive 95/7/EC (n 86).

88 This graphic does not take into account the definition of immovable property by Member States which varies per Member State. As a result of that what may be considered an immovable property in one Member State does not qualify as such in another Member State. Specific situations where the deduction period might be different are also not included in this graphic.

89 Terra/Kajus (n 26) section 10.6.4.

90 Assuming the supplier will try to increase its price to cover the non-deductible VAT, but may not be able to do so due to market conditions such as price elasticity.

91 Case C-51/76, Verbond nederlandse ondernemingen, EU:C:1977:12.

92 Uudenkaupungin Kaupunki (n 85) para 25; Gmina Międzyzdroje (n 85) para 20; Mateusiak (n 85) para 30.

93 Terra/Kajus (n 26) para 10.6.5.1.

94 Cases C-468/93, gemeente Emmen, EU:C:1996:139; C-543/11, Woningstichting Maasdriel, EU:C:2013:20.

95 See, for example, BLC Baumarkt (n 42) para 16.

96 Council Directive 2006/69/EC of 24 July 2006 amending Directive 77/388/EEC as regards certain measures to simplify the procedure for charging value added tax and to assist in countering tax evasion or avoidance, and repealing certain Decisions granting derogations, OJ L 221/9.

97 For example, in Belgium Art. 6 Royal Decree n0 3. Only assets that are depreciated in five years or more are considered capital goods for which a longer adjustment period applies: Circulaire AFZ 3/2007 (AFZ/2006-0362 – AFZ/2006/0718), para 53.

98 For example, in the Netherlands. The Dutch Supreme Court explicitly rejected adjustments for services. HR 23 October 1991, case 27.053, BNB 1992/44, HR 19 November 2011, case 08/01021, BNB 2011/42 and HR 8 March 2013, no. 11/00701, BNB 2013/111.

99 In Romania, for example, a longer adjustment period only applies to construction services and refurbishment of immovable property that are capitalised, if the value of the services is at least 20% of the total value of the property after transformation, art. 305 (1) (a) of the Romanian Value Added Tax Act.

100 Amsterdam Court of Appeal 10 January 2017, 16/00255, NL:GHAMS:2017:159.

101 Haarlem District Court 25 May 2016, AWB - 15 _ 187, NL:RBNHO:2016:5017.

102 JPWHT Becks comment on Haarlem District Court 25 May 2016, AWB-15?187, NTFR 2016/2050.

103 Manfred-Holger Stadie, Umsatzsteuergesetz (Otto Schmidt, 3rd edn 2015), 1132.

104 ibid 1148.

105 It may also be based on Cases C-322/99 and C-323/99, Fischer and Brandenstein, EU:C:2001:280, para 91.

106 Compare: Case C-532/16, SEB Bankas, EU:C:2018:228, para 48.