The influence of international accounting standards in the field of VAT: a recent ECJ judgment and its impact on VAT practice

Abstract

The influence of international accounting standards (IAS), now known as IFRS (International Financial Reporting Standards), on the question whether certain operations fall within the scope of VAT may be surprising at first sight. Indeed, they are supposedly two distinct disciplines, two autonomous sets of rules with diverging scopes: IFRS apply primarily to consolidated accounts of publicly traded companies, while VAT applies to taxable persons undertaking economic activities. Until recently, this assumption seemed uncontroversial as far as the tax and accounting community was concerned—to such a degree that the question of a possible influence of IFRS on VAT did not even occur. Nevertheless, a recent decision of the European Court of Justice (ECJ) dated 16 February 2012 stirred up trouble between these two sets of rules. In this ruling the ECJ developed an argument, based on IAS 17, concerning leasing agreements, to render an operation which would usually be analysed as a supply of services, as a supply of goods under the VAT Directive. Is it possible that this is a stand-alone case, which we could call a ‘glitch’ or a ‘case-law mishap’? Or is it the beginning of a new trend, where VAT practitioners will systematically search IFRS to find a practical solution to a harmonised interpretation of VAT at the European level, based on an economic approach as opposed to a more legal approach, as it currently stands? The aims of this article are to analyse the aforementioned ruling, to assess the consequences of a generalised application of the IFRS rules in VAT law, and, finally, to show the intrinsic limits of such an approach. To better understand the importance of this ruling and its potential application to IFRS, this article also provides a reminder of the VAT harmonisation process and its difficulties, and outlines the importance of the connection between the VAT declaration process and the accounting principles of LuxGAAP.