Class 4

Question 1

What is the destination principle?

Answer 1

• Destination principle: internationally accepted principle = guiding principle → should levy taxes as close to consumption as possible.

Question 2

Why is it easier to grant full relief when it is harmonized?

Answer 2

• In a harmonized system, we can grant full relief in the member state of origin and when that good comes into the member state of destination, that member state can apply what is so called national treatment/equal treatment to domestic transactions and apply to the import of the good.
• Member state of origin will apply an exemption to cross-border supply of goods into MS of destination. Purpose: not to start all the tax burdens in the member state of origin again, because that would be contrary to the destination principle.
  
  • The destination principle means the member state of destination is supposed to takeover with its own tax system (the 20%) and that means we have to get rid of any tax burden in the member state of origin.

Question 3

Does the consumer profit from input VAT deduction mechanism?

Answer 3

Consumer does not profit from the input VAT deduction mechanism = the consumer does not have a credit against the state = no refund of the tax possible → he bears the economic burden.

Question 4

Relation of (harmonized) VAT to other taxes levied by MS

Answer 4

• Art. 411 Directive 2006: ““without prejudice to other provisions of community law or EU law. Nowadays this directive shall not prevent a member state from maintaining or introducing taxes on insurance, contracts taxes on betting gambling, excise duty, stamp duties or more generally any taxes, duties or charges which cannot be characterised as turn over taxes. Provided that they do not give rise in trade between member states to formalities with border crossing”.
• Any taxes are prohibited which have a similar character → tries to stop interferences from MS and domestic systems which have a similar character.

Question 5

Case: Banca Poplar Di Cremona v. Agenzia Entrate:

Answer 5

• Italy had introduced a domestic tax = turnover tax prohibited by art. 401? = 120 billion was at stake. Other MS came to aid and assist Italy.
• Second Advocate General: not fulfilled because it was a proportionate tax but it was a tax on the net value of the production of a taxpayer in a certain period of time = conglomerate and accumulation of activities during a certain period.
  
  • No violation of art. 401.

Question 6

Criteria for a violation of art. 401?

Answer 6

1. Transactions related to goods and services in general
2. Proportionate to price
3. Charged at each stage of the production and distribution process
4. The amounts of tax paid during the preceding stages are deducted by the taxable person from the tax payable so that the tax applies at any given stage only to the value added at that stage and the final burden of tax rests ultimately on the consumer = the customer bears the burden.

Question 7

What is the basic taxable event in VAT?

Answer 7

• Goods & services:
  
  • Good = tangible asset, might be movable or immovable, also includes electricity or gas.
  • Services = catch-all clause.
• Place depends on whether it is a service or a good, also consequences for the taxability and tax consequences.
  
  • Must be within a territory of a MS.
• Supply must also be by a taxable person.

Question 8

Who is the taxeble person in VAT?

Answer 8

• art. 9 of the directive
• You cannot be dependent on someone, you need to be an entrepreneur → brings obligations with it: administration, invoices,…
• Also allowed to deduct VAT: art. 168

Question 9

What is the neutrality principle?

Answer 9

• Important: neutrality principle: through the VAT deduction mechanism, VAT remains neutral = not an additional cost for you as manufacturer.
• Problem: certain transactions of taxable persons are tax exempt → what if there is no tax burden on the output side = is that still deductible and will that not distort the neutrality principle?

Question 10

Distinction exemptions?

Answer 10

1. Real exemptions = often with services: medical care, social security, education,… no 21% so that it is cheaper for the consumer: input VAT related to these real exemptions if not deductable → they are not entitled to deduct input VAT and reduce the costs.
   
   • Problem is that if they are buying goods, they cannot deduct so the input becomes a cost for you → this will be included in the price so somehow it is still rolled over to the customer.
2. Technical exemptions: often for goods with a rate of 0%: eg. export of a good because of the destination principle. The related input VAT is deductible because of the detaxation in the member state of origin.

Question 11

Case Halifax: facts of the case

Answer 11

• Bank (financial services), on output side almost exclusively services who were tax exempted without the right to input VAT deduction → input VAT becomes an actual cost.
• The bank set up a whole scheme in order to achieve something on the output side that would be taxable in order to have input VAT on invoices by other taxable persons. Question: do I get a credit against the state or is the money lost as a real cost.
  
  • Really important case when it comes to VAT and abusive practices.

Question 12

Case Halifax: view of the court

Answer 12

• Court: exceptionally a taxpayer loses the right to import VAT deduction. The deduction right is precluded when the transaction from which that right derived constitutes an abusive practice. When there is abuse involved, a construction is set up expressively to obtain the input VAT deduction, that might be abusive. Then you have no right to import VAT deduction.

Question 13

2 elements for abusive practice:

Answer 13

1. The transactions concerned, even though formally they comply with the relevant provisions. Here in the directive and the domestic legislation on taxable output and therefore allowing import VAT deduction. If they result in a tax advantage that would be contrary the purpose of these provisions. That is an objective element which is necessary for exist for an abusive practice.
2. Essential aim or intention of the transaction is to obtain a tax advantage = subjective element.

Question 14

What is a problem of the harmonized VAT system when it comes to the treatment of goods?

Answer 14

• Original idea = internal market and a lot of harmonization. Then: Jacques Delors: idea of the internal market so no more borders from 1993 → border control disappears.
  
  • Problem: how do you apply the system with realization of the destination principle, detaxation in the country of origin when you have no border control and thus no way to check whether the good is really moved across the border?
• Question there: do we give up the destination principle? MS did not want to go to an origin principle, so there was a compromis.
• Solution: intracommunity acquisition and supply (exemption)

Question 15

intracommunity acquisition and supply

Answer 15

• Only applied in B2B situation. This was supposed to be a transitional regime. This puts high administrative burdens on enterprises → they now perform border control.
• Control mechanisms are built in to make sure that the retailer reports to his domestic tax authorities that the good has arrived so that he can have a tax exemption. And the authorities can check whether or not is has arrived in MS of the customer.

Question 16

Problem VAT with services?

Answer 16

• We cannot see services cross border so here we have rules for the application of the destination principle = place of supplied services: you ned to look at the place of supply that indicates the MS.
  
  • This serves to avoid double taxation.
• Solution: Distinction between B2C and B2B

Question 17

distinction between B2C and B2B VAT services?

Answer 17

1. B2B: place of the recipient = place of supply so for cross border situation = in the other MS: no taxable transaction since there is no place of supply in the MS of origin so you do not need to apply an exemption.
2. B2C: exemption is only necessary if it is in principle taxable: place of supply between the 2 MS indicates the other MS of the receiving enterprise → where the provider is located that MS of origin does not have tax jurisdiction, does not need to exempt.
   
   • = Verlegging van heffing → the supplier would be obliged to pay the tax to that state authority because he triggered that tax burden. But the legislation says: the recipient must calculate the tax and pay.
   • Typically, it is an entrepreneur with non-exempted activities will be entitled to deduct the same amount as input VAT. It is to a certain degree comparable to these intracommunity transactions and intracommunity supplies.
   • Basic principle of B2C: place of the supplier: enterprise in Belgium who provides services to final consumer in the Netherlands → place of the supplier is the place where the service takes place for tax purpose so Belgium is entitled to tax and where the tax must be paid.

Question 18

Problems with the intercommunity acquisitions and suppply?

Answer 18

• Problem: vulnerability to abusive or fraudulent behavior
  
  • Eg. VAT carousels, missing trader frauds,…
• Missing trader: sending invoices, making payments, reclaiming input VAT deduction and then the one who would have to pay something on the output side disappears → pulling VAT refunds out of a system but not paying the other side of the coin to that MS or to another MS.
• VAT Gap in the EU: difference between the VAT that should have been levied and the VAT that has been levied.
  
  • Tax avoidance structures
  • Tax fraud
  • Tax authorities not always efficient = great differences in effectiveness.

Question 19

VAT policy initiative?

Answer 19

• Everyone could give input for the change f intracommunity acquisition.
  
  • A lot of criticism because it leads to high administrative burdens, not a real internal markets, high compliance costs,…
  • High danger of losing exemption if the paperwork is not right → distortion of neutrality in the internal market.
• So Commission wanted to make a move to the final regime on the basis of destination principle because MS still do not want origin principle for the EU as a special system because if would divide it from international standards.

Question 20

2016: Action plan for VAT:

Answer 20

1. Simplify the rules on cross border commerce
2. Digital economy and SME measures
3. Measures to close the VAT gap, tackle VAT fraud, abusive behavior,…
4. Better administrative cooperation
5. Extension of the reverse charge mechanism
   
   • Idea: create a definitive VAT system and also do something about the rates.

Question 21

One-stop-shop” = OSS:

Answer 21

• Enterprise is established in a certain MS = all its VAT there, not just domestic VAT but also foreign VAT for cross-border supplies → that way, a taxpayer does not need to check the rules of 26 MS, just one payment and then through a clearing mechanism = netting.
• Third country enterprises are supposed to chose one MS.
• Mini one-stop shop: compulsory → only concerned certain services, does not concern cross-border B2B services (place of recipient = place of supply and reverse charge is applicable there).
  
  • Has been used since 2015 for TBE services and normally for the rest as well, but postponed until July 2021.
  • Proximus in Belgium (telecommunications): 3 consumers for 100 each but different rates = include the VAT monthly → pay the different rates to the Belgian authorities and they will sort it out with the French, German, Dutch… Clearing between them.