[This is the second and concluding part of write up on VAT in the European Union (‘EU’)]
The previous write up discussed the background of Value Added Tax (‘VAT’) regime currently in force in the European Union (EU). It briefly described inter alia the authority and scope of the tax, the internal coordination between various Member States, the value added tax principles and the mechanics of tax regime. The current write up deals with some important concepts and procedural aspects of the EU VAT .
Branch Transfer (also known as intra-community acquisitions):
Generally, a transfer of goods between branches of the same legal entity (i.e. transfer of goods from a factory to a warehouse owned by the same company within the same Member State) is not considered as a supply for VAT purposes. However, this general rule will not apply in situations where an entity transfers its own goods across borders within the EU. Such transfers are also known as intra-community supplies / acquisition. A taxable person is deemed to make an intra-community supply and an intra-community acquisition if the person transfers goods between different parts of a single legal entity located in different Member States. In such cases, the transferring entity may need to register for VAT in both i.e. the Member State of dispatch and the Member State of arrival. Member States are authorised to prescribe their own registration requirement and business entities need to refer to the relevant Member State’s requirements before transferring goods across borders.
Exceptions to the above (Transfers deemed not to be acquisitions).
It is pertinent to note that not all intra-community movements of own goods are treated as acquisitions.The following cross border transfers are not treated as intracommunity transfers:
Goods to be installed or assembled for a customer in another Member State
Goods transported to another Member State under the distance selling rules
Goods meant for export outside the EU from another Member State or dispatched to another Member State (i.e. the goods are temporarily transferred from one Member State to another and thereafter exported from the second Member State)
Goods sent to another Member State for processing (provided that the goods are returned after processing)
Goods temporarily used in another Member State for a supply of services made there
Goods used temporarily (i.e. for less than two years) in another Member State
Taxable person:
The EU VAT directive defines ‘Taxable person’ to mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity. Such a person may be an individual, partnership, company or other forms of business which supplies taxable goods and services in the course of business.
Economic activity conducted ‘independently’ shall exclude activities of employee 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 creating the relationship of employer and employee as regards working conditions, remuneration and the employer’s liability.
Exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis is regarded as an economic activity. In addition to this, any person who, on an occasional basis, supplies a new means of transport, which is dispatched or transported to the customer by the vendor or the customer, or on behalf of the vendor or the customer, to a destination outside the territory of a Member State but within the territory of the Community, shall be regarded as a taxable person.
States, regional and local government authorities and other bodies governed by public law are not regarded as taxable persons in respect of the activities or transactions in which they engage as public authorities. This is so, even where they collect dues, fees, contributions or payments in connection with those activities or transactions. However, as an exception to the general rule, when State / regional / local government authorities engage in such activities or transactions, they shall be regarded as taxable persons in respect of those activities or transactions where their treatment as non-taxable persons would lead to significant distortions of competition. Annexure I appended to the EU VAT directive provides a list of activities (i.e. supply of water / electricity / gas, warehousing, organisation of public fares and trade exhibitions, etc.), in respect of which bodies governed by public law are regarded as taxable persons, provided that those activities are not carried out on such a small scale as to be negligible.
VAT rates:
The EU law only requires that the standard VAT rate must be at least 15% and the reduced rate at least 5% (for supplies of goods and services referred to in an exhaustive list). Actual rates applied for this purpose may vary between Member States and between certain types of products. There is a provision for super reduced rate also.
The most reliable source of information on current VAT rates for a specified product in a particular Member State is that country’s VAT authority. Nevertheless, it is possible to get an overview of the different rates applied from the VAT rates in the European Union information document.
Valuation:
For the purpose of levy of VAT on supply of goods or services, the taxable amount includes everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the said supply.
Inclusions:
The taxable amount shall include the following factors:
(a) taxes, duties, levies and charges, excluding the VAT itself;
(b) incidental expenses such as commission, packing, transport and insurance costs, charged by the supplier to the customer.
For the purposes of incidental expenses, Member States are allowed to regard expenses covered by a separate agreement as incidental expenses.
Exclusions:
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.
The taxable person must furnish proof of the actual amount of the expenditure in respect of reimbursements claimed and may not deduct any VAT which may have been charged.
Packing material:
As regards the costs of returnable packing material, Member States may take one of the followings:
(a) exclude them from the taxable amount and take the measures necessary to ensure that this amount is adjusted if the packing material is not returned;
(b) include them in the taxable amount and take the measures necessary to ensure that this amount is adjusted if the packing material is in fact returned.
EXEMPTIONS:
Member States grant exemptions in respect of certain activities in the interest of public at large. A snapshot of activities which are currently exempted from EU VAT is given below:
Supply by the public postal services, of services and the supply of goods incidental thereto.
Hospital and medical care and closely related activities undertaken by bodies governed by public law.
Provision of medical care in the exercise of the medical and paramedical professions as defined by the Member State concerned.
Supply of human organs, blood and milk.
Supply of services by dental technicians in their professional capacity and the supply of dental prostheses by dentists and dental technicians.
Supply of services by independent groups of persons, who are carrying on an activity which is exempt from VAT or in relation to which they are not taxable persons, for the purpose of rendering their members the services directly necessary for the exercise of that activity, where those groups merely claim from their members exact reimbursement of their share of the joint expenses, provided that such exemption is not likely to cause distortion of competition
Supply of services and of goods closely linked to welfare and social security work, including those supplied by old people’s homes, by bodies governed by public law or by other bodies recognised by the Member State concerned as being devoted to social wellbeing.
Supply of services and of goods closely linked to the protection of children and young persons, by bodies governed by public law or by other organisations recognised by the Member State concerned as being devoted to social wellbeing.
Provision of children’s or young people’s education, school or university education, vocational training or retraining, including the supply of services and of goods closely related thereto, by bodies governed by public law having such as their aim or by other organisations recognised by the Member State concerned as having similar objects.
Tuition given privately by teachers covering school or university education.
Supply of staff by religious or philosophical institutions with a view to spiritual welfare.
Supply of services, and the supply of goods closely linked thereto, to their members in their common interest in return for a subscription fixed in accordance with their rules by non-profit-making organisations with aims of a political, trade union, religious, patriotic, philosophical, philanthropic or civic nature, provided that this exemption is not likely to cause distortion of competition.
Supply of certain services closely linked to sport or physical education by non-profit-making organisations to persons taking part in sport or physical education.
Supply of certain cultural services and the supply of goods closely linked thereto, by bodies governed by public law or by other cultural bodies recognised by the Member State concerned.
Supply of services and goods, by organisations whose activities are exempt in connection with fund-raising events organised exclusively for their own benefit, provided that exemption is not likely to cause distortion of competition.
Supply of transport services for sick or injured persons in vehicles specially designed for the purpose, by duly authorised bodies.
Activities, other than those of a commercial nature, carried out by public radio and television bodies.
Certain financial services / transactions such as insurance / reinsurance transactions and related broking services, granting and negotiation of credit, negotiating of or dealings in credit guarantees and management of credit guarantees, acceptance of deposit / current accounts, banking transactions: payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection, transactions in money, etc.
Invoicing:
Taxable persons doing business in the EU are subject to a single set of basic EU-wide invoicing rules1 , and in certain areas, national rules set by the individual EU country. Businesses are free to issue electronic invoices subject to acceptance by the recipient. National tax authorities cannot require businesses to provide any notification or to receive authorisation. However, e-invoicing will become obligatory in public procurement. Businesses can outsource invoicing operations to a third party or to the customer (i.e. self-billing), in some circumstances.
Businesses are generally free to store invoices where and how they like (paper/electronic, in a different EU country to where they are based, etc.).
An ‘invoice’ is required for VAT purposes, under EU rules, in case of business-to-business (B2B) supplies and certain business-to-consumer (B2C) transactions. In some cases, there are specific national rules on transactions which require businesses to issue an ‘invoice’.
Apart from the usual Information required in an Invoice such as date of invoice, serial number, customer’s VAT identification number, supplier’s and customer’s full name and address, description of quantity & type of goods supplied or type & extent of services rendered, VAT rate applied, VAT amount payable, breakup of VAT amount payable by VAT rate or exemption unit price of goods or services – exclusive of tax, discounts or rebates (unless included in the unit price), some extra information is also required in some cases. Specific instance of the same are as follows:
Exempt transactions – a reference to the appropriate (EU or national) legislation exempting it, or any other reference indicating it is exempt (at the choice of the supplier).
Customer liable for the tax (i.e. under the reversecharge procedure) – the words ‘Reverse charge’.
Intra-EU supply of a new means of transport – the details specified in Article 2(2)(b) of the VAT Directive (e.g. for a car, its age and mileage).
Applicability of margin scheme – a reference to the particular scheme involved (e.g. ‘Margin scheme — travel agents’).
Self-billing (customer issues invoice instead of supplier) – the words ‘Self-billing’.
Person liable for tax is a tax representative – their VAT identification number, full name and address.
Supplier is operating a cash-accounting system – the words ‘Cash accounting’.
Once an invoice includes all the required information (depending on the case, and the EU country), it serves as sufficient proof to allow a right to deduct VAT in whichever EU country the person is concerned. No EU country will prevent this by requiring any extra information, prior confirmation, etc.
EU filings:
Intrastat
Intrastat is a system for reporting intra-community transactions made by taxable persons. This system was first introduced on 1st January 1993 with a view to allow the collection of statistical information on intra-community trade in the absence of customs controls at the borders. EU businesses are required to submit information on a periodic basis to the VAT authorities if they make either intra-community supplies or acquisitions of goods in excess of specified limits.
Taxable persons making intra-community supplies are also required to submit EU Sales Lists (ESLs) to the VAT authorities on a quarterly basis. Failure to comply (delays, errors or omissions) can lead to penal consequences. Effective from 1st January 2010, a new requirement has been introduced whereby businesses are also obligated to file Intrastat returns for cross-border services provided to business customers in other EU Member States.
VAT returns:
Currently, all business registered for EU VAT purposes are obligated to file VAT returns as per their respective counties requirements i.e. National VAT returns. As a result, business intra- community supply / acquisition are required to file VAT returns in more than one jurisdiction (in different forms and with varying reporting requirements) and leads to an extra administrative burden on the business. A proposal has been moved by the European Commission (on 23rd October 2013) whereby all business within the EU will be required to file a standard VAT return. The standard VAT return, which will replace national VAT returns, will ensure that businesses are asked for the same basic information, within the same deadlines, across the EU.
The purpose of the standard VAT return is to reduce administrative burdens for businesses, ease of tax compliance and make tax compliances across the EU more efficient. The proposal also envisages a simplified and uniform set of information that businesses will have to provide to tax authorities when filing their VAT returns, regardless of the Member State of submission. The Commission envisages that once the proposed directive is adopted by the Council, after consultation with the European Parliament, it will enter into force on 1st January 2017.
Parting words:
Undoubtedly, the EU VAT legislation is unique in many ways when compared to the VAT legislations of other countries. Success of the EU VAT regime rests largely on the effectiveness of the European Commission and co-operation of the Member States. They are indeed a fine example to emulate (various countries, having diverse political and economic interest, coming together and administering the tax laws with such a smooth and satisfactory procedure).
Our country, which has borrowed several concepts from the EU VAT legislation while designing the ‘place of supply rules’ and the ‘point of taxation rules’, etc., can also take some inspiration from the Member States and their spirit of co-operation and trust while designing Indian Goods and Services Tax system.
