Introduction Note: The earlier write ups, under this series, covered the GST legislation in one country (comprising of several States). In comparison, the EU is unique in the sense that it comprises of several countries which have their own laws and tax legislation, but these laws conform to a common charter i.e. the EU directives.
The EU is a politico-economic union of 28 Member States that are located primarily in Europe. Presently, the following countries are members of the EU: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain, Sweden, and the United Kingdom.
The EU operates through a system of supranational institutions and intergovernmental-negotiated decisions by the Member States. The supranational institutions are: the European Parliament, the European Council, the Council of the European Union, the European Commission, the Court of Justice of the European Union, the European Central Bank, and the Court of Auditors.
For the purposes of achieving a ‘single market’, the EU has developed a standardised system of laws and policies that apply in all Member States ensuring free movement of people, goods, services, and capital across Member States. The EU Value Added Tax (‘EUVAT’) is one such legislation. This tax is levied on goods and services supplied within the EU. While the EU’s supranational institutions themselves do not collect the tax, EU Member States are each required to adopt a VAT legislation that complies with the EU VAT code (read below about co-ordinated administration of value added tax within the EU).
EU VAT Area
The EU VAT area is a territory consisting of territory of all Member States of the EU and certain other countries which follow the EU rules on VAT . The principle is also valid for some special taxes on products like alcohol and tobacco. Goods are only considered as imported or exported if they enter or leave the EU area.
Authority and scope of the tax
The EU VAT system is regulated by a series of European Union directives issued by the European Council, the most important of which is the Sixth VAT Directive [Council Directive1 2006/112/EC of 28t November 2006 on the common system of value added tax]. The primary aim of the EU VAT directive is to harmonise VAT (content and implementation) within the EU VAT area. Besides this, the directive also specifies that VAT rates must be within a certain range. Some other key objectives of this directive are:
- harmonisation of content and layout of the VAT declaration
- regulation of accounting, providing a common legal accounting framework
- detailed description of invoices2 and receipts3, meaning that Member States
- have a common invoice framework
- regulation of accounts payable
- regulation of accounts receivable
- standard definition of national accountancy and administrative terms.
The directive is updated from time to time, to address various issues arising from the movement of men, capital, material and services within the Member States and it includes “the place of supply of services” rules which have been in force since 1st January 2010. More recently, the directive was amended to rationalise the place of supply of services in respect of electronic services.
Co-ordinated administration of value added tax within the EU
VAT collected at each stage in the supply chain is remitted to the tax authorities of the concerned Member State and forms part of that State’s revenue. A small proportion goes to the EU in the form of a levy (‘VAT -based own resources’). Previously, in spite of the customs union, the differing VAT rates and the separate VAT administration processes resulted in a high administrative and cost burden for crossborder trade. The EU has tried to resolve this by developing the co-ordinated administration of VAT within the EU VAT area.
Key initiatives under the co-ordinated administration include:
Cross-border VAT is declared in the same way as domestic VAT , and thus, facilitates the elimination of border controls between Member States, saving costs and reducing delays. It also simplifies administrative work for freight forwarders.
‘Mini One Stop Shop’ simplification scheme (read more below) is one of the measures adopted to achieve the ‘Single market’ objective.
The value added tax principle
Output VAT: VAT on output supplies charged by a business and paid by its customers.
Input VAT: VAT that is paid by a business to other businesses on the supplies that a business receives
Input tax credit: A business is generally able to recover input VAT to the extent that the input VAT is attributable to its taxable outputs.
Input VAT is recovered by offsetting it against the output VAT for which the business is required to account to the government, or, if there is an excess, by claiming a repayment (refund) from the government. The net effect of this is that each supplier in the chain remits tax on the value added, and ultimately the tax is paid by the end consumer. The final consumer does not receive a credit for the VAT paid.
Destination based tax
Generally, VAT is charged on the ‘destination principle’ i.e. the supply of goods or services is taxed in the Member State where the goods or services are delivered commonly known as the ‘Member State of arrival’.
The mechanism for achieving this result is as follows:
The exporting Member State zero-rates the VAT. This means that the Member State of the exporting merchant does not collect VAT on the sale, but still gives the exporting merchant a credit for the VAT paid on the purchase by the exporter (in practice, this often means a cash refund).
The importing Member State ‘reverse charges’ the VAT . This means that the importer is required to pay VAT to the importing Member State at its rate. In many cases, a credit is immediately given for this as input VAT . The importer then charges VAT on resale in the normal way.
Exceptions are made to the destination based principle and are also made in case of:
supplies of goods such as: distance supply (i.e. mail order catalog sales or e-commerce supplies), supplies within EU to exempt/non-taxable legal persons and excise products (i.e. energy products, alcohol and alcoholic beverages and manufactured tobacco).
supplies of services such as: supply of transport, supply of real estate services, etc.
In such cases the tax is sometimes based on the ‘origin principle’ and collected in the State of origin, commonly known as ‘Member State of dispatch’. Supply of goods
Domestic supply
A domestic supply of goods is a taxable transaction where goods are received in exchange for consideration within one Member State. Thus, one Member State charges VAT on the goods and allows a corresponding credit upon subsequent resale of those goods.
Intra-Community acquisition
An intra-community acquisition of goods for a consideration is a taxable transaction on crossing two or more Member States. The place of supply is determined to be the destination Member State, and VAT is normally charged at the rate applicable in the destination Member State. However, there are special provisions for distance selling.
Distance sales
Distance sales treatment allows the vendor to apply domestic place of supply rules (ie., rules in the Member State of dispatch) for determining which Member State collects the VAT . This means that VAT is charged at the rate applicable in the Member State of dispatch. However, there are exceptions to this, for instance:
- When a vendor in one Member State sells goods directly to individuals and VAT-exempt organisations in another Member State and the aggregate value of goods sold to consumers in that Member State is below the specified threshold4 in any 12 consecutive months, then such a sale of goods may qualify for a distance sales treatment.
- supply of excisable goods to the UK (like tobacco and alcohol).
In the abovementioned cases of distance supply, where the supply of goods is made to final consumers in a Member State of arrival, the exporting vendor may be required to charge VAT at the rate applicable in the Member State of arrival. If a supplier provides a distant sales service to several EU Member States, a separate accounting of sold goods in regard to VAT calculation is required. The supplier then must seek a VAT registration (and charge applicable rate) in each such country where the volume of sales in any 12 consecutive months exceeds the local threshold.
Supply of services
A supply of services is the supply of anything that is not a goods. The general rule for determining the place of supply is the place where the supplier of the services is established (registered/incorporated), such as a fixed establishment where the service is supplied, the supplier’s permanent address, or where the supplier usually resides. VAT is then charged at the rate applicable in the Member State where the place of supply of the services is located and is collected by that Member State. This general rule for the place of supply of services (the place where the supplier is established) is subject to several exceptions. Most of the exceptions switch the place of supply to the place where the services are received. Such exceptions include the:
- supply of transport services,
- supply of cultural services,
- supply of artistic services,
- supply of sporting services,
- supply of scientific services,
- supply of educational services,
- supply of ancillary transport services,
- supply of services related to transfer pricing services,
- and many miscellaneous services including
- supply of legal services,
- supply of banking and financial services,
- supply of telecommunications,
- supply of broadcasting,
- electronically supplied services,
- supply of services from engineers and accountants,
- supply of advertising services, and
- supply of intellectual property services.
The place of supply of services related to real estate is where the real estate is located. There are special rules for determining the place of supply of services delivered electronically. The mechanism for collecting VAT when the place of supply is not in the same Member State as the supplier is similar to that used for Intra-Community Acquisitions of goods, i.e. zero-rating by the supplier and reverse charge by the recipient of the services (if a taxable person). But if the recipient of the services is not a taxable person (i.e. a final consumer), the supplier must generally charge VAT at the rate applicable in its own Member State. If the place of supply is outside the EU, no VAT is charged.
Businesses may be required to register for VAT in EU Member States, other than the one in which they are based if they supply goods via mail order to those states over a certain threshold. Businesses that are established in one Member State but receive supplies in another Member State may be able to reclaim VAT charged in the second State if they have a value added tax identification number. A similar directive, the Thirteenth VAT Directive, also allows businesses established outside the EU to recover VAT in certain circumstances.
