Indirect Tax Forum Case Law Update

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Carmella Jocelyn Parrish
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1 Case Law Update Prinal Nathwani and Holly Grantham

2 Agenda 1. Introduction 2. National Roads Authority (C-344/15) 3. MVM Magyar Villamos Művek Zrt. (C-28/16) 4. DPAS Ltd (C-5/17) 5. Cost sharing groups (CSGs) 6. Euro Tyre BV (C-21/16) 7. Look ahead Indirect TaxForum Slide 2

3 National Roads Authority (C-344/15) CJEU rules that difference in VAT treatment of public and private road toll collectors does not distort competition 1 Slide 3

4 National Roads Authority Background The taxpayer, National Roads Authority (NRA), is an independent public authority with responsibility for the construction and management of national roads in Ireland. It sometimes collects tolls on these roads. The NRA applied to the Revenue Commissioners for repayment of VAT charged on tolls, on the basis that it was acting as a public body and was therefore a non-taxable person for the purpose of the supplies in accordance with Article 13 PVD. The Irish tax authority refused the repayment and the NRA appealed, with questions referred to the CJEU. Article 13 would not apply if to deem the NRA a non-taxable person would cause significant distortions of competition. So the question for the court was whether the NRA s activity in managing toll roads itself was to be treated as being in competition with private operators. Slide 4

5 National Roads Authority Decision 1 The CJEU considered whether a body governed by public law must be regarded as competing with private operators who collect tolls. The CJEU stated that Art. 13(1) aims to ensure that private operators are not placed at an economic disadvantage. The question of economic disadvantage must be evaluated by reference to the activity in question, as long as the possibility of potential competition is real. 2 The CJEU did not consider that the NRA was in competition with private toll road operators and so could be treated as a non-taxable person in this context. 3 The second subparagraph of Article 13(1) of Council Directive 2006/112/EC... must be interpreted as meaning that, in a situation such that in the main proceedings, a body governed by public law which carries on an activity consisting in providing access to a road on payment of a toll may not be regarded as competing with private operators who collect tolls on other toll roads pursuant to an agreement with the public law body concerned under national statutory provisions Slide 5

6 National Roads Authority Implications The CJEU s judgment highlights that the distortion of competition test requires that potential competition must be more than merely hypothetical (at least insofar as Article 13 is concerned). Cf. Isle of Wight? Distortion of competition under Article London Borough of Ealing? Slide 6

7 MVM Magyar Villamos Művek Zrt. (C-28/16) Holding companies and input VAT deduction 2 Slide 7

8 MVM Magyar Villamos Művek Zrt. Background The taxpayer is a state owned company trading in the energy sector and VAT registered. It leases power plants and fibre optic networks and owns subsidiaries which sell electricity. The taxpayer and its subsidiaries have formed a corporate group under Hungarian law. In , MVM was responsible for the strategic management of the group. It procured various services for the benefit of itself, the group and individual member companies. MVM deducted all of the VAT incurred, however, did not charge its subsidiaries for the management services (except on rare occasions). The Hungarian tax authority only allowed the VAT to be deducted to the extent that it was related to taxable supplies. The taxpayer appealed and the court of first instance dismissed that action. The taxpayer lodged a further appeal. The questions referred to the CJEU were as follows: 1. Can a holding company be regarded as a taxable person in respect of the management of its subsidiaries when it does not charge the subsidiaries for these services or pass on the VAT incurred? 2. If yes, can the holding company deduct VAT relating to those services used by it which are related to the taxed economic activity of its subsidiaries? 3. If the first question is answered in the affirmative, can the holding company deduct VAT for services which are in the interest of the group companies as a whole? 4. Would the answers to the above questions differ if the active holding company bills its subsidiaries in respect of the above-mentioned subsidiaries as intermediary services and, if so, to what extent? Slide 8

9 MVM Magyar Villamos Művek Zrt. Decision 1 A holding company with the sole purpose of the acquisition and holding of shares is not a taxable person and cannot deduct input VAT. The position is different if there is direct or indirect involvement in the management of the companies held and a taxable supply is made to these companies. 2 Management alone, without the making of taxable supplies, is insufficient. MVM received no consideration from its subsidiaries for the management activities - this is therefore not an economic activity. To the extent the VAT incurred relates to these activities, it is not deductible. 3 4 Reference made to the decision in Larentia and Minerva - taxpayer has a right to deduct, even where there is no direct link between an input and an output, where the services are part of its general overheads. 5 In the present case, the services in dispute were for the interest of other members of the group or were related to the acquisition of shareholdings and so were unlikely to form part of the taxpayer s overheads. Slide 9

10 MVM Magyar Villamos Művek Zrt. Implications The CJEU has followed and applied the approach set out in recent case law on input VAT deduction - key principles recounted and addressed in the decision. Approach is broadly consistent with that adopted in the UK courts, for example by the Upper Tribunal in Norseman Gold plc v HMRC [2016] UKUT 0069 (TCC). What is HMRC s approach and how does this fit with the case law and guidance from the CJEU? The draft guidance produced by HMRC is in line with the case law. What are our clients telling us and what do businesses consider is the right approach? Court of Appeal decision in Norseman Gold due on 4 April Slide 10

11 DPAS Ltd (C-5/17) CJEU questions published in UK payment processing and debt collection case 3 Slide 11

12 DPAS Ltd Background DPAS Ltd (the taxpayer) is a business which arranges and administers direct debits for the payment of periodic dental plan charges. Prior to the AXA UK [2010] case, DPAS charged the dentists for this service, but after the AXA case, DPAS charged the patients instead. In AXA UK [2010], the CJEU held that because the dentists were paying for the payment collection service, this amounted to debt collection and was therefore excluded from the VAT exemption under Article 135(1)(d) Principal VAT Directive. DPAS therefore changed its payment structure in order to benefit from the exemption and the FTT held that the services DPAS provided were exempt. HMRC appealed to the UT, arguing the FTT erred in law on 5 grounds. In respect of the effect of the changes to the payment structure, the UT gave its first decision on 5 November The UT concluded that the new arrangements and corresponding VAT treatment could not apply to existing customers that failed to return an acceptance form (70% of existing customers). The arrangements did apply to existing customers that returned the acceptance form and to new customers. The new payment arrangements were found not to be abusive. The question as to whether the supplies fell within the exemption was stayed pending the release of the CJEU s decision in Bookit and NEC. Post Bookit and NEC the UT decided to refer questions to the CJEU. Slide 12

13 DPAS Ltd Questions referred to the CJEU 1. Is a service, consisting of directing, pursuant to a direct debit mandate, that money is taken by direct debit from a patient s bank account and passed by the taxpayer, after deduction of the taxpayer s remuneration, to the patient s dentist and insurance provider, an exempt supply of transfer or payment services within Article 135(1)(d)? 2. Do the decisions in Bookit II and NEC lead to the conclusion that the exemption from VAT in Article 135(1)(d) is not applicable to a service, such as that performed by the taxpayer in the present case, which does not involve the taxpayer itself debiting or crediting any accounts over which it has control but which, where a transfer of funds results, is essential to that transfer? Or does the decision in AXA lead to the contrary conclusion? 3. What are the relevant principles to be applied for determining whether or not a service, as performed in the present case, falls within the scope of debt collection within Article 135(1)(d)? Particularly, if (as decided in AXA regarding the same or a very similar service) such a service would constitute debt collection if provided to the person to whom the payment is due (i.e. the dentists in the present case), does that service also constitute debt collection if such a service is provided to the person from whom the payment is due (i.e. the patients in the present case)? Slide 13

14 DPAS Ltd Implications The scope of the questions referred are broad and seem to overlap with the issues considered in earlier cases. Although ostensibly focused on direct debit payments and mandates, the CJEU is being asked to clarify the application of its earlier decisions. The questions also touch on the structuring of arrangements and payment flows in situations when the benefit of the exemption is sought. No abuse was found in this case itself. How, if at all, will the CJEU eventually address the questions? Will it consider that the exemption has already been clarified on a number of occasions and so no further detailed guidance is needed? Slide 14

15 Cost sharing groups (CSGs) Advocate General opinions on the scope of the VAT exemption for cost sharing groups (CSGs) 4 Slide 15

16 Cost sharing groups (CSGs) Background The Advocate General has given two opinions concerning the cost sharing exemption. The overall impact is to limit the scope of the exemption to supplies to bodies whose own supplies are exempt under Art The exemption is further limited to supplies within a single Member State. DNB is a member of the DNB banking group, which provided exempt financial services and was supplied services by other group companies. DNB was invoiced by the Danish companies in the group, DNB Nord AS and DNB Nord IT AS. DNB Nord IT claimed the input VAT relating to these supplies from the Danish tax authority. The issue was whether DNB was receiving supplies which were exempt under Art. 132(1)(f) Principal VAT Directive, in which case DNB would not be required to apply the VAT reverse charge on receipt. Aviva is a Polish member of Aviva Group (AG). AG is considering setting up shared service centres in EU Member States in EEIG form. Shared services will be provided to all companies in group. Aviva sought a ruling to the effect that it was not required to apply the VAT reverse charge to services received from the EEIG because they were exempt. The tax authority did not agree citing distortion of competition. Slide 16

17 Cost sharing groups (CSGs) Questions Aviva 1. Is a provision of national law concerning the exemption from VAT of independent groups of persons which does not lay down any criteria or procedures governing the fulfilment of the condition of distortion of competition compatible with article 132(1)(f) of the EU VAT Directive (2006/112) in conjunction with article 131 of the EU VAT Directive (2006/112), and also with the principles of effectiveness, of legal certainty and of the protection of legitimate expectations? 2. What criteria should be applied in assessing whether the condition of distortion of competition laid down in article 132 (1)(f) of the EU VAT Directive (2006/112) is fulfilled? 3. Is the answer to the second question above affected by the fact that the independent group of persons provides the services to members who fall within the jurisdiction of different Member States? Slide 17

18 Cost sharing groups (CSGs) Questions DNB Is it possible for there to be an independent group of persons for the purposes of Article 132(1)(f) of Council Directive 2006/112/EC when the members of that group are established in separate Member States of the European Union, in which that provision of the Directive has been transposed with different requirements which are not compatible? Can a Member State restrict the right of a taxable person to apply the exemption provided for in Article 132(1)(f) of the Directive, when that taxable person has satisfied all the requirements for the application of the exemption in its Member State, but that provision of the Directive has been transposed into the national law of the Member States of other members of the group with restrictions which limit the possibility for taxable persons of other Member States of applying in their own Member State the corresponding exemption from value added tax? Is it permissible to apply the exemption in Article 132(1)(f) of the Directive to services in the Member State of the recipient of those services, who is a taxable person for value added tax, when the provider of the services, also a taxable person for value added tax, has applied in another Member State value added tax to those services in accordance with general arrangements, that is, considering that value added tax on those services was payable in the Member State of the recipient of those services, in accordance with Article 196 of the Directive? Slide 18

19 Cost sharing groups (CSGs) Questions Must the term independent group of persons, for the purposes of Article 132(1)(f) of the Directive, be taken to mean a separate legal person whose existence has to be proved through a specific agreement creating that independent group of persons. If the reply to that question is that an independent group of persons need not necessarily be taken to mean a separate entity, is an independent group of persons to be regarded as a group of related undertakings in which, in the course of their usual economic activities, those undertakings provide each other with support services for carrying out their commercial activities, and may the existence of that group be proved through the contracts for services concluded or through documentation on transfer prices? Can a Member State restrict the right of a taxable person to apply the value added tax exemption in Article 132(1)(f) of the Directive, when that taxable person has applied an uplift to the transactions, as required under the legislation on direct taxation of the Member State where the taxable person is established? Does the exemption in Article 132(1)(f) of the Directive apply to services received from third countries? In other words, where a member of an independent group of persons, as referred to in Article 132(1)(f) of the Directive, provides, within that group, services to other members of the group, can that person be a taxable person from a third country? Slide 19

20 Cost sharing groups (CSGs) Opinion of Advocate General 1 DNB 2 Aviva An independent group of persons under Art. 132(1)(f) does not have to be a legal person, but a taxable person. A group of companies does not satisfy this requirement. Art. 132(1)(f) covers only groups of taxable persons which carry out supplies that are exempt under Art Groups of financial services undertakings do not fall within its scope. An independent group of persons may supply exempt services only to members that are subject to the same legal order, namely its own. The exemption under Article 132(1)(f) of the VAT Directive is not applicable where a consideration is paid for the supply of services which goes beyond the expenses incurred. That is also the case where, as required under the legislation on direct taxation, a simple flat-rate cost uplift is paid. Article 132(1)(f) of the VAT Directive does not preclude a provision of national law which does not prescribe any criteria or procedures with respect to compliance with the condition that there must be no distortion of competition. It must be assumed as a rule that the services supplied by a group within the meaning of Article 132(1)(f) of the VAT Directive do not give rise to a distortion of competition. As a provision for the avoidance of abuse, that criterion must be interpreted restrictively. An independent group of persons may supply exempt services only to those of its members which are subject to the same legal system as itself. Slide 20

21 Cost sharing groups (CSGs) Implications The suggestion that the exemption has direct effect and that the Member State has no discretion to impose conditions on the legal form and rules of membership of CSGs is positive. HR services, financial and accounting services, IT services, administrative services, customer service facilities, and new product development services seem to be accepted as necessary. The AG's opinion that the exemption extends only to the exemptions for activities carried on in the public interest and does not apply cross-border or to supplies from non-eu territories is problematic. What has the approach of HMRC been? Possible changes if the CJEU adopts the AG s reasoning? How much use will the exemption have if the CJEU follows the Opinion and restricts the scope even further? Slide 21

22 Euro Tyre BV (C-21/16) Substantive conditions for VAT relief trump domestic formalities unless avoidance is involved 5 Slide 22

23 Euro Tyre BV Background The taxpayer is a Portuguese branch of a company incorporated under Netherlands law, Euro Tyre BV. Its business is the import, export and marketing of tyres for retailers based in Portugal and Spain. It also sells through a distributor, Euro Tyre Distribution de Neumaticos SL (ETD), in Spain. The dispute concerns sales made between 2010 and 2012 to ETD. ETD was registered for VAT in Spain, but not subject to the system of taxation on intra-community acquisitions, nor registered in the VAT Information Exchange System (VIES). In March 2013 the Spanish tax authorities granted it the status of intra-community operator and registered with effect from July The taxpayer declared its sales to ETD as intra-community supplies and thus relieved from VAT. The tax authority declined this request because ETD was not registered in ITT or VIES. The taxpayer appealed on the basis that the condition, that the purchaser must come under a system of taxation on intra- Community acquisitions of goods and be registered in the VIES system, was a requirement imposed only by the Portuguese domestic law and was an incorrect transposition of Art.138. The court noted that ETD did not come under a system of taxation on intra-community acquisitions and was not registered in the VIES system. The taxpayer, aware of this, had expected the Spanish tax authorities to grant ETD the status of an intra-community operator with retroactive effect. Questions for the CJEU: Must Art 131 be interpreted as precluding tax authorities from refusing to grant VAT exemption on the ground of not being registered; does proportionality preclude the interpretation of Art 138 so that VAT exemption can be denied where purchaser was aware that supplier was not registered. Slide 23

24 Euro Tyre BV Decision 1 The CJEU held that Art. 138(1) requires Member States to relieve supplies of goods which satisfy the conditions listed in that article from VAT. Member States are required to take measures to identify every taxable person or non-taxable legal person who makes intra-community acquisitions. The registration of taxable persons carrying out intra-community transactions in the VIES system is important. 2 Art. 138(1) does not mention the obligation for the purchaser to have a VAT identification number, nor the obligation to be registered for the purpose of carrying out intra-community transactions and to be registered in the VIES system. 3 4 A national measure is disproportionate if it goes further than is necessary to ensure the correct collection of the tax. 5 If the Art. 138(1) objective characteristics are present, the supply must be relieved from VAT, even if formal requirements are not all complied with. There are only two situations in which that does not hold true, i.e. tax evasion and where non-compliance with a formal requirement would effectively prevent the production of conclusive evidence that the substantive requirements have been satisfied. 6 Slide 24

25 Euro Tyre BV Implications The latest in a series of cases where satisfaction of the substantive conditions for VAT relief have been held to trump formal requirements in Member States. Unless there is avoidance or evasion, the focus is on the objective characteristics of a transactions. Domestic legislation aimed at ensuring compliance or preventing avoidance must not go further than is necessary to achieve those objectives, a principle recently applied in the UK in Water Property Ltd [2016] UKFTT 721 (TC). In practice, the decision reinforces the view that, although formal requirements are important and necessary, excessive reliance on these by tax authorities could well be challenged. Slide 25

26 A look ahead... Upcoming hearings and decisions ITC decision awaited. Taylor Wimpey - possible further Upper Tribunal decision. London Borough of Ealing - CJEU decision awaited. ZipVit - hearing date TBC. Cost-sharing exemption references - CJEU decisions awaited. DPAS - listing of CJEU hearing to be confirmed. Littlewoods - Supreme Court hearing in July. Slide 26

27 Any questions? Slide 27

28 Contact details Holly Grantham T: +44 (0) E: Prinal Nathwani T: +44 (0) E: Slide 28

29 Thank you This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers LLP. All rights reserved. In this document, refers to the UK member firm, and may sometimes refer to the network. Each member firm is a separate legal entity. Please see for further details CR-OS

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