European Commission Green Paper on the Future of VAT Towards a simpler, more robust and efficient VAT system

Size: px

Start display at page:

Download "European Commission Green Paper on the Future of VAT Towards a simpler, more robust and efficient VAT system"

Dorthy Dawson
5 years ago
Views:

27 May 2011 European Commission Directorate-General for Taxation and Customs Union VAT and other turnover taxes Unit C1 Rue Joseph II 79, Office J79 05/093 B-1049 Brussels By email:

1 27 May 2011 European Commission Directorate-General for Taxation and Customs Union VAT and other turnover taxes Unit C1 Rue Joseph II 79, Office J79 05/093 B-1049 Brussels By Dear Mr. Deffaa, European Commission Green Paper on the Future of VAT Towards a simpler, more robust and efficient VAT system The IMA represents the UK-based investment management industry. Our Members include independent investment managers, the investment management arms of retail banks, life insurers and investment banks, and the managers of occupational pension schemes. They are responsible for the management of over 4 trillion of funds (based in the UK, Europe and elsewhere), including authorised investment funds, institutional funds (e.g. pensions and life funds), private client accounts and a wide range of pooled investment vehicles. In particular, our Members are the management companies of UK-authorised funds (both UCITS and Non-UCITS) and are the appointed investment managers of funds domiciled offshore, including non-uk UCITS. Our response to the European Commission s Green Paper on the Future of VAT ( the Green Paper ) set out in the appendix to this letter, does not cover all the questions raised in the Green Paper; it is limited to the questions relevant to our industry. In particular, we note that the Commission s review of VAT and financial services should not be sidetracked as a result of the Green Paper and that the outcomes of the two must be consistent. If you wish to discuss in more detail any of the issues raised in the attachment, please feel free to call me on or me at slynam@investmentuk.org. Yours sincerely Stephen Lynam Head of Tax 65 Kings wa y Lo nd on W C2B 6TD Tel:+44(0) Fax:+44(0) w w w. i n v e s t m e n t u k. o r g Investment Management Association is a company limited by guarantee registered in England and Wales. Registered number Registered office as above.

2 Appendix IMA response to specific questions raised in the Green Paper on the Future of VAT Towards a simpler, more robust and efficient VAT system Q1. Do you think that the current VAT arrangements for intra-eu trade are suitable enough for the single market or are they an obstacle to maximising its benefits? Over the last decade, the VAT arrangements for the intra-eu supply of goods and services have moved to a model based on the taxation, for place of supply purposes, in the destination Member State rather than in the Member State of origin, which was the EU s original intention. We think that the costs and the strain on resources for both VAT registered businesses and local tax authorities would be too great if the origin system was to be re-adopted because a large amount of the framework that is in place would have to be amended to revert to a completely different basis of taxation. This would also come at a time of financial stress for business and fiscal authorities. The associated uncertainty for business during any transitional phase would also be unwelcome. We note also that the OECD, in their December 2010 Draft Guidelines on VAT/GST neutrality ( the Draft Guidelines ), remains strongly supportive of the destination principle, which it describes, correctly, as the international norm. 1 The OECD also points out in the Draft Guidelines that the origin principle runs counter to one of the core features of VAT: that as a tax on consumption, the revenue should accrue to the jurisdiction in which the consumption takes place, whereas under the origin principle these revenues are shared amongst jurisdictions where value is added. 2 However, we recognise that there is inconsistency in the application of the rules between Member States, which remains a key obstacle to a truly open market. Our Members are content with the current business to business ( B2B ) destination rules, which (broadly) achieve neutrality in international trade, and therefore should remain. The origin rule could encourage groups of companies to arrange themselves to provide services from countries with low taxation rates, which would distort competition. Moreover, if an origin basis of taxation were to be implemented within the EU, there would be a concern that most non-eu countries that operate a VAT or similar tax system do so using a destination model. Global businesses need to consider this issue on a basis broader than the EU, and there is a distinct advantage in having global agreement since this will impact systems and resource costs. An origin based model would result only in improvement over the destination model if there were true harmonisation of VAT rates and exemptions, and we think it is wholly unrealistic to expect this. As the Green Paper itself illustrates, the current arrangements are full of shortcomings, but absent substantial progress on harmonisation (within and beyond the EU) of rates, practices and legal interpretation they are probably as good as can reasonably be expected. If B2B rules are to change then the only sensible course would be to have some guarantee of consistency going forward combined with simplification. 1 OECD International VAT/GST Guidelines Draft Guidelines on Neutrality Invitation for Comments December 2010, page 5. 2 Ibid, page 6.

3 The reverse charge for intra-ec supplies fits a need and is relatively simple for business to operate (especially since 1/1/10), however there are three important points that should be looked at urgently. We suggest that: (i) (ii) (iii) The date of payment is adopted as the time of supply since the date of performance can be difficult to establish, as it is often not possible for the recipient of a supply from overseas to determine when services supplied by a third party have been completed. There should not be disproportionate penalties for failure to account for the reverse charge where this causes no significant loss of revenue. The requirement to file sales lists for Cross border services subject to the reverse charge in the EU serves no useful purpose and consideration should be given to the abolition of this requirement. On a point of detail, we would prefer that the date of payment is used as the time of supply (subject to any major distortion) since it is not always possible for the recipient of a supply to know when services provided by a third party are complete. We would not support a reverse charge on domestic B2B transactions, which would be costly to implement and to administer, and could easily result in a loss of revenue to Member States in the short term, which would be greater than the current loss of tax on frauds that it seeks to eliminate. Q3. Do you think that the current VAT rules for public authorities and holding companies are acceptable, particularly in terms of tax neutrality, and if not, why not? We will comment only in respect of holding companies. The Polysar Investments Netherlands, C-60/90 case established that a mere holding company, which does not involve itself in the management of the undertakings in which it invests, is not a taxable person for the purposes of VAT, and therefore has no right to deduct tax under Article 168 of the VAT Directive 2006/112/EC. However, not all holding companies act in this way, and may therefore have an economic activity. We believe that it is important to provide clarity in this area in order to maintain the principle of neutrality. Q6. Which of the current VAT exemptions should no longer be kept? Please explain why you consider them problematic. Are there any exemptions which should be kept and, if so, why? VAT is, of course, a tax on consumption and, from an economic point of view, it needs to be acknowledged that any exemption distorts that outcome and runs counter to this principle. However, there are sound broader policy issues behind some exemptions, and in the context of the investment management industry, we would welcome a clear restatement of the social reasons for the exemption for special investment funds, in accordance with the decision in Abbey National Plc and Inscape Investment Fund v HM Commissioners of Revenue and Customs (C-169/04). Any fresh review as a result of the Green Paper should take into account that there is currently a Commission review of VAT and financial services in progress. Any further change as a result of the Green Paper is likely to result in further instability and substantial additional costs being incurred by industry. Although we do not yet know the outcome of the current review of financial services, there should be a presumption against continuous radical change unless there are powerful arguments to the contrary. Note that, at this stage

4 of the review, there does not appear to be any desire to challenge the principle of the exemption for special investment funds. The Commission is, of course, also consulting on its proposals to implement additional taxation on the financial sector in the form of a financial transactions tax (FTT) and a financial activities tax (FAT). Any further review arising out of the Green Paper needs to take into account both the current VAT review and the consultation on an FTT and an FAT. Q9. What do you consider to be the main problems with the right of deduction? & Q10. What changes would you like to see to improve the neutrality and fairness of the rules on deduction of input VAT? There is a great deal of inconsistency between Member States concerning the right to deduct input VAT, in particular with regard to the partial exemption. There is a need to eliminate that inconsistency. In some States, the conditions for deduction are very onerous and it is quite common for tax payers to simply forego recovery because the costs involved in establishing the right to recover outweigh amount of the tax potentially recoverable. The practice of the Member States varies significantly in regard to the attribution of input tax, some allowing direct attribution to taxable and exempt supplies to the maximum extent possible before the application of a pro rata to the residual element, and others insisting on the application of the pro rata to all supplies, which can significantly restrict recovery. There are also variations in the extent to which special methods to produce a fairer attribution of input tax are allowed to be negotiated with the tax authorities. A major concern is the inconsistency of evidence required to support the right to deduction. Member States have different requirements with regard to the information that must be included on an invoice and this issue can be compounded by the need to comply with the rules in more than one country when sending invoices cross-border. We recognise that there is a trade-off between flexibility and harmonisation. It is important that greater harmonisation does not prejudice the right of individual Member States to agree customised partial exemption methods with individual companies in the light of the precise facts and business models. Even when the tax can be recovered, significant timing differences between the right to deduct and when the payment is made can break the principle of tax neutrality, to the benefit of late-payers, as the right to deduct arises when the correct invoice is received. It may be that some of the worst problems may be solved by the new centralised system for cross-border VAT refunds, but if this does not solve the problems then further work may be required. Q11. What are the main problems with the current VAT rules for international services, in terms of competition and tax neutrality or other factors? Currently, EU-based businesses that are partly exempt B2B service providers are at a competitive disadvantage to providers established in non-eu locations due to the additional burden of VAT. To minimise this distortion, the VAT playing field needs to be extended by way of guiding principles from the OECD in the area of VAT on intangible services and agreements between the EU and Third Countries.

5 Some degree of mitigation would be achieved following the introduction of cross border VAT grouping and/or cost sharing arrangements. Within the EU, one of the major problems is the creation of VAT obligations in another country, due to reverse charge rules, and the differing interpretation of these rules in different Member States. For example, in the Netherlands, the reverse charge simplification for the recipient of cross-border property specific services is available only where the recipient is resident in the Netherlands; it is not sufficient that it be VAT-registered there. We acknowledge that differing interpretations of the rules can give rise to cross-border tax planning by business, as well as generating additional costs. But overall this lack of consistency is an additional burden on business and we believe that business would be prepared to forego the planning opportunities if the additional costs generated elsewhere could be eliminated. Planning opportunities on one side and additional costs on the other are both distortive to business decisions and run counter to the principle of neutrality. In practice, the biggest problem arises from different approaches to the force of attraction rules and the lack of clarity as to when they apply in different Member States. In addition to potentially inconsistent treatment across the EU (which will still be possible even after the new Implementing Regulation comes into force), the force of attraction principle itself leads to significant difficulties for businesses where the commercial accounting treatment and VAT accounting requirements do not align, and often leads to impractical and confusing results. Q13. Which, if any, provisions of EU VAT law should be laid down in a Council regulation instead of a directive? None. The current system allows for a robust challenge process and it is important that this be maintained. Q14. Do you consider that implementing rules should be laid down in a Commission decision? No. There needs to be full scrutiny of any proposed change in VAT law. We do not believe that greater discretion should be given to the Commission. We are particularly concerned by the suggestion in the Green Paper that the EU may press for the ability to issue decisions on the basis of majority voting. The consequent reduction of an individual Member States influence on VAT policy-making would need to be borne in mind. Q15. If this is not achievable, might guidance on new EU VAT legislation be useful even if it is not legally binding on the Member States? Do you see any disadvantages to issuing such guidance? & Q16. More broadly, what should be done to improve the legislative process, its transparency and the role of stakeholders in the process, from the initial phase (drafting the proposal) to the final phase (national implementation)? In principle we would support guidance, but it is essential that this results in a consistent application between Member States. If guidance is issued, there should be a clear drafting framework that aims to minimise the scope for misinterpretation. Otherwise, there is a danger that the guidance itself could be misinterpreted or applied in an inconsistent way, and this could have the perverse effect of increasing rather than decreasing distortions in competition.

6 In respect of the broader legislative process, IMA would support a formal role for the European investment management industry in the formulation of tax policy and legislation throughout the policy/legislative cycle. Q18. Do you think that the current procedure for granting individual derogations is satisfactory and, if not, how could it be improved? Derogations should stay and should be allowed for simplifications. There should always be explicit time limits, after which the derogation is reviewed/withdrawn. Q21. What are the main problems you have experienced with the current rules on VAT obligations? While the rules are, in principle, simple, there are many differences of interpretation across the Member States and some draconian penalties for getting things wrong (which are disproportionate to the error). This can result in significant additional costs and burdens on business. The rules need to be harmonised and any penalties should be proportionate. The requirement for VAT registrations in multiple EU jurisdictions often gives rise to the need to engage local external VAT advisors who understand the local rules. This represents an additional cost of doing business in these countries. Q28. Do you think that the current VAT rules create difficulties for intra-company or intra-group cross-border transactions? How can these difficulties be solved? The current rules do create difficulties. There is a lack of consistency between Member States and cross-border transactions are complicated by needing to know the domestic rules for the supplier and customer. These can generate substantial VAT costs for the financial services sector. A supplier should be able to rely on the domestic rules in the place of supply. However the biggest problem lies not in the area of intra-group cross-border transactions but intra-company. In respect of intra-group, we would welcome cross-border VAT grouping for simplification. The Commission's stance regarding restriction of VAT grouping to the fixed establishment in a Member State, rather than the entire taxable person (i.e. including foreign establishments), is extremely unhelpful. The implementation of cost-sharing across all Member States could also alleviate some of the current issues and should be encouraged in any case. The cost-sharing exemption rules should be explained and clarified by the Commission and then implemented on a consistent basis in all Member States, since there are wide variations in practical application causing distortion of competition at present. The Member States that have so far failed to implement this mandatory exemption at all should be urged to do so as soon as possible. Wider grouping plus cost-sharing should be the goal.

Stéphane Buydens VAT Policy Advisory Consumption Taxes Unit OECD 2, rue André Pascal Paris France. 24 September 2012

Stéphane Buydens VAT Policy Advisory Consumption Taxes Unit OECD 2, rue André Pascal 75775 Paris France 24 September 2012 Comments on OECD International VAT/GST Guidelines Draft Commentary on the International