Malta Institute of Taxation Professional Certificate in Taxation 2016/2017

THEME FOUR 4. (a) The VAT Act brings within the scope of Malta VAT Supplies made by a taxable person acting as such. Examine the concept of a taxable person for VAT purposes. (b) The rules in the Third Schedule to the VAT Act establish where a transaction takes place for VAT purposes, and consequently where that transaction is taxed: illustrate how these rules distinguish between the different categories of transactions, and identify the criteria that are relevant for the purposes of determining whether or not those transactions are to be treated as taking place in Malta Malta Institute of Taxation Professional Certificate in Taxation 2016/2017 Matthew Booker 419192(M) 28/04/17

(a) The VAT Act brings within the scope of Malta VAT Supplies made by a taxable person acting as such. Examine the concept of a taxable person for VAT purposes. The nature of any sales transaction requires the existence of at least two parties, a seller and a consumer. VAT is a taxed charged on consumption and it is the final consumer who ultimately suffers the tax burden. Having said this, VAT legislation generally burdens the seller of the goods/services as the primary responsible party for collection and payment of VAT. The VAT Act 1 provides specific guidance and further defines a seller of goods/services through the term taxable person. Being given the status of a taxable person therefore means that that party is responsible for charging, collecting and finally paying VAT to the tax authorities as well as filing a VAT return to document all of those activities. 2 Article 4(a) of the VAT Act provides that: there shall be charged, levied and collected on account of the Government a value added tax on every supply of goods or of services that takes place in Malta made on or after 1 January 1999 for consideration by a taxable person acting as such. The VAT Act, 3 which basis itself on the EU VAT Directive 4 defines a taxable person as a person who carries on an economic activity, whatever the purpose or result of that activity. In order to get an in depth understanding of the concept of a taxable person in VAT law, this definition can be further broken down into smaller definable segments. In accordance with the definition of person assigned to it in the VAT Act 5, we understand that this may include a physical person, a body of persons, a public authority and any entity capable of carrying on an economic activity. In practice, 1 VAT Act, Chapter 406 LoM 2 H van Arendonk, S Jansen, R van der Paart VAT in an EU and International Perspective, (IBFD 2011) 3 Article 5(1), VAT Act, Chapter 406 LoM 4 Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax 5 Article 2, VAT Act, Chapter 406 LoM

however a taxable person is in general a business, sole trader or professional. 6 The VAT Act 7 also provides a definition of what constitutes economic activity and refers to an activity carried on by a person, other than an employee acting as such and consisting one of a number of activities. 8 In recent EU case C- 263/15 9, the Hungarian Tax Directorate refused the right to deduct VAT claimed by the applicants on the grounds that the planned activity was not an economic activity and therefore they could not be classified as taxable persons. The CJEU heard that it was not certain that the applicants had begun operating on the date they claimed the right to deduct VAT. It subsequently held however in referring to previous cases, 10 that: a person who has the intention.of commencing independently an economic activity within the meaning of Article 9 of Directive 2006/112 and incurs the first investment expenditure for those purposes must be regarded as a taxable person. It is interesting to note that, in case C- 223/03, 11 the Court stated that the scope of the term economic activity is very wide, and that the term is to be objective in character, in the sense that the activity is considered per se and without regard to its purpose or results. In the opinion of the Advocate General in case C- 6 https://ec.europa.eu/taxation_customs/business/vat/eu- vat- rules- topic/taxable- persons- under- eu- vat- rules_en Last Accessed: 20/04/17 7 Article 5(2), VAT Act, Chapter 406 LoM 8 a) any trade or business; b) any profession or vocation and the provision of any personal services (excl. employment); c) the exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis; d) the provision by a club, association or organisation (for a subscription or other consideration) of the facilities or advantages available to its members; e) the admission, for a consideration, of persons to any premises. 9 Lajvér Meliorációs Nonprofit Kft vs (NAV), Case C- 263/15 10 Gabalfrisa and Others, C- 110/98; and Breitsohl, Case C- 400/98 11 University of Huddersfield Higher Education Corporation vs Commissioners of Customs & Excise, Case C- 223/03

32/03, 12 it was stated that the fact that the whole enterprise is loss- making does not affect the right to deduct input tax. 13 After examining who is to be considered a taxable person for VAT purposes, one must also understand who is considered a non- taxable person. The VAT Act unfortunately does not give a helpful definition in this respect, in that it simply defines a non- taxable person as person who is not a taxable person. Article 5 of the VAT Act however does specify some specific types of person who s activities would not fall within the definition of economic activities and therefore who would not by inference be considered as taxable persons. Generally, private individuals acting as such will not be considered to be carrying out an economic activity and will therefore not be classed as taxable persons. However, it should be noted that some exceptions do exist such as when a private individual sells a means of transport which qualifies as new in terms of Article 5(4) to another person in the EU these are generally considered non- taxable natural persons. Another type of non- taxable natural persons are employees. Whilst these may, by virtue of the work they do, be prima facie seen to be carrying out an economic activity, in reality they are not acting independently and are in fact solely acting in their capacity as employees. As a result the activity is not deemed to appertain to them but rather to their employer. On the other hand, persons who carry out business activities independently will likely fall within the definition of a taxable person. In Case C- 355/06 the Court held that a natural person carrying out all work in the name and on behalf of a company that is a taxable person pursuant to a contract of employment binding him to that company of which he is also the sole shareholder, the sole manager and the sole member of staff, is not himself a taxable person In case C- 235/85 the Court explained that the definition of taxable person excludes all persons who are bound to an employer by a contract of employment or similar legal tie, as this would make them dependent on their employer. Interestingly, it referred to the profession of bailiffs and notaries, who, whilst subject to the disciplinary control of public authorities, still carry out their activities on their own account and on their own responsibility, and the fact their that their remuneration is determined by law is not sufficient to constitute a 12 I/S Fini H vs Skatteministeriet, Case C- 32/03 13 A. Schenk, V. Thuronyi, C. Wei, Value Added Tax, Cambridge University Press (2015)

similar tie to that of an employment contract. As a result it was found that these do fall within the definition of taxable persons. 14 Furthermore, it should be noted that non- taxable persons can also be legal persons. Article 5(3) of the VAT Act generally provides that the activities of a public authority acting in the exercise of the functions assigned to it by law are not deemed to be economic activities. In the recent case C- 520/14, 15 the CJEU referred to the definition of taxable person in Article 9(1) of the VAT Directive and held that a regional or local authority which provides a service for the transport of schoolchildren under conditions does not carry out an economic activity and is not therefore a taxable person. There are however some exceptions to this rule, as in the case of public authorities who carry out economic activities, since by treating them as non- taxable persons, this would have an effect of significantly distorting competition in the market. Additionally, the First Schedule to the VAT Act provides a list of public authorities which are considered as taxable persons, together with a list of certain specified activities which would still fall within the definition of taxable person even though they are carried out by a public authority. Certain specific types of entities whose main activities consist of controlling other entities do not generally fall within the definition of taxable persons. In Case C- 142/99, 16 the ECJ recognized that it has consistently held that a holding company whose sole purpose is to acquire holdings in other undertakings, without involving itself directly or indirectly in the management of those undertakings does not have the status of taxable person. However in case C- 8/03, 17 the Court ruled that open- ended investment companies (SICAVs) which have as their sole object the collective investment in transferable securities of capital raised from the public are to be considered taxable persons for VAT purposes. It can be seen therefore that the definition given to taxable person under EU and Maltese VAT law has a broad scope but does at the same time specifically exclude certain specific types of person. What is key to note however is that once a 14 Commission of the European Communities v Kingdom of the Netherlands, Case C- 235/85 15 Gemeente Borsele vs Staatssecretaris van Financiën, Case C- 520/14 16 Floridienne SA,Berginvest SA and Belgian State, Case C- 142/99, 17 Banque Bruxelles Lambert SA (BBL) vs État belge, Case C- 8/03

taxable person is classified as such, that person is not necessarily subject to VAT in all the transactions carried out by that person. Article 4 imposes VAT obligations on a taxable person qua taxable person. Ergo the person must fall within the definition as examined above, but must also be acting in his capacity as a taxable person in order to be subject to VAT law.

(b) The rules in the Third Schedule to the VAT Act establish where a transaction takes place for VAT purposes, and consequently where that transaction is taxed: illustrate how these rules distinguish between the different categories of transactions, and identify the criteria that are relevant for the purposes of determining whether or not those transactions are to be treated as taking place in Malta As mentioned previously, VAT is a tax on consumption, but equally it is also a territorial tax. As a result, the VAT Act provides for a number of rules which are to be applied in order to determine the place of supply of a transaction for VAT purposes. Therefore, the scope of these rules is to shift VAT obligations onto the place of consumption. Previously we examined the charging provision in Article 4(a) of the VAT Act which charges to tax every supply of goods or services that takes place in Malta made on or after 1 January 1999 for consideration by a taxable person acting as such. Therefore for supplies to be chargeable to VAT in Malta, they must take place in Malta. Therefore from the charging provision we understand that VAT is imposed on supplies of goods as well as on supplies of services. The 2 nd Schedule to the VAT Act defines a supply of goods as a transfer of the right to dispose of tangible property as owner, the jus abutendi. A supply of services is simply defined as a supply that is not a supply of goods. In order to determine the place of supply, the VAT Act 18 provides a general rule for the place of supply of goods and outlines three situations: (a) a supply of goods that are not transported takes place where the goods are at the time when they are placed at the disposal of the person acquiring those goods; (b) a supply of goods that are transported takes place where the goods are at the time when the transport of those goods begins; (c) when the transport of goods begins outside the Community and ends in a Member State the supply of those goods by the importer and any subsequent supply up to the acquisition of those goods takes place in the Member State where they are imported. 18 Item 1, Third Schedule, VAT Act, Chapter 406 LoM

The first two situations consider intra- community transactions, ergo movements of goods by a taxable person to another Member State within the European Union (EU). Whereas the last situation considers the movement of goods from outside the EU and into a EU Member State, which for VAT purposes would be referred to as an import. Therefore, an essential element in determining whether and which intra- community place of supply rules apply is whether the supply has taken place with or without transport. For this purpose, transport will be deemed to have occurred when there a business dispatches or transports its movable tangible property to another EU country. 19 Naturally, these general rules are however subject to a number of exceptions. One exception is made for goods which are installed or assembled and in this case the supply is deemed to take place where the goods are installed or assembled. Another exception to the general rule is made for goods supplied on board ships, aircraft or trains. Supplies of such goods during the part of a transport of passengers effected in the Community is deemed to take place at the point of departure of the transport of passengers. Further exceptions include what are known as distance sales as well as supplies of gas which the author believes to be outside the scope of this paper as they warrant a separate discussion in themselves. 20 The VAT Act continues to provide for place of supply rules for services also and establishes general rules for supplies of services to: a) Taxable persons (B2B services) the place of supply of services to a taxable person is where that person has established his business. However if those services are provided to a fixed establishment of the taxable person located in another place, the place of supply is where that fixed establishment is located. Where there is neither a place of establishment nor a fixed establishment, the place of supply is where the taxable person receiving the services has his permanent address or usually resides. b) Non- taxable persons (B2C services) - the place of supply of services to a 19 http://ec.europa.eu/taxation_customs/business/vat/eu- vat- rules- topic/taxable- transactions_en Last Accessed: 20/04/17 20 Items 2,3,4,5, Third Schedule, VAT Act, Chapter 406 LoM

non- taxable person is where the supplier has established his business. However if those services are provided from a fixed establishment of the supplier located in another place, the place of supply is where that fixed establishment is located. Where there is neither a place of establishment nor a fixed establishment, the place of supply is where the supplier of the services has his permanent address or usually resides. As was the case for supplies of goods, place of supply rules for services are also subject to a number of exceptions which can be split up into groups; the first of which apply in all cases and the second of which only apply to supplies of services to non- taxable persons. With regard to the first group, exceptions include the supply of passenger transport which is deemed to take place where the transport takes place, calculated proportionately to the distances covered. In addition, the place of short- term hiring of a means of transport is deemed to be the place where the means of transport is put in the hands of the customer. 21 Another exception is made for the supply of services which are connected with immovable property which is deemed to take place where the immovable is located 22 this provision therefore makes an exception in order to stress the importance to the lex situs and place of consumption principle. It is also a very wide exception and includes almost all services which have some connection with immovable property. In Case C- 155/12 23 the Court stated that a large number of services are connected in one way or another with immovable property, however it is also necessary that the supply of services should relate to the immovable property itself. In Case C- 530/09 24 the Court held that only supplies of services which have a sufficiently direct connection with immovable property can be covered. The court stated that the mere fact that a fair or exhibition stand must (on temporary basis), be installed on immovable property, or inside such property, is insufficient to establish a sufficient connection. The final exception within this group, is for supplies of services in respect to cultural, artistic, sporting, scientific, educational, entertainment or similar events and their ancillary services. For the admission into these events supplied to 21 Items 5 and 8, Third Schedule, VAT Act, Chapter 406 LoM 22 ibid. item 4 23 Minister Finansów v RR Donnelley Global Turnkey Solutions Poland sp. z o.o., Case C- 155/12 24 Inter- Mark Group sp. z o.o. sp. komandytowa v Minister Finansów, Case C- 530/09

taxable persons, the place of supply is deemed to be where the events actually take place. The place of supply for the services themselves supplied to non- taxable persons is also where those activities take place. 25 With regard to the second group of services, those specific only to non- taxable persons, the first exception is made for services rendered to a non- taxable person by an intermediary acting in the name and on behalf of another person is deemed to be the place where the underlying transaction is supplied. 26 Another exception is that relating to supplies of the transport of goods. Supplies of the transport of goods to non- taxable persons intra- Community are deemed to take place at the place of departure. With regard to transport of goods other than intra- Community but still made to non- taxable persons, the place of supply is deemed to be the place where the transport takes place, calculated in proportion to the distances covered. 27 Further exceptions to the general rule within this group include ancillary transport activities and valuation of a work on movable tangible property as well as for telecommunications, broadcasting and electronic services amongst others. 28 It has been seen therefore that the VAT Act sets out general rules as well as a number of exceptions for the determination of the place of supply to adhere to the principle of the lex situs in order to allocate VAT obligations to the country of consumption. In addition to these rules however the VAT Act incorporates another important provision to this end. Item 12 of the Third Schedule provides that in order to prevent double- taxation, or distortion of competition, the VAT Commissioner may change the place of supply of any or all of those services, if situated within Malta, as being situated outside the Community if the effective use and enjoyment of the services takes place outside the Community and vice versa. This therefore is a very influential provision, which gives the Commissioner a lot of power and discretion and its application should not be taken lightly. 25 Item 6, Third Schedule, VAT Act, Chapter 406 LoM 26 Ibid. Item 3 27 Ibid. Item 5(2) 28 Third Schedule, VAT Act, Chapter 406 LoM