Consultation on Review of existing VAT legislation on public bodies and tax exemptions in the public interest

Consultation on Review of existing VAT legislation on public bodies and tax exemptions in the public interest Brussels,25 April 2014 1. Introduction RESPONSE TO CONSULTATION Ref: 2014/AD/P6639 Identification number EC register 4817795559-48 By e-mail to TAXUD-C1-PUBLICSECTOR-REGISTERED@ec.europa.eu PEARLE*-Live Performance Europe welcomes the opportunity to present its comments on the consultation of the European Commission on a Review of existing VAT legislation on public bodies an tax exemptions in the public interest. Pearle* represents through its 47 members associations more than 5,000 theatres, theatre production companies, orchestras and music ensembles, opera houses, ballet and dance companies, festivals, producers, comedy, variété, circus and other organisations within the performing arts sector across Europe. It concerns both private and public bodies in the live performance sector. Pearle* is recognised by the European Commission, DG Employment as the European employers association for the live performance, represented in the European sectoral social dialogue committee. In May 2011 Pearle* responded to the consultation of the European Commission on the Future of VAT Towards a simpler, more robust and efficient VAT system (COM (2010)695 final). Note was taken of the Communication on the future of VAT of December 2011, and the initiatives of the European Commission after the publication of the Communication, such as the publication of two economic studies in 2011 and 2013 and a conference in Italy in April 2013. Several of the issues addressed in the response of Pearle to the Green paper are still valid in relation to the questions raised in the present consultation paper and can be accessed from the website of Pearle* as follows http://www.pearle.ws/en/positionpapers/detail/54. 1

In 2012 an internal survey was conducted amongst Pearle members with a view to understand persistent (and/or new) problems in relation to taxation, including VAT. The main findings of the survey and study were discussed at the general assembly meeting of members in Brussels in November 2012, with following conclusions: A Reform of VAT directive should keep in mind: The persisting need for exemptions and reduced rates for the highly labor intensive live performance sector in the light of the goals of the EU to foster the cultural heritage of Europe (art. 167 TFEU and art. 3 (3) TEU) The fact, that due to their local nature, reduced rates for live performances are no obstacle to the internal market The need for automatic exemption of cultural entities exempted in their MS of origin, also for the supply of performances to other MS The possibility for cultural entities, or at least freelance performers (in the meaning of having a small company as a self-employed person see Matthias Hoffman case C-144/00 ECJ), to choose between a reduced VAT rate and a complete exemption 2. Identification of the stakeholder You are included in one of the following groups: Multinational enterprise Large company Small and medium sized enterprise (SMEs) National Association X European Association Non-Governmental organisation (NGO) Tax advisor or tax practitioner Citizen Academic Public body Others. Please specify Name of your organisation/ entity/ company Pearle*-Live Performance Europe, Performing Arts Employers Associations league Europe Country of domicile Belgium... Brief description of your activity or your sector Pearle* represents through its 47 members associations more than 5,000 theatres, theatre production companies, orchestras and music ensembles, opera houses, ballet and dance companies, festivals, producers, comedy, variété, circus and other organisations within the performing arts sector across Europe. It concerns both private and public bodies in the live performance sector. Pearle* is recognised by the European Commission, DG Employment as the European employers association for the live performance, represented in the European sectoral social dialogue committee Please note: The contributions will be published on the website of DG TAXUD. Without publication their content will not be taken into account. If the contributor objects to the publication of his personal data on the ground that such publication would harm his or her legitimate interests the contribution may be published in anonymous form (see also point 8. of this document). 2

Do you confirm your agreement to have your response to the consultation published along with other responses? X Yes No Do you agree to the publication of your personal data? X Yes No 3. Response to the questions Q1: General evaluation of the current rules (see point 3): - What is your evaluation of the current VAT regime as regards the public sector (including special rules for public bodies, Article 13, and tax exemptions in the public interest, Article 132-134 of the VAT Directive)? - What are in your opinion the main problems of the current rules? - Are there any distortions of competition (output and input side)? If so, how and in which sector do they occur? - Is the complexity of the current rules and the lack of harmonisation causing problems? Please give specific examples. - What is their impact on compliance costs? - Are the problems identified only of a national nature or do they constitute an obstacle to the smooth functioning of the Internal Market? - If you are an entrepreneur how do the current rules affect your business? Response to Q1 General remarks 1. The issue of competition (point 3.3.). According to EU competition law, the Commission states in recital (6) of the draft Regulation GBER II that cultural institutions and projects whose activities are covered by Article 107(1) of the Treaty do not typically give rise to any significant distortion of competition. In mentioning the dual nature of culture, the Commission recognizes that cultural services do not only contribute to wealth and employment but also serve as a vehicle of identities, values and meanings that mirror and shape our society. It is therefore a specificity of cultural services that they cannot be assessed as other goods on the market. In order to decide which aid is compatible with the common market, the Commission assesses whether a public service compensation affects or threatens to affect the intra-community trade. In the Communication on the application of the European Union State aid rules to compensation granted for the provision of services of general economic interest (2012/ C8/02) which is part of the 3

Almunia package, it is concluded in Article 40 that several activities have a purely local character and thus do not affect trade between Member States. In addition it is reminded that in the cultural sector there are thousands of micro, small and mediums sized organisations, so the size of their activities is not as such that it will impact the internal market. Whereas there is mentioning in studies of possible forms of competition, or distortion of competition, between private and public bodies, this is an analysis which does not correspond with the particular functioning of the sector, as both public and private- organisations work alongside each other, and create a multiplicator effect. A strong public sector will therefore also result in a strong private sector. With regard to problems of the current rules, difficulties are mainly reported in relation to interpretation of VAT rules and on operational answers from tax administrations. 2. The context of the VAT rules and the EU VAT regime. Pearle* notes that Member States have implemented the VAT rules, following from article 13 and article 132 letter n), in relation to the performing arts sector, in different ways. Indeed, the EU VAT regime provides a framework for Member States, which allows to implement EU directives according to tax systems and structure of public finances. In the case of the performing arts, differences between Member States are resulting from a mix of factors, such as: historic developments, mix of organisations considered as offering cultural services in the public interest and the diversity of cultures and cultural policy in the Member States. A change to provisions in the EU regime on public bodies and those exempt, in particular with regard to the question on those qualifying to fall under the exemption rules, should obviously seek to be compatible with the subsidiarity principle on culture. Whereas the focus of this consultation is on the public bodies, it should be underlined that other areas in VAT legislation are of importance to the sector and have an impact on the way it is operating, such as on the reduced VAT rates for certain cultural services (article 98, 7 and 8 of the VAT Directive) and the place of supply of services (Council Directive 2008/8/EC). When addressing issues in relation to public bodies, the above should therefore also be taken into account. It is in this direction that Pearle is seeking for solutions which would allow for the sector to better function and in this way also contribute to the goals of EU formulated in the Lisbon strategy. 3. Neutrality of tax system. As Pearle* already explained in its response of 30 May 2011 to the Green paper on the future of VAT, artistic decisions are usually prevailing above economic decisions in a performing arts organisation. In addition, it concerns a highly labour-intensive sector, which means that there is an important level of investment in terms of creation process, reseach and development, and in particular human resources. If already it is possible, it takes a long period before a production can reach break even. 4

Furthermore, in the context of the VAT directive Art 98 point 7 admission to shows the effects of a mere increase of the VAT rate for tickets on the sector such as happened in the Netherlands in 2010 and in Spain in 2013, demonstrate clearly that higher rates and had a substantial negative impact on number of tickets sold, productions and performances sold and therefore also employment and production, leading to a situation that it did not generate the income that was hoped for by the public authorities. 4. Need for an EU framework which allows for a level playing field for all. Pearle* is of the opinion that the EU can provide further clarity to guide Member States in the interpretation of Article 13 allowing for qualifying organisations to have the option to choose between different systems: tax exemption or zero or low VAT rate. This would allow for organisations with a very little amount of cross-border activities, taxable activities or outsourced services to continue working under the status of tax exemption (for example when under a certain threshhold of taxable activities). Organisations which do have a more substantial amount of taxable or cross-border activities could choose to continue working under a Tax exempt status or operate under a low VAT rate. In the case of cross-border activities, tax exempt or non tax exempt organisations should be able to obtain an EU VAT number, in order to facilitate cooperation and to sell services abroad. Especially for tax exempt organisations this would improve substantially its work and it would reduce administrative problems happening at present. In addition, an EU wide low VAT rate would also stimulate cross-border activities and create a possibility to optimise costs. Specific remarks 5. Transactions and services in the performing arts sector in the internal market. For the purpose of activities in the EU internal market, the sector would welcome further clarification to the VAT legislation, which would ease the functioning of the sector and provide better guidance to the Member States. Rather than seeking a clarification on the definition(s) or explanation of what is understood by a public body at a European level, it can be considered to shift the focus on the activity that is undertaken. In an EU context, the principle of reciprocity can therefore be introduced. For example if in one Member State an organis ation is tax exempt and undertakes activities in another Member State, it will be automatically also be exempted in the country where it performs cross-border activities. 6. Provision of cultural services and exemption of public bodies Legal uncertainty and therefore complexity derives from different applicable rules in relation to services rendered by tax exempt organisations. In cross-border situations, live performance organisations delivering a service in another Member State are often subject to the interpretation of the tax office in the country concerned (sometimes even with variations inside the country, such as it happens between the regions in Germany). 5

Pearle is of the opinion that organisations should themselves be able to evaluate what framework best applies to their activity: - Small organisations may wish to prefer opting for a tax exemption, for example activities which are normally taxable can be exempt if a condition is met that the amount of (normal) taxable activities remains under a certain threshold - Organisations of which the activities are normally tax exempt may wish to choose to be subject of a low VAT rate for cultural services as it may facilitate and make activities of coproduction, cooperation or outsourcing function better and as it can stimulate cross-border activities. Other remarks 7. Reduced rates, article 98 - Admission to shows, theatres, etcetera (7) and - supply of services by writers, composers and performing artists (8) Given the labour intense nature of the sector, it is essential for performing arts organisations for the EU to continue offering to Member States the possibility of reduced VAT rates regardless the type of organisation. This in combination with the option to choose for exemption for cultural services for public bodies. Q2: Distortion of competition clause: - Do you think the distortion of competition clause pursuant to the second subparagraph of Article 13 (1) of the VAT Directive and the existing case law from the Court of Justice of the European Union in this respect have been efficient enough in preventing distortions of competition between public and private providers on the output side? - Does the national legislation of your country provide for a legal mechanism according to which a private entrepreneur who is experiencing unfair competition from a public sector body could formally raise this issue with the tax authorities or the courts? Response to question 2 - Do you think the distortion of competition clause pursuant to the second subparagraph of Article 13 (1) of the VAT Directive and the existing case law from the Court of Justice of the European Union in this respect have been efficient enough in preventing distortions of competition between public and private providers on the output side? The studies conducted by Copenhagen Economics describe the issue of distortion of competition in public sectors such at it may be the case for large entities in wasste disposal or postal sectors. In the performing arts sector there are no such entities of a size comparable to public bodies such as the ones studied. On the contrary, the sector is characterised by entities of the size of SMEs (public and private). Should there be a change of Article 13, the issue of distortion of competition will have to be evaluated on the basis of the impact such change may have on the entire sector. Private an public entities work alongside and with each other in such way that, what could be a distortion of competition in one particular sector, this is not considered to be the case in the performing arts sector. 6

Pearle is of the opinion that the second subpar of Art 13 (1) : However, when they 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. to which the Commission is referring in the context of distortion of competition, as a condition for a non-taxable person to be regarded as taxable person, does not work for the performing arts. In the view of Pearle third subpar of Art 13 (1), In any event, bodies governed by public law shall be regarded as taxable persons in respect of the activities listed in Annex I, provided that those activities are not carried out on such a small scale as to be negligible makes more sense as it is not related to a condition of distortion of competition. Performing arts organisations seek to balance their choice to be regarded as taxable person, for other arguments which are equally valid for public authorities today. A better financial management of a public entity, including means that result in a better financial management such as outsourcing or through coproductions and cooperation. It is a fair request of public authorities to ask for public bodies such as in the performing arts sector to evaluate the financially most beneficial model, often based on level of labour intense type of organisation, mixed organisations of labour intense operations and activities with important production costs, or organisations with mostly production costs and low human resources costs. Leaving performing arts organisations the option to choose the taxable model they wish to operate under, balanced against the administrative costs and its related human resources to handle the administration, shall lead to a better functioning of the sector and financial management under the best economic model for each of the organisations. - Does the national legislation of your country provide for a legal mechanism according to which a private entrepreneur who is experiencing unfair competition from a public sector body could formally raise this issue with the tax authorities or the courts? No answer Q3: Reform measures (see point 5): - What are your views on the different reform options or reform measures mentioned in this document (including a possible sectorial reform); do you have a preference for any particular option and any particular variant mentioned in relation to the different options and why? - Is there any option which should be excluded and why? - Do you have any additional ideas or proposals? Response to question 3 Pearle* believes that there is room for improvement to VAT legislation which would support the sector. in the different reform options proposed, for the performing arts sector, the EU should provide for the widest possible framework for Member States. The options described in the consultation paper may perhaps be an answer to respond to the needs of one or more particular sectors, however, for the 7

performing arts sector none of the options proposed are addressing the needs shared by the sector across the EU. Option 1 full taxation model, model 1 taxation dependent on consideration: this option would not leave an option to performing arts organisations to choose whether to apply tax exemption or reduced VAT rate. In addition it could also affect cultural services which are now qualified under services of general interest. Option 1 full taxation model, model 2 taxation independent of consideration: this option would go against the understanding of the specifity of cultural services as contributing to society. Option 1 full taxation model model 1 variant 1 subject to standard VAT rate : this option would be highly detrimental for the sector. Conclusions can be drawn from Member States where public authorities decided to increase the rate on tickets to performances that the impact on the sector in terms of income and employment had a negative effect. It woud be expecdted that full taxation on cultural services would have even a more important impact in terms of turnover and employment. Option 1 full taxation model model 1 variant 1 subject to reduced VAT rate : even with a reduced rate organisations would not have the option to choose whether to apply tax exemption or not. This is a request clearly expressed amongst the Pearle membership. Option 2 refund system: (variant 1 and 2) : in the case of cultural services a main question in such model concerns the administrative burdens that go with a refund or input VAT. For small organisations, by which the performing arts sector is characterised, the desire to remain under a VAT exemption status is preferred (for reasons of administrative costs being higher than the benefits arising from a not VAT exempted status) above the option to operate within such system. It should be left to the Member States should they wish to continue or set up a refund system. Option 3 : deletion of Article 13 while keeping the tax exemptions in the public interest: equal treatment of public and private sector entities. Article 13 defines the type of bodies being regarding as taxable persons and the acticvities they are engaged in. Given the great variation between Member States on definitions of those bodies governed by public law, it would be very difficult to propose a deletion of Article 13, in particular as Article 132 letter n) describes the exemptions for certain activities in the public interest. A modification to article 13 could be based on Art132 n) which refers to cultural services by bodies governed by public law or other cultural bodies recognised by the Member state concerned. This would improve the legal certainty. Option 4: sectorial reform : in the studies conducted and with regard to the sectors mentioned the focus here would not be on cultural services. 8

Even in the case of a sectorial reform on cultural services, a major reform is not what Pearle members express to be necessary or wanted. Certain improvements or clarifications would be enough. Option 5 : selective amendments of the current rules : - Clearer structure of Article 13 e.g. deletion of Article 13 (2): this would not be desirable, as it would not allow for cultural services to be exempt and fall out of the scope of VAT. In addition as regards the place of supply rules following from Directive2008/8/EC has led to other issues, which would not be solved with a change to article 13 of the VAT directive. A clearer structure of Article 13 could be reached through a modification by adding in 1. States, regional and local government authorities and other bodies governed by public law or other bodies recognised by the Member State shall not be regarded as taxable persons in respect of the activities or transactions in which they engage as public authorities,. 2. Member States may regard activities, exempt under Articles 132, 135, 136, 371, 374 to 377, and Article 378(2), Article 379(2), or Articles 380 to 390, engaged in by bodies governed by public law or other bodies recognised by the Member State as activities in which those bodies engage as public authorities. Q4: Sectorial reform (see point 5.4.): In case a sectorial reform would be the way forward, Copenhagen Economics has modelled,the sectors postal services, broadcasting, waste management and sewage. Other sectors such as air traffic control, access to roads and parking areas could be potential candidates as well. - Do you agree with this list? - Which other sectors should in your view be selected for such a review? Why? Response to question 4 Pearle* is of the opinion that through some minor clarifications to the VAT legislation in relation to cultural services, as explained above, would benefit the performing arts sector in terms of legal certainty, providing a level playing field, sustaining a labour-intensive sector and supporting crossborder activities. Q5: Option to tax (see point 5.5.): - Do you think that an option to tax as regards tax exempt activities either by taxable persons or Member States should be considered? Response to question 5 In general Pearle is of the opinion that the EU should respect the subsidiarity of Member States regarding the option on tax exemption of public cultural services and/or on low VAT rates for cultural services. In this regard the EU provides a framework in which the Member States can apply their own rules. 9

A main criterion for the EU in legislating, is the question of cutting red tape through better regulation. In this regard an option to tax may lead to important additional administrative burdens and costs for organisations that now operate under a tax exempt system. For that reason, in certain EU Member States (such as in Belgium) public authorities have used article 13 (1) to exempt organisations when undertaking VAT liable activities under a certain threshhold. According to an internal survey conducted amongst Pearle* members in 2012, it was concluded that performing arts organisations which are exempt for the supply of cultural services would be in favour of a) having a choice between a reduced rate for their cultural services (to which extent art 98, Annex III is adjusted) or exemption. b) an automatic recognition of exempted entities, without the need for exemption certificates, as equally exempted in the country of destination c) a union wide choice for self-employed artists (see Matthias Hofmann case C-144/00 in relation to recognition of individual artists as cultural bodies ) to be either exempt from VAT or subject to a reduced VAT rate for the sale of their services To conclude: 1. For the performing arts sector, any change to the VAT legislation in relation to public bodies should be focusing on providing a framework that allows members states to offer an as wide possible choice for organisations to operate. 2. In this regard, should sectorial changes be necessary for other sectors which would need a different approach than a broad framework then that is desirable, as it should not jeopardise or impact sectors such as the performing arts sector which has mainly SME type of organisations and where the public and private sectors work well alongside each other. 3. Pearle calls upon the EU to provide a framework that allows organisations to opt for the best model according to the activities they undertake, as this will allow for better financial management, increased employment, more cooperation and exchanges. 10