VAT News - empcom.gov.in

Software industry 

The government has extended the preferential regime 

for the software industry until 31 December 2019 on the 

basis of Law No. 26,692, which was published in the Official 

Gazette of 18 August 2011. This regime has the effect 

that, under the condition that they satisfy at least two of 

the following requirements, businesses in the software 

industry are not confronted with withholding of VAT 1 by 

their customers and advance collection of VAT 2 by their 

suppliers. Those requirements are that the businesses: 

– have incurred expenditure in relation to research and 

development; 

– hold a quality certificate; or 

– export software. 

Nicolás Procopio 

Tax Consultant, Buenos Aires 

Barbados 

On 16 August 2011, the Minister of Finance and Economic 

Affairs delivered the Financial Statement and Budgetary 

Proposals, which, as regards VAT, contained the 

following measures that came into effect on 1 September 

2011. 

Sports equipment 

All sports equipment and gear, including vehicles, that are 

temporarily imported for the sole purpose of using them 

in the framework of games are zero rated. 

Personal computers 

All parts imported for the purpose of assembly of personal 

computers are exempt from VAT. 

Belgium 

Organizers of sports events 

By means of a public notice of 11 July 2011, the tax 

authorities have clarified the VAT aspects of organizing 

sports events, such as cycling races, cross-countries, 

athletics meetings, rallies, showjumping, etc., and related 

commercial activities. 

Apart from providing admission to the event, organizers 

of sports events are also commonly engaged in other activities 

for consideration in the framework of those events, 

such as provision of food and drink for on-the-spot consumption, 

advertising services, rentals of stalls to thirdparty 

vendors, merchandising, etc., which means that the 

organizers must be considered as taxable persons for VAT 

purposes, even if their main objective is to provide free 

admission to the event to the public. 

Organizers of sports events which qualify as non-profit 

organizations can rely on the exemption for services 

414 

Argentina 

VAT News 

closely linked to sport supplied to persons taking part in 

sport laid down by Art. 44(2)(3°) of the VAT Code and, 

in addition, on the exemption for incidental fund-raising 

activities laid down by Art. 44(2)(12°) of the VAT 

Code. The latter exemption only applies if it is not likely 

to cause distortion of competition and does not apply to 

transactions that form part of the main objectives of the 

organizer or to structural activities, including admission 

to games in the framework of football, basketball, volleyball, 

etc. competitions, and the commercial activities associated 

with those games. 

To the extent that they cannot rely on the exemptions for 

the services of non-profit sports organizations and fundraising 

activities, organizers of sports events must register 

if their annual turnover exceeds EUR 5,580. Even 

below that turnover threshold, “small businesses” must 

nonetheless: 

– apply for a VAT identification number; 

– issue invoices to taxable customers; and 

– file annual lists of supplies made to taxable customers. 

Organizers of sports events that normally take place only 

once a year who are not engaged in any other activities 

subject to VAT can apply for a simplified scheme under 

which they can file an annual VAT return by the end of 

the second calendar month following that in which the 

sports event ended. 

Public notice of 11 July 2011, No. ET 119,653, www. 

fisconet.be. 

Digital storage 

Taxable persons must store printed invoices received 

in either their original or in digital format. If printed 

invoices are stored in digital format, the conversion technology 

and process must guarantee the authenticity of 

the origin and the integrity of the contents of the invoices 

(Art. 60(3) of the VAT Code). 

One of the approved techniques for conversion of printed 

invoices into digital format is the technique of “secure 

image scanning”, which is based on the use of an advanced 

electronic signature or sealing algorithm as described in 

more detail in Notice AOIF No. 16 of 13 May 2008. 

1. Under the withholding system, suppliers of goods charge the full amount 

of the tax to their customers but, instead of paying the full amount of 

the tax to their suppliers, the customers (“withholding agents”) withhold 

(part of) that amount and remit it directly to the authorities; for 

example: where the value of the goods is 100 and the tax is 6%, the supplier 

charges to his customer 106. Where the withholding percentage is 

2, the customer remits 2 to the tax authorities and pays 104 to his supplier. 

The supplier’s tax liability is 6 minus the amount withheld by his 

customer (2) i.e. 4 net. 

2. Under the advance collection system, suppliers of goods (“advance 

collection agents”) charge to their customers not only the tax due on the 

transaction but also an additional amount of tax. The supplier remits the 

full amount of the tax, including the additional tax, to the authorities, and 

the customer is entitled to deduct that same amount. For example, where 

the value of the goods is 100, the tax is 6% and the collection percentage 

is 3, the supplier charges to his customer 106 + 3, which makes a total 

amount of 109. The supplier remits 9 to the authorities and the customer 

deducts the same amount. 

INTERNATIONAL VAT MONITOR NOVEMBER/DECEMBER 2011 © IBFD

Although the conversion techniques are legally limited to 

invoices, the tax authorities accept that, under the same 

conditions, taxable persons also convert other printed 

commercial documents into digital format and store 

them in that format. 

Parliamentary question No. 411 from Mr Uyttersprot of 6 

June 2011; answer of 2 August 2011, No. 037, 7. 

From our correspondent Patrick Wille 

The VAT House, Brussels 

BES Islands/Netherlands 

Decree No. DV2011/43-0M of 23 September 2011, which 

was published in the Official Gazette of 27 September 

2011, provides for changes to the expenditure tax in 

Bonaire, Saba and St Eustatius (BES Islands), which apply 

from 1 October 2011. 

Rates 

The standard tax rate for services is reduced from 8% to 

6% in Bonaire and from 6% to 4% in Saba and St Eustatius. 

The rate for insurance services is reduced from 9% to 

7% in Bonaire and from 7% to 5% in Saba and St Eustatius. 

In respect of insurance contracts concluded before 1 

October 2011, the new rates apply to premiums paid after 

30 September 2011. 

The rate for the importation of goods and for the supply 

of goods by manufacturers will continue to be 6% in Saba 

and St Eustatius and 8% in Bonaire. 

Deduction 

Deduction of the expenditure tax charged in the construction 

industry is extended to subcontracting and 

building on freehold land. 

Bosnia and Herzegovina 

Exemption for IPA-funded projects 

The VAT Law provides for an exemption for supplies of 

goods and services in the framework of projects financed 

by the Instrument for Pre-Accession Assistance (IPA). 

Detailed rules and procedures for the application of 

the exemption are laid down by the “Instruction on the 

exemption from customs duties and taxes under the 

IPA” 3 issued by the director of the indirect taxation authority 

(ITA). 

On 25 August 2011, the director of the ITA issued an 

amended Instruction that entered into force on 27 September 

2011. 4 Under the new Instruction, the Ministry 

of Finance and Treasury becomes more actively involved 

in the administrative procedure for granting the VAT 

exemption for projects funded by IPA funds. 

The first step of the procedure remains unchanged: contractors 

wishing to apply the exemption must apply for 

and obtain a certificate from the Delegation of the European 

Union confirming that the project will be financed 

© IBFD INTERNATIONAL VAT MONITOR NOVEMBER/DECEMBER 2011 


under the IPA agreement. From 27 September 2011, the 

contractor must then apply to the Ministry of Finance 

and Treasury for the VAT exemption and, if goods are to 

be imported in the framework of the project, the application 

must be accompanied by a specification of those 

goods. The specification must be signed by the relevant 

ministry5 or, if it is difficult to determine which ministry 

is directly involved, by the Ministry of Foreign Trade 

and Economic Relations, and must be accompanied by 

a statement issued by the final beneficiary of the project 

confirming that the goods are an essential element of the 

project. 

Finally, after having checked the documentation pertaining 

to the contract, the Ministry of Finance and Treasury 

issues an officially sealed exemption certificate. The Ministry 

is obliged to keep records of the exemptions granted, 

and to inform the ITA thereof on a monthly basis. 

From our correspondents Dinka Antić 

(Macroeconomic Unit) Governing Board of ITA 

and Jozo Piljić (ITA Taxpayers Service Department) 

Brazil 

Automobile industry 

Under Decree No. 7,567, which was published in the Official 

Gazette of 16 September 2011 and came into effect 

on the same date, 6 the rate of IPI 7 imposed on certain 

national and imported vehicles was increased by 30 percentage 

points (i.e., depending on the vehicle, the current 

rates, which range from 7% to 25%, were increased to rates 

ranging from 37% to 55%). However, the effect of the IPI 

rate increase has been neutralized for certain transactions 

involving resident automobile manufacturers, by granting 

them at the same time a rate reduction of 30 percentage 

points, provided that they meet the following requirements: 

– at least 65% of the manufactured vehicles must comprise 

domestically produced parts. The minimum 

percentage is calculated on the basis of a formula laid 

down by the Decree; 

– the automobile manufacturing company must invest 

at least 0.5% of its total turnover derived from supplies 

of goods and services (exclusive of taxes and 

social security contributions due on the supplies) in 

innovation and R&D activities in Brazil; and 

3. The new “Instruction on claiming exemption from customs duties and 

taxes under the Framework Agreement between Bosnia and Herzegovina, 

and the Commission of the European Union on the rules for cooperation 

to implement EU financial assistance to Bosnia and Herzegovina 

under the Instrument for Pre-Accession Assistance (IPA)” was published 

in Official Gazette No. 74/11 of 19 September 2011. 

4. Id. 

5. “Relevant Ministry” means the ministry that covers the field to which the 

project relates. 

6. The federal Constitution provides that amendments to IPI rates enter 

into force after expiry of a period of 90 days. Therefore, the new rates 

apply with effect from 15 December 2011. 

7. IPI (Imposto sobre produtos industrializados) is a federal tax levied at rates 

varying from 0% to 365% on the supply and importation of manufactured 

products; in principle, input IPI is deductible from IPI due. 

415


– the automobile manufacturing company must carry 

out, in Brazil, at least six of the following activities 

relating to at least 80% of its production: 

– assembly, final inspection, and testing; 

– stamping of the vehicles’ bodywork; 

– welding; 

– treating the vehicles with anti-corrosives, and 

painting them; 

– manufacturing of the engine; 

– manufacturing of the transmission; 

– assembly of steering, suspension, electric, 

braking, axis, propulsion, gearing, and transmission 

systems; 

– assembly of subframes and bodywork; 

– finishing the interior or body, including acoustic 

and thermal insulation, lining, and upholstery; 

and 

– production of auto bodies primarily from spare 

parts, stamped or formatted regionally. 

Under certain conditions, the reduction of the IPI rate 

also applies to the importation of listed vehicles by registered 

Brazilian automobile companies from: 

– countries that are members of Mercosur; 8 or 

– countries that have signed an automobile treaty with 

Brazil. 

In order to benefit from the reduction of the IPI rate, 

automobile companies must be licensed by the Ministry 

of Development, Industry and Foreign Trade. Automobile 

manufacturing companies in Brazil are automatically 

granted a temporary licence that is valid for a period of 

45 days. After expiry of that period, these companies will 

obtain a definitive licence. 

The Decree also provides for cancellation of the licences 

for companies that fail to comply with the requirements. 

Cancellation of the licence has the effect that the automobile 

company must apply the increased IPI rates and 

remit to the tax authorities the additional IPI, increased 

by penalties and late-payment interest. 

The increased IPI rates apply until December 2012 and 

mainly affect automobile dealers established in Brazil that 

do not manufacture vehicles within the country and sell 

imported vehicles. 

Bruno Carramaschi 

Lobo & de Rizzo Advogados, São Paulo 

416 

Bulgaria 

On 9 September 2011, the Minister of Finance announced 

the following amendments to the VAT Act, which are 

envisaged to come into effect on 1 January 2012. 

Registration threshold 

The Minister proposes to increase the VAT registration 

threshold from BGL 50,000 (EUR 25,600) to BGL 100,000 

(EUR 51,200) or possibly BGL 150,000 (EUR 76,800). 

Since Art. 287 of the VAT Directive provides that Bulgaria 

may apply a registration threshold of EUR 25,600, 

an increase of that threshold requires authorization by the 

EU Council. The government intends to apply for such 

an authorization. 

Reverse charge mechanism 

The Minister also intends to extend the scope of the 

reverse charge mechanism to the construction sector and 

to domestic supplies and the importation of fuel and agricultural 

products. 

Art. 194 of the VAT Directive enables Member States to 

apply the reverse charge mechanism to supplies made 

by taxable persons who are not established in their territory, 

and Art. 199 of the VAT Directive enables them to 

apply the reverse charge mechanism to, inter alia, supplies 

of construction work, including repair, cleaning, 

maintenance, alteration and demolition services in relation 

to immovable property, as well as the handing over of 

construction works, and supplies of immovable property 

under the option for taxation. Under Art. 201 of the VAT 

Directive, Member States may also designate the customer 

as being liable for payment of VAT on the importation of 

goods (taxation of imports under postponed accounting). 

However, extension of the reverse charge mechanism to 

domestic supplies, by resident taxable persons, of fuel and 

agricultural products requires authorization by the EU 

Council. The government intends to apply also for such 

an authorization. 

From our correspondent Lubka Tzenova 

Lawyer, Sofia 

Canada 

Harmonization of Quebec sales tax 

On 30 September 2011, the Canadian Prime Minister 

and the Premier of Quebec announced the conclusion 

of a Memorandum of Agreement (MOA) regarding the 

harmonization of the Quebec sales tax (QST) with the 

federal GST. 

Currently, Quebec’s provincial VAT (the QST), is similar 

(but not identical) to the federal GST and coexists with 

the federal GST as a separate system. Consistent with 

the harmonization agreements with other provinces, the 

MOA provides for harmonization of the tax bases and 

tax rules for QST and GST purposes going forward. This 

means that consumers will no longer have to pay the QST 

on the GST – eliminating “tax on tax”. 

Under the agreement, Quebec is required to make a 

number of changes to the QST in order to harmonize 

it with the GST. As part of this agreement, Quebec will 

continue, generally, to administer the QST and the GST/ 

8. Mercosur or Mercosul is an economic and political agreement among 

Argentina, Brazil, Paraguay and Uruguay for the purpose of promoting 

free trade and the fluid movement of goods, people, and currency. 

Bolivia, Chile, Colombia, Ecuador and Peru currently have the status of 

associate members and Venezuela signed a membership agreement in 

2006. 


HST in the province, and the QST will continue to be legislated 

by Quebec. 

Once fully implemented, this agreement will fully remove 

QST on key business inputs, such as telecommunications 

services and energy, and ensure that the sales tax treatment 

of financial services is consistent for QST and GST 

purposes. 

Costa Rica 

Educational and medical services 

On 27 September 2011, the Ministry of Finance submitted 

to the Congress a proposal to impose VAT on educational 

and medical services at a reduced rate of 2%. 

The Congress will follow a special legislative procedure, 

which would enable it to approve the proposal before the 

end of 2011. 

Curaçao 

Electronic filing 

In a press release, the tax authorities announced that, with 

effect from September 2011, VAT returns can be filed 

electronically. 

Cyprus 

Residential property 

With effect from 1 October 2011, the reduced rate of 

5% applies to the supply or construction of new residential 

properties to be used by the owner as his main and 

permanent place of residence. For the purposes of the 

reduced rate, the total floor surface of the property must 

not exceed 275 m 2 and the reduced rate applies only to 

200 m 2 . The remaining part of the property (between 200 

and 275 m 2 ) is subject to the standard rate of 15%. 

Homeowners who benefit from the reduced rate must 

stay in the dwelling for at least ten years; if they move out 

before expiry of the ten-year period, they must pay, to 

the tax authorities, the difference between the reduced 

and standard rates in proportion to the part of the tenyear 

period during which they will not use the property 

as their main residence. 

Transitional arrangements apply to agreements for the 

purchase or construction of new dwellings concluded 

before 1 October 2011. Those transactions are subject 

to the former regime, i.e. to the standard rate of 15%. 

However, where the property is transferred or construction 

of the property is completed on or after that date, 

the homeowner may apply for a compensatory subsidy, 

which depends on the type of dwelling (apartment or 

house) and its size. 

From our correspondent Yiannis Tsangaris 

VAT Service, Cyprus 

European Union 



Green Paper – Opinion European Parliament 

On 30 September 2011, the Rapporteur of the Committee 

on Economic and Monetary Affairs of the European Parliament 

presented his report (No. A7-0318/2011) on the 

Commission’s Green Paper on the future of the EU VAT 

system. 9 The report does not only include observations 

and recommendations of the Committee on Economic 

and Monetary Affairs, but also those of the Committees 

on Budgetary Control, on the Internal Market and Consumer 

Protection, and on Transport and Tourism. The 

report contains more than 48 recommendations to be included 

in a resolution of the European Parliament. 

On 13 of October 2011, the European Parliament adopted 

the proposed resolution. 

Infringement procedure – Zero rate – France 

See under France. 

Infringement procedure – Supervisory boards – 

Netherlands 

See under Netherlands. 

Invoicing – DG Taxud’s Explanatory Notes 

On 5 October 2011, Directorate General Taxud of the 

European Commission released Explanatory Notes to the 

Second Invoicing Directive, 10 which comes into effect on 

1 January 2013. 

By publishing the Explanatory Notes more than a year 

before the provisions of the Second Invoicing Directive 

must have been transposed into the national legislation 

of the Member States, DG Taxud hopes to ensure a more 

uniform transposition process and to enable businesses 

to adapt their invoicing systems to the new rules in time. 

The Explanatory Notes do not replace VAT Committee’s 

guidelines or the provisions of the VAT Implementing 

Regulation, 11 which have their own roles in the legislative 

process. 

The Explanatory Notes are not legally binding and are 

only practical and informal guidance on how EU law is 

to be applied on the basis of the views of DG Taxud. They 

do not represent the views of the Commission nor is the 

Commission bound by any of the views expressed therein. 

The Explanatory Notes are not comprehensive, i.e. they 

only relate to invoicing issues of which DG Taxud thought 

it is desirable to provide further explanation. The Explanatory 

Notes are a work in progress, i.e. these notes are not 

a final product but reflect DG Taxud’s current views. 

9. Green Paper of 1 December 2010, “On the future of VAT – Towards a 

simpler, more robust and efficient VAT system”, COM(2010) 695. 

10. Council Directive 2010/45/EU of 13 July 2010 amending Directive 

2006/112 on the common system of value added tax as regards the rules 

on invoicing, OJ L 189 of 22 July 2010. 

11. Council Implementing Regulation (EU) No. 282/2011 of 15 March 2011 

laying down implementing measures for Directive 2006/112/EC on the 

common system of value added tax, OJ L 77 of 23 March 2011. 

417


Taxation of the financial sector – EESC Opinion 

On 15 June 2011, the European Economic and Social 

Committee (EESC) delivered its Opinion on the “Communication 

from the Commission to the European Parliament, 

the Council, the European Economic and Social 

Committee and the Committee of the Regions on Taxation 

of the Financial Sector”. The most important points 

regarding VAT discussed in the Opinion are as follows. 

The EESC noted that, in the Commission’s view, the 

introduction of a new tax for the financial sector is underpinned, 

inter alia, by the VAT exemption for financial 

services under Directive 2006/112. 

The EESC emphasized that the primary reason for the 

exemption is the conceptual and practical difficulty in 

measuring the value related to financial services rendered 

by banks. This is especially the case for the traditional 

financial intermediation services of deposits and loans. 

The consideration for these services is in the form of the 

spread between the interest charged on loans and the 

interest paid on deposits. This margin is a global composite 

measure of intermediation services rendered by a 

bank to both depositors and borrowers, which cannot be 

readily measured for individual transactions for the purposes 

of applying VAT or any other form of transactionbased 

consumption tax. It has been difficult to develop 

a methodology for allocating this margin to individual 

transactions for VAT purposes under an invoice-based 

system. Similar issues arise in the taxation of insurance 

and other types of financial services, e.g. currency 

exchange and trading in securities. 

The VAT exemption for financial services is associated 

in the VAT legislation with no right – or limited right 

– to deduct input VAT. This means that financial institutions 

cannot fully deduct the VAT incurred on their 

expenses, which therefore is a pure cost. The amount of 

this “hidden VAT cost” may be significant, as outsourced 

services and intra-group transactions suffer a cascading 

effect of the tax. 

The Commission issued in 2007 a proposal for a Directive 

to reform the VAT treatment of financial services, which 

was based on three pillars, including the proposal for an 

option to tax financial services. The EESC believes that 

the debate on the financial sector tax should not be separated 

from the proposed VAT reform. 

The EESC is also concerned about the scope of the financial 

activities tax (FAT) and the cumulative burden of 

this tax with the amounts of irrecoverable VAT. Whilst 

it can be designed to specifically target economic rents 

and/or risk, the FAT falls on total profit and wages in its 

most extensive form (addition method FAT). The EESC 

believes that if a new tax were based on cash flows or on 

similar factors, the Commission should assess the merits 

of designing it in the scope of VAT, so as to alleviate the 

impact caused by irrecoverable VAT, hence avoiding an 

increase of the economic cost for all economic operators 

in Europe. 

OJ C 248/64 of 25 August 2011. 

418 

Questions from the European Parliament 

VAT rate for newspapers and magazines 

Question: 

“Various Member States apply reduced rates of VAT or 

even a zero rate to newspapers and magazines. This is very 

much bound up with the importance of news reporting to 

a democratic society. However, if the same information is 

supplied on websites or in a digital version, it is subject to 

VAT at the standard rate. It is argued that the difference 

is justified because of the distinction between supplying 

goods and rendering services. 

(1) In the light of the Digital Agenda and the development 

of a genuine knowledge-based economy, ought 

this distinction still to be maintained? 

(2) Would it not be desirable to eliminate the difference 

in treatment between offline and online news 

reporting, making digital newspapers and magazines 

likewise subject to a reduced rate of VAT, so that 

equal competition can be ensured between paper and 

digital news reporting? 

(3) As news reporting is an activity of general interest, 

ought it not to be eligible for exemption from VAT 

under Art. 132 of Directive 2006/112?” 

Answer of 20 January 2011: 

“As the Honourable Member correctly explains, pursuant 

to the EU VAT rates rules currently in force, a majority 

of Member States apply reduced rates of VAT to newspapers 

and magazines. Whereas zero rates and reduced rates 

below the allowed minimum of 5% constitute exceptions 

to the general rules on VAT rates, they form part of temporary 

derogations granted to certain Member States on 

the basis that such rates were in force before 1 January 

1991, and continue to be limited to the goods to which 

they were applied at the time. 

The difference in taxation of online publications (standard 

rated today) as compared to hard-copy publications 

(reduced rate possible today), is not only the result of the 

difference in their qualification for VAT purposes, but 

also in their nature and functionalities. The supply of 

online newspapers as well as of online periodicals qualify 

as electronically supplied services to which the reduced 

rates must not apply in accordance with the second subparagraph 

of Art. 98(2) of the VAT Directive. 

It should be underlined that – according to the EU VAT 

rules currently in force – any material wholly or predominantly 

devoted to advertising is explicitly excluded 

from the scope of the reduced rates. Considering the economic 

importance of online publications to the advertising 

industry with its more sophisticated technical possibilities 

(pop-ups etc.) in comparison to paper-printed 

products, a coherent application of reduced rates to 

online products would be more difficult from a practical 

perspective and thus burdensome for businesses and tax 

administrations. 


To take account of new socioeconomic realities and technological 

developments, which certainly give rise to new 

challenges in the VAT area, the Commission adopted a 

consultative Green Paper12 on 1 December 2010. This 

Green paper is also intended to initiate a general reflection 

on the level of future tax harmonization and will be 

the appropriate format for all stakeholders to be involved 

and give input. The reflection should thus include the 

concerns raised by the Honourable Member. 

Inclusion of supplies of newspapers and periodicals in the 

list of exemptions for certain activities in the public interest 

in Art. 132 of the VAT Directive is not conceivable at 

present. As already mentioned, VAT, as a general consumption 

tax, should, in principle, be levied on all taxable 

supplies of goods and services. Any extension of the scope 

of exempt transactions therefore represents an obstacle to 

a neutral and well-functioning VAT system. Moreover, it 

should be noted that, in falling under this exemption, the 

publishers would in principle no longer have the right to 

deduct the VAT paid at the preceding stage, notably on 

their investments, equipment and general expenses. VAT 

becomes in that case a cost factor and therefore a disincentive 

to investment and outsourcing of activities which 

could often more efficiently be performed by specialized 

providers.” 

E-010332/2010. 

Commission Work Programme for 2011 – VAT 

Question: 

“In its Work Programme for 2011, point 2.6 (tapping 

the potential of the Single Market for growth), the Commission 

says it ‘will also publish a Communication on 

a future VAT strategy targeting the weaknesses of the 

current system by modernizing and simplifying it, to 

reduce the administrative burden of VAT on companies’. 

VAT simplification is of fundamental importance to businesses, 

especially in these current times of crisis. 

(1) What concrete modifications to the current VAT 

system does the Commission intend to introduce in 

order to modernize and simplify it? 

(2) Since the new electronic system for requesting VAT 

returns [refunds] has proved problematic, what 

action can the Commission take to make it more 

efficient?” 


“(1) On 1 December 2010, the Commission adopted 

a Green Paper on the future of VAT 13 and thus 

launched a broad consultation process with all stakeholders 

on the evaluation of the current VAT system 

and the possible ways forward, in particular strengthening 

its coherence with the single market and its 

capacity as a revenue raiser, whilst reducing the costs 

of compliance and collection. The consultation will 

be open until 31 May 2011. Based on the outcome of 

the consultation, the Commission will work on establishing 

new VAT priorities and on the corresponding 

appropriate measures. They will be announced in 



the communication mentioned by the Honourable 

Member by the end of 2011. Since the public consultation 

has only just begun, the Commission cannot 

at this stage mention any concrete modifications to 

the current VAT system that it would intend to introduce 

to modernize and simplify it. 

(2) In order to safeguard the taxable person’s right to 

deduct VAT and to ensure a more efficient functioning 

of the refund mechanism, the Commission tabled 

on 15 July 2010 a proposal to postpone the deadline 

for the submission of VAT refund requests relating to 

2009 and to harmonize some features of the national 

VAT refund web portals in order to make them more 

interoperable and accessible for claimants. 14 On 

14 October 2010, the Council adopted a Directive 

concerning the deadline for the submission of refund 

applications 15 but there was no agreement on the 

second part of the Commission’s proposal.” 

E-010514/2010. 

Future Green Paper on revision of the VAT system 

Question: 

“On 23 November, the European Parliament approved 

a Commission proposal to extend to 31 December 2015 

the obligation for EU Member States to apply a minimum 

standard rate of VAT of 15%. Parliament considers that 

the VAT system to which the Member States are subject 

at present contains loopholes, which are being exploited 

for purposes of fraud. 

The Commission has announced its intention of starting 

work on a Green Paper on revision of the VAT system 

with a view to creating an environment more favourable 

to businesses and a simpler and sounder system for 

Member States. 

When does the Commission intend to submit this Green 

Paper? Does it intend to consider the specific issues of the 

standard rate of VAT and the amount of the rate? Does 

not the Commission consider that account should be 

taken of the wider issues of a new VAT strategy, including 

the field of application of VAT and exemptions from 

it? Will the Commission involve the European Parliament 

in these discussions?” 


“The Commission adopted the Green Paper on 1 December 

2010. 16 The Green Paper has been transmitted to the 

European Parliament. It covers numerous key issues, such 

as VAT rates, the scope of VAT and exemptions. Based 

12. European Commission’s Green Paper of 1 December 2010, “On the 

future of VAT – Towards a simpler, more robust and efficient VAT 

system”, COM(2010) 695. 

13. See note 12. 

14. Proposal for a Council Directive amending Directive 2008/9/EC laying 

down detailed rules for the refund of value added tax, provided for in 

Directive 2006/112, to taxable persons not established in the Member 

State of refund but established in another Member State, COM(2010) 

381 final). 

15. Council Directive 2010/66/EU, OJ L 275 of 20 October 2010. 


419


on the outcome of the public consultation launched by 

the Green Paper, the Commission will work on new VAT 

priorities. They will be presented in a Communication to 

the Council and the European Parliament before the end 

of 2011. The European Parliament will therefore be fully 

involved in these discussions.” 

E-010589/2010. 

European VAT refunds 

Question: 

“Since 1 January 2010, a new VAT refund procedure has 

applied, as laid down by Directive 2008/8 [read: Directive 

2008/9]. 17 The Commission has stated that it was confident 

that the remaining problems with the electronic 

system would be solved very soon. 

On 23 December 2010, the Netherlands government sent 

a letter to the House of Representatives of the Netherlands 

Parliament enclosing the half-yearly report of the 

Tax Department. It indicates that there are still serious 

problems with VAT refunds in Europe, involving both 

the Dutch Tax Department and the authorities in other 

Member States. These concern deficiencies and faults in 

the (EU) systems providing support. Faults have arisen 

in the Tax Department’s refund system, and the Tax 

Department indicates that there are also problems with 

the refund systems of other Member States. 

Consequently, Dutch businesses which have paid their 

VAT on time in the Netherlands have still not received 

refunds of the VAT they have paid abroad. Requests from 

abroad seem to have been processed only after very long 

delays. 

(1) Is the Commission aware of the problems which are 

still occurring with the new refund procedure, as a 

result of which businesses either do not receive their 

VAT refunds or only receive them after a very excessive 

delay? If so, can the Commission provide an 

overview of the Member States in which problems 

are occurring and state what steps the Commission 

has taken to solve them? 

(2) If not, will the Commission, as a matter of urgency, 

investigate the functioning of the new refund procedure, 

including in its investigation an analysis of 

deficiencies and faults in the refund systems, and will 

it make proposals for eliminating these problems? 

(3) Many businesses, particularly in the transport 

industry, have experienced liquidity problems due 

to the problems with the new refund system. What 

are the Member States doing to help them overcome 

these problems?” 

Answer of 10 February 2011: 

“The Commission is aware that two Member States, the 

Netherlands and Luxembourg, have been experiencing 

serious difficulties with their national VAT refund 

systems in receiving and processing applications from 

other Member States. The Commission sent a delegation 

to both Member States in order to monitor the situation 

and assist both administrations. To our knowledge, 

420 

the Dutch system is now functioning, and the authorities 

are currently clearing the backlog of claims. Whilst 

the Luxembourg system is still experiencing difficulties, 

the authorities expect to resolve these issues shortly and 

have started to clear the backlog on a manual basis. The 

Commission has not been informed of any other Member 

State which has experienced the same type of problems. 

The Commission would also like to remind the Honourable 

Member that interest is due on any payment 

which is made outside the deadlines specified in Directive 

2008/9. 18 

The Commission is aware that there remain additional 

difficulties in the functioning and interoperability of the 

web portals. It accordingly adopted a proposal on 16 July 

201019 not only to extend the deadline for the submission 

of claims relating to 2009 to 31 March 2011, but also to 

extend the use of the comitology procedure, enabling 

the Commission to adopt implementing measures to 

improve the functionality of the system. The Council 

adopted the first element of the proposal in October 2010 

(Directive 2010/6620 ), but there is not yet an agreement 

on the second element. The Hungarian Presidency has 

taken up this remaining element for discussion in the 

Council, which is, in the Commission’s view, necessary 

to make this scheme fully interoperable and business 

friendly. 

The Commission cannot comment on the steps Member 

States are taking to alleviate the liquidity difficulties of 

their own businesses. 

Currently there are no plans to extend the deadline of 31 

March 2011 for claims relating to periods in 2009 any 

further.” 

E-000801/2011. 

VAT rates and tax fraud: Effects on competition 

Question: 

“VAT rates are of fundamental importance for the proper 

functioning of the single market and for ensuring fair 

competition within it. Whilst the European Union has set 

maximum and minimum limits for VAT rates, Member 

States still have considerable leeway to set their own VAT 

rates. 

17. Council Directive 2008/9/EC of 12 February 2008 laying down detailed 

rules for the refund of value added tax, provided for in Directive 

2006/112/EC, to taxable persons not established in the Member State of 

refund but established in another Member State, OJ L 44 of 20 February 

2008. 


19. COM(2010) 381. 

20. Council Directive 2010/66/EU of 14 October 2010 amending Directive 

2008/9/EC laying down detailed rules for refund of value added tax, 

provided for in Directive 2006/112/EC, to taxable persons not established 

in the Member State of refund but established in another Member State, 

OJ L 275 of 20 October 2010. 


Derogations from minimum VAT rates are possible if a 

given Member State considers such a departure appropriate, 

for example for goods and services which are not in 

competition with goods and services from other Member 

States, or for basic essentials, such as food and medicine. 

There are also some sectors with 0% VAT, in the United 

Kingdom for example. 

Tax evasion is also an obstacle to the proper functioning 

of the internal market, as it creates unjustified flows 

of goods and places goods on the market at abnormally 

low prices. In order to combat this problem, Directive 

2008/117/EC proposes the following measures: 

(i) the deadline for information on intra-Community 

supplies of goods should be set at one month; 

(ii) intra-Community transactions should be declared 

for the same tax period by both the supplier and the 

purchaser or customer; 

(iii) the administrative burden should be reduced; and 

(iv) operators should be authorized to submit on 

a quarterly basis the recapitulative statements 

concerning intra-Community supplies of goods. 

Would the Commission say how many Member States 

have transposed Directive 2008/117 so far, and in what 

way? 

Would the Commission provide estimates and data on 

the impact of VAT evasion on the single market? 

Would the Commission provide estimates and data on 

the possible distortion of competition caused by differing 

VAT rates, in particular minimum and 0% rates?” 

Answer of 23 March 2011: 

“Directive 2008/11721 of 16 December 2009 amended Art. 

263 of Directive 2006/112. 

The new Art. 263 introduces the principle that, from 1 of 

January 2010, recapitulative statements for intra-Community 

supplies should be submitted on a monthly basis. 

Member States have, however, the option to allow taxable 

persons to submit recapitulative statements for each calendar 

quarter for intra-Community supplies of goods 

below a certain threshold and for services. 

According to Art. 2 of Directive 2008/117, the Commission 

must present, no later than 30 June 2011, a report 

assessing the impact of Art. 263 on Member States’ ability 

to fight against VAT frauds and the usefulness of the 

options. 

At the time being, according to the information collected 

by the Commission from Member States, 26 of them have 

transposed the Directive into their national legislation. 

The transposition in the remaining Member State will 

be only completed in June 2011. Due to the fact that not 

all Member States had implemented this legislation in 

time in their domestic VAT legislation and the fact that 

the Commission finds it more appropriate to present a 

complete report, this report should be published by the 

end of 2011. 



As regards data on the impact of VAT frauds on the single 

market, the Commission published in October 2010 a 

study carried out by a private consultant (Reckon) 22 

aimed to quantify and analyse the VAT gap in the EU 25 

Member States for each of the years in the period from 

2000 to 2006. 

The study provides estimates of the VAT gap which is the 

difference between the theoretical net VAT liability for 

the economy as a whole and the accrued VAT receipts. 

The VAT gap includes, among other things, fraud, legal 

avoidance, and unpaid VAT liability due to insolvencies, 

which means that the entire VAT gap is not due to fraud 

only. It has to be stressed that it was unachievable to fully 

quantify VAT fraud as one element of the VAT gap. 

According to this study, the overall VAT gap in the EU-25 

as a share of theoretical liability amounts to EUR 106.7 

billion in 2006. 

The Commission services envisage carrying out a followup 

study for the subsequent years in order to see the trend 

over the years in the different Member States. 

Apart from the ‘Study on reduced VAT applied to goods 

and services in the Member States of the EU’ (Executed 

by Copenhagen Economics on behalf of the Commission), 

23 the Commission cannot provide the Honourable 

Member with concrete data on possible distortions of 

competition due to differences in the VAT rates across 

Member States. 

Under the current VAT rules, Member States are obliged 

to apply a standard rate of at least 15% and may also 

apply one or two reduced rates, set no lower than 5%. 

The reduced rates must apply only to an exhaustive list. 

This list of the supplies eligible for a reduced VAT rate is 

the result of various compromises in the Council which 

are unavoidable as EU tax law has to be adopted by unanimity, 

whereas the rates outside this framework are derogations 

granted to certain Member States under specific 

conditions. Nonetheless, it should be noted that the 

current differences in the VAT rates generally do not 

cause significant disruptions in the internal market. This 

is mainly because of the existing rules and correction 

mechanisms governing the place where the VAT is due 

which, in cases of cross-border transaction in the European 

Union, require taxation at the rate applied in the 

Member State of destination of the goods or establishment 

of the customer. 

Finally, the Commission presented on 1 December 2010 

a Green paper on the future of VAT24 to launch a broad 

consultation process with all stakeholders on the evalu- 

21. Council Directive 2008/117/EC of 16 December 2008 amending Directive 

2006/112/EC on the common system of value added tax to combat 

tax evasion connected with intra-Community transactions, OJ L 14 of 20 

January 2009. 

22. The report is published on the Taxation and Customs Union Directorate 

General (DG Taxud) website: http://ec.europa.eu/taxation_customs/ 

common/publications/studies/index_en.htm. 

23. The study is available on the following link: http://ec.europa.eu/taxation_ 

customs/taxation/vat/how_vat_works/rates/index_en.htm. 


421


ation of the current VAT system and possible means for 

its improvement. The debate [consultation] will last until 

31 May 2011. Based on the outcome of the consultation, 

the Commission will work on establishing new VAT priorities 

and on the corresponding appropriate measures. 

They will be announced in the communication planned 

for the end of 2011.” 

E-001106/2011. 

Services of general interest performed at ports – 

Uniform application of VAT 

Question: 

“The Italian Competition and Market Authority was 

informed as long ago as 2001 that the rates charged by 

Tirrenia di Navigazione SpA were improper to the extent 

that they were higher than the rates laid down by the 

port authorities concerned for ‘port dues’ payable for the 

above services. 

Tirrenia stated that the amounts charged were as laid 

down by the port authorities, but with VAT added on 

(10% for passengers and 20% for cars carried with them), 

and that taxation in that form was in accordance with 

Presidential Decree No. 633/1972, as had been confirmed, 

moreover, by the Finance Ministry and the Naples VAT 

Office in notes dated 8 November 2000 and 26 October 

2000, respectively. 

Taking a different view, another shipping company maintained 

that port dues, as referred to in Art. 9(1)(6) of Presidential 

Decree No. 633/1972 and in the interpretation 

given in Art. 3(13) of Decree-Law 90/90, converted into 

Law 165/90, could not be subject to tax. 

Tirrenia is continuing to this day to charge VAT on the 

dues, whereas Moby SpA, for example, does not follow 

this practice. 

Bearing in mind that services of general interest performed 

at ports do not always conform to the principles 

of non-discrimination, proportionality, transparency, 

and user involvement: 

(1) Can the Commission say whether, assuming that 

the port services provided are invariably the same, 

the taxability of the abovementioned port dues is 

compatible with European legislation on VAT and 

respects the rights of all users? If the answer is no, 

what steps will the Commission take? 

(2) Which legal framework should apply to the taxation 

of services of general interest, given their specific 

nature?” 

Answer of 6 April 2011: 

“Port zone services are taxable, irrespective of the persons 

providing these services. Where those services are provided 

by bodies governed by public law referred to in Art. 

13(1) of the VAT Directive, these bodies must be regarded 

as taxable persons in accordance with Annex I(4) to the 

VAT Directive, provided that the activities concerned are 

not carried out on such a small scale as to be negligible. 

422 

In some circumstances, exemption [zero rate] may be 

applicable. This possibility for exemption [zero rating] is 

based on Art. 148(d) of the VAT Directive as regards the 

supply of services other than those referred to in point 

(c) of this Article. (Point (c) of Art. 148 of the VAT Directive 

refers to the supply, modification, repair, maintenance, 

chartering and hiring of the vessels referred to in 

point (a), and the supply, hiring, repair and maintenance 

of equipment, including fishing equipment, incorporated 

or used therein), to meet the direct needs of vessels used 

for navigation on the high seas and carrying passengers 

for reward or used for the purpose of commercial, industrial, 

or fishing activities, or for rescue or assistance at 

sea, or for inshore fishing, with the exception in the case 

of vessels used for inshore fishing, of ships’ provisions. 

As regards the Honourable Member’s question on the 

VAT treatment of port services provided by shipping 

companies Tirrenia and Moby SpA, the Commission 

does not have any information on the nature of these services 

and the status of these companies which could be 

used to answer this query. In particular, the assessment of 

the scale of the activities carried out by bodies governed 

by public law is a question of facts to be addressed by the 

Member State concerned. 

Finally, it is worth mentioning that the Commission is at 

present reflecting on a new VAT strategy on the future 

of VAT in its Green Paper “Towards a simpler, more 

robust and efficient VAT system”, 25 by which it launched 

a wide public consultation on how the EU VAT system 

can be strengthened and improved, to the benefit of citizens, 

businesses and Member States. The current system 

of exemptions, as well as the VAT treatment of public 

authorities is a part of this reflection.” 

E-001413/2011. 

Harmonization of VAT due dates 

Question: 

“Is the Commission aware that the differing VAT due 

dates across Member States often cause problems for 

small businesses? The differing VAT due dates across 

the European Union often place an extra administrative 

burden on small and medium-sized businesses. 

Is the Commission considering any legislation which 

could harmonize VAT due dates across the European 

Union?” 

Answer of 27 April 2011: 

“The chargeability of VAT in the European Union is regulated 

in Arts. 62 to 71 of the VAT Directive. 

As a general rule, VAT becomes chargeable when the 

goods or the services are supplied. Specific rules exist 

for the continuous supply of goods or services and the 

payment on account before the goods or services are supplied. 



Member States may, however, provide that VAT is 

chargeable either at the time the invoice is issued or at 

the time the payment is received. Consequently, Member 

States may apply different dates for the chargeability of 

VAT. 

As regards intra-Community supplies and acquisition 

of goods, VAT is due on the 15th day of the month following 

the supply, or on the date of issue of the invoice, 

if issued before. 

Some steps have been taken in order to harmonize and 

simplify the rules for all businesses, including small 

and medium-sized enterprises (SMEs) (see Directive 

2010/4526 ). Thus, from 1 January 2013, the time when 

an invoice needs to be issued for cross-border supplies of 

goods or services is set throughout the European Union, 

as a general rule, at the 15th day of the month following 

the supply. 

In this context, it is also important to draw the Honourable 

Member’s attention to the fact that, in December 

2010, the Commission adopted a Green Paper on the 

future of VAT, 27 by which it launched a public consultation 

on how the EU VAT system can be strengthened 

and improved, to the benefit of citizens, businesses and 

Member States. The topic of the VAT treatment of small 

businesses is specifically addressed in those reflections. 

The outcome of the public consultation will serve as a 

basis for the Commission’s reassessment of the current 

general rules of VAT as applicable in particular to small 

businesses.” 

E-002313/2011. 

VAT on public bodies 

Question: 

“What is the current situation with regard to the consideration 

at EU level of VAT rules covering public bodies 

and exemptions for certain activities in the public interest 

and subsidies?” 

Answer of 5 May 2011: 

“The review that the Commission mentioned in 2007 

remains on the Commission’s programme, although, 

since then, other priorities have intervened, notably the 

need to address fraud in the VAT system. It remains the 

intention to review the provisions in the VAT Directive 

on public bodies and the exemptions in the public interest. 

As a first step, the Commission has undertaken an indepth 

study on the topic. This study has been published 

on the Commission’s website and will pave the way for 

any possible future initiative in this area. 

Currently, a public consultation is taking place on the 

future of VAT (Green Paper28 ). Discussions as regards the 

VAT rules covering public bodies and exemptions in the 

public interest will take place in this context.” 

E-002684/2011. 



Application of the reverse charge mechanism for VAT 

Question: 

“On 10 February 2010, Parliament approved the Council 

Directive amending Directive 2006/112 as regards an 

optional and temporary application of the reverse charge 

mechanism in relation to supplies of certain goods and 

services susceptible to fraud. 

Although the VAT reverse charge mechanism is basically 

a positive measure, I see a problem with it. For example: A 

sells to B, B sells to C and C then sells to the end consumer 

or to a person who is not registered for VAT. A and B do 

not pay VAT because they are not the end sellers. Only 

C, who sells the finished product to the consumer, pays 

VAT. In fact, B does not pay VAT at any time, despite the 

fact that his main activity consists in buying at a lower 

price and deriving added value through reselling. 

Does the Commission not think that it would be wise to 

propose a scheme whereby B pays the Treasury VAT on 

the price difference? 

The scheme is beneficial in all aspects save one: no one 

is going to request reimbursement of VAT from the 

Treasury but if C is dishonest, then he will quite simply 

not pay the VAT due as the end seller. This being so, 

applying the VAT reverse charge mechanism will mean 

that the balance will not be negative because no-one will 

request reimbursement of VAT and, in my view, this 

scheme will be just as easy to run insofar as the price difference 

will come to light during tax inspections.” 

Answer of 20 May 2011: 

“First, it should be pointed out that the Directive, to 

which reference is made, 29 is only applicable in relation to 

the greenhouse gas emission allowances trading. Overall, 

these emission allowances are not destined for supply 

to private end consumers and the problems outlined in 

the question of the Honourable Member should in principle 

not occur in this context. Moreover, the system is 

entirely optional and the normal rules can continue to be 

applied when deemed necessary by the Member States. 

As the proposed scheme – whereby B pays the VAT on 

the price difference – corresponds with the normal VAT 

rules, there is no need for a new legislative initiative from 

the Commission in this field. 

On a more general level, the Commission is aware of 

the risks and possible side-effects that the application of 

the reverse charge mechanism might create. Although 

effective in combating carousel fraud because of the lack 

of effective payments from the buyer to the seller, it is 

indeed correct that the amount [collection] of VAT is no 

longer fractionated but entirely transferred towards the 


27. See note 12. The Green Paper was accompanied by Commission Staff 

Working Document No. SEC(2010) 1455 final. 


29. Council Directive 2010/23/EU of 16 March 2010 amending Directive 

2006/112, as regards an optional and temporary application of the 

reverse charge mechanism in relation to supplies of certain services 

susceptible to fraud, OJ L 72 of 20 March 2010. 

423


last taxable supplier and that, as a result, fraud could be 

shifted to the retail level. The application of the reverse 

charge mechanism as a means to combat fraud should 

therefore only be applied in a limited number of wellspecified 

cases. 

Furthermore, the Commission would like to recall that it 

adopted on 1 December 2010 a Green Paper on the future 

of VAT. 30 In this context, different options for preventing 

or combating VAT fraud are presented. A political decision 

on the options to be followed and on the practical 

way forward will have to be taken in this context.” 

E-003320/2011. 

424 

Finland 

Social welfare services 

The tax authorities have published an updated guidance 

(No. 604/40/2011) on the VAT treatment of social welfare 

services, in order to align the VAT aspects of those services 

with the provisions of the new law on private social 

welfare services (922/2011), which came into effect on 1 

October 2011. Consequently, from that date, private suppliers 

of childcare services can rely on the VAT exemption 

for those activities, even if they are not registered 

with the supervisory authorities. 

From our correspondent Harri Huikuri 

Deloitte & Touche Oy, Helsinki 

France 

Gifts of low value 

VAT incurred by taxable persons on the purchase of 

goods that they subsequently give away for free (or supply 

for a price far below the open-market value of the goods) 

is non-deductible, unless the free-of-charge supplied 

goods have a “low value”. 

Since 12 October 2005, the threshold for goods of low 

value has been set at a total VAT-inclusive value of EUR 

60 per beneficiary per year. The threshold was to be 

revised on 1 January 2011 and, then, every five years. 

By administrative guideline 3D-1-11 of 26 July 2011, the 

tax authorities have increased the threshold, with retrospective 

effect to 1 January 2011, to EUR 65 (VAT included) 

per beneficiary per year. 

From our correspondents Elvire Tardivon-Lorizon 

Grant Thornton Société d’Avocats 

and Xavier Casal, Cabinet d’Avocats Chastres et Associés 

Infringement procedure – Zero rate 

On 29 September 2011, the European Commission 

announced that it has brought before the Court of Justice 

of the European Union its dispute with the French government 

on the validity of the French rules on zero rating 

certain transactions involving vessels. 

The scope of the French zero rate for supplies relating to 

vessels goes beyond what is permitted by the VAT Directive 

because that rate applies to supplies of all vessels 

used for the transport of passengers and commercial 

activities, whereas it should be limited to vessels used for 

navigation on the high seas. 

In response to the Commission’s reasoned opinion of 18 

March 2010, 31 France has amended the General Tax Code 

with effect from 1 January 2011 by including the condition 

that the vessels in question must be used for navigation 

on the high seas but, subsequently, on 22 February 

2011, it has published an administrative interpretation 

under which the previous rules continue to apply. 

As the condition imposed in the amended law is not actually 

applied in France, the Commission decided to refer 

the issue to the ECJ. 

IP/11/1126 of 29 September 2011. 

Germany 

Intra-Community supplies 

On 26 September 2011, following the judgment of the 

Court of Justice of the European Union (ECJ) in the criminal 

proceedings against R32 and the subsequent decision of 

the Bundesfinanzhof (Federal Tax Court), No. V R 30/10, 

the Bundesministerium für Finanzen (Federal Ministry of 

Finance) amended the Umsatzsteuer-Anwendungserlass 

(VAT Implementing Regulations) as regards the conditions 

under which intra-Community supplies of goods 

are zero rated. 

In line with the ECJ’s judgment, the Umsatzsteuer- 

Anwendungserlass provides that intra-Community supplies 

of goods that fulfil the formal conditions for zero 

rating are nonetheless not zero rated if, at the time of 

supply, the supplier concealed the identity of the true 

purchaser in order to enable the latter to evade payment 

of VAT. The same policy also applies to all cases pending 

on that date. 

Cash accounting 

On 14 September 2011, the Bundesregierung (federal government) 

presented a proposal to set, with effect from 1 

January 2012, the annual turnover threshold below which 

entrepreneurs can account for VAT on the basis of cash 

receipts (Istbesteuerung) at EUR 500,000 on a permanent 

basis. In 2009, the threshold was temporarily set at EUR 

500,000 in all federal states for the period between 1 July 

2009 and 31 December 2011. Prior to 1 July 2009, the 

threshold was set at EUR 500,000 in five states and at EUR 

250,000 in the other states. 

The measure is aimed at improving the liquidity of small 

and medium-sized businesses. 


31. See International VAT Monitor 3 (2010), pp. 216-217. 

32. ECJ judgment of 7 December 2010 in the criminal proceedings against R, 

Case C-285/09. 


Samples 

On 31 August 2011, the Ministry of Finance adapted the 

Umsatzsteuer-Anwendungserlass (VAT Implementing 

Decree) to the ECJ’s judgment in EMI33 by adding the 

ECJ’s definition of samples, in respect of which input tax 

is fully deductible although their free-of-charge supply is 

not subject to VAT. In EMI, the ECJ defined a “sample” 

as a specimen of a product which is intended to promote 

the sales of that product and which allows the characteristics 

and qualities of that product to be assessed without 

resulting in final consumption, other than where final 

consumption is inherent in such promotional transactions. 

That term also includes specimens presented in a 

form available for sale, if distribution of the final products 

is necessary for potential buyers to assess their characteristics 

and qualities, and free distribution of the final 

products is primarily aimed at promoting sales. 

The new definition applies to all cases pending on that 

date. 

Hungary 

Refund of excess input VAT 

On 19 September 2011, the parliament adopted a special 

VAT refund procedure following the judgment of the 

European Court of Justice (ECJ) in the infringement procedure 

of the European Commission against Hungary. 34 

Between 27 September and 20 October 2011, taxable 

persons eligible for a refund of excess input VAT can 

apply for a refund by filing a separate application, even if 

they have not yet paid their suppliers. Alternatively, they 

may claim the refund, from 27 September 2011, through 

their regular VAT returns. The tax authorities must make 

the refund within 30 days or, if the refund exceeds HUF 1 

million, within 45 days. 

In addition, taxable persons may apply for revision of the 

tax penalties and late-payment interest imposed before 

27 September 2011 on account of non-compliance with 

the former prohibition to recover VAT relating to unpaid 

debts. 

The new legislation ensures that, with effect from 27 September 

2011, the repealed provisions are not applied to 

ongoing audits and pending procedures. 

Gabor Antal, Kinstellar, Budapest 

Standard rate 

On 16 September 2011, the Minster of National Economy 

presented in a press conference the main tax changes for 

2012, which have been included in the proposal for the 

Budget for 2012, as submitted to the Fiscal Council. 

One of the proposed amendments concerns an increase 

of the standard rate of VAT from 25% to 27%, with effect 

from 1 January 2012. 

Iceland 



On 27 September 2011, the parliament approved amendments 

to the VAT Act, which have come into force on 1 

November 2011. 

Electronic books and music 

The VAT rate on the supply of electronic books and 

music (without images), including the sale of printed 

notes, will be subject to the reduced VAT rate of 7% (currently 

subject to the standard VAT rate of 25.5%). 

Electronic services 

Service providers established abroad who supply services 

electronically to final consumers resident in Iceland must 

account for VAT. They are required to register for VAT 

purposes and charge VAT on such supplies, provided 

that the value of such services is equal to or exceeds ISK 1 

million in any 12-month period. 

Hjordis B. Gunnarsdottir, Deloitte, Kopavogur 

India 

Introduction of GST – Update 

The Empowered Committee of State Finance Ministers 

on GST is scheduled to meet on 14 October 2011 

to discuss various issues identified by the state governments 

in the framework of the introduction of state and 

Union GST. 

One of the main topics for discussion is the compensation 

that the state governments have sought from the 

central government on account of phasing out the central 

tales tax (CST). CST is imposed on transactions involving 

movement of goods from one state to another, and is 

not deductible. The rate of CST was reduced to 3% in the 

financial year 2007/08 and to 2% in 2008/09. Although 

the rate of CST was planned to be reduced to 0%, the final 

abolition of CST was postponed pending resolution of the 

compensation issue and in view of the fact that the introduction 

of GST has been postponed. 

Other topics for discussion concern the power of state 

governments to levy, in addition to GST, a cess in the 

event of natural calamities. The state governments have 

also been suggesting that they should have autonomy in 

matters of taxation and that they have concerns about the 

powers of the dispute settlement authority, which have 

been included in the proposal for amendment of the Con- 

33. ECJ judgment of 30 September 2010 in EMI Group Ltd v. The Commissioners 

for Her Majesty’s Revenue and Customs, Case C-581/08. 

34. By its judgment of 28 July 2011 in European Commission v. Republic of 

Hungary, Case C-274/10, the ECJ declared that, by requiring taxable 

persons to carry forward to the following tax period “excess input VAT” 

if they had not paid their supplier the full amount for the purchase in 

question, and to carry forward the excess more than once, Hungary has 

failed to fulfil its obligations under the VAT Directive. 

425


stitution. Issues relating to the taxation of textiles, tobacco 

products and sugar are also to be discussed. 

Finally, several state VAT departments apply a system of 

online payment of taxes, and the Committee will discuss 

the system of payment of GST. The state VAT departments 

would like all the banks to facilitate online payment 

of taxes and, depending on the discussion and consensus 

on the issue at the meeting, the matter will be taken up 

with the Central Bank. 

Study of EU VAT system 

The Members of the Empowered Committee of State 

Finance Ministers from about 20 states have made a 

ten-day tour through the European Union (France, Spain, 

Luxembourg and Belgium) to study various aspects of 

the EU VAT system, including its scope (definitions of 

taxable transactions, taxable persons, taxable amount, 

chargeable event, etc.), taxation of imports and intra- 

Community acquisitions, control of fraud, and various 

other administrative issues. 

Hiring-out of staff 

Specified categories of services are subject to service tax. 

One of those categories concerns “manpower recruitment 

and supply services”, which covers the services provided, 

directly or indirectly, by any person to any other person 

in the form of temporary or permanent recruitment or 

supply of staff, in any manner. 35 

In this context, the Ministry of Finance has clarified that 

those services also include the secondment of employees 

by a company in the public sector to one of the departments 

of the central government. In that case, the public 

company continued to pay the seconded employees’ salaries 

for which it was reimbursed by the department where 

the employees actually worked. The Ministry has clarified 

that, for the purposes of interpreting “manpower 

recruitment or supply services”, the scale of the activity 

or the presence or absence of the aim to make a profit are 

irrelevant. The same principles apply to the cross-border 

secondment of staff by Indian companies to their subsidiaries, 

joint ventures or other connected entities located 

abroad, and vice versa. 

From our correspondent Bhavna Doshi 

Bharat S Raut & Co., KPMG, Mumbai 

426 

Italy 

Standard rate 

With effect from 17 September 2011, the standard rate of 

VAT of 20% has been increased to 21%. 

Since the new rate entered into force on the day after 

publication of the measure in the Official Gazette, the 

Agenzia delle Entrate (Tax Agency) has clarified by means 

of a press release that, where, for technical reasons, suppliers 

were unable to adapt their invoicing software and 

cash registers within a day, they can adjust their invoices 

and cash receipts that are based on the VAT rate of 20% 

by issuing an additional invoice in accordance with Art. 

26(1) of the VAT Act, and remit the corresponding additional 

VAT to the tax authorities for the month of September 

2011. 

Law of 14 September 2011, No. 148, which was published 

in the Official Gazette of 16 September 2011; press release 

of 16 September 2011. 

From our correspondent Simonetta La Grutta 

Ernst & Young, Milan 

Korea (Rep.) 

On 7 September 2011, the Ministry of Strategy and 

Finance announced a list of proposed tax changes aimed 

at facilitating sustainable growth and job creation, promoting 

fair competition, and improving tax conditions. 

The proposed changes will mostly come into effect on 1 

January 2012, and are subject to review and approval by 

the National Assembly. As regards VAT, the proposal 

contains the following measures. 

Electric buses 

Electric buses used for public transport will be exempt 

from VAT. 

Taxis 

The special regime under which taxi drivers do not have 

to remit to the tax authorities 90% of the VAT on taxi 

fares will be extended by two years. 

Agricultural and fishery equipment 

The period of application of the reduced VAT rate to 

supplies of agricultural and fishery equipment will be 

extended by another three years. 

Diapers and milk powder 

The period of application of the VAT exemption for 

diapers and powder milk for babies and infants will be 

extended by three years. 

Latvia 

On 1 October 2011, various amendments to the VAT Law 

entered into force. The most important amendments are 

summarized below. 

New buildings 

Prior to 1 October 2011, only the first supply of “new 

buildings”, i.e. newly constructed or transformed (renovated, 

reconstructed or restored) buildings and other 

structures, was subject to VAT. From that date, every 

(subsequent) supply of “new buildings” as defined by the 

VAT Law is subject to VAT. 

35. Secs. 65(105)(k) and 65(68) of the Finance Act, 1994. 


Auctions 

Where a court bailiff sells a taxable person’s property at 

an auction, the taxable amount for that transaction for 

VAT purposes is determined on the basis of information 

provided by the taxable person to the bailiff prior to the 

announcement of the auction. From 1 October 2011, the 

VAT Law contains rules for determining the taxable value 

of the property where the taxable person has not provided 

the information to the bailiff, as required by the VAT 

Law. Those rules depend on the nature of the property. 

Where the property is movable or qualifies as a newly 

constructed “new building” or as “building land”, the 

taxable amount is the auction price. However, where the 

property qualifying as a “new building” is a transformed 

building (or a building in the process of being transformed), 

the taxable amount is the difference between 

the acquisition price of the existing building, as stated in 

the cadastre (land registry), and the auction price. 

Where the bailiff determines that the immovable property 

does not qualify as a new building or building land, 

the transaction will not be subject to VAT. 

Registration 

The tax authorities have the power to deregister a taxable 

person, after they have suspended the taxable person’s 

economic activity in accordance with the Law on Taxes 

and Duties. Deregistered persons must, within 20 days 

from the date on which the deregistration comes into 

effect, file a VAT return for the tax period in which their 

registration is annulled. 

Postal services 

The VAT exemption for postal services supplied by providers 

of the “universal postal services” has been broadened 

to include services relating to: 

– letters up to 2 kilograms; and 

– packages up to 10 kilograms. 

Until 1 October 2011, the exemption was limited to services 

relating to postal items up to 50 grams. 

Newspapers and periodicals 

The period of application of the reduced VAT rate of 12% 

to newspapers, magazines, bulletins and other periodicals, 

published not less than once per quarter and exceeding 

100 copies per issue, with the exception of materials of 

an erotic or pornographic nature and advertising materials, 

will continue to apply after 1 January 2012. 

The reduced VAT rate was envisaged to be abolished with 

effect from that date. 36 

Excess input VAT 

If the claim exceeds LVL 1,000, the tax authorities will 

refund excess input VAT not only in respect of inputs 

purchased for the purposes of transactions involving 

timber but, from 1 October 2011, also involving scrap 

materials, within 30 days after receipt of the VAT return 

for the relevant tax period. 



Cash accounting 

Instead of accounting for VAT at the time they make their 

supplies of goods and services or issue the related invoice, 

taxable persons whose taxable transactions did not exceed 

a value of LVL 70,000 in the preceding tax year or who, 

at the time they register for VAT purposes, do not expect 

to exceed that value in the current year, are entitled to 

account for VAT at the time they receive payment of the 

price from their customers, on the condition that they 

exercise their right to deduct input VAT at the time they 

pay their suppliers (not at the time they receive the related 

invoice). 37 

With effect from 1 January 2012, taxable persons active 

in the fishery sector can also account for VAT on a cash 

basis in respect of supplies of fresh, frozen or chilled fish 

and shellfish, even if their taxable transactions in the preceding 

year exceeded a value of LVL 70,000. However, the 

tax liability of this category of taxable persons can only 

be postponed by a maximum of six months from the date 

they issued the related invoice. 

Scrap materials 

From 1 October 2011, domestic supplies of specified 

scrap materials and related services are subject to the 

reverse charge mechanism, provided that: 

– the supplier and customer are taxable persons; and 

– the customer is licensed to purchase scrap materials 

in Latvia. 

In this context, “scrap materials” include, inter alia, 

certain ferrous and non-ferrous scrap, car wrecks, electrical 

and electronic waste, and lead acid batteries. The services 

relating to scrap materials include, inter alia, sorting, 

cutting, crushing and pressing of ferrous and non-ferrous 

scrap, extracting scrap from industrial waste, and 

dismantling metal frames of non-reusable buildings or 

other structures. 

From our correspondent Larisa Gerzova 

IBFD 

Luxembourg 

Suspensive regime 

On 28 July 2011, the parliament amended the VAT Act 

1979 to the effect of introducing a suspensive regime for 

supplies of goods under specific circumstances. Under 

this regime, supplies of metals, including silver and platinum 

(not gold), bulk chemicals and basic foodstuffs are 

zero rated, until the goods are released for consumption, 

either in Luxembourg or, following a zero-rated intra- 

Community supply or export, in another Member State 

or country outside the European Union. 

The regime is based on Art. 156 of the VAT Directive and, 

under the new Art. 56sexies of the VAT Act, applies to the 

following transactions: 

36. See International VAT Monitor 3 (2010), p. 221. 


427


(a) the supply and intra-Community acquisition of 

goods which are intended to be presented to customs 

and, where applicable, placed in temporary storage; 

(b) the supply and intra-Community acquisition of 

goods which are intended to be placed in a free zone 

or in a free warehouse; 

(c) the supply and intra-Community acquisition 

of goods which are intended to be placed under 

customs warehousing arrangements or inward-processing 

arrangements; 

(d) the supply, intra-Community acquisition and importation 

of goods which are intended to be placed 

under VAT warehousing arrangements; 

(e) the supply of services relating to supplies of goods 

referred to under (a) to (d); and 

(f) the supply of goods and the supply of services taking 

place in the areas referred to under (a) to (d), when 

the applicable regimes are maintained. 

The levying of VAT (as well as of customs and excise 

duties in cases other than those referred to under (d) is 

suspended for the period during which the goods remain 

under control of the customs (or tax) authorities. VAT 

(and duties) become chargeable at the time the goods are 

released for consumption and are due from the (taxable) 

person responsible for their release (Art. 56sexies(7) of 

the VAT Act). 

The regimes under (a) to (d) involve authorized warehousekeepers, 

who are vis-à-vis the VAT and customs 

authorities responsible for the correct application of 

the regime, and the destination of the goods stored and 

traded under the suspensive regimes. Those warehousekeepers 

can also act as tax representatives for their customers, 

if the latter are neither established nor registered 

for VAT in Luxembourg. A specific VAT identification 

number will be allocated to authorized warehousekeepers 

who declare, on behalf of their customers, the intra- 

Community acquisition, importation and supply of the 

goods placed under the suspensive regimes. 

The new legislation entered into effect on 1 October 2011. 

On 15 September 2011, the tax authorities published an 

administrative circular that provides further details of 

the objectives and functioning of the suspensive regimes. 

They are aimed at facilitating speculative transactions, 

reducing cash flow effects and encouraging storage of 

goods in Luxembourg. The tax authorities also claim that 

the suspensive regimes have the effect of reducing the risk 

of carousel fraud. 

From our correspondent Erwan Loquet 

BDO, Luxembourg 

Energy efficiency measures 

On 29 September 2011, the Minister of Finance proposed 

various measures aimed at improving the efficiency of the 

use of energy. As regards VAT, the Minister proposed to 

reduce the VAT rate for energy efficiency improvements 

to dwellings from 15% to 3%. 

428 

Macedonia 

The parliament has adopted two laws, amending the VAT 

Law, in its session of 28 September 2011. Both laws are 

published in Official Gazette No. 135 of 3 October 2011 

and entered into force on the eighth day following their 

official publication. 

Registration/deregistration 

The first amending law is aimed at accelerating the procedure 

for the tax authorities making decisions on applications 

for registration or deregistration for VAT. If the 

tax authorities have not made their decision within 15 

working days of the date of receipt of the application: 

– the applicant may request the director of the competent 

tax office for a decision; 

– if the director does not make the decision within 

five working days, the applicant may notify the 

State Administrative Inspectorate (SAI), which will 

request the director to make a decision within ten 

days and to notify the inspector of the decision; 

– where the director fails to make the latter decision 

in time, the SAI inspector must start, within three 

working days, a misdemeanour procedure against 

the director and set a new deadline of five working 

days; 

– where the director fails to make the decision before 

expiry of that deadline, the SAI will notify the public 

prosecutor of the issue; 

– where the SAI inspector fails to follow this procedure, 

the applicant can submit an objection to the 

SAI director within five working days, who must, 

within three working days, decide on the objection 

and, if necessary, start a misdemeanour procedure 

against the SAI inspector; and 

– as a last resort, the applicant may lodge a complaint 

with the public prosecutor or with the court following 

an urgent procedure. 

Reduced rate 

The second amending law has the effect of extending the 

list of goods and services that are subject to the reduced 

VAT rate of 5% to include: 

– raw oil for the production of food for human consumption; 

– the first sale of residential buildings and apartments 

in so far as they are used for residential purposes, 

within five years of the date of completion of the construction; 

this reduced rate applies from 1 January 

2012 until 31 December 2015; and 

– services of commercial tourist facilities (hotels, 

hostels, motels, etc.), such as board, and bed and 

breakfast. 

Antun Belamarik, Skopje 


Mexico 

State VAT 

On 8 September 2011, the government presented to the 

Congress the economic programme for 2012 (Propuesta 

de Programa Económico 2012). Under the proposed programme, 

the states (Entidades Federativas) are empowered 

to levy, in addition to the imposition of federal VAT 

by the federal tax authorities at the standard rate of 16%, a 

state VAT on domestic supplies at a maximum rate of 5%. 

Netherlands 

On 20 September 2011 (the third Tuesday in September), 

the Minister for Finance officially presented the Budget 

for 2012 to the parliament. As regards VAT, the most 

important measures contained in the Budget are summarized 

below. 

Intra-Community acquisitions 

Where, in the framework of intra-Community supplies of 

goods, the goods are delivered in a Member State where 

the customer is not established, the customer must be 

registered there in order to account for VAT on the intra- 

Community acquisition. In order to ensure that the customer 

complies with that obligation, Art. 41 of the VAT 

Directive contains a safety net provision under which 

the customer must account for VAT on the acquisition 

that is deemed to be made in the Member State where 

the customer is registered. As the Court of Justice of the 

European Union (ECJ) confirmed in X and Facet, 38 VAT 

due under the safety net provision is non-deductible. 

However, when the customer has accounted for VAT 

on the intra-Community acquisition of the goods in the 

Member State of arrival of the goods, the taxable amount 

for the safety net acquisition is reduced accordingly. In 

the framework of intra-Community triangular transactions, 

it frequently occurs that the “intermediate parties” 

must be registered in the final customer’s Member State 

in order to account for VAT on the intra-Community 

acquisition of goods there. 

In the framework of specific intra-Community triangular 

transactions involving three parties registered in three 

different Member States, the intermediate parties are considered 

to have effected the intra-Community acquisition 

of the goods in the final customer’s Member State but, 

under Art. 141 of the VAT Directive, that acquisition is 

not actually subject to VAT there. Where the intermediate 

party is established or registered in the Netherlands, 

it must account for VAT under the safety net provision 

because the simplification is based on the obligation for 

the intermediate party to show that the conditions for 

the simplification measures are fulfilled and to report the 

subsequent domestic supply in the customer’ Member 

State through its recapitulative statement. The safety net 

acquisitions are aimed at ensuring that the intermediate 

parties comply with those obligations. 



In response to complaints from businesses that they 

cannot immediately deduct the safety net VAT, the State 

Secretary for Finance has proposed to abolish, with effect 

from 1 January 2012, the intermediate party’s obligation 

to account for VAT on acquisitions of goods under the 

safety net provision in the framework of the simplified 

arrangements for intra-Community triangulation. 

Recapitulative statements 

For the purposes of combating tax evasion connected 

with intra-Community transactions, the quarterly recapitulative 

statements were, with effect from 1 January 

2010, replaced by monthly statements. 39 By means of the 

recapitulative statements, the tax authorities of the customer’s 

Member State are informed about the value of 

the good for which the customer must account for VAT 

on the intra-Community acquisition, and the services 

for which the customer must account for VAT under the 

reverse charge mechanism. However, under Art. 263(1a) 

of the VAT Directive, Member States were allowed to 

retain quarterly recapitulative statements in respect of 

suppliers whose intra-Community supplies of goods and 

B2B intra-Community services are less that EUR 50,000 

per quarter or, until 31 December 2011, less than EUR 

100,000 per quarter (Art. 263(1b)). 

The Netherlands has made use of the latter option and 

has not yet reduced the threshold of EUR 100,000 to EUR 

50,000 with effect from 1 January 2012. The State Secretary 

for Finance has decided to await the assessment 

report on the impact of the reduction of the reporting 

period on Member States’ ability to combat VAT fraud 

connected with intra-Community supplies of goods and 

services, as well as the usefulness of the options provided 

for in Art. 263(1a) to (1c) of the VAT Directive. Under 

Art. 2 of Directive 2008/117, the Commission was obliged 

to have presented that report on 30 June 2011 at the latest 

but it had still not yet complied with that legal obligation 

in October 2011. 

Second Chamber of Parliament, Proposal No. 33,004, 

Overige fiscale maatregelen 2012 (Other tax measures 

2012). 

Horses 

Member States may apply a reduced VAT to, inter alia, 

foodstuffs for human and animal consumption, and live 

animals [..] normally intended for use in the preparation 

of foodstuffs. However, under the VAT Act, the reduced 

rate applies to “cattle, sheep, goats, pigs and horses”, 

without the restriction that those animals must be normally 

intended for use in the preparation of foodstuffs. 

38. ECJ judgment of 22 April 2010 in X v. Staatssecretaris van Financiën and 

Fiscale eenheid Facet BV/Facet Trading BV v. Staatssecretaris van Financiën, 

Joined Cases C-536/08 and C-539/08. 

39. See Art. 263 of the VAT Directive, as amended by Council Directive 

2008/117/EC of 16 December 2008, amending Directive 2006/112/ 

EC on the common system of value added tax to combat tax evasion 

connected with intra-Community transactions, OJ L 14 of 20 January 

2009. 

429


Following the judgment of the ECJ in the infringement 

procedure of the Commission against the Netherlands40 that, by applying the reduced rate to all horses (including 

race horses), the Netherlands has violated its obligations 

under the VAT Directive, the State Secretary for Finance 

has proposed to limit, with effect from 1 January 2012, the 

scope of the reduced rate as regards live animals to horses 

normally intended for use in the preparation of foodstuffs, 

which means that, unlike the initial proposal of 

2006, the reduced rate continues to apply to cattle, sheep, 

goats and pigs, without the restriction that those animals 

must be intended for use in the preparation of foodstuffs. 

In this context, the Secretary for Finance relies on the 

ECJ’s observation that cattle, sheep, goats and pigs, 

regardless of their destination, can be subject to the 

reduced rate because those animals are normally intended 

to enter the human and animal food chain. 

Second Chamber of Parliament, Proposal No. 30,922. 

Invoicing rules 

On 5 September 2011, the State Secretary for Finance 

presented to the parliament the proposal to adapt the 

VAT invoicing rules to the provisions of the Second 

Invoicing Directive, 41 which must come into effect on 1 

January 2013. The amendments are limited because the 

tax authorities are already quite tolerant as regards electronic 

invoicing. 

The State Secretary for Finance will not make use of the 

option laid down by the new Art. 167a of the VAT Directive 

to require businesses that account for VAT on a 

cash basis to deduct input VAT on the same basis, i.e. at 

the time they pay their suppliers. 

Second Chamber of Parliament, Proposal No. 32,877. 

Infringement procedure – Supervisory boards 

On 29 September 2011, the European Commission 

announced that it had sent the Netherlands a reasoned 

opinion (the second stage of the infringement procedure 

under Art. 258 of the Treaty on the Functioning of the 

European Union, TFEU) requesting that Member State 

to amend its rules on the VAT treatment of participation 

in supervisory boards. 

Under the Dutch VAT rules, individuals are not obliged to 

register for VAT, pay VAT on the remuneration received, 

or file a VAT return in respect of being a member of a 

supervisory board of legal business entity, if they hold no 

more than four positions as a member of such supervisory 

boards. The Commission regards the activity of serving 

as a member of even a single supervisory board as an economic 

activity that is subject to VAT. 

Since, in effect, the Netherlands grants a VAT exemption 

for services that should be taxed according to the 

VAT Directive, the Commission considers that the Dutch 

treatment of participating in supervisory boards is incompatible 

with the VAT Directive. 

430 

If the Netherlands does not amend its legislation within 

two months, the Commission may refer the matter to the 

Court of Justice of the European Union. 

IP/11/1128 of 29 September 2011. 

New Zealand 

Cross-border supplies 

On 23 August 2011, the Minister of Revenue released a 

government discussion document42 seeking feedback on 

proposed changes aimed at ensuring that the GST system 

does not impede transactions between non-resident and 

resident businesses. 

The government’s main concern is that, in effect, some 

existing GST rules do not treat non-resident and resident 

businesses acquiring services in New Zealand in a similar 

way. To the extent that GST is an irrecoverable cost to a 

non-resident business but a recoverable cost to a resident 

business, the GST may have a distortionary effect. Nonresident 

recipients of services may choose to do business 

in another jurisdiction, which may have the effect of limiting 

the market for New Zealand service providers. 

The problem arises because non-resident businesses can 

only recover input GST if they both undertake a “taxable 

activity” anywhere in the world and use the goods or 

services acquired for making “taxable supplies” in New 

Zealand. For example, a non-resident airline contracts 

with a training institute in New Zealand to train pilots 

there. 43 The successful trainee pilots are bonded to the 

non-resident airline for many years. As the trainee pilots 

receive the training in New Zealand, the services bear 

GST. The non-resident airline is carrying on a “taxable 

activity” somewhere in the world but may not be using the 

services for making “taxable supplies” in New Zealand. A 

resident airline, however, would be carrying on a taxable 

activity in New Zealand and would probably be using 

the services for the purpose of making taxable supplies 

in New Zealand. Consequently, the GST on the training 

services becomes an additional business cost for the nonresident 

airline but not for the resident airline. 

The discussion document recognizes that non-resident 

businesses in this scenario may not always fully bear the 

cost of the GST. They may receive an income tax deduction 

for this cost in their home country or they may 

include the cost in the price of their products and pass 

it on to their customers. Nevertheless, just as governments 

have accepted that investors may sometimes take 

into account headline (rather than effective) company tax 

40. ECJ judgment of 3 March 2011 in European Commission v. Kingdom of 

the Netherlands, Case C-41/09. 


2006/112/EC on the common system of value added tax as regards the 

rules on invoicing, OJ L 189/8 of 22 July 2010. 

42. “GST: Business-to-business neutrality across borders: a government 

discussion document about GST on cross-border supplies between 

businesses,” August 2011, available at http://taxpolicy.ird.govt.nz/index. 

php. 

43. Id, p. 7. 


ates, the New Zealand government has concluded that “it 

is reasonable to assume that businesses would perceive 

the GST cost to be a significant factor when comparing 

New Zealand’s GST treatment with that of other jurisdictions 

in which they may alternatively purchase services.” 44 

The government has considered three business-to-business 

reform options: 

(1) zero rating all or certain supplies made to non-resident 

businesses; 

(2) relaxing the restrictions on non-resident businesses 

claiming a refund of input tax; and 

(3) a direct refund system for non-resident businesses, 

and has concluded that the second option strikes the best 

balance between promoting business-to-business neutrality 

and protecting the GST revenue base. This “enhanced 

registration system” would bring non-resident businesses 

into the GST filing system, which would provide 

assurance to the tax authorities that the GST obligations 

are being met. The government recognizes that this will 

increase business compliance costs and will endeavour to 

minimize these costs. 

Under the proposed enhanced registration system, nonresident 

businesses would have the right to register and to 

link input tax to their worldwide taxable supplies. 

Some of the proposed legislative safeguards include: 

– requiring that the non-resident business is registered 

for a comparable transaction tax in its home jurisdiction 

(or is registered as a “business taxpayer”, if no 

comparable tax exists); 

– requiring that the non-resident business is of sufficient 

size to make annual taxable supplies in excess 

of the registration threshold of NZD 60,000; 

– imposing, in the first year of registration, a refund 

threshold of NZD 500 to cover administrative costs; 

– extending the period for processing refund applications 

of non-resident businesses to three months; 

– requiring non-resident businesses to comply with 

all filing requirements before granting them refunds 

and enabling them to remain registered; 

– requiring non-resident businesses to account for GST 

on a payments accounting basis or a hybrid accounting 

basis (accounting for input tax on a payment 

basis and for output tax on an invoice basis); and 

– not allowing non-registered persons to register in 

New Zealand where they are making onward supplies 

of New Zealand services to non-registered persons. 

From our correspondent David White 

Victoria University of Wellington 

Norway 

On 6 October 2011, the government presented the proposal 

for the Budget 2012 to the parliament. As regards 

VAT, the Budget Bill contains the following measures, 

which, unless indicated otherwise, are envisaged to apply 

from 1 January 2012. 



Foodstuffs 

The VAT rate on foodstuffs is increased from 14% to 15%. 

Warranty repairs 

The zero rating of warranty repairs will be reinstated. 

Since 1 January 2010, businesses established abroad had 

to pay Norwegian VAT on warranty repairs made in 

Norway and had to apply for a refund of that VAT. Under 

the Budget Bill, repairs of goods under warranty carried 

out in Norway on behalf of non-resident businesses that 

are not registered in Norway for VAT purposes, would be 

subject to the zero rate, with effect from 1 January 2012, if 

the owner of the goods is resident in Norway. 

From our correspondent Espen Qvist 

PwC, Oslo 

Poland 

Thresholds 

With effect of 1 January 2012, the following VAT thresholds, 

which are expressed in euro, will be converted to 

zloty based on the exchange rate of the National Bank 

of Poland published on the first working day of October 

of the year preceding the tax year (3 October 2011). The 

amounts are rounded up to a multiple of PLZ 1,000. 

The annual turnover thresholds: 

– for qualification as a “small business” that is entitled 

to account for VAT on a quarterly basis and on the 

basis of cash receipts will be set at PLZ 5.324 million 

(equivalent to EUR 1.2 million), including VAT; and 

– below which agents and commissionaires are entitled 

to account for VAT on a quarterly basis and on the 

basis of cash receipts will be set at PLZ 200,000, 

including VAT (equivalent to EUR 45,000). 

From our correspondents Krzysztof Lasiński-Sulecki 

Nicholas Copernicus University, Toruń 

Portugal 

The proposal for the Budget for 2012 contains the following 

measures relating to VAT. 

Reduced rates 

Supplies of milk-based drinks and soft drinks, and admission 

to sporting and entertainment events will cease to be 

subject to the reduced rate of 6% (4% in the Azores and 

Madeira). Canned food, precooked food, jelly, cooking 

oil, margarine, coffee, snacks and restaurant transactions 

will no longer be subject to VAT at the intermediate rate 

of 13% (9% in the Azores and Madeira). All supplies will 

be subject to the standard rate of 23% (16% in the Azores 

and Madeira). Table water and bottled water will be no 

longer subject to the reduced rate and will be subject to 

the standard rate. 

44. Id, p. 8. 

431



With effect from 1 January 2012, taxable persons must 

file their recapitulative statements of intra-Community 

supplies of goods and cross-border B2B services on a 

monthly basis if the value of those supplies in the current 

quarter or one of the four preceding quarters exceeds 

EUR 50,000. Below that threshold, taxable persons may 

file those statements on a quarterly basis. Until 31 December 

2011, the threshold for monthly filing was set at EUR 

100,000, under Art. 263(1b) of the VAT Directive, as 

amended by Directive 2008/117. 45 

Open-market value 

Art. 80 of the VAT Directive will be transposed into 

national law to the effect that the tax authorities have the 

power to replace the actual price agreed between connected 

parties by the open-market value of the transaction, 

as the taxable amount for VAT purposes. 

Gaseous fuel and LPG 

The special scheme applicable to gaseous fuel and liquefied 

petroleum gas will be repealed. 

Gas and electricity 

The Memorandum of Understanding (MoU) between 

the government and the joint task force of the European 

Central Bank, the European Commission and the International 

Monetary Fund contains certain amendments 

to the VAT legislation. One of those amendments concerns 

the withdrawal of the reduced VAT rate for the 

supply of natural gas and electricity. With effect from 1 

October 2011, natural gas and electricity are subject to 

the standard rate of VAT of 23% (16% in the Azores and 

Madeira). 

In order to compensate lower-income households for 

the increased burden of VAT, the maximum VAT-inclusive 

retail prices for natural gas and electricity have been 

reduced. From 1 October 2011, the reduction is 13.8%. 

The government will set new prices every year. 

Vehicle tax 

By its judgment in Lidl, 46 the Court of Justice of the European 

Union (ECJ) declared that the imposto sobre veículos 

(vehicle tax) is covered by the definition of “taxes, duties, 

levies and charges” in Art. 78(a) of the VAT Directive and, 

consequently, must be included in the taxable amount for 

calculating VAT on supplies of vehicles. In this context, it 

was decisive that the chargeable event for the vehicle tax 

is linked directly to the supply of a vehicle and that the 

vehicle tax must be paid by the supplier of the vehicle. 

The government had included vehicle tax in the taxable 

amount for VAT purposes following the infringement 

proceedings of the Commission against Portugal (No. 

2006/4398). 

From our correspondent Isabel Vieira dos Reis 

Garrigues, Lisbon 

432 

Romania 

By Government Ordinance No. 30/2011, which was officially 

published on 2 September 2011, the government 

amended various chapters of the Tax Code. As regards 

VAT, the most important amendments are as follows. 


Starting with the recapitulative statements (lists of intra- 

Community sales and purchases of goods and services) 

for August 2011, taxable persons must file those monthly 

statements with the tax authorities by, at the latest, the 

25th day of the month following the reporting period. 

Previously, the filing deadline expired on the 15th day of 

the following month. 

Penalties 

Under the Tax Procedures Code, the tax authorities may 

impose a penalty where taxable persons fail to file recapitulative 

statements or file incorrect or incomplete statements. 

Until 17 September 2011, that penalty was equal 

to 2% of the value of the non-declared sales or purchases 

or, depending on the circumstances, 2% of the difference 

between the amount declared and the correct amount. 

From that date, under Ordinance No. 29/2011, which 

was also published on 2 September 2011, the penalty for 

not filing such statements may vary between RON 1,000 

(EUR 233) and RON 5,000 (EUR 1,162) and, for filing 

incorrect or incomplete statements, between RON 500 

(EUR 116) and RON 1,500 (EUR 350). The tax authorities 

do not impose a penalty if the taxable person corrects 

the statement before expiry of the deadline for filing the 

next sales and purchases list and the tax authorities have 

not noticed the taxable person’s mistake(s). The penalty 

is reduced to 50% of the minimum penalty if the taxable 

person pays it within 48 hours. 

Continuous supplies 

Where they give rise to successive statements of account 

or successive payments, supplies of goods and services 

are no longer regarded as being completed, for the purposes 

of determining the time at which VAT becomes 

chargeable, on expiry of a one-year period. However, the 

maximum period of one year continues to apply to crossborder 

services for which the customer must account for 

VAT under the reverse charge mechanism laid down by 

Art. 150(2) of the Tax Code (which corresponds to Art. 

196 of the VAT Directive). 

Scrap 

The definition of domestic supplies of scrap that are 

subject to VAT under the reverse charge mechanism has 

been limited with effect from 6 September 2011. Until 

45. Council Directive 2008/117/EC of 16 December 2008 amending Directive 

2006/112/EC on the common system of value added tax to combat 

tax evasion connected with intra-Community transactions, OJ L 14 of 20 

January 2009. 

46. ECJ judgment of 28 July 2011 in Lidl & Companhia v. Fazenda Pública, 

Case C-106/10. 


that date, the reverse charge mechanism applied to supplies 

of scrap and so-called “secondary raw materials”, i.e. 

materials recovered from waste, as defined by a specific 

law on recyclable industrial waste management. From 

6 September 2011, the reverse charge mechanism only 

applies to supplies of: 

– ferrous and non-ferrous scrap, scrap of recyclable 

materials and used recyclable paper, paperboard and 

board, textiles (rags), rubber and plastic, glass and 

glass fragments; and 

– the materials mentioned above after they have been 

processed in the form of cleaning, polishing, sorting, 

cutting, fragmenting, pressing or casting into ingots. 

Amnesty 

The Tax Procedures Code provides that, in addition 

to charging interest (currently 0.04% per day), the tax 

authorities also impose a penalty if taxable persons have 

not paid their tax liabilities within 30 days following the 

date of expiry of the legal payment deadline. The late-payment 

penalty is 5% of the amount of tax due if the taxable 

person pays the tax between 30 and 60 days after expiry 

of the payment deadline, and 15% if they make payment 

after 60 days. 

Under Ordinance No. 30/2011, the government introduced 

an amnesty and reduction scheme for late-payment 

penalties relating to tax debts due prior to 1 September 

2011, as follows: 

– the tax authorities will waive late-payment penalties 

if taxable persons have voluntarily settled their tax 

debts and late-payment penalties by 31 December 

2011; 

– the tax authorities will reduce late-payment penalties 

by 50% if taxable persons have voluntarily settled 

their tax debts and late-payment penalties by 30 June 

2012. 

The same concessions apply to 50% of the late-payment 

interest due in relation to the period from 1 January 2006 

to 30 June 2010. 

From our correspondent Ana-Maria Notingher 

Tax adviser, Bucharest 

Russia 

Under Federal Law No. 245-FZ of 19 July 2011, significant 

amendments were made to the VAT Chapter of the 

Tax Code. Most of the provisions of Law No. 245-FZ 

came into effect on 1 October 2011. The most important 

amendments are summarized as follows. 

Place of supply of goods 

Before 1 October 2011, goods were deemed to be supplied 

in Russia for VAT purposes, i.e. the supplies were subject 

to Russian VAT, if: 

– the goods were located on Russian territory and were 

not transported; or 

– transport of the goods began on Russian territory. 



From that date, the “Russian territory” for VAT purposes 

also includes other territories under jurisdiction of the 

Russian Federation. For example, artificial islands, installations 

and structures located on the continental shelf of 

Russia are not recognized as forming part of Russian territory 

under the Constitution, but they form part of the 

Russian jurisdiction under Russian legislation and provisions 

of international law. 

Natural resources 

Under the new Art. 148(2.1) of the Tax Code, specific 

services (including work) in connection with geological 

survey, exploration and production of subterranean 

natural resources (hydrocarbons) located wholly or partly 

on the continental shelf and/or in Russia’s exclusive economic 

zone are deemed to be supplied in Russia for VAT 

purposes and, consequently, such activities are subject to 

Russian VAT. 

Audit services 

Audit services have been added (as Subpara. 4) to Art. 

148(1) of the Tax Code to the effect that, for VAT purposes, 

those services are deemed to be supplied at the 

place where the customer carries out its activities, which 

means that Russian auditors no longer have to charge 

Russian VAT if their customers are legal entities established 

abroad that do not have a place of activity in Russia 

for VAT purposes. 

Foreign currencies 

Under the new Art. 153 of the Tax Code, prices for transactions47 

expressed in a contract or on an invoice in a 

foreign currency but payable in roubles or in standard 

conventional units48 must, for the purposes of determining 

the taxable VAT base, be converted into roubles at 

the exchange rate of the Central Bank of Russia applicable 

on the date on which the supply is made. The tax base 

must not be adjusted on the basis of the exchange rate that 

applies at the time the customer pays the price. 

Under the new Art. 172 of the Tax Code, customers who 

must pay, in roubles, the price for a transaction that is 

expressed in a foreign currency or in standard conventional 

units, must determine the amount of deductible 

input VAT at the exchange rate of the Central Bank of 

Russia applicable on the date on which the purchase is 

made, and they must not adjust the deductible input VAT 

on the basis of the exchange rate applicable at the time of 

payment. 

Amending VAT invoices 

Suppliers must issue an “amending VAT invoice” if 

the value of the transaction has changed on account of 

a change of the price or an adjustment of the quantity 

47. The term “transactions” includes supplies of goods and services, work, 

and transfers of property rights. 

48. The standard conventional unit is used to express the price in a foreign 

currency (usually US dollars) which is generally payable in roubles at 

the Central Bank’s exchange rate for dollars on the date of payment 

(although parties may also agree on conversion at a different rate). 

433


(volume). Where the value of the transaction is decreased, 

the amending VAT invoice must mention the difference 

between the initial and corrected amounts of VAT as a 

negative amount, which the supplier is entitled to claim 

back from the tax authorities and which the customer 

must pay to the authorities by way of correction of his 

initial deduction. 

Where the value of the transactions is increased, the customer 

is entitled to deduct the additional VAT on the 

basis of the amending VAT invoice and the supplier must 

correspondingly increase the tax base. 

Transfers of commercial claims 

Where a supplier transfers a monetary claim that is based 

on a commercial transaction to a third party, or where 

such a transfer takes place pursuant to the law, the initial 

creditor’s tax base in relation to the transfer is limited, 

under the new Art. 155 of the Tax Code, to the price he 

receives for the transfer in excess of the face value of the 

claim. 

Furthermore, where the new creditor subsequently transfers 

such a monetary claim to a third party, the taxable 

amount for the transfer consists of the creditor’s positive 

margin. 

It should be noted that, prior to 1 October 2011, transfers 

of monetary claims based on commercial transactions 

were not subject to VAT if the underlying supply was not 

subject to VAT. 

Deduction of VAT by banks 

Banks that deduct VAT paid to their suppliers of goods, 

works or services as a deductible expense for profits tax 

and that dispose of the acquired goods (including fixed 

and intangible assets), or property rights before they are: 

– used for banking transactions; 

– used for leasing transactions; or 

– taken into use, 

must include the amount of VAT paid on their purchases 

in the cost of the acquired goods or property rights. 

The banks must determine the taxable base for VAT 

purposes in this case as the margin between the selling 

price, including VAT, and the value (residual value) of 

the goods or property rights acquired. 

Sale of a bankrupt’s property 

The amended Art. 161(4)(1) of the Tax Code provides 

that, in the event of a sale of a bankrupt’s property or 

property rights, the tax base is the selling price of the 

property, including VAT. The tax agent must determine 

the tax base for each transaction separately. In this 

context, the “tax agent” is the buyer of the property or 

property rights, with the exception of private individuals. 

The tax agents are obliged to extract the amount 

of VAT out of the purchase price, withhold it from the 

amount paid and remit the amount of tax withheld to the 

tax authorities. 

434 

Partial deduction 

Businesses engaged in making both taxed and exempt 

supplies are entitled to a partial deduction of the VAT 

paid on purchases (including fixed and intangible assets), 

in proportion to their taxed turnover in the quarter 

of investment. Art. 170(4) of the Tax Code has been 

amended to the effect that businesses have the right to 

calculate the deductible proportion in respect of purchases 

of fixed and intangible assets made in the first or 

the second month of a quarter on the basis of the value of 

their output transactions in the respective month. 

If costs relating to transactions that are not subject to 

VAT are less than 5% of the total costs, businesses do 

not have to keep separate records of the use of the goods, 

work, services and property rights for taxed and exempt 

purposes and they can deduct the related input VAT in 

full. Until 1 October 2011, the 5% threshold was defined 

in terms of the production cost of the output transactions. 

Art. 170(4) of the Tax Code has been amended to the 

effect that the 5% threshold is defined in terms of the cost 

price of the output transactions, which means that the tax 

concession can also be applied by businesses that do not 

produce goods (work, services) themselves. 

Renovation 

The new Art. 171 of the Tax Code states explicitly that 

VAT charged by contractors (developers) not only on 

construction and installation work, but also on demolition 

or dismantling buildings or other structures, is 

deductible. 

As regards renovation (reconstruction) work, the Tax 

Code contains a procedure for adjusting initial deduction 

of VAT relating to construction and installation work, 

including goods (work, services) purchased for the purposes 

of such work, if it appears that the renovated building 

will be used for carrying out transactions that are not 

subject to VAT. 

Reversal of input VAT relating to exports 

The Federal Law requires that initial deduction of VAT 

is reversed in respect of goods (work, services), including 

fixed assets and intangible assets, and property rights, if 

those inputs will be used for the purposes of carrying out 

zero-rated transactions. In this context, the initial deduction 

is reversed in the period in which the zero-rated supplies 

are made. However, unless the transaction is subsidized, 

the input VAT becomes deductible again, in the tax 

period in which the exporter submits to the tax authorities 

documentary evidence confirming that the export 

has actually taken place or, if the export has not been confirmed 

within 180 days from the date of the supply, on the 

181st day following the date of supply. In the latter case, 

the VAT on the export likewise becomes chargeable on 

the 181st day. 

The new regulations provide that VAT on fixed assets 

and intangible assets must be reversed on the basis of the 

amount previously deducted and not on the basis of the 

VAT that is presumed to be included in the residual value 

of the assets. 


Documentary evidence 

Under the amended Arts. 164 and 165 of the Tax Code, 

businesses no longer need a bank statement (or a copy of a 

bank statement) confirming actual receipt of the customer’s 

payment, in order to be entitled to zero rate the transactions 

listed in Subparas. 1 to 5 of Art. 164(1) of the Tax 

Code (these transactions include, in particular, exports of 

goods, international transport, transit of goods and international 

passenger transport). 

From our correspondent Oleg Berezin 

Deloitte, Russia 

Singapore 

Islamic finance 

On 8 June 2011, the Monetary Authority of Singapore 

(MAS) issued Circular No. FDD 05/2011, which 

describes the GST treatment of specific Islamic financing 

transactions, such as murabaha, musharaka, istisna and 

wakalah. 49 

Provided that these transactions meet the commercial 

conditions laid down by the MAS, supplies of goods in 

the context of one of those Islamic financing arrangements 

(in the form of transfers of non-residential properties, 

leasing/subleasing of non-residential properties, etc.) 

which would not have occurred under a conventional financing 

arrangement are exempt from GST. 

Slovak Republic 

On 14 September 2011, the National Council approved 

several changes to the VAT Act. Unless indicated otherwise, 

the amendments will come into effect on 1 January 2012. 

Deduction of VAT 

Art. 168a of the VAT Directive, under which VAT on 

immovable property that is used for both business and 

private purposes can initially (in the year of investment) 

only be deducted to the proportion the property is used 

for business purposes, had already been transposed into 

national law with effect from 1 January 2011. The initial 

deduction had to be adjusted if, in subsequent years, the 

use of the property changed. 

From 1 January 2012, the adjustment provisions will 

be further specified to the effect that the initial deduction 

must be adjusted in subsequent years, regardless of 

whether it was less than, or equal to, 100%. Moreover, 

those adjustments must be made for all subsequent years 

of the adjustment period, not only with respect to the first 

change of the use of the property. 

Electronic invoicing 

Under the provisions of the Second Invoicing Directive, 50 

the possibilities to ensure the authenticity of the origin 

and the integrity of the contents of invoices sent or made 

available by electronic means will be extended. Currently, 

the authenticity of the origin and the integrity of the contents 

of electronically issued invoices must be guaran- 



teed by means of an advanced electronic signature or 

electronic data interchange (EDI). From 1 January 2012, 

it will also be possible to ensure the authenticity of the 

origin and the integrity of the contents of electronically 

issued invoices by means of any business controls which 

create a reliable audit trail between an invoice and a 

supply of goods or services. 

Excess input VAT 

Under the current rules, where, for the tax period, the 

amount of deductible input VAT exceeds the amount of 

VAT due, the taxable person must carry the excess input 

VAT forward to the following tax period, unless specific 

conditions for refunding the excess are met. If the taxable 

person cannot deduct the excess in full from his tax liability 

for the following tax period, the tax authorities 

must refund the non-deducted balance within 30 days of 

receipt of the tax return for the second tax period. 

Under the amendments, where the taxable person claims 

input tax or increases his claim through a supplementary 

VAT return, which he files after he has filed the regular 

VAT return for the second tax period, the taxable person 

does not have to carry forward the additional claim to the 

following tax period and the tax authorities will refund 

it within 30 days of receipt of the supplementary VAT 

return. Similarly, where the taxable person increases the 

excess input VAT through a supplementary VAT return, 

which he files after the tax authorities have refunded the 

original claim, the tax authorities will refund the additional 

claim within 30 days of receipt of the supplementary 

VAT return. 

In addition, the amendments provide that the time limit 

for refunding excess input VAT is suspended where the 

tax authorities start the procedure for correcting the 

applicant’s VAT return. 

Postponed accounting 

With effect from 1 January 2013, VAT due on the importation 

of goods by certain categories of taxable persons 

registered for VAT purposes will be payable under “postponed 

accounting”, i.e. designated importers no longer 

pay the import VAT to the customs authorities at the 

time of importation of the goods but through their periodic 

VAT returns. They can generally deduct that VAT 

through the same return. In effect, postponed accounting 

is similar to the reverse charge mechanism. 

Katarina Balogová, BMB Leitner, Bratislava 

49. Murabaha is the Islamic equivalent of a mortgage. Instead of loaning the 

buyer money to purchase the item, the bank purchases the item itself and 

resells it to the buyer at a profit, while allowing the buyer to pay the price 

in instalments. Musharaka is the Islamic equivalent of a business loan: 

the bank and the borrowing company form a partnership and the bank’s 

profit is equal to a certain percentage of the borrowing company’s profits. 

Once the company has repaid the principal amount of the loan, the bank 

and the company terminate the profit-sharing arrangement. Istisna is a 

contract of exchange with deferred delivery, applied to specified madeto-order 

items. Under wakalah, a person appoints a representative to 

undertake transactions on his behalf, similar to a power of attorney. 




435


436 

Slovenia 

On 23 September 2011, the parliament adopted various 

amendments to the VAT Act (ZDDV-1E), which, unless 

indicated otherwise, have come into effect on 20 October 

2011. The most important amendments are summarized 

below. 

Price adjustments 

In order to reduce the taxable amount relating to a transaction, 

suppliers who grant a discount to their customers 

after having issued an invoice are no longer obliged 

to have received confirmation that their customers have 

not yet deducted, or have corrected their deduction of, the 

amount of VAT mentioned on the initial invoice. Suppliers 

need only inform their customers in writing about the 

amount of VAT that the latter cannot deduct, which they 

generally do in practice by issuing a credit note. By issuing 

a credit note, the supplier will be entitled to reclaim a part 

of the initially remitted VAT corresponding to the VAT 

included in the discount. 

Bad-debt relief 

With retrospective effect from 1 January 2011, suppliers 

can reclaim the VAT included in commercial debts that 

their customers have not settled, immediately after they 

have submitted their claim in the customer’s bankruptcy 

proceedings or compulsory settlement procedure. 

Reverse charge mechanism 

The obligation has been abolished for taxable persons 

to notify the tax authorities of the start or cessation of 

their activities falling within the scope of Art. 76(a) of 

the VAT Act (i.e. domestic transactions that are subject 

to the reverse charge mechanism under Art. 199 of the 

VAT Directive). 

Voluntary corrections 

Where they voluntarily report, through the VAT return 

for the current tax period, VAT that they should have 

reported through a previous VAT return, regardless of 

whether they correct the previously reported VAT or had 

not filed a return at all, taxable persons must also pay 

interest based on the European interbank offering rate 

(EURIBOR) plus 1, 2, 3 or 4 percentage points (depending 

on the time that has elapsed from the moment the 

VAT due should have been settled). 

Taxable persons can only voluntarily correct their omissions 

in the field of VAT if the tax authorities have not yet 

issued a notice of assessment or have not yet announced a 

tax inspection or initiated criminal proceedings. 

Electronic filing 

The obligation to provide information in electronic 

format through the electronic portal of the tax authorities 

(“E-davki”) has been extended to certain notifications 

such as the cessation of the taxable person’s activities, the 

submission of the joint statement for VAT taxable lease, 

the application of the cash accounting system, and the ap- 

plication of a pro rata method (different starting dates are 

set for the above e-notifications). 

With effect from 1 July 2012, businesses established 

outside the European Union must apply for a refund 

(under the Thirteenth Directive) through an electronic 

application procedure. 

From our correspondent Marc van Rijnsoever 

Ernst & Young, Ljubljana 

South Africa 

Withdrawal of rulings issued prior to 2007 

Written decisions issued by the South African Revenue 

Service (SARS) prior to 1 January 2007 do not have 

binding effect for supplies made on or after that date, 

unless the SARS has reconfirmed its previous decision. 

Failure to lodge a request for reconfirmation of an old 

ruling within the prescribed period (the last period ended 

on 30 June 2007) has the effect that the ruling becomes a 

non-binding opinion. Rulings issued by the SARS before 

2007 that were submitted for confirmation within the 

prescribed period remain binding until the SARS has 

reconfirmed them or has notified an applicant that a 

ruling has been withdrawn. 

However, with effect from 1 October 2011, the SARS has 

categorically withdrawn the binding status of all pre-2007 

rulings which have not yet been reconfirmed on that date. 

Vendors who still rely on written decisions issued by the 

SARS prior to 2007 are thus at risk, as these rulings are no 

longer binding on the SARS. Under those circumstances, 

the vendors have no option but to apply to the SARS for 

a new ruling. 

From our correspondent Marlene Botes 

PwC South Africa, Cape Town 

Sweden 

Restaurant transactions 

On 20 September 2011, the government presented the 

Budget for 2012 (prop. 2011/12:1) to the parliament. One 

of the proposals of the government is a reduction of the 

VAT rate on restaurant transactions and catering services 

(excluding alcoholic beverages) from 25% to 12%, i.e. the 

same rate that currently applies to, inter alia, supplies of 

foodstuffs and the provision of hotel accommodation. 

The proposal is aimed at simplifying the VAT rules and 

achieving a positive effect on the economy, in particular 

on long-term employment. 

Provided that the parliament approves the proposal, 

the rate reduction is envisaged to come into effect on 1 

January 2012. 

Invoicing rules 

On 29 August 2011, the Ministry of Finance released a 

memo (Fi2011/3586) to communicate details of a forth- 


coming proposal for changes to the VAT Act as regards 

invoicing. The purpose of the memo is to enable stakeholders 

to give their views and comments on the future 

invoicing rules. The proposed amendments are based on 

Directive 2010/4551 and are envisaged to enter into force 

on 1 January 2013. 

From our correspondent Tomas Karlsson 

Ernst & Young AB, Stockholm 

Switzerland 

Imported telecommunications and electronic services 

Service providers established outside Switzerland and the 

Principality of Liechtenstein which provide telecommunications 

or electronically supplied services to non-taxable 

customers (such as private individuals) domiciled 

in Switzerland or the Principality of Liechtenstein (B2C 

supplies) are confronted with new VAT rules that came 

into force on 1 January 2010. 

Where their annual turnover derived from B2C telecommunications 

and electronic services reaches the threshold 

of CHF 100,000, the non-resident service providers must 

be registered in Switzerland, which has the effect that they 

must charge Swiss VAT, not only on both B2B and B2C 

supplies of telecommunications and electronic services to 

customers in Switzerland and the Principality of Liechtenstein, 

but also on all other services that are subject 

to VAT in the customer’s country under Art. 8(1) of the 

VAT Law, such as B2B and B2C marketing and advertising 

services, the granting of licences, advisory services, 

and management services. 

Telecommunications services include: 52 

– services relating to the transmission, emission, and 

receipt of signals, writing, images, sounds and information 

of any nature; 

– transmission of radio and television signals (not 

reception of radio and television programmes); 

– telephone transmission services on behalf of other 

service providers, such as roaming services; 

– provision of access to the Internet or other information 

networks, whether or not by subscription; and 

– provision of access to cable and satellite television 

systems (not reception of television programmes). 

Electronically supplied services include: 

– website and webpage hosting; 

– the supply of software and updates through the Internet; 

– the supply of images, text, information and making 

available of databases through the Internet; 

– the supply of music, movies and games, including 

gambling and lotteries, through the Internet. 

Non-resident businesses that fail to comply with the obligation 

to register may be assessed for unpaid VAT and 

interest, which is imposed at the rate of 4.5% per year. In 

addition, the tax authorities may impose a penalty for violation 

of the registration rules. In the case of negligence, 

the maximum penalty is CHF 400,000, However, in prac- 



tice, the actual penalty depends on a decision of the tax 

authorities. 

Benno Suter and Tomáš Rodák 

Deloitte Switzerland 

Trinidad and Tobago 

The Minister of Finance presented the Budget for 2012 to 

the House of Representatives on 10 October 2011. As 

regards VAT, the main measures are summarized below. 

Registration 

The threshold for VAT registration will be increased 

from TTD 200,000 to TTD 360,000 (i.e. TTD 30,000 per 

month) to adjust for inflation. 

Offshore activities 

Offshore drilling rigs, drilling ships and other vessels associated 

with offshore activities in the energy sector will 

be zero rated in order to keep the energy sector competitive. 

Turks and Caicos Islands 

Insurance premium sales tax 

With effect from 12 September 2011, insurance premium 

sales tax (IPST) is imposed at the rate of 2.5% on insurance 

premiums charged for domestic insurance other 

than life and health insurance. IPST was introduced as 

an interim measure to increase revenue in anticipation 

of the introduction of VAT, which is expected to commence 

in April 2013. 53 Once VAT comes into effect, it 

will replace IPST. 

Financial services sales tax 

With effect from 12 September 2011, domestic financial 

services sales tax (DFSST) is imposed at the rate of 

10% on services for which domestic financial institutions 

charge a fee. 

Interest is not subject to DFSST. The service fees subject 

to DFSST include (but are not limited to): 

– operation of accounts; 

– account transaction services; 

– ATM withdrawals; 

– wire transfers and money transfers; 

– money orders; 

– cheques; 

– clearing cheques; 

– rental of safety deposit boxes; and 

– preparation of payrolls. 




52. The complete list of telecommunications and electronically supplied 

services can be found in VAT business brochure No. 13 “Telecommunications 

and electronic services”. 


437


The introduction of DFSST replaced the money transfer 

levy and the stamp duty applicable to cheques. DFSST 

was introduced as an interim measure to increase revenue 

in anticipation of the introduction of VAT, which is 

expected to commence in April 2013. 54 Once VAT comes 

into effect, it will replace DFSST. 

438 

Ukraine 

On 7 July 2011, the parliament adopted Law No. 3609-VI, 

which contained a number of amendments to the Tax 

Code. The amendments came into effect on 6 August 

2011 and, as regards VAT, include the following. 

Registration 

Newly established entities may opt for voluntary VAT 

registration if they have assets or a statutory capital of a 

value of at least UAH 300,000. Under the previous rules, 

VAT registration was possible only after the entities had 

operated for 12 months or after they had achieved a turnover 

of UAH 300,000 from transactions subject to VAT. 

Invoices 

VAT invoices relating to supplies of imported goods and 

goods subject to excise duties must be included in the 

unified registry, regardless of the value of the transactions. 

The invoices must specify the customs codes of all 

imported goods. 

The deadline for registration of all VAT invoices (including 

those which relate to domestic supplies) has been 

extended to 20 days. 

Service to sea vessels 

The supply of services to vessels operating in international 

transport is exempt from VAT, if the services are 

covered by port charges. 

Grain 

Grain traders who purchase grain directly from agricultural 

producers must account for VAT at the rate of 20% 

on the subsequent domestic supply of such grain. Exports 

of grain are exempt from VAT (not zero rated). Under the 

previous rules, domestic supplies by grain traders were 

exempt from VAT until 2014. 

Yulia Logunova, DLA Piper, Kiev 

United Kingdom 

Employee benefits in kind (2) 

After the judgment of the Court of Justice of the European 

Union in Astra Zeneca, 55 the tax authorities (Her Majesty’s 

Revenue and Customs, HMRC) had to change their 

policy on salary sacrifice schemes. Previously, HMRC 

had accepted that salary sacrificed for a benefit was not 

consideration for a supply, although deductions from the 

employee’s salary were consideration for the benefit provided 

by the employer. 

“Salary sacrifice” is tightly defined and involves the option 

for an employee to agree to a binding new or amended 

contract of employment setting out a lower salary and 

the benefits chosen by the employee in lieu of the salary 

foregone. 

In Brief No. 28/11 issued in July 2011, 56 HMRC set out 

the new policy: payments received (salary sacrificed by 

an employee) on or after 1 January 2012 under a salary 

sacrifice scheme would be viewed as consideration for 

the benefit obtained. 

After listening to concerns of the business community, 

HMRC announced a slight alteration to this new policy 

in Brief No. 36/11 of 3 October 2011. For salary sacrifice 

arrangements entered into before the date of Brief No. 

28/11, which extend beyond December 2011, HMRC will 

allow amounts of salary foregone in return for taxable 

benefits to continue to be free of VAT until the date after 

1 January 2012 when the contract of employment expires 

or is due for review or renegotiation. This process, known 

as grandfathering, has the effect that there will be no additional 

VAT costs for employer or employee which were 

unknown when they entered into the salary sacrifice 

agreement. 

From our correspondent Karen Killington 

KPMG UK LLP 

United States 

California 

Click-through nexus 

For sales and use tax purposes, a click-through nexus 

provision should have come into effect on 29 June 2011, 

on the basis of Law No. AB 28 of 2011. Under that provision, 

the definition of “retailer engaged in business in this 

state” was extended to include any remote retailer who 

enters into an agreement under which a person in California, 

for a commission or other consideration, directly 

or indirectly, refers potential purchasers of tangible personal 

property to the remote retailer, either by an Internet-based 

link, a website, or otherwise, provided that the 

remote retailer’s total sales of tangible personal property: 

(1) to purchasers in California that are referred pursuant 

to such an agreement was more than USD 10,000 in 

the preceding 12 months; and 

(2) to all purchasers in California exceeded USD 500,000 

in the preceding 12 months. 

For the purposes of this click-through nexus provision, 

the agreement between a remote retailer and person in 

California does not include any agreement under which 

the retailer: 

– purchases advertisements from the person in California, 

to be delivered on television, radio, in print, 

54. Id. 

55. ECJ judgment of 29 July 2010 in Astra Zeneca UK Ltd v. Commissioners 

for Her Majesty’s Revenue and Customs, Case C-40/09. 



on the Internet, or by any other medium, unless the 

advertising fee consists of a commission or other 

consideration that is based on sales of tangible personal 

property; or 

– engages the person in California to place an 

advertisement on a website operated by that person 

or by another person in the state, unless the person 

in California also, directly or indirectly, solicits 

potential customers in California through the use of 

flyers, newsletters, telephone calls, electronic mail, 

blogs, micro blogs, social networking sites, or other 

means. 

The term “retailer” includes any entity affiliated with a 

remote retailer, and the term “retailer engaged in business 

in this state” also includes any retailer that is a member of 

a commonly controlled group and a combined reporting 

group, both as defined, that includes another member of 

the retailer’s commonly controlled group that, pursuant 

to an agreement, or in cooperation with the retailer, performs 

services in California in connection with tangible 

personal property to be sold by the retailer, including but 

not limited to the design and development of tangible 

personal property sold by the retailer, or the solicitation 

of sales of tangible personal property on behalf of the 

retailer. Finally, the definition of “retailer engaged in business 

in this state” has been amended to include a retailer 

that has substantial nexus with California for purposes 

of the Commerce Clause of the US Constitution and any 

retailer on whom the state, under federal law, can impose 

the obligation to collect use tax. 

The click-through nexus provision does not apply if the 

retailer can demonstrate that the person in California 

does not engage in referrals in the state on behalf of the 

retailer that would satisfy the requirements of the Commerce 

Clause of the US Constitution. 

In its News Release No. 82-11-H of 12 July 2011, the 

Board of Equalization (BOE) estimated that the clickthrough 

nexus provisions would enable California to 

collect an additional USD 200 million in sales tax per 

year, and that purchases from out-of-state retailers result 

in approximately USD 1.1 billion in unreported use tax. 

Amazon is challenging the constitutionality of the legal 

click-through nexus provision and it wants voters in 

California to overturn the law. On 8 July 2011, it filed 

a petition for a referendum with the Attorney General’s 

Office. Amazon also has an option of challenging the law 

in court. 

On 18 July 2011, the Attorney General issued and delivered 

to the Secretary of State a title and summary for 

a proposed statewide “referendum to overturn the law 

requiring Internet retailers to collect the same sales or use 

taxes as other retailers”. If the petition is signed by 5% of 

the registered voters (almost 505,000 voters) by 27 September 

2011, the law must be approved by all voters in 

order to remain in effect. 

On 23 September 2011, the governor signed a measure 

that delays the introduction of the sales and use tax nexus 



provisions and makes their commencement conditional 

on authorization to that effect at federal level. The new 

law ( No. AB 155) will reinstate the nexus provisions of 

Law No. AB 28 on: 

– 15 September 2012, if federal authorization is not 

enacted on or before 31 July 2012; or 

– 1 January 2013, if federal authorization is enacted 

on or before 31 July 2012, but California does not 

elect to transpose the federal law on or before 14 

September 2012. 

Under the new law, the threshold for the reinstated clickthrough 

nexus provisions will be increased from USD 

500,000 to USD 1 million in total sales in California. 

Colorado 

Standardized software 

The sales tax exemption for standardized software was 

eliminated by HB 1192, Laws 2010, but will be reinstated 

with effect from 1 July 2012. To that end, the definition 

of “tangible personal property” has been amended to 

exclude standardized software. 

Computer software will be subject to tax only if it is prepackaged 

for repeated sale or licence, governed by a tearopen 

non-negotiable licence agreement, and delivered to 

the customer on a tangible medium. 

HB 1293, Laws 2011. 

Connecticut 


Recently enacted legislation had the effect of amending 

the definition of “retailer” for the purposes of sales 

and use tax nexus (“click-through nexus”). It contained 

a rebuttable presumption that such a remote retailer is 

soliciting business through a resident independent contractor 

or other representative. The law, which has come 

into effect on 1 July 2011, has been given retrospective 

effect in the sense that it applies to sales that were made 

on or after 4 May 2011. 

The newly introduced “click-through nexus” provisions 

have also been amended to the effect of: 

– eliminating the rebuttable presumption; 

– requiring the person making referrals to the remote 

seller under an agreement to be located, rather than 

being resident, in Connecticut; 

– requiring that the commission which the contractor 

or representative receives is based on the sale of 

taxable items or services; and 

– expressly defining “someone who sells taxable items 

or services under these conditions” to be “engaged in 

business in this state” and, as such, required to collect 

sales tax on the sales. 

Agents 

With effect from 1 July 2011, the definition of taxable 

“services” has been amended to include the services of an 

agent of any person in relation to the sale of any item of 

tangible personal property for such a person, not including 

the services of a consignee selling certain articles of 

439


clothing or footwear intended to be worn on or about the 

human body. 

Medical transport 

With effect from 1 July 2011, the definition of taxable 

“services” has been amended to exclude from taxable 

“intrastate transport services” non-emergency medical 

transport provided under the Medicaid programme, 

paratransit services provided under an agreement or 

arrangement with the state or any political subdivision of 

the state, and dial-a-ride services. 

Sales of low value 

With effect from 1 July 2011, sales tax must be added to, 

and collected at the rate of 6.35% on, all sales above USD 

1.18. 

Vehicles for the disabled 

With effect from 21 June 2011, and applicable to all open 

tax periods, a sales and use tax exemption applies to the 

part of the sales price of a vehicle, which is attributed to 

special equipment for the exclusive use of a person with 

physical disabilities, where the equipment has already 

been installed when the vehicle is sold to a disabled 

person. The exemption for such special equipment also 

applies when the vehicle is sold privately. 

Dealers are required to collect sales tax and private buyers 

are required to pay use tax on the price of the vehicle 

alone. 

Non-resident contractors 

With effect from 1 October 2011, the tax security requirements 

for non-resident contractors have been amended 

to the effect of, inter alia: 

– requiring the Department of Revenue Services to 

verify, on request, whether non-resident contractors 

and subcontractors are registered with the Department 

for tax purposes, whether they have filed all 

required tax returns and, if required, whether they 

have posted a security with the Department; 

– imposing the requirement to post a security only 

on non-resident general or prime contractors, and 

imposing the tax withholding requirement only in 

relation to non-resident subcontractors who are not 

so verified by the Department; 

– requiring general contractors, rather than customers, 

to withhold the tax from payments made to their 

unverified subcontractors; and 

– requiring customers who contract with unverified 

general or prime contractors to obtain proof that the 

contractor has posted the required security. 

In this context, “verified contractors” are defined as nonresident 

contractors or subcontractors: 

– who are registered for all applicable taxes with the 

Department; 

– who have filed all required tax returns with the 

Department; 

– who have no outstanding tax liabilities to the Department; 

440 

– who are treated as a “verified contractor” by the 

Commissioner of Revenue Services; and 

– whose status as such is verified by the Commissioner. 

Act 61 (HB 6652), Laws 2011. 

Kansas 

Video games 

In Private Letter Ruling No. P-2011-004 of 16 June 2011, 

the Department of Revenue discussed the retailers’ sales 

tax treatment of sales of video games in a physical retail 

outlet or through the Internet. 

Since the state does not tax the provision of electronic 

access to information stored on a remote server, the sale 

of codes for access to video games stored on a third-party 

server is not subject to tax, regardless of whether the sale 

takes place in a physical retail outlet or over the Internet. 

Conversely, since sales tax applies to the sale by retailers 

of prewritten computer software, whether installed 

or delivered electronically, sales of access codes to video 

games or video game add-ons downloaded to the customer’s 

computer, gaming console or mobile device are 

subject to sales tax, regardless of whether the sale takes 

place in a physical retail outlet or online. 

Sales of cards containing subscription time or point 

values for playing online games are subject to sales tax, 

regardless of whether they are sold in a physical retail 

outlet or over the Internet. However, sales of cards containing 

notional dollar values for playing online games 

are not subject to tax because such cards are considered 

to be gift certificates. Instead of taxing the supply of those 

gift certificates, the tax is imposed when the gift certificates 

are redeemed and used as means of payment for the 

purchase of goods or services. 

Massachusetts 

Solar energy systems 

The purchase by a taxpayer of a solar energy photovoltaic 

system (PV system) is exempt from sales and use tax 

as “machinery used, directly and exclusively, for the provision 

of electricity to consumers through mains” if the 

owner of the PV system sells the power to other tenants 

in the building or supplies it to the grid for use by other 

consumers. 

Machinery used for the construction of the PV system is 

not exempt unless it is part of the integrated and synchronized 

system that furnishes the electricity to consumers. 

Letter Ruling No. 11-7 of the Massachusetts Department 

of Revenue of 22 June 2011. 

Michigan 


A bill containing both affiliate and click-through nexus 

provisions under which remote sellers become liable for 

payment of sales and use tax has been presented to the 

House of Representatives. The bill would amend the definition 

of “a person engaging in business in the state” by 

including remote sellers with an “affiliated person”, who: 


– has a physical location in the state; 

– conducts business or is subject to sales or use tax 

there; and 

– does, directly or indirectly, any of the following: 

– sells a similar line of products as the remote 

seller, under the same or a similar business 

name; 

– uses its employees or facilities in the state to 

advertise and promote sales by the remote seller; 

– maintains an office, distribution facility, or 

other similar place of business to deliver tangible 

personal property sold by the remote seller to 

customers in the state; 

– uses trademarks or service marks that are similar 

to those used by the remote seller; 

– delivers, installs, assembles, or performs 

maintenance or repair services for the remote 

seller’s customers; 

– allows the customers of the remote seller to pick 

up or return tangible personal property, sold 

by the remote seller, at a distribution facility or 

other similar place of business maintained by 

the affiliated person; or 

– performs any other activities associated with the 

remote seller’s ability to establish or maintain a 

market in the state. 

Under the click-through nexus provisions, remote sellers 

are considered to be engaged in business in the state if 

they enter into an agreement with a person resident in 

the state, under which the resident person, for a commission 

or other consideration, directly or indirectly, refers 

potential customers to the remote seller, either by a link 

on an Internet website, by in-person oral presentation, or 

otherwise. For the purposes of the click-through nexus, 

the remote seller’s total turnover in the preceding 12 

months derived from sales to customers who are referred 

to it by a resident person must be larger than USD 10,000. 

The presumption of nexus, based on the activities of an 

affiliated person or the referral by a resident person, can 

be rebutted by showing that the affiliated person or resident 

person did not engage in solicitation or any other 

activity relating to the remote seller’s ability to establish 

or maintain a market in the state. 

HB 5004, presented to the House of Representatives on 

22 September 2011 

New York 

Discounts, trade-ins and additional charges 

The Department of Taxation and Finance has updated 

a sales and use tax bulletin (TB-ST 860 of 16 June 2011) 

which discusses various types of charges that are included 

in or excluded from the taxable base, the effect of discounts 

on the taxable base, and how the taxable base must 

be determined in respect of barter transactions and tradeins. 



Combinations of items 

Where taxable and non-taxable goods or services are sold 

together as a single package, sales tax is only due on the 

taxable items, if: 

– the taxable and non-taxable items may be purchased 

separately; 

– the prices for the items are separately stated on the 

invoice; and 

– the prices attributed to the individual items are 

reasonable in relation to the total price. 

However, if items are packaged together for a single price 

and cannot be broken down and purchased separately, 

sales tax is due on the total price. 

Discounts 

Discounts that result in a reduction of the selling price, 

such as trade discounts, volume discounts, or cash-andcarry 

discounts, are subtracted before calculating the 

amount of sales tax due on the sale. However, early-payment 

discounts and manufacturer’s rebates, regardless of 

whether the rebate is assigned or paid to the seller at the 

time of sale or later, paid directly to the purchaser by the 

manufacturer, cannot be subtracted. 

Interest, account service fees and late fees 

In general, interest, service fees, or late fees for granting 

credit to the customers, enabling them to pay the seller 

over a period of time, are not part of the selling price of 

the goods or services and, therefore, are not subject to 

sales tax. 

However, a late fee charged by the seller to the customer 

for the latter’s failure to return rented goods on time is 

part of the charge for the taxable rental of the goods for 

an additional period. 

Deposits 

Deposits on rented, leased, or loaned goods are not considered 

to be part of the taxable service, unless the seller 

retains a part of the deposit when the customer returns 

the goods. In the latter case, sales tax is due at the time 

the seller retains part of the deposit as the charge for the 

rental or lease of the goods for an additional period or as 

compensation for damage to the rented goods. 

Excise taxes 

Most excise taxes imposed by state and federal governmental 

entities on manufacturers, importers, producers, 

distributors, or distillers of specific goods are included 

in the price paid by the customer and subject to sales tax. 

However, state-imposed excise taxes on motor fuel (or 

gasoline) and diesel are part of the price per gallon paid 

for the fuels, but are not part of the taxable base. 

Trade-ins 

Sellers who accept a good as a trade-in and reduce the 

selling price accordingly must only charge sales tax on 

the reduced price, provided that they plan to resell the 

traded-in good. 

441


Barter transactions and exchange of items 

A barter transaction or an exchange of items is different 

from a trade-in because the swapped items are normally 

not intended for resale; for example, where a private 

individual agrees with another private individual to trade 

a boat for a dirt bike of similar value. Occasionally, businesses 

may also be engaged in barter transactions or may 

exchange goods or services; for example, a plumber who 

repairs a broken water heater for a mechanic in exchange 

for repair work on his automobile. In either of these circumstances, 

sales tax is due on the value of the goods or 

services given in trade. Private individuals pay sales tax on 

exchanged motor vehicles when they register the vehicles 

with the State Department of Motor Vehicles. 

Loyalty cards 

The Department of Taxation and Finance has issued a 

sales and use tax memorandum describing the procedures 

that sellers must follow to properly disclose to customers 

that certain discounts received through store loyalty cards 

are “manufacturer’s discounts”. 

Businesses may use store loyalty cards to offer their customers 

an incentive to shop frequently at their stores. 

These incentives often include discounts that are activated 

by scanning the customer’s loyalty card at the cash 

register. When these loyalty card discounts are given and 

the discounted item is subject to sales tax, the amount 

subject to sales tax generally depends on whether the discount 

reflects a manufacturer’s discount or a store discount. 

If the store is reimbursed for the amount of the 

discount by the manufacturer, distributor or other third 

party, the discount is a “manufacturer’s discount”. If the 

store receives no reimbursement from a third party for 

the amount of the discount given, the discount is a “store 

discount”. 

Generally, when a customer purchases an item subject 

to sales tax and receives a manufacturer’s discount, the 

amount subject to sales tax is the full price of the item 

without subtracting the discount. For store discounts, 

however, the amount subject to sales tax is the price of the 

item after the discount is subtracted. 

In order to ensure that the customer is aware that the full 

purchase price is subject to sales tax, the store must adequately 

disclose to the customer, at or before the time of 

purchase, that a discount is a manufacturer’s discount. 

If the seller fails to adequately disclose this information 

to the customer, the seller must collect sales tax from the 

customer on the reduced price of the item. However, in 

this case, when the seller files its sales tax return, it must 

still remit sales tax on the full price of the item before the 

discount; i.e. the seller will be required to pay itself the 

sales tax on the amount of the manufacturer’s discount. 

Although these rules apply to purchases at the seller’s 

store, the same rules apply with respect to online sales 

in respect of which discounts are given through a loyalty 

card or a special discount code. 

TSB-M-11(10)S, New York Department of Taxation and 

Finance, 29 June 2011. 

442 

Pennsylvania 


A bill presented to the House of Representatives would, 

if enacted as currently drafted, extend the sales and use 

tax definition of “maintaining a place of business in this 

Commonwealth” under the Tax Reform Code to include 

the following provisions: 

– a click-through nexus provision under which there 

would be a rebuttable presumption that remote 

sellers have nexus if they solicit sales with links on instate 

businesses’ Internet pages, if the total turnover 

derived from such referrals exceeded USD 10,000 in 

the preceding 12 months; 

– a provision that presumes nexus for members of the 

same “integrated business enterprise”, if any of the 

members of the group have nexus, directly or indirectly 

through an agent or representative, by maintaining 

or using a physical place of business or regularly 

soliciting orders; and 

– an affiliate nexus provision under which there would 

be a rebuttable presumption that a remote seller has 

nexus if an affiliate, who is a member of the same 

controlled group of corporations: 

– has nexus and sells goods under the same or a 

similar business name; 

– uses the same or similar trademarks, trade 

names, and service marks; and 

– advertises, promotes, or facilitates sales by the 

remote seller, using in-state employees or instate 

facilities, or performs maintenance services 

or delivers, installs, or assembles goods there. 

In addition, the bill, as currently drafted, would require 

remote sellers, who are not required to collect sales tax, 

to notify their customers on their retail Internet websites, 

in their retail catalogues, in their telemarketing scripts or 

similar marketing tools, and on receipts and invoices that, 

unless the purchase is exempt or non-taxable, the customer 

must pay the tax on the use of the purchased items. 

Furthermore, such non-collecting remote sellers would 

be required, on an annual basis, to send, both to their instate 

customers, who purchased for more than USD 500 

in the preceding calendar year, and to the Department of 

Revenue, forms detailing the customer’s purchases for 

the year. 

HB 14, presented to the House of Representatives on 3 

October 2011. 

Texas 

Internet hosting 

A person who only uses an Internet site hosted by a third 

party is not considered to be engaged in business in the 

state for sales and use tax nexus purposes. 

Persons hosting Internet sites are not required to: 

– examine the user’s data to determine the applicability 

of sales and use tax to the user; 

– report the user’s activities to the Comptroller of 

Public Accounts; or 


– advise the user as to the applicability of sales and use 

tax. 

“Internet hosting” means providing access to an unrelated 

party to computer services over the Internet using property 

that is owned or leased and managed by the provider, 

and on which the user may store or process his own data 

Austria 

Withholding mechanism 

Under the special withholding mechanism laid down by 

Sec. 27(4) of the VAT Act, non-resident suppliers with 

no seat or fixed establishment in Austria must charge the 

VAT due in Austria to their customers and, instead of 

paying the VAT to their suppliers, the customers must 

withhold it and remit it to the tax authorities in the name 

and on behalf of the non-resident supplier. Where customers 

fail to fulfil this withholding obligation (i.e. they 

instead pay the total amount invoiced, including the 

VAT, to their non-resident supplier), the tax authorities 

can hold the customer liable for any loss of VAT revenue. 

By its decision of 7 July 2011, No. 2008/15/0010, the Verwaltungsgerichtshof 

declared that non-resident suppliers 

are not required to mention on their invoices that the 

withholding mechanism applies. It is for the customer to 

determine whether or not the conditions laid down by 

Sec. 27(4) of the VAT Act are fulfilled. Nevertheless, due 

to the fact that the enforcement of the customer’s liability 

is at the discretion of the tax authorities, the latter can 

only hold a customer liable for payment of VAT which 

his supplier failed to remit if they prove that the customer 

knew or should have known that the conditions for withholding 

the VAT were fulfilled, i.e. the tax authorities 

must prove the customer’s lack of due diligence. 

From our correspondent Hannes Gurtner 

Leitner+Leitner, Linz 

Canada 

Sales of cocaine and marijuana 

Bailey v. R., [2011] GSTC 76 (Tax Court of Canada 

(Informal Procedure)) 

This was an attempt by three appellants to bypass going 

to trial in the Tax Court by having the Court rule on a 

motion that their sales were zero rated; it failed. 

Bailey, Payeur and Dion were each assessed for not remitting 

GST on illegal sales of marijuana or cocaine. Each of 

them has appealed, using the same counsel. Their notices 

VAT Case Notes 



or use software that is owned, licensed or leased by the 

user or the provider. The term does not include telecommunications 

services. 

HB 1841, Laws 2011, in effect from 17 June 2011. 

From our correspondent Rob van Brederode, 

New York University, School of Law, New York, NY 

of appeal make various claims, including (a) that they 

cannot be liable as agents of the Crown to collect tax on 

illegal sales; (b) that they cannot have been in a partnership 

for an illegal purpose; and (c) that the assessments 

wrongly extrapolated a few months of sales to two years. 

Each appellant brought a motion to strike out the Crown’s 

Reply, on the basis that the drugs they are alleged to have 

sold are zero rated by Para. VI-I-2(d). 

Para. VI-I-2(d) zero rates a “drug that contains a substance 

included in the schedule to the Narcotic Control 

Regulations”, subject to an exception. Marijuana and 

cocaine are both included in the Schedule to the Narcotic 

Control Regulations, so at first blush one might think it 

obvious that they are zero rated. 

However, Justice Patrick Boyle denied the motion, ruling 

that the matter must proceed to trial. A recent Court of 

Quebec case (Robitaille), dealing with the parallel Quebec 

sales tax provision, had ruled that “drug” means only a 

drug that is a medicine, and does not apply to street drugs. 

That decision was based on the meaning of “drug” in Sec. 

VI-I-2, determined to mean “medication”, in a very different 

context (medical diagnostic kits), in Centre Hospitalier 

Le Gardeur. 1 

Due to the Robitaille case, it was not at all clear that the 

drugs at issue were zero rated, and it certainly could not 

be said that the Robitaille argument had no chance of 

success in the Tax Court. Thus, a full trial will be required 

to consider the zero rating argument. Justice Boyle also 

pointed out (Para. 30) that the Narcotic Control Regulations 

list exceptions to the inclusion of cannabis, and evidence 

may be required to establish whether the marijuana 

sold falls within any of the exceptions. 

In my view, the Court was clearly correct to rule that the 

matter could not be resolved on the motion. The argument 

that “drug” means “medication” can certainly not 

be said to be a definite loser, given the Robitaille and Le 

Gardeur cases. In fact, the argument may well succeed. 

One can note that Paras. VI-I-2(a) and (b) zero rate “a 

drug included in” a particular schedule, while Para. (d) 

1. [2007] GSTC 170 (TCC). 

443

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