The New EU Place-of-Supply Rules from a ... - empcom.gov.in

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If Member State 1 treats finance lease as a supply of goods, the supply is deemed to be made at the place where transport of the goods begins or where the goods are located at the time of the supply (Member State 1). If Member State 2 treats the transaction as a supply of services, that service is deemed to be supplied at the place where the customer is established (Member State 2), which results in double taxation. In the opposite situation, the transaction would not be taxed at all. Furthermore, the new obligation to also report in the recapitulative statement cross-border services subject to the reverse charge, will likely show these mismatches. In the absence of a harmonized treatment of finance lease transactions, the problem would be resolved if, in respect of individual leasing contracts, the tax authorities of the lessee’s Member State were to adhere to the qualification applicable in the lessor’s Member State. A similar issue may arise in respect of repair of movable goods, which, depending on the relative value of the work and the spare parts used for the repair, may be treated as a repair service or as a supply of goods (the spare parts). This problem would be resolved if all Member States were to take the position that all goods used in the framework of repairs of goods are ancillary to the repair service. 3. Status of the Recipient To a large extent, the new place-of-supply rules depend on the fact of whether the customer qualifies as a taxable person (B2B) or does not qualify as a taxable person (B2C). In this framework, the new Art. 4 provides that: – taxable persons who also carry out activities or transactions that are not considered to be taxable supplies of goods or services; and – non-taxable legal persons who are identified for VAT purposes must be considered to be taxable persons in respect of all services rendered to them. From a practical perspective, the first question is whether that provision applies to all customers, regardless of whether they are established within or outside the European Union and, if that rule also covers customers outside the European Union, how the service provider must determine that his customer is a taxable person or is to be regarded as such and, consequently, that he should apply the place-of-supply rules applicable to B2B services. As regards customers established within the European Union, their VAT identification number should play a crucial role for the purposes of determining their VAT status. If the customer is able to provide a VAT identification number to the service provider and the tax authorities confirm through the VIES4 that that number is valid, the service provider should have sufficient proof that he supplied the service to a taxable person and that the B2B place-of-supply rules apply. In addition, it should be the responsibility of the customer to decide when or for which transactions to use his VAT identification number (private versus business purpose). The © IBFD INTERNATIONAL VAT MONITOR MARCH/APRIL 2009 Articles use of the VAT identification number as a means to verify the VAT status of a customer is a continuation of the existing practice applicable to intra-Community supplies of goods, intra-Community transport of goods and other “intra-Community services”. In order to have a useful tool to verify the validity of the VAT identification numbers of their customers, service providers should have access to the VIES without any delays and, without revealing information protected by legislation on privacy or commercial secrets, the VIES should contain more detailed information, such as the business’s name and address, date of issue (and cancellation) of its VAT identification number, name and address of its fixed establishment(s), etc. The VIES should also indicate whether or not an individual company forms part of a VAT group. Finally, the functionality of the VIES should be enhanced by allowing “batch validation” (i.e. validation of large quantities of VAT identification numbers at the same time). In respect of services supplied to customers established outside the European Union, the service provider must also hold proof that his customer qualifies as a taxable person as defined in Art. 9 of the VAT Directive. All Member States should provide uniform and clear guidance as to how the VAT status of those customers must be ascertained. The evidence should be flexible and depend on the circumstances, and not be limited to certain specific documentation. The evidence could, for example, consist of an order form, which mentions the customer’s business address and trade registration number, a printout of the customer’s website on which it presents itself as a commercial business, or a printout of the website of the tax authorities of the customer’s country (e.g. for countries neighbouring the European Union) or any other form of evidence provided by those authorities indicating that the non-EU customer is engaged in economic activities. Although most companies qualify as “full” taxable persons for VAT purposes in respect of all their activities, there are exceptions to that rule. Depending on the circumstances, “passive” holding companies generally do not qualify as taxable persons and even “active” holding companies may only be considered to be taxable persons for part of their activities. The same applies to pub- . This interpretation would be in line with Art. (2) of the VAT Implementing Regulation (Council Regulation EC 1777/200 of 17 October 200 ), which provides that, where a taxable person only assembles the different parts of a machine all of which were provided to him by his customer, that transaction must be treated as a supply of services. On the basis of the judgment of the European Court of Justice (ECJ) in Card Protection Plan (judgment of 2 February 1999 in Case C- 49/9 , [1999] ECR I-97 ), it can be argued that the supply of spare parts is ancillary to the repair service because the supply of spare parts does not constitute for the customer an “aim in itself ” but a means of better enjoying the principal (repair) service. 4. VAT Information Exchange System. . See Arts. 44, 47, 49, 0, , 4, and . . ECJ judgments of 21 October 2004 in Banque Bruxelles Lambert SA (BBL) v. Belgian State, Case C-8/0 , [2004] ECR I-101 7; and of 20 June 199 in Wellcome Trust Ltd. v. Commissioners of Customs and Excise, Case C-1 /94, [199 ] ECR I- 01 . 101
Articles lic hospitals, universities, libraries and other public institutions. In order to ensure administrative simplicity, the tax authorities should confirm that customers with a dual VAT status and those that are also performing nontaxable supplies, such as public authorities, should be treated as taxable persons for the purposes of the placeof-supply rules if they hold a valid VAT identification number, even if that number was assigned to them solely for the purpose of accounting for VAT on their intra- Community acquisitions of goods. The fact that the service provider has received confirmation of the validity of his customer’s VAT identification number through the VIES should be considered to mean that the service provider has applied the B2B place-ofsupply rules with sufficient due diligence. 4. Place-of-Supply Rules As regards services supplied to taxable persons, the new place-of-supply rules consist of a general rule (see 4.1.), a number of specific rules (see 4.2. to 4.4.), and a broad override rule (see 4. .). 4.1. General rule Under the new Art. 44, the place of supply of services to a taxable person acting as such is the place where that person has established his business. However, if those services are provided to a fixed establishment of the taxable person, the place of supply of those services is the place where that fixed establishment is located. Unless specifically provided otherwise, all B2B services are subject to the new general place-of-supply rule, which, however, does not take precedence over the specific rules. Consequently, the general rule only applies if the service is not covered by one of the specific rules, 7 which may give rise to difficulties if the service consists of several elements that, considered separately, would be subject to different place-of-supply rules because the new Art. 44 does not indicate how bundled services must be treated and how “separate services” must be distinguished from “ancillary services”. 8 Example A service provider established in Member State 1 supplies a bundled service to a taxable person in Member State 2, which consists of the repair and maintenance of an immovable property located in Member State 3, and management and consultancy services. The price for the bundle consists of a single fee. If the repair and maintenance services are considered to be the principal services, the entire supply is deemed to be supplied in Member State 3, i.e. where the immovable property is located. On the other hand, if the management and consulting services are considered to be the principal services, the entire supply is deemed to be supplied in Member State 2, i.e. where the recipient of the service has established its business. Under ECJ case law, there is a single supply, particularly, where one or more elements are to be regarded as constituting the principal supply, whilst one or more elements are to be regarded as ancillary supplies which share the tax treatment of the principal supply. 9 In the case of a complex service, the different elements are so closely linked to each other that they can not be split up in order to ensure rational taxation. 10 In line with the ECJ’s case law, a supply of services should be considered to be the principal supply if it is clear that all components of the service are either so closely linked that, from an economic perspective, they form a single, indivisible supply, whose split-up would be artificial, or one component is predominant and other components are ancillary thereto. Criteria that can be used for identifying the principal supply are, inter alia, the wording of the underlying agreement and the pricing. The new Art. 4 broadens the scope of the concept of taxable person in the framework of the place-of-supply rules; however, the use of the phrase “taxable person acting as such” in the new Art. 44 gives rise to the question of whether the general B2B place-of-supply rule only applies where the customer uses the service for the purposes of his economic activities, and not for his non-economic activities, if any. 11 If the words “acting as such” must be interpreted as meaning that the general B2B place-of-supply rule only applies where the customer uses the service for the purposes of his economic activities, that provision would put a disproportionate burden on the service provider. This is contrary to the aim of Directive 2008/8 of contributing to the realization of the internal market by taking away the hindrances for businesses making cross-border supplies 12 . In particular, even though common sense should be followed, there would be a number of cases where the purpose for which services are purchased could prima facie be either for a taxable or a non-taxable purpose, putting the supplier into the difficult position of having to decide whether or not to take the risk of applying the reverse charge. 7. ECJ judgments of 2 September 199 in Jürgen Dudda v. Finanzamt Bergisch Gladbach, Case C- 27/94, [199 ] ECR I-4 9 ; and of 12 May 200 in RAL (Channel Islands) Ltd, RAL Ltd, RAL Services Ltd, RAL Machines Ltd v. Commissioners of Customs and Excise, Case C-4 2/0 , [200 ] ECR I- 947. 8. ECJ judgments of 2 January 2001 in Commission of the European Communities v. French Republic, Case C-429/97, [2001] ECR I- 7; of 2 May 199 in Faaborg-Gelting Linien A/S v. Finanzamt Flensburg, Case C-2 1/94, [199 ] ECR I-2 9 ; of 2 February 1999 in Card Protection Plan Ltd. v. Commissioners of Customs and Excise, Case C- 49/9 , [1999] ECR I-97 ; and of 27 October 200 in Levob Verzekeringen BV, OV Bank NV v. Staatssecretaris van Financiën, Case C-41/04, [200 ] ECR I-94 . 9. See ECJ judgments in Faaborg-Gelting Linien, Card Protection Plan and Levob, see note 8. 10. See Commission v. France (note 8). 11. In its judgment of November 2008 in Kollektivavtalsstiftelsen TRR Trygghetsrådet v. Skatteverket, Case C-291/07, which has not yet officially been published, the ECJ declared that Art. 9(2)(e) of the former Sixth Directive and Art. (1)(c) of Directive 200 /112 must be interpreted as meaning that, where the customer for consultancy services supplied by a taxable person established in another Member State carries out both an economic activity and an activity which falls outside the scope of those Directives, that customer is to be regarded as a taxable person, even where the supply is used solely for the purposes of the latter activity. The ECJ’s decision in that case was, however, based on the fact that the phrase “acting as such” was not included in the placeof-supply rules. By contrast, that phrase is included in the new Art. 44 which raises the issue of how to interpret it. 12. Recitals (1) and (2) of the preamble to Directive 2008/8. 102 INTERNATIONAL VAT MONITOR MARCH/APRIL 2009 © IBFD
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