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

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Example A transport company, established and VAT registered in Member State 1, transports goods for a business customer established outside the European Union. The transport begins in Member State 1 and ends in Member State 2. Based on the new Art. 44, the transport service is deemed to be supplied outside the European Union. However, if the intra- Community transport of the goods passes through several other Member States and if all those Member States apply the effective-use-and-enjoyment criterion in the sense that transport service are effectively used and enjoyed at the place where transport of the goods physically takes place, 17 part of the transport service is deemed to be supplied in all the Member States concerned. However, if Member State 1 (Member State of departure) applies the effective-use-and-enjoyment criterion and interprets it as meaning that transport services are effectively used and enjoyed at the place where the transport begins, the entire service is subject to VAT in Member State 1. If Member State 2 (Member State of arrival) applies the effective-use-andenjoyment criterion and interprets it as meaning that transport services are effectively used and enjoyed at the place where the transport ends, the entire service is subject to VAT in Member State 2. In order to avoid double taxation and additional compliance costs for businesses, the effective-use-andenjoyment criterion should be defined clearly and unambiguously at EU level. In that respect, the following interpretations would not lead to satisfactory results and should therefore be avoided: – the place where the ultimate recipient of the service effectively uses and enjoys the service should not be decisive, because the service provider may not even be aware of the identity of the ultimate recipient(s); – the place where the recipient of the service generates turnover from the use of the service should not be decisive, because, in respect of customers established outside the European Union, it would automatically shift the place of supply of the services to the place outside the European Union where the recipient of the services is established; – percentage use of the services by the customer or percentage turnover derived by the customer from the use of the services within and outside the European Union would not be workable in practice, because the interpretation is based on information that is normally not available to the service provider; – actual physical use of the service by the recipient would give rise to high compliance costs for both the service provider and the customer, in particular if actual use of the services cannot be established. In this respect, it should be noted that some services are not physically used. The place of effective use and enjoyment of a service should be determined in such a way as to eliminate risks of double taxation and divergent interpretation between Member States. In this respect, common binding rules would seem to be key in order to achieve the simplification the new rules are aimed to achieve. Furthermore, it should be emphasized that the principle of proportionality will play an important role in preventing that Member States in which only a minor part of a transaction is effectively used or enjoyed, are able to © IBFD INTERNATIONAL VAT MONITOR MARCH/APRIL 2009 Articles claim that the entire supply was made within their territory. 18 5. Administrative Obligations The most important arrangements accompanying the new place-of-supply rules are the application of the reverse charge mechanism, including the scenario in which the service provider has a fixed establishment in his customer’s Member State, and the obligation for service providers to include cross-border B2B services in their periodic recapitulative statements. 5.1. Reverse charge mechanism Under the new Art. 19 , Member States must apply the reverse charge mechanism to the services falling under the new Art. 44 rendered by non-resident service providers, which means that that mechanism is not compulsory in respect of services that are excluded from the general B2B place-of-supply rule even if the place of supply is where the customer is located, for example, services connected with immovable property. However, Member States are entitled to apply the reverse charge mechanism on a voluntary basis to the latter services. For practical reasons, it would have been better if the scope of the new Art. 19 had been extended to all categories of services supplied by non-resident service providers to taxable persons located where the supply takes place, including supplies of goods with assembly and installation. Alternatively, the place of supply of services connected with immovable property should have shifted from the place where the property is located to the place where the recipient is established or registered (a mechanism comparable to the “safety net” provision currently applicable to intra-Community acquisitions of goods under Art. 41). Finally, a simplification measure could have been introduced in order to avoid registration of taxable persons involved in rendering services connected with an immovable property located in a Member State where they are not established. 19 Such a simplification could be applicable in respect of all services that are deemed to be supplied at a place different from that where the customer is established. The services referred to in the new Art. 44 are generally deemed to be supplied at the place where the customer is established. However, as a consequence of the application of the effective-use-and-enjoyment criterion laid down by the new Art. 9a, those services may also be deemed to be supplied at a place where the customer is not established. Since the new Art. 19 provides that the reverse charge mechanism applies to services, if the service provider is not established at the place where the service is deemed to be supplied, literal interpretation of 17. As, for example, in the new Arts. 48 and 49. 18. ECJ judgment of 18 December 1997 in Garage Molenheide BVBA and others v. Belgian State, Cases C-28 /94, C- 40/9 , C-401/9 and C-47/9 , [1997] ECR I-7281. 19. For example, an approach similar to that which may apply to supplies of non-imported goods, see Art. 1 7. 107
Articles that provision has the effect that, where neither the service provider nor the customer is established in the Member State where the supply is made, the customer must register there in order to account for VAT on the value of the received services, even if the customer is established outside the European Union. Example A transport company established in the United States transports goods from one Member State to another on behalf of another company established in the United States. The Member States involved in the transport service apply the effective-use-andenjoyment criterion to the effect that the service is effectively used and enjoyed at the place where the transport actually takes place. Under the general system of VAT (Art. 193), the US transport company would be liable for VAT and thus would have to register for VAT purposes in the Member State(s) where the transport actually takes place. However, under the new Art. 196, the US customer could also be held liable and therefore obliged to register for VAT purposes in those Member State(s) and account for VAT under the reverse charge mechanism on the value of the received transport service. In view of the seventh recital of the preamble to Directive 2008/8, the new Art. 19 should only apply if the recipient of the services is established in the Member State where the services are deemed to be supplied. That recital states that the reverse charge mechanism is obligatory “where a taxable person receives services from a person not established in the same Member State”. The words “in the same Member State” clearly refer to the Member State where the recipient of the service is established. Under teleological interpretation, the new Art. 19 should not apply to services that are deemed to be supplied in a Member State where the customer is not established. The reverse charge mechanism is a simplification measure aimed at preventing the situation that the service provider must register in the Member State of the supply. It would be contrary to the nature of the simplification measure if, instead of the non-resident service provider, the non-resident customer would be required to register in another Member State. 5.2. Fixed establishments The new Art. 192a provides that, for the purposes of the liability to remit the tax to the authorities, a taxable person who has a fixed establishment within the territory of the Member State where the tax is due is to be regarded as not being established there, if: (a) he makes a taxable supply of goods or services within the territory of that Member State; and (b) his establishment within the territory of that Member State does not intervene in the supply. This legal provision contains two elements that are not entirely clear, i.e. “fixed establishment” and “intervention in the supply”. Although the ECJ has interpreted the concept of fixed establishment on several occasions, 20 its judgments leave the Member States too much room for their own interpretation of that concept in practice. 21 On the basis of the ECJ’s case law, a taxable person’s ware- house or representative office in another Member State should not qualify as a fixed establishment. Example A management company established and VAT registered in Member State 1 supplies management services to a taxable person established in Member State 2. The management company has a representative office in Member State 2. If the representative office does not qualify as a fixed establishment, the management services will be subject to the reverse charge mechanism. However, if the representative office constitutes a fixed establishment, which intervenes in the supply, there is a good chance that the authorities of Member State 2 will take the view that the management company’s fixed establishment must issue the invoice relating to the management services and charge the VAT of Member State 2 to the recipient of the services. As regards the question of whether or not the non-resident service provider’s fixed establishment in the customer’s Member State intervenes in the supply made by the non-resident service provider, several different positions are possible. Member States may take the view that the fixed establishment “intervenes” if it: – acts as a subcontractor of the service provider’s nonresident head office; – carries out specific pre-sales activities, for example advertising, or provision of product information to potential customers; – acts as the non-resident service provider’s invoicing agent; – is merely registered in the Member State where the service is deemed to be supplied. The service provider’s fixed establishment in the customer’s Member State should be considered to intervene in the supply if the invoice mentions the fixed establishment’s address and VAT identification number, or the contract expressly mentions the fixed establishment as a “contracting party”. This approach has the advantage that the recipient can easily check whether the conditions for his or his supplier’s VAT liability are fulfilled. In addition to the lack of clarity of the concept of fixed establishment, it is unclear what actions the customers of non-resident service providers can be expected to undertake to ensure that the invoices they receive from those service providers are correct. If the invoices mention an amount of VAT, must the customer, in order to avoid possibly being held jointly and severally liable for payment of that VAT, check whether: – the service provider rendered the service under the correct VAT identification number? 20. ECJ judgments of 4 July 198 in Günther Berkholz v. Finanzamt Hamburg-Mitte-Altstadt, Case 1 8/84, [198 ] ECR 22 1; of 17 July 1997 in ARO Lease BV v. Inspecteur der Belastingdienst Grote Ondernemingen, Amsterdam, Case C-190/9 , [1997] ECR I-4 8 ; and of 7 May 1998 in Lease Plan Luxembourg SA v. Belgian State, Case C- 90/9 , [1998] ECR I-2 . 21. Under ECJ case law, a fixed establishment is an establishment with a minimum degree of stability derived from the permanent presence of both the human and technical resources necessary for the provision of the services on an independent basis. 108 INTERNATIONAL VAT MONITOR MARCH/APRIL 2009 © IBFD
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