VAT Modernization and Competition in the Cross-border Mail Market

2.2.1 Fiscal NeutralityEffectively, the competition distortive effect comes in at the point where only one provider isgranted the tax exemption and the other provider is not. The principle of fiscal neutralityincludes the requirement to eliminate the differing treatment for VAT purposes for same-kindservices. However, sometimes, the services provided by two different operators can looksimilar at first, but the similarity can be ambiguous nonetheless. Where some tend to give thefiscal neutrality argument the upper hand, stating that the exemption of public postal servicesis creating distortions in a situation where these services are increasingly exposed to marketcompetition, there is also an important argument to make about the vital social role of postalservices as stipulated in the universal postal service provision of which each member statehas a statutory requirement to provide.The meaning of fiscal neutrality is opaque and viewed in relation to different phenomena. Forexample, internal neutrality is usually distinguished from external neutrality. Levying the taxin a general manner, covering all goods as well as the supply of services and the full right todeduction of input tax through the supply chain, with the exception of the end consumer,ensures internal neutrality. External neutrality provides for equal tax treatment regardinginternational trade. The VAT case at the European Court of Justice treated the principle ofinternal neutrality, whilst the external neutrality of VAT treatment is another and lessprominent matter from the viewpoint of predominantly national postal markets. 19The principle of neutrality precludes treating similar, and therefore competing, suppliesdifferently for VAT purposes. Consequently, exemptions, tax rates and special schemesshould be applied equally within a member state. The principle of fiscal neutrality wassupported in a number of ECJ cases (e.g. C-169/04 of Abbey National, concerning the scopeof the VAT exemption for management services of special investment funds). Concurrently,the universal service obligation requires the USP to provide ubiquitous service at a uniformprice and at a reasonably uniform standard of quality. These requirements do not apply tocompeting postal operators. The consideration that the removal of the exemption rule couldimpact the consumer in terms of affordable postal services and the universal commitmentmust also be given equal priority in the debate. Experiences from the past have shown that19 IPC Strategic Perspectives on VAT, October 200910