1. 1 VAT for Public entities and Charities The point of view of a tax adviser Christian Amand Fiscal Comittee of the CFE, Brussels 27 April 2006

2. 2 A two sides approach  Supply (output) Taxable > < VAT exempt (price) / outside of the scope (eg subsidies) Is VAT due ?Is VAT due ? Where VAT is due ?Where VAT is due ? Who is liable of the payment of the VAT ?Who is liable of the payment of the VAT ? According to which formalities is the VAT due ?According to which formalities is the VAT due ? Does it allow the deduction of input VAT on costs ?Does it allow the deduction of input VAT on costs ?  Costs VAT on costs (input) VAT on costs (input) Taxable supplies deduction of VATTaxable supplies deduction of VAT VAT exempt supplies no deduction of input VATVAT exempt supplies no deduction of input VAT Complex rules about services acquired abroadComplex rules about services acquired abroad

3. 3 First Management issue Appropriate VAT qualification of the activity  For the supplier, a taxable supply means Reduction of costs Reduction of costs Increase of the sales price Increase of the sales price  A VAT exempt supply means Possibly, a reduction of sales price Possibly, a reduction of sales price Increase of costs Increase of costs Reduction of outsourcingReduction of outsourcing Renders group cooperation more difficultRenders group cooperation more difficult Increases the need of external financingIncreases the need of external financing  A VAT exempt supply means increase of the prices for the customers (private individuals) increase of the prices for the customers (private individuals)

4. 4 Taxable/ non taxable Supply Irrelevant criteria for a distinction  Commercial activity  not for profit Except when specifically listed in article 13 of the Sixth VAT directive Except when specifically listed in article 13 of the Sixth VAT directive  legal structure Except if public body Except if public body And some VAT exempt operations listed in article 13 of the Sixth VAT Direcitive And some VAT exempt operations listed in article 13 of the Sixth VAT Direcitive

5. 5 Qualification of the supply Relevant criteria (1)  Economic activity : “Any activity in exchange of a consideration” Direct link between the supply and the consideration Direct link between the supply and the consideration Consideration (payment) v. subsidy Consideration (payment) v. subsidy Price is the taxable basePrice is the taxable base Subsidy paid by a third partySubsidy paid by a third party should be included in the taxable base if directly linked with the price of the goods should be included in the taxable base if directly linked with the price of the goods subsidy should not be included in the taxable base if not directly linked with the price of the goods and services BUT…… subsidy should not be included in the taxable base if not directly linked with the price of the goods and services BUT…… what is the difference between sponsoring and subsidy ? what is the difference between sponsoring and subsidy ?

6. 6 Qualification of the supply Relevant criteria (2)  VAT exempted or not ? List of article 13 of the Sixth VAT Directive: Trade Unions Trade Unions Social security Social security Culture Culture Health Health Education Education

7. 7 Childrens care (article 13(A)(1)(g) and (A)(2) of the Directive 77/388/EEC) Article 13 Exemptions within the territory of the country A Exemptions for certain activities in the public interest A Exemptions for certain activities in the public interest  1.Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of such exemptions and of preventing any possible evasion, avoidance or abuse:  g) the supply of services and of goods closely linked to welfare and social security work, including those supplied by old people's homes, by bodies governed by public law or by other organizations recognized as charitable by the Member State concerned;  2. (a) Member States may make the granting to bodies other than those governed by public law of each exemption provided for in (1) (b), (g), (h), (i), (l), (m) and (n) of this Article subject in each individual case to one or more of the following conditions: - they shall not systematically aim to make a profit, but any profits nevertheless arising shall not be distributed, but shall be assigned to the continuance or improvement of the services supplied,  - they shall be managed and administered on an essentially voluntary basis by persons who have no direct or indirect interest, either themselves or through intermediaries, in the results of the activities concerned,  - they shall charge prices approved by the public authorities or which do not exceed such approved prices or, in respect of those services not subject to approval, prices lower than those charged for similar services by commercial enterprises subject to value added tax,  - exemption of the services concerned shall not be likely to create distortions of competition such as to place at a disadvantage commercial enterprises liable to value added tax.  (b) The supply of services or goods shall not be granted exemption as provided for in (1) (b), (g), (h), (i), (l), (m) and (n) above if: - it is not essential to the transactions exempted,  - its basic purpose is to obtain additional income for the organization by carrying out transactions which are in direct competition with those of commercial enterprises liable for value added tax.

8. 8 Qualification of the supply Relevant criteria (3)  Public body or not ? National constitutional law National constitutional law Taxable if mentionne in a detailled list of taxable activities (annex D) Taxable if mentionne in a detailled list of taxable activities (annex D) Possible economic distortions Possible economic distortions If listed as VAT exempted activity, is treated as VAT exempt business, unless specific option (France,..) If listed as VAT exempted activity, is treated as VAT exempt business, unless specific option (France,..)

9. 9 Qualification of the supply Relevant criteria (4) “A service is ancillary to another one if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied” But : - What about the legal principle of strict interpretation of VATexemptions ? - What about the legal principle of prohibition of distortion of competition ?

10. 10 Second Management issue How to distinguish ?  Sometimes difficult, but possible: Economic v. non economic activies Economic v. non economic activies  Very difficult, and sometimes impossible: VAT exempt v. taxable operations VAT exempt v. taxable operations Private bodies v. public bodies Private bodies v. public bodies Ancillary actvities v. principal operations Ancillary actvities v. principal operations

11. 11 Costs side Taxable operation v. VAT exempt (deductible VAT) > < (non deductible VAT)  Taxable output: Deduction input VATDeduction input VAT Reduction of costsReduction of costs  VAT exempt output : No deduction of input VATNo deduction of input VAT Administrative charge in presence of taxable output (prorata, direct attribution, etc)Administrative charge in presence of taxable output (prorata, direct attribution, etc) Incentive to internalisationIncentive to internalisation Financing taxes collected today taxes by higher taxes to be collected laterFinancing taxes collected today taxes by higher taxes to be collected later

12. 12 Cost side Taxable person v. non taxable person Divergences in the rules concerning the place of supply of services rendered from abroad Sometimes impossible to determine the place of supply of services to public entitiesSometimes impossible to determine the place of supply of services to public entities

13. 13 Suggestions for simplifications  A single system for each kind of business ? And not a mix of Taxable and VAT exempt which increases the cost of application of VAT and reduces the transparancy And not a mix of Taxable and VAT exempt which increases the cost of application of VAT and reduces the transparancy  Simple legal criteria Place of supply: add to business the concept of “non taxable legal person” Place of supply: add to business the concept of “non taxable legal person” Simplify the list of VAT exemptions and delete the concept of “not for profit” Simplify the list of VAT exemptions and delete the concept of “not for profit” Cross-border cost sharing groups Cross-border cost sharing groups  Appropriate VAT rates and deduction of input VAT Zero rate (VAT exemption with deduction input VAT) Zero rate (VAT exemption with deduction input VAT) Option to tax, possibly combined with a reduced VAT rate Option to tax, possibly combined with a reduced VAT rate Refund schemes (AU, NL, FR, DK, FI, SW, UK, LU, PT, UK) Refund schemes (AU, NL, FR, DK, FI, SW, UK, LU, PT, UK)

14. 14 Back to the origin Revisit the methods of legal interpretation Remember the simple and coherent economic objectives of the VAT !