1. 1 VAT for Public Entities and Charities Current Issues and Proposals CFE Forum 27 April 2006 Rolf DIEMER European Commission DG Taxation and Customs Union Unit D1: Value Added Tax and other turnover taxes

2. 2 Determining a public body's VAT liability is a complicated affair Consequences on taxation and deduction. Public activities Outside the scope ExemptTaxable Inside the scope Treatment of public bodies under the EU's 6th VAT Directive.

3. 3 Public activities Outside the scope Exempt Taxation of outputs Taxable No VAT on supplies of goods and services Inside the scope No VAT on supplies of goods and services VAT on supplies of goods and services at standard or reduced rate

4. 4 Public activities Outside the scope Exempt Deduction on inputs Article 17.2 of 6th Directive: right of deduction for taxable activities only. Article 17.5 and Article 19.1 of 6th Directive: pro rata of deduction when inputs used both for taxable activities and activities in respect of which VAT is not deductible. Optional inclusion of non-taxable subsidies for pro rata calculation. Taxable No right of deduction Inside the scope Right of deductionNo right of deduction

5. 5 Article 4 of 6th VAT Directive 1."Taxable person" shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity. 2. The economic activities referred to in paragraph 1 shall comprise all activities of producers, traders and persons supplying services including mining and agricultural activities and activities of the professions. The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall also be considered an economic activity. 3. (…) 4. (…)

6. 6 5.States, regional and local government authorities and other bodies governed by public law shall not be considered taxable persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues, fees, contributions or payments in connection with these activities or transactions. However, when they engage in such activities or transactions, they shall be considered taxable persons in respect of these activities or transactions where treatment as non-taxable persons would lead to significant distortions of competition. In any case, these bodies shall be considered taxable persons in relation to the activities listed in Annex D, provided they are not carried out on such a small scale as to be negligible. Member States may consider activities of these bodies which are exempt under Article 13 or 28 as activities which they engage in as public authorities.

7. 7 Supplies of goods and services Inside / Outside the Scope (1) General rule: public body's "economic activities" are inside the scope of VAT. Exception: economic activities in which a public body engages as a "public authority" are out of scope unless significant distortions of competition occur. Annex D activities are always taxable except when negligible. A public body's exempt economic activities may be treated by Member States as outside the scope of VAT.

8. 8 When does the exception apply? Two conditions must be fulfilled (ECJ cases 260/98, 408/97, 358/97, 276/97, 202/90, 129/88, 231/87) 1) A body governed by public law i.e. subject to special legal regime which differs from that applicable to private economic operators. 2) Acting as a "public authority" Supplies of goods and services Inside / Outside the Scope (2)

9. 9 List of activities referred to in Annex D Telecommunications1. The supply of water, gas, electricity and steam 2. The transport of goods3. Port and airport services4. Passenger transport5. Supply of new goods manufactured for sale 6. The transactions of agricultural intervention agencies in respect of agricultural products carried out pursuant to regulations on the common organization of the market in these products 7. The running of trade fairs and exhibitions 8. Warehousing9. The activities of commercial publicity bodies 10. The activities of travel agencies11. The running of staff shops, cooperatives and industrial canteens and similar institutions 12. Transactions other than those specified in Article 13(A)(1)(q), of radio and television bodies 13. Supplies of goods and services Inside / Outside the Scope (3)

10. 10 Inside the scope of the tax Taxed and exempt activities Many of the activities of public bodies which are inside the scope, are exempt as a result of the provisions in articles 13 and 28 of the 6th VAT Directive. hospital school

11. 11 Treatment of some public activities Provision by the local authority of: Taxable (T)Exempt (E) Non-business activities (NB) parking sites on public roads D(T/NB), DK(T/NB),E, EL, FIN, I, NL(T/NB), P, S, UK(T/NB) A, B, F, IRL, L parking sites on non-public roads A(T/E), B, D(T/NB), DK(T/NB), E, EL, F, FIN, I, L(T/E), NL, P, S, UK(T/NB) IRL Air traffic control services to airlines A(T/E), B, DK, E, FIN(T/E), IRL, UK I, SEL, F, L, NL, P Veterinary services in respect of live stock A, DK, F, FIN, I, IRL, NL, P, S, UK(T/NB) B, D, E, EL, L Information provided by MS in 2000

12. 12 Problems caused by this treatment  Lack of neutrality  Lack of harmonization 1.Lack of neutrality Distortion of competition public / private sector Non-deduction in the public sector results in: - Lower rates of investment. - No outsourcing of those activities which could more efficiently be performed by specialized providers. - Cascade effect of exemptions in supplies to businesses. - Expensive tax avoidance "mitigation" schemes.

13. 13 Problems caused by this treatment 2. Lack of harmonization No community approach on treatment of public activities. MS define: - what a public body is - when it acts as a public authority - when there is a significant distortion of competition - when an economic activity is significant MS allowed to consider exempt activities of public bodies as activities in which they engage as public authorities.

14. 14 A way forward Little chance for radical reform Improvements in the following areas: a) Through legislative action (amending the 6th Directive). *Review of Annex D *Deletion of option to treat exempt activities as out of scope *A right of deduction for input VAT relating to outside the scope supplies? *Review of certain exemptions in article 13 A b) Through litigation (complaints, monitoring and preliminary requests for a ruling) *Ensure taxation of public bodies when competitive conditions require it

15. 15 Reviewing Annex D Identify areas where economic inefficiencies and distortions of competition due to "out of scope" treatment are greatest. Criteria - Economic importance of the activities. - Significant presence of "business" providers. - Distortions to cross-border trade in goods/services. - Public activity is relevant business input and non-taxation results in "VAT cascade effect".

16. 16 Conferring a right of deduction/VAT refund for outside the scope activities VAT refund systems for outside the scope activities in some MS (on the fringe of 6th Directive). Pros:corrects distortions due to non-deduction of VAT. Cons: - would worsen distortions with private sector unless the "significant distortion of competition” test is applied strictly. - distinguishing input VAT belonging to out of scope and exempt activities may be difficult. UKSWFIPTFRLXATNL

17. 17 Review of certain "social" exemptions" (article 13 A) Exemptions of certain activities in the public interest (postal services, health, education, culture, sport, etc.) are causing distortions of competition. The Commission has started the review of these exemptions in 2003, by proposing the taxation of public postal services and giving Member States the possibility to tax it under a reduced rate. However, due to the opposition of several Member States, the discussions in the Council have not progressed. The purpose of this review is to simplify and modernise the current legal framework and adapt it to the modern reality. This might involve the redrafting of the legal wording but it is still premature to say if some and which of the current exemptions will be removed.

18. 18 A strategy for the future Achieve greater neutrality and harmonisation of the tax by: 1) Widening Annex D’s scope to include certain activities performed by public bodies. Introduce reduced rates where needed for social reasons. 2) Exploring new options for the treatment of outside the scope supplies. Introduce a right of deduction/VAT refunds? 3) Testing existing VAT exemptions to ensure they remain appropriate. 4) Closer monitoring of Member States´ legislation and practice in this area.

19. 19 Current VAT rules applicable to Charities Charitable activities Outside the scope ExemptTaxable Inside the scope

20. 20 Charitable activities Activities implying the supply of goods or services given free of charge are, in principle, outside the scope of VAT (see Article 2 of 6th VAT Directive). Exempted activities include e.g. social welfare, education, health, sport, culture (see Article 13 and 28 of 6th VAT Directive). Trading of goods or services are taxable activities.

21. 21 Main problem of Charities The main concern of a Charity is to find a way of reducing the weight of VAT, either on the input side or on the output side, thereby increasing the amount of revenue available to spend on charitable causes. The incapacity to deduct the input VAT incurred on the purchases of goods and services made by the Charity, which are related to outside the scope and exempted activities, constitutes a cost for that Charity.

22. 22 Possible solutions Addressing the problem outside the VAT system by introducing VAT refund schemes in favour of Charities in order to allow them to recover their non-deductible input VAT? Depends upon a pure « national » budgetary decision that may not affect the VAT own resources of the Community. Better implementation in some Member States of the possibility to apply VAT reduced rates to supplies of goods and services made by certain Charities (see Annex H of 6th VAT Directive).  Without a modification of the 6th VAT Directive

23. 23 Possible solutions Introducing a “zero-rating” for supplies made by Charities? Not realistic; poses problems of its own. Abolishing (some) exemptions while introducing the possibility to apply more reduced rates?  Through a modification of the 6th VAT Directive

24. 24 Commission's Timetable The review of the rules on public bodies will include close related issues such as subsidies and social exemptions; An assessment of the social and economic impact of possible legislative solutions will be undertaken in 2006; The Commission analysis and the package of possible solutions will be put in the Commission's web site for public consultation in late 2006; A legislative proposal is programmed for 2007.

25. 25 Thank you for your attention !