Brussels Briefing — December 2009 

VAT treatment of postal services still under discussion

Due to the recent ECJ ruling (C-357/07, TNT Post UK Ltd) and the development of postal markets, the Swedish Presidency held a meeting on July 16, 2009, to see if Member States were interested in resuming negotiations over the VAT treatment of postal services.

A note subsequently issued by the Presidency at the end of October called on the Council to agree political guidelines on how to proceed over the VAT treatment of postal services.At issue is how to make Directive 2006/112/EC compatible with three existing EU Directives on the liberalization of postal services, while also taking account of specific political problems for Member States.

Whereas the three existing Directives are aimed at improving competition in EU postal markets, the VAT Directive allows for a VAT exemption for certain postal operators, thus creating a distortion of competition.

The Commission presented a proposal in 2003 to remove the exemption. A majority of delegates supported the proposal, but others wished to retain it on the basis that removing it would lead to price increases which could adversely affect certain types of users, create difficulties for postal operators or have an adverse impact on a universal postal service.

In the meantime, the ECJ ruling in the TNT case confirmed that the exemption of public postal services covered any operator, whether public or private, which undertakes to provide all or part of the universal service and is a universal service in the public interest.

The ECJ suggests that postal services aimed at meeting the needs of specific customers, such as economic operators, are not classed as services in the public interest. Following the outcome of the case, Germany, for example, has issued draft legislation implementing the decision. In order to address the current difficulties, the Presidency proposes that postal services be considered taxable services, but with an option for Member States to retain the exemption according to the existing rules. Member States would continue to liberalize their postal markets in accordance with the postal Directives, and those that consider it appropriate could impose VAT on postal services supplied by all postal operators. No reduced rate for postal services would be possible.

The aim of the Council is to have an agreement by June 2010 at the latest, given that December 31, 2010 has been set as the deadline for full liberalization of the postal sector.

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Technical amendments to various provisions of the VAT Directive

In a previous issue of the Brussels Briefing (Brussels Briefing Issue June 2009), we reported that the Council had agreed on a general approach to incorporating technical amendments into the VAT Directive; notably amendments aiming to repair the consequences of the so-called “Lennartz” principle. The adoption of the new proposal by the Council on 22 December brings the discussion to a conclusion.

The “Lennartz” principle allowed taxable persons who include in their economic activities immovable property used simultaneously for business and non-business purposes, to fully recover immediately input VAT incurred on their purchase. Although the non-business use of the goods was subsequently subject to VAT (on the amount of expenditure incurred) spread over the economic lifetime of the property, the principle offered significant cash-flow benefits to taxpayers.

The proposed amendments to the VAT Directive should ensure that the initial right of deduction of such goods closely reflects the business use of the property. In cases of mixed use, it will therefore no longer be possible to deduct upfront all input VAT. Because of the significant amendments previously made by the Council to the Commission's original proposal, especially with regards to the above, the European Parliament had to be re-consulted over the proposals. As a result of the consultation, the European Parliament clarified that since immovable property and related expenditure account for the most significant cases where clarification and strengthening of the rule are appropriate, the initial right of deduction corresponding to the business use of the goods should be applied to immovable property supplied to the taxable person, and important related services.

The Parliament did not support applying the rule to VAT incurred on expenditure related to other goods forming part of the business assets. It believed that doing so would lead to less harmonization by giving too much freedom to Member States.

However, the Commission subsequently refused to consider these views. As a consequence, Member States will be given the option to apply the same measures to movable goods forming part of the assets of the taxpayer and not wholly used to perform taxable activities. Businesses operating in multiple EU Member States should monitor how this option will be implemented in the specific countries where they own movable goods as fixed assets.

The Proposal is now awaiting final agreement. This is expected to happen in early 2010, with the changes effective from 2011.

Data protection and the proposal on administrative cooperation and combating fraud: opinion of the European Data Protector Supervisor

On August 18, 2009, the Commission adopted a proposal for a Council Regulation on administrative cooperation and combating VAT fraud. The administrative cooperation in question raises various data protection and privacy issues. The European Data Protector Supervisor (EDPS) therefore commented on the proposal and highlighted issues that require further attention from the Commission.

The EDPS notes that the proposal does not sufficiently specify the kind of data that are exchanged and the purposes for which the data are exchanged. The proposal allows for any information that may help to effect a correct assessment of VAT to be exchanged – which is a very broad formulation.

As such, there is a risk that tax authorities could use the broad definition for a disproportionate exchange of information. The EDPS therefore urges the Commission to be more precise in its proposal. Furthermore, the EDPS notes that the Regulation could be stricter concerning the use of personal data, which should not be used for other purposes than the one for which they were collected.

Another topic concerns the VIES database. The EDPS notes that the proposal mentions that taxable persons who consult the VIES system should be provided with the name and address associated with the VAT identification number that is checked. The EDPS sees no harm in this new approach. This is good news, as currently only a few Member States show the name and address details when a VAT number is checked. It should therefore lead to increased certainty that a checked VAT number is indeed the VAT number of the customer concerned.

We welcome the report of the EDPS, as it takes data protection seriously, which is in the interest of all EU citizens. Furthermore, the new possibility in VIES to link a VAT number to a name and address will be very useful for taxpayers when they need to check the status of their customers.

New customs regulations threaten the “first sale for export principle”

For several years, the European Commission, together with Member States, has been developing new regulations for customs duties. The results have since been set out in the new Modernized Customs Code (Regulation (EC) No 450/2008), which will enter into effect as soon as the measures for the implementation of this Modernized Customs Code are adopted. The Modernized Customs Code is expected to take effect by June 24, 2013, at the latest.

Although no definitive decision has yet been made, the “first sale for export principle” is expected to be removed from customs regulations.

For years, the “first sale for export principle” has ensured that customs values, and thus the remittance of customs duties, remain limited for enterprises with associated companies outside Europe. The same is true for VAT remittances on imports, and for any anti-dumping duties owed.

This principle basically works as follows:

Suppose that goods are purchased several times before being imported into the European Community (EC). Manufacturer A in China sells the goods to Enterprise B in Japan for 100. Enterprise B, in turn, resells the goods to its associated Enterprise C in the Netherlands, for a price of 120. Enterprise C also pays a royalty of 20 to Enterprise B. The customs value is normally based on the price of the last sales transaction before the goods enter the EC - in this case, 120. The royalty payment must then be added to the last sales price, so the customs value comes to 140.

Because the EC accepts the “first sale for export principle”, it is possible, under certain conditions, to use the transaction between Manufacturer A and Enterprise B to establish the customs value. The price of that transaction was 100, which is also the basis of the customs value, because the royalty payments fall outside of the transaction between A and B. The difference in price, an amount of 40, will not be subject to customs duties, which means a saving of almost 30% in this case.

Consequences and possible actions

Eliminating this principle will have consequences for, among others, enterprises with associated companies outside the EC. According to the new proposed regulations, the customs value, in principle, must be established on the basis of the last sales transaction that occurred before the moment the goods enter the EC.

“In principle,” since a transaction occurring after this moment, but before the import is declared (for example, for a sales transaction that takes place while the goods are kept in the customs warehouse), could also serve to determine the customs value. Prices related to earlier sales transactions of the goods could then no longer be used to determine the customs value. This change would mean that the customs value will not only include a higher sale price (since prices generally rise for transactions higher up the sales chain ), but will also include any royalty payments.

For an enterprise currently using the “first sale for export principle” to determine the customs value of goods being imported, it is important to consider the upcoming elimination of this principle in 2013. These enterprises should consider such steps as creating a new structure for the flow of goods and sales, and amending contractual agreements. Failure to act will result in substantially higher remittance of customs duties, import VAT, and possibly anti-dumping duties.

For a business that will be affected by the elimination of this principle, it is still possible to make use of the principle until June 24, 2013, and by doing so, to realize important cost savings. If this were done, of course, preparation for the elimination of the principle should also be undertaken.

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Judgment C-461/08 (Don Bosco Onroerend Goed): when does demolishing a building lead to the supply of a new building?

The judgment in this case tells us whether a supply of land is exempt from VAT when the building upon it is being demolished. In other words, when does demolishing a building lead to the supply of a new building, or building land, which is subject to tax in accordance with article 12(1) of the VAT Directive?

X BV purchased land from foundation B. A building on that land had to be demolished, because X wanted to build a new building on the land. To make sure that the supply of the land would be taxable, B and X agreed that B should demolish the building before the supply would take place to create VAT taxed building land (Article 12(1)b EU VAT Directive). The purpose was to avoid Real Estate Transfer Tax, which is not due if the sale of land is subject to VAT (without the use of an option to tax). However, the supply did not take place according to this plan, but while the building was being demolished. The tax inspector therefore claimed that the sale was not taxed with VAT, because the old building was still there (although damaged). As a consequence, X BV had to pay Real Estate Transfer Tax.

The Dutch Supreme Court had to interpret Article 4(3)a of the Sixth Directive, currently Article 12(1)a and b of the VAT Directive. It judged that the phrase "the supply, before occupation..." is not clear. Does this mean that the new building should be fully completed, or is any supply within the demolishing/construction phase and the final completion already a supply before occupation? The Supreme Court therefore asked several questions to obtain guidance on this issue.

VAT is usually a tax that is only looking at the actual good supplied when the supply takes place, and not what the supplier concerned thought he was supplying. In this respect, it could have been expected that the ECJ would have concluded that the old building was still there, and although damaged, this would be the VAT exempt supply of an existing building. Paragraph 30 of the judgment certainly seemed to go for that route. However, things get complicated as from paragraph 38. The ECJ mentions that it should be taken into account that Don Bosco not only agreed to supply the property, but also agreed to demolish the old building so that a new building could be constructed in its place. The combination of these two actions leads the ECJ to the conclusion that the aim of the transaction was not to supply the existing building, but land that had not been built on. Therefore, such a transaction, viewed as a whole, does not fall within the VAT exemption for the supply of existing buildings.

Although the ECJ concluded that the aim was to supply land that had not been built on, so that a new building could be constructed in its place, the Supreme Court of the Netherlands will still have to decide on the basis of Dutch VAT law whether it now concerns building land in accordance with Article 12(1)b of the Directive. In addition, the ECJ judgment leads to further questions. When an old building is supplied, but the supplier agrees in the same contract to demolish the building after the supply in order to make the property suitable for property development, would that already lead to a supply of land that has not been built on? The aim is certainly to supply land for development of new property, but the while old building is still there, it would be quite a leap to claim that it concerns land that has not been built on. However, the reasoning of the ECJ certainly makes this a justifiable position. It is therefore quite certain that new case law will be developed as a result of this case, either on the level of the Member States or again at the level of the ECJ.

Judgment C-246/08 (Commission v Republic of Finland)

In Finland the state offers legal advice to people with modest income and assets. Such recipients can receive the service without paying fees. People with small incomes have to pay a charge depending on their income. The amount charged does not cover the costs of the state agency, which is mainly financed by the Finnish state.

In its decision dated October 6, 2009, the ECJ ruled that the term “economic activity” generally has to be construed broadly. However, the collection of a payment does not necessarily mean that it is a consideration for a supply.

The Commission brought action under Article 226 EC with respect to the payments of a fee to be rendered by persons with small incomes. The Commission argues that the payment of the fee is inside the scope of VAT because it qualifies as consideration for a legal service. Furthermore, the Commission says that the Finnish state agency is not acting as public authority in the meaning of Article 13, paragraph 1 of the VAT Directive, due to the circumstance that lawyers are engaged in the legal consultation if the state agency does not have the capacity or if a court action is necessary. Even if so, the legal advice would lead to a material distortion of competition (Art. 13 para. 1, VAT Directive) because of a competition between the state agency and lawyers.

The AG Colomer disagreed with the Commission on all points. He said that payment of the fee does not qualify as consideration and therefore the public entity does not render an economic activity.

The court follows the opinion of the AG and dismissed the action of the Commission (ECJ, Decision dated October 6, 2009). According to the ECJ, the term “economic activity” generally has to be construed broadly. However, the collection of a payment does not necessarily mean that it is a consideration for a supply.

The crucial argument used by the ECJ is that the entity rendering the legal services does not receive a sufficient consideration for the services provided. The ECJ refers to the case law and argues that if a person’s activity consists exclusively in providing services for no direct consideration, there is no basis of assessment and the services are therefore not subject to VAT.

Moreover, a supply of services is only effected “for consideration” within the meaning of the VAT Directive if there is a legal relationship between the provider of the service and the recipient, pursuant to which there is a reciprocal performance. The remuneration received by the provider of the service must constitute the value actually given in return for the service supplied to the recipient. A supply of services for consideration presupposes a direct link between the service and the consideration received.

In the decisive part of its judgment, the ECJ holds that a partial remuneration which does not cover all cost incurred cannot be seen as a remuneration if it does not depend on the efforts of the supplier, but on external factors like the income of the recipient of the supply. In such a situation the activity cannot be considered as an economic activity. The ECJ rules that these criteria for an economic activity are not met in the case at hand. The ECJ holds that the link between the legal aid services provided and the payment made by the recipients seems not sufficiently direct for that payment to be regarded as consideration for the services. Accordingly, those services could not be regarded as economic activities for the purpose of the VAT Directive.

The ECJ refers to the fact that the payment of the fee depends upon the recipient’s income and assets. Thus, the level of the income and assets is essential for the fee and not, for example, the number of hours worked by the public offices or the complexity of the case concerned. Therefore, according to the ECJ, the payment made to the public entity depends only in part on the actual value of the services provided. The more modest the recipient’s income and assets, the less strong the link with that value will be. As according to the ECJ the public entity in default of a consideration does not render an economic activity, the ECJ does not need to consider the argument of the Commission that the public entity acts as public authority within the meaning of Article 13 of the VAT Directive when providing the legal aid service, nor whether the failure to levy VAT on that activity leads, in any event, to significant distortions of competition.

This case is important for the interpretation of the term “remuneration” and for the definition of an economic activity. The ECJ already contributed to the clarification of the concept of “economic activities” in its ruling of October 6, 2009 in the SPÖ Kärnten (case C-267/08). ).

In that case, the ECJ held that advertising activities rendered the SPÖ, a public statutory body financed mainly by public funds and by its members, did not constitute an economic activity because SPÖ – in a similar situation with a partial compensation - does not participate in any market but carries out only activities of a political nature. A significant difference with the case at hand, however, is that the nature of the political activity did not allow generating revenue on a continuous basis.

We assume that the ECJ will have to address the criteria of a direct link between service and consideration again in the future to prevent possible misunderstandings of these recent judgments.

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