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EC Takes 4 Member States To Task Over VAT Rules

by Ulrika Lomas, Tax-News.com, Brussels

05 July 2007


The European Commission has told the governments of the UK, France, Poland and Portugal to amend certain aspects of their value-added tax regimes or face legal proceedings in the European Court of Justice.

The complaint against the UK relates to the recovery of VAT borne by taxable persons not established in the EU.

In December 2004, the United Kingdom amended its domestic VAT legislation transposing the 13th VAT Directive. That Directive lays down the arrangements for the refund of VAT to taxable persons not established in the territory of the Community. As a result of the amendment, a taxable person established outside the Community is denied the right to recover VAT paid or due in the UK on goods or services in so far as they are used for the purpose of insurance or financial transactions supplied to customers established outside the EU. By contrast, a taxable person established in the Community (in the UK or otherwise) is entitled, under UK domestic legislation, to recover VAT in such cases.

The Commission has taken the view that the 13th VAT Directive, interpreted in connection with the relevant Community legislation, must be understood as allowing taxable persons established outside the Community to recover VAT in the aforementioned cases.

The complaint against France relates to VAT rates applied to transactions carried out by undertakers. Transactions carried out by undertakers in France are not subject to a single tax rate. Transportation of a body in a vehicle is subject to a reduced tax rate, whereas normal tax rates apply to the transportation of a body by a bearer and, in general, all other operations carried out by the company.

The Commission believes that France is making an artificial distinction between these operations, which is not in accordance with Community case law relating to the notion of single composite service. In fact, under this case law, the services provided by undertakers and the delivery of goods related to them constitute one and the same service.

The Commission believes that these operations, as a single composite service, should be subject to a single VAT rate, whether this be a normal or reduced rate. France has the option, if it wishes to do so, of applying the reduced rate in accordance with the VAT Directive, but this should apply to the whole service.

Brussels warned both governments that if the relevant national legislations are not amended within two months, the Commission may decide to refer these matters to the European Court of Justice.

The EC has also formally requested that Poland and Portugal change their laws as regards the inclusion of the amount of their car registration taxes within the taxable amount of VAT in the case of supply of road vehicles. The Commission considers the registration tax should not be included in the taxable amount of VAT.

In the case of supplies of road vehicles, both Poland and Portugal include the amount of their car taxes (the Oplata rejestracyjna and the Imposto Automòvel, respectively) within the taxable amount of VAT. The European Court of Justice has examined whether the taxable amount for VAT purposes, in the case of supplies of means of transport, must include the amount of the registration tax (RT), which is usually paid by the supplier to the tax authorities and afterwards repaid to him by the purchaser along with the price of the vehicle. The RT at stake in the case was the one levied in Denmark.

The Court ruled that, in the context of a contract of sale providing that the dealer will supply a vehicle registered for a price which includes the registration tax he paid before supplying the vehicle, the amount of that duty must not be included within the taxable amount of the VAT charged on the sale of the vehicle. This is because, firstly, the RT is charged by reason of the registration of the vehicle and not by reason of the supply and, secondly, because the RT is paid by the supplier of the vehicle on account of the purchaser.

The Commission understands that the car taxes levied in Poland and Portugal, despite some minor or ancillary differences, are basically identical to the Danish one examined by the Court. Thus, all of them are one-off taxes which are payable on the acquisition of the motor vehicle, or as a condition for bringing it into use on the territory of the Member State concerned.

The rules on the taxable amount of VAT having been harmonized at the EU level, and the uniform application of those rules being an essential condition for the proper operation of the VAT system, the Commission has taken the view that the criteria of the EC Court must be applied to the car taxes levied in Poland and Portugal. These Member States have also been given two months to bring their legislation in conformity with Community Law.


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