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European Union
Council Adopts VAT Rules on Vouchers On June 27, 2016, the Council of the European Union adopted a directive aimed at harmonizing VAT rules for vouchers. The directive is intended to reduce the risk of double or non-taxation when vouchers are used or traded between Member States, where different national rules might apply. To harmonize treatment, the directive first distinguishes between “single-purpose vouchers” – where the place of supply and VAT due on the related goods and services is known at the time of issue – and “multi-purpose vouchers,” which are all other types of vouchers. The directive states that VAT should be charged on each issue of a single-purpose voucher, and that the subsequent transfer of goods or services in return for a single-purpose voucher should not be regarded as an independent transaction. In essence, the sale of a single-purpose voucher is taxed as a sale of the corresponding goods or services. For multi-purpose vouchers, the scope of the voucher is not known at the time of transfer, and thus VAT can only be charged when the goods or services to which the voucher relates are supplied. For this reason, the original sale of a multi-purpose voucher is not in itself subject to VAT. The adopted directive applies only to vouchers that are used for redemption against goods and services – instruments that merely guarantee a discounted price to the holder are not subject to the new rules. The directive will apply only to vouchers issued after December 31, 2018, and must be incorporated into national laws by that date. VAT Exemption for Blood Plasma On June 2, 2016, Advocate General Wahl issued an opinion in European Court of Justice Case C-412/15, on the proper VAT treatment of blood plasma manufactured for use in medicinal products. The Advocate General addressed two questions in the opinion: first, whether blood plasma qualifies as “blood” for purposes of the exemption listed in Article 132(d) of the EU VAT Directive (applying the exemption to “the supply of human organs, blood and milk”); and secondly, whether Article 132(d) applies to blood plasma intended for exclusive use in manufacturing medicinal products, and not for therapeutic purposes. The Advocate General answered both questions in the affirmative, noting first that “the supply of ‘blood’” should include blood components, given that the legislature likely intended to apply the exemption broadly, and secondly that distinguishing between “therapeutic” and “manufacturing” purposes would make the exemption “uncertain and rather difficult to manage.” The Advocate General relied in part on a 2013 opinion of the Advisory Committee on Value Added Tax, which also held that blood plasma should qualify for the Article 132(d) exemption. Card-Handling Services Not Exempt from VAT On May 26, 2016, the European Court of Justice (ECJ) held that the service of transmitting debit and credit cards information to a bank, absent any further processing or transfer of funds, did not qualify as an exempt transaction under Article 135(1)(d) of the EU VAT Directive. The case of Bookit Ltd, C-607/14, involved a company providing “card-handling services” to its parent cinema group. The company would route debit and credit card information to a third-party bank, which would in turn process the payment and send an authorization code back to the company, allowing the parent group to complete the sale of cinema tickets. The company argued that its services fell under the VAT exemption for “transactions… concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments” set out in Article 135(1)(d) of the VAT Directive. However, the ECJ rejected this argument, concluding that the company’s “card-handling services” could not, “individually or together, be regarded as performing a specific and essential function of a payment or transfer transaction,” and that the services were therefore not exempt from VAT. VAT on Retained Assets Not Limited by Adjustment Period On June 16, 2016, the European Court of Justice (ECJ) issued a judgment in Case C-229/15, Minister Finansów v. Jan Mateusiak. Between 1997 and 1999, Mr. Mateusiak invested in construction of a building used for both residential and commercial purposes, deducting as input VAT his expenses in constructing the commercial portion. In 2013, Mr. Mateusiak asked the Lodz Tax Office whether he should include the value of the building when winding up his inventory, noting that the ten-year adjustment period for deductions on immovable property had passed. After a series of rulings and appeals, the question was referred to the ECJ, which held that Article 18(c) of the EU VAT Directive – which allows Member States to treat as a taxable supply the retention of goods by a taxable person who ceases to carry out a taxable economic activity – applies even when the goods are subject to an adjustment period that has expired. The ECJ explained that regardless of the adjustment period, “taxation due under Article 18(c) of the VAT Directive must take place… where goods on which VAT became deductible still have a residual value when the taxable economic activity ceases,” in order to avoid a situation where the final consumption of deductible goods is untaxed.
Belgium: New Rules on Cost-Sharing Associations
As previously reported, Belgium will implement new rules governing cost-sharing associations (CSA) effective July 1, 2016, pursuant to an Act of 12 May 2016. Typically, members of a CSA benefit from a VAT exemption on purchases from other members. Belgium’s prior rules on the subject, which the European Commission found to be improper, allowed for two types of CSAs: i) independent CSAs established as a separate legal entity from their members; and ii) CSAs not constituting an independent entity and not separate from their members. After July 1, no provision will be made for non-independent CSAs, leaving their legal status uncertain. Independent CSAs, however, should benefit from certain expanded VAT deductions found in the new rules.
Bulgaria: Bill on Collateral for Liquid Fuel Sales Submitted to Parliament
On June 10, 2016, a VAT bill on providing security for liquid fuel sales was submitted to the Bulgarian Parliament. If passed, VAT Bill No. 602-01-30 would impose an obligation for taxpayers to provide the Bulgarian tax authorities with collateral when the value of their liquid fuel supplies exceeds BGN 25,000. Acceptable forms of collateral would include cash, government securities, or an unconditional bank guarantee. Additionally, the bill would authorize the tax authority to cancel the VAT registration of any taxpayer failing to provide the required collateral.
Croatia: VAT Rate for Surgical Sutures
The Croatian tax authority has issued a circular on the applicable VAT rate for transactions involving surgical suture thread. The authority notes that under Croatia’s Regulations on VAT, a 5% rate applies to medical equipment, which includes items that are surgically implanted in the body. The authority then notes that wire used for “sewing, binding, and ligatures” is listed as a product that qualifies as an implant. Finally, the authority cites a letter by the Agency for Medicinal Products and Medical Devices (HALMED), stating that surgical sutures meet the definition of medical devices for implant, as they are left in the body for more than 30 days. Accordingly, as a medical device, the supply of surgical suture threads is subject to a VAT rate of 5% under the provisions of Article 38, paragraph 2, point (e) of the Law on Value Added Tax.
Czech Republic
Chamber of Deputies Approves Domestic Reverse Charge Provision for Goods The Lower House of the Czech Parliament has passed a bill that would apply a reverse charge to all deliveries of goods within the Czech Republic by a non-established, non-identified supplier, on condition that the customer is a registered taxpayer. This amendment is part of the Czech Republic’s long-standing effort to reduce VAT fraud, which costs the country an estimated 300 million annually. The bill was moved to the Czech Senate for review on June 16, 2016. Czech Finance Minister Claims Indirect Tax Concessions from EU According to Andrej Babis, Finance Minister of the Czech Republic, the EU Commission has agreed to introduce legislation by the end of 2016 that would give Member States the option of implementing a generalized reverse-charge mechanism to combat VAT fraud. This would represent a shift in thinking from the Commission, which has rebuffed previous attempts by the Czech Republic, Austria, Bulgaria, and Slovakia to introduce national reverse-charge mechanisms as a derogation from the EU VAT Directive. The new agreement follows a series of intense negotiations within the Economic and Financial Affairs Council (ECOFIN) over proposed measures to prevent corporate tax-avoidance, which were finally approved on June 20, 2016. Minister Babis had threatened to veto the measures on the grounds that any agreement “must cover both direct and indirect taxation,” stating, “I am strongly in favour of the anti-tax avoidance package. However a temporary application of reverse charge as envisaged by the Commission in their own Action Plan must go along with it.” It appears that Minister Babis withdrew his opposition following the Commission’s concessions on the reverse charge issue. The exact nature of the reverse charge agreement has not yet been published.
Denmark: New Treatment of Grants to Vocational Schools
Beginning July 1, 2016, Denmark’s Tax Agency will treat government grants to vocational schools as revenue, which must be included in total revenues when calculating a partial VAT deduction. The change follows the European Court of Justice’s decision in Case C151/13 (2014), holding that a government grant to a nursing home should be considered a payment for services received under the VAT Directive. The Tax Agency believes that grants to vocational schools would be governed by the same logic. Government grants to vocational schools have not previously been considered revenue for purposes of calculating VAT deductions in Denmark. The Tax Agency’s new interpretation was originally scheduled to take effect January 1, 2016, but it has now been postponed until July 1 so that the Tax Agency can clarify the ramifications, if any, for other educational institutions.
Finland: Tax Changes for 2017
Finland has set up a new web page containing information on major tax changes that are expected to take effect in early 2017. One change involves VAT Returns: It is expected that sometime in 2017, electronic submission of VAT Returns will be required. Additionally, the system of penalties will be more consistent and clear, and will include a 45-day grace period where data can be corrected without penalty.
France: Reduced Rate for Admission to Cultural Activities
The French Ministry of Finance has published an Official Bulletin clarifying the application of the reduced VAT rate to admission to cultural activities. Prior to 2016, Article 278-0 bis of the French General Tax Code (i.e. Code Général des Impôts or “CGI”) only allowed the application of the 5.5% reduced VAT rate on admission fees to theatre plays, musicals, circuses, concerts and variety shows, with the exception of shows where it is customary to consume food or drink during the shows, e.g. at clubs and discos. However, France has officially extended the scope of the reduced rate to include admission to shows held in places where it is customary to consume food or drink, as long as these places are affiliated with the “Centre national de la chanson, des variétés et du jazz.” The Bulletin further explains that if tickets are sold for “original interpretations of musical works requiring the physical presence of at least one performing artist who receives payment” (e.g. sets by DJs), where food or drink consumption during the show is an optional extra, the 5.5% reduced rate also applies. As such, the 5.5% reduced rate no longer applies solely to concerts in the traditional sense.
Germany: Germany Not Required to Apply “Rounding-Up Rule” to Deductions
On June 16, 2016, the European Court of Justice (ECJ) decided Case C-186/15, Kreissparkasse Wiedenbrück v. Finanzamt Wiedenbrück, holding that Article 175(1) of the EU VAT Directive does not preclude Germany, or any other Member State, from implementing its own rounding rules for adjustments of deductions. The Kreissparkasse, a credit institution, had rounded the deductible proportion of VAT attributable to its acquisition of mixed use goods and services from 13.55% to 14% in 2009, and from 13.18% to 14% in 2010, claiming that it was acting pursuant to Article 175(1) of the VAT Directive, which provides that “The deductible proportion shall be determined on an annual basis, fixed as a percentage and rounded up to a figure not exceeding the next whole number.” German national law, however, provides that deductible proportions are to be calculated using the method of “economic allocation,” which does not require rounding up. The German tax authorities claimed this to be an acceptable derogation under Article 173, which provides that Member States may “require the taxable person to determine a proportion for each sector of his business.” The ECJ agreed with the tax authorities that Article 173 released them from any obligation to round deductions up to the nearest whole number, finding that it would be “inconsistent” to allow Member States the option of implementing their own rounding rules – which could possibly be “more accurate or more appropriate” than rounding up – while at the same time requiring those rules to conform to Article 175(1).
Greece: Tax Evasion on the Rise
Greek authorities are expressing concerns about the growth of tax evasion in the Greek islands, fueled by the recent rate increase of VAT. In June 1, the rate of VAT was increased from 23% to 24%, but at the same time VAT collections in some islands has decreased to 62% below the expected revenue. If the trend continues, the Greek government may be forced to implement as early as October of this year the automatic fiscal adjustment mechanism that would cut public spending, or increase taxes, if revenue targets are not met. As part of the bailout agreement signed between the Eurogroup and the Greek government, Greece agreed to implement automatic correction mechanisms mainly on the spending side, but did not rule out additional tax changes to correct any budget deficit.
Hungary: Parliament Approves VAT Cuts for 2017
On June 7, 2016, the Hungarian Parliament approved Bill T/10537, a supplementary tax package to the Ministry of Economy’s 2017 budget. As previously reported, the bill applies a 5% reduced VAT rate to sales of poultry, fresh milk, and eggs, an 18% reduced VAT rate to restaurant services, and an 18% reduced VAT rate to internet access services, effective January 1, 2017. Restaurant services will be further reduced to 5% in 2018, absent further legislation. Finally, the bill reduces the threshold for registration as a taxable person from HUF 1 million to HUF 100,000. The VAT cuts are intended to reduce the tax burden on working families, and to spur economic growth.
Ireland: Government Procurement of Goods and Services
The Irish Revenue has updated its leaflet setting out the circumstances in which “the State, a local authority and a body established by any enactment” is required to register and “self-account” for the VAT due on goods or services it procures. According to the leaflet, a public body is obliged to register and account for VAT in four situations:
- where it acquires, or is likely to acquire, more than €41,000 worth of goods from other EU Member States (intra-Community acquisitions);
- where it is in receipt of a good which is supplied and installed/assembled (other than as a fixture) by a non-established supplier;
- where it is in receipt, as a principal contractor, of construction services supplied by a sub-contractor;
- where it makes supplies of taxable goods and services whose value exceeds the registration threshold.
The full leaflet can be found at the Irish Revenue’s website.
Latvia: Reverse Charge Mechanism for Supplies of Industrial Crops
On June 16, 2016, the Latvian Parliament, the Saeima, approved the introduction of a reverse charge mechanism to supplies of cereals and industrial (non-food) crops, provided that the supplier and customer are taxable persons. Additionally, the taxable person is allowed to claim a monthly refund of excess input VAT if the excess exceeds EUR 1,500 and is incurred on goods and services involving items already subject to the reverse charge mechanism. These items include electronics such as mobile phones and tablets, construction services, and timber. The new amendment is effective July 1, 2016.
Netherlands: Netherlands Seeks Greater Flexibility on VAT Rates
In a meeting of the House of Representatives on June 2, 2016, State Secretary of Finance Eric Wiebes declared that the Netherlands would welcome greater flexibility in setting its own VAT rates, a step proposed by the EU Commission in its recently published VAT Action Plan. According to Wiebes, decisions on VAT rates “should be taken at this table, and not somewhere else.” Wiebes warned, however, that national rate-setting would likely be heavily politicized, as numerous interest groups would advocate for reduced rating of their products. Initial VAT rate reform is scheduled for 2017 under the Commission’s Action Plan.
Poland: Ministry of Finance Proposes New Retail Sales Tax
Poland’s Ministry of Finance has issued draft legislation for a new retail sales tax, to be imposed on sales to private consumers by companies exceeding a minimum revenue threshold. The tax would be imposed at a 0.8% rate for retailers with revenues between PLN 17 mln and PLN 170 mln, and at a 1.4% rate on retailers with revenues exceeding PLN 170 mln. The revenue base is exclusive of VAT. Online sales, sales within commercial chains, and sales of water, fuel, drugs, and foodstuffs would not be subject to the tax. Poland’s ruling Law and Justice Party has proposed the retail sales tax as a means to assert greater state control over the economy and boost social spending. The tax has drawn criticism from prominent figures in the EU, and from small, independently-owned shops within Poland operating on a franchise model. Nevertheless, the tax is expected to come into force in the summer of 2016.
Portugal: Restaurant Services Subject to Reduced Rate
The Portuguese Parliament has approved the 2016 budget, which among other changes provides that effective July 1, 2016, the tax rate applicable to catering and restaurant services will be reduced from 23% to 13% in the mainland of Portugal, 12% in Madeira, and 9% in Azores. In conjunction with this law change, the revenue department of Portugal (Autoridade Tributaria e Aduaneira) has issued the Oficio Circulado No. 30181, which explains how the change will apply. According to this regulation, when food is sold “to go” by a restaurant, the reduced rate of 13% will apply only to solid food – each drink sold alongside solid food will be subject to the specific rate applicable to it under the law. For sales of food for consumption within the premises of a restaurant, however, the reduced rate will apply to both food and drinks, except for alcoholic beverages, juices and soft drinks, which will be taxed at the standard rate. Other drinks, like coffee, tea, and milk, are subject to the reduced rate. In addition to these measures, the Portuguese government has enacted a number of decrees intended to simplify the application of VAT and other taxes. Among those measures are the simplification of invoicing rules applicable to small retailers.
Romania: Reverse Charge Mechanism on Domestic Supplies of Wood
Romania currently applies a reverse charge to domestic supplies of wood products, including standing timber, round or cleft working wood, and fuel wood. This is a derogation from Article 193 of the EU VAT Directive (2006/112). On June 1, 2016, the European Commission issued a proposal for a Council Implementing Decision to the Council of the European Union, which would authorize Romania’s request to continue derogating from Article 193. If authorized, the derogation will be effective until December 31, 2019.
Spain: New Returns for Claiming Exemptions
The Spanish tax administration ((AEAT) has released a new set of VAT forms for use by NATO when claiming VAT refunds or advanced exemptions. Order EHA/789/2010, of 16 March 2010, regulates the way that both refunds and exemptions should be claimed by NATO when making taxable purchases in Spanish territory. It has been modified to introduce the new Modelo 364, which is the return for claiming a refund of VAT paid on purchases by NATO, and Modelo 365, for use by NATO when making exempt purchases of goods.
Sweden: VAT Exemptions for Small Businesses Proposed in 2017 Budget
The Swedish government has stated its intention to include a VAT exemption for small businesses in its 2017 budget. As previously reported, the exemption would apply to businesses with a turnover of up to SEK 30,000 per year, and would enter into force on 1 January 2017. Parliament’s Tax Committee is awaiting the upcoming proposals, but has already declared that it sees no reason to propose any changes to the VAT system.
United Kingdom
Click here to read more about the Brexit vote implications. HMRC Challenges Zero-Rating of Adult Coloring Books According to multiple reports, the HMRC is currently investigating whether several leading publishers owe unpaid VAT on sales of adult coloring books, which gained widespread popularity in 2015. Several publishers have reportedly received letters from the HMRC stating that adult coloring books whose pages can be torn out, as well as certain ‘dot-to-dot’ books, should be standard-rated – either because they don’t qualify as books, or because they require the customer to add color in order to be ‘complete.’ Under UK rules, print books and children’s coloring books are exempt from VAT in the UK, but ‘uncompleted’ books are subject to the standard rate. An HMRC representative has confirmed that the agency plans to meet with publishers on the issue of adult coloring books, but stressed that the rules for children’s coloring books remain unchanged. At least one publisher has already begun to collect VAT on adult coloring books pending further clarification.
COUNTRIES OUTSIDE THE EUROPEAN UNION
Switzerland: Swiss Voters Reject Universal Basic Income On June 5, 2016, Switzerland held a national referendum on a proposal to grant all citizens a “universal basic income” (UBI), in order to “allow the whole population to lead a decent life and to participate in public life.” Although the value of said grant was not included in the proposal, advocates suggested a sum of CHF 2,500 per month for adults, with an additional CHF 625 per month for children. More than three out of every four voters rejected the measure, after opponents claimed that financing the UBI would require raising the standard VAT rate from 8% to 50-55%.
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