Tax Considerations in the Global Environment: Skandia America Corporation Case C-7/13 Peter Hewitt FTII Head of European Tax Practice, FiscalReps

The World Turned Upside Down FCE Bank Case C-210/04 – no supply between Head Office (HO) and branch, nor branch to branch Within same entity: o so same taxable person o so cannot be a supply to yourself for VAT purposes Court did not look at whether VAT group in country of HO or branch made a difference Now it appears it does!

Skandia America Corporation Case C-7/13 IT charges from US HO to Swedish branch in Swedish VAT group Recharges from Swedish branch to other VAT group members European Court (CJEU) sees a supply from HO to VAT group VAT group is a separate taxable person for VAT purposes Art 9(1) of the Principal VAT Directive defines “taxable person”: o Any person who independently carries out an economic activity Therefore a branch cannot be a taxable person according to CJEU o BUT a VAT group can

The SAC Structure Common structure in UK Need for anti-avoidance rule Ss 43(2A)-(2E) VAT Act 1994 May need to go now! We await HMRC’s response SAC US (HO) (US) SAC US (HO) (US) SAC Swedish Establishment (Branch) SAC Swedish Establishment (Branch) Services, no VAT EUR 100 VAT Group Services, no VAT? EUR 105 Third Party Supplier (US) Third Party Supplier (US) Skandia Insurance (Swedish insurer) Skandia Insurance (Swedish insurer) Services, no VAT EUR 110

Charge from VAT Group to Branch Clearly a service from one VAT group to another VAT group (in another country) will become a supply, even where it remains in the same entity The real problem for everyday business arises when there is a charge from a company in a VAT group to its branches around Europe Insurance Service Company Insurance Service Company Insurance Company (Branch) Insurance Company (Branch) VAT Group Services, no VAT? EUR 105 Insurance Company (HO) Insurance Company (HO) Services, no VAT EUR 100

VAT Group to Branch – Input Tax If the services are bought in from outside the VAT group, VAT will usually be chargeable This will normally be recovered (today) at the residual rate applied in the HO country Insurance Company (HO) (UK) Insurance Company (HO) (UK) Insurance Co (Branch) Insurance Co (Branch) Services, + VAT GBP GBP 20 VAT Group Services, no VAT? GBP 100 plus VAT? Third Party Supplier (UK) Third Party Supplier (UK) Group Company

Head Office Recharges to Branches In practice, costs are recharged/shared around a network of branches so things become a lot more complex Partial Exemption Methodology needs to be looked at again 1.Will the VAT group country admit there is a supply, and so allow VAT recovery (unless it is an exempt intermediary service)? 2.Will the branch country insist on collecting reverse charge VAT? If the answers are Yes/Yes, there is an output tax liability for the branch If the answers are No/No, there is an input tax cost for the HO (as now) If the answers are Yes/No, there is no taxation If the answers are No/Yes, there is double taxation Timing of policy changes?

Internal/External Costs Recharged There are different rules for goods, so this change really applies only to services If the service is internally generated, there is now a supply from VAT group to Branch If the service is bought in from outside the VAT Group, the supplier will expect to charge VAT in only one country – using the Implementing Regulations to decide which (likely to be the country of the HO) BUT – is there a separate service being supplied by HO to Branch when a partial recharge is made? Can we argue the HO in the VAT Group is supplying nothing to the Branch? Probably not…

Internal/External Costs Recharged There is an argument (which might be accepted by some Member States) that a Branch is not a taxable person even though a VAT Group is The CJEU found that a Branch of FCE Bank in Italy is not an independent taxable person In Skandia America Corporation, the CJEU went one step further and said “(Branch) is dependent on SAC (Head Office) and cannot therefore itself be characterised as a taxable person within the meaning of Article 9 of the VAT Directive” If there is no taxable person, there can be no reverse charge

Other Ramifications Partial Exemption Methods will need amending to take into account recharges if they are supplies EC Sales Lists will need to be completed The cost sharing exemption may become more attractive However, structuring a cost sharing group using a VAT Group may be counter-productive in some countries as o The VAT Group may be seen as making the supplies rather than the EEIG (CSG) within the VAT Group o Also if EEIG members are in a VAT Group perhaps they will lose their identity as members In Germany VAT Grouping is mandatory, so costs will increase more in Frankfurt and Munich than in London!

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