International Bureau of Fiscal Documentation (IBFD) The European Union 6th VAT Directive: Basic features and general compliance of the Serbian Law on VAT with the Directive Paul Bater, International Bureau of Fiscal Documentation (IBFD) April 2005

Compulsory for EU member states. The EU 6th VAT Directive: Basic features and general compliance of the Serbian Law on VAT with the Directive A. Why is the 6th Directive important ? Basic framework of VAT. Compulsory for EU member states. Binding interpretation by European Court of Justice. Adoption by EU applicant states.

The EU 6th VAT Directive: Basic features and general compliance of the Serbian Law on VAT with the Directive B. Taxable persons EU law Any person who independently and in the course of an economic activity supplies goods and services for consideration or imports goods (Arts. 2 & 4). Public law bodies in respect of transactions where such treatment necessary to avoid significant distortion of competition (Art. 4.5). Option to treat VAT groups as single taxpayer (Art. 4.4). Serbian law Public law bodies not subject to VAT. VAT group option not used.

The EU 6th VAT Directive: Basic features and general compliance of the Serbian Law on VAT with the Directive C. What is an economic activity? EU law Limited definition in 6th Directive (Art. 4.2): - all activities of producers, traders and service providers - exploitation of tangible or intangible property for the purpose of obtaining income on a continuing basis. Some guidance from the European Court of Justice Supplies free of charge are not taxable transactions, even if donations are requested and received (Tolsma, Case C-16/93). Investment activities of large foundation not an economic activity (Wellcome Trust, Case C-155/94). Serbian law Consistent with limited definition in Directive.

The EU 6th VAT Directive: Basic features and general compliance of the Serbian Law on VAT with the Directive D. What is the taxable amount of a supply ? EU law The consideration, in money or in kind, receivable by the taxpayer for the supply (Art. 11.1a). Including subsidies directly linked to the price of such supplies (Keeping Newcastle Warm, Case C-353/00). Serbian law Supplies free of charge deemed to be taxable transactions based on market value of similar supplies (Art.5) (whether they are business activities or not). Taxable amount defined as fee received by taxpayer for supply (Art. 17) (appears to exclude all grants or subsidies).

The EU 6th VAT Directive: Basic features and general compliance of the Serbian Law on VAT with the Directive E. Tax rates EU law Standard rate: minimum 15 % (Art. 12.3) Option for member states to apply one or two reduced rates (minimum 5% rate). Some member states allowed to retain reduced rates below 5% for transitional period. Reduced rate option for gas & electricity supplies provided no risk of distortion of competition. Reduced rate option for Annex H goods & services (e.g. medical equipment, admission to cultural events, construction & alteration of social housing, non-exempt supplies by welfare charities). Temporary reduced rate option for certain labour-intensive services until the end of 2006 (Annex K).

The EU 6th VAT Directive: Basic features and general compliance of the Serbian Law on VAT with the Directive E. Tax rates Serbian law Standard rate of 18% and a reduced rate of 8% (Art. 23). Limited scope of 8% reduced rate but appears consistent with Annex H (e.g. medical products, books).

The EU 6th VAT Directive: Basic features and general compliance of the Serbian Law on VAT with the Directive F. Exemptions in the public interest - EU law Mandatory exemptions for certain activities (Art. 13.1A) including: (b) medical care provided by hospitals etc. (f) services provided by independent groups of persons to their members (g) welfare goods and services provided by charities (NGO) (h) child protection goods and services provided by charities (i) education (l) goods & services supplied by charities to subscribing members (m) sporting services supplied by charities (n) cultural services supplied by cultural bodies (o) supplies of goods & services for fundraising events for the benefit of organisations within categories (b), (g), (h), (i), (l), (m), (n) above (p) transport services for sick or injured people in specially designated vehicles

The EU 6th VAT Directive: Basic features and general compliance of the Serbian Law on VAT with the Directive F. Exemptions in the public interest - EU law Option for member states to make some exemptions subject to one or more of the following conditions (Art. 13.2): exemption restricted to non-profit organisations exemption restricted to organisations managed and administered on an essentially voluntary basis must charge prices not exceeding prices approved by public authorities or, where no approval required, prices lower than those charged by commercial competitors exemption must not be likely to create distortion of competition

F. Exemptions in the public interest Serbian law The EU 6th VAT Directive: Basic features and general compliance of the Serbian Law on VAT with the Directive F. Exemptions in the public interest Serbian law Exemptions not available for supplies in categories (f), (l) and (o) (Art. 25): - (f) services provided by independent groups of persons to their members - (l) goods & services supplied by charities to subscribing members - (o) supplies of goods & services for fundraising events for the benefit of organisations within categories (b), (g), (h), (i), (l), (m), (n) above

The EU 6th VAT Directive: Basic features and general compliance of the Serbian Law on VAT with the Directive G. Input tax deduction EU law Mandatory right to deduct input tax paid or payable on purchases of goods & services used for purposes of taxable transactions (Art. 17.2a) Taxpayers whose supplies are partly exempt and partly taxable can deduct only the pro rata portion of their total input tax that is attributable to taxable supplies (Art. 17.5) The pro rata calculation is based on turnover (Art. 19) but member states can allow the use of other methods Input tax on capital goods must be deducted over a period of 5 years (Art. 20.2) Option for member states to spread deductions on purchase of real estate over period of up to 20 years

The EU 6th VAT Directive: Basic features and general compliance of the Serbian Law on VAT with the Directive G. Input tax deduction Serbian law Turnover based method used for pro rate calculation (Art. 30) No other methods permitted No provision for year end adjustment to pro rata calculations for individual tax periods Capital goods deduction spread over 5 years (10 years for real estate)

The EU 6th VAT Directive: Basic features and general compliance of the Serbian Law on VAT with the Directive H. Imports EU law Mandatory exemption of imported goods which would be exempt if supplied by a taxable person (Art. 14.1a) Mandatory exemption of certain goods imported for charitable purposes (EC Directive 83/181, Arts. 40-55) Member states have discretion to interpret which charities benefit from the relief (do donated goods distort competition ?)

The EU 6th VAT Directive: Basic features and general compliance of the Serbian Law on VAT with the Directive H. Imports Serbian law Refund to foreign donors of input tax paid on purchases or imports of goods & services for projects in Serbia funded by the donors where tax relief for donor & project based on an international agreement (Art. 55) Exemption of imports that are exempt from customs duty (Art. 26) Exemption under Customs Law (Art. 193 para. 1 item 6) of goods donated to legal persons for relief of natural disasters or armed conflict with prior government approval

The EU 6th VAT Directive: Basic features and general compliance of the Serbian Law on VAT with the Directive H. Imports Serbian law Refund to foreign donors of input tax paid on purchases or imports of goods & services for projects in Serbia funded by the donors where tax relief for donor & project based on an international agreement (Art. 55) Exemption of imports that are exempt from customs duty (Art. 26) Exemption under Customs Law (Art. 193 para. 1 item 6) of goods donated to legal persons for relief of natural disasters or armed conflict with prior government approval

European Commission Proposal: Minimum standard rate of 15% to stay The EU 6th VAT Directive: Basic features and general compliance of the Serbian Law on VAT with the Directive European Commission Proposal: Minimum standard rate of 15% to stay until 2010 at least. Reduce or eliminate exemptions on supplies and reduced rates. Status of charities providing pro bono supplies remains the same?

European Commission Proposal: Good or bad for charities? The EU 6th VAT Directive: Basic features and general compliance of the Serbian Law on VAT with the Directive European Commission Proposal: Good or bad for charities?