Judicial Training on EU Taxation Law Value Added Tax (VAT): Main Principles Prof. Dr. David Hummel 23.10.2018

Value Added Tax (VAT): Main Principles Agenda Overview Principle 1: consumption tax Principle 2: undertaker as a tax collector Principle 3: Neutrality Principle 4: Proportionality Excurs: Proportionality in case of fraud? Prof. Dr. David Hummel Barcelona 23.10.2018

Value Added Tax (VAT): Main Principles I. Overview tax office I (190) tax office II (95) tax office I + II = 285 285 190 190 1190 1785 S U C Burden for Seller: first 190, then 0 Burden for Undertaker: first 190, then 95, then 0 VAT burden: 285 of 1785 VAT as an indirect tax is a consumption tax that charges the expenses of the receiver of goods (or services) for consumable goods and services. Prof. Dr. David Hummel Barcelona 23.10.2018

Value Added Tax (VAT): Main Principles For comparison: Australien: 10% Brasilien: 18-25% China: 5 - 17% Japan: 10 % Kanada: 5-15% Russland: 18% Türkei: 18% USA: 0% + Sales Tax Prof. Dr. David Hummel Barcelona 23.10.2018

Value Added Tax (VAT): Main Principles II. Consumption Tax Character of the VAT is not to tax each payment of money or to tax contracts between two parties It has to be a payment for a delivery of goods or a service of an undertaker (see Art. 2 and Art. 9 VAT-directive) The investment of a person for a consumption good shows the financial ability, which is taxed with the VAT That explains why there are rules for transactions of an undertaker free of cost (Art. 16 and 26 VAT-directive) and only an undertaker can be a taxable person Prof. Dr. David Hummel Barcelona 23.10.2018

Value Added Tax (VAT): Main Principles II. Consumption Tax Main taxable transactions within VAT-Law: Supply of goods for consideration and the supply of services for consideration (Art. 2 Nr. 1 lit. a and c) The national civil law is not important for the VAT But: the ECJ sais: „It follows that a supply of services is effected 'for consideration' within the meaning of Article 2, and hence is taxable, only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied.” (C-16/93 – Tolsma) Prof. Dr. David Hummel Barcelona 23.10.2018

Value Added Tax (VAT): Main Principles II. Consumption Tax The aim of VAT: The aim of VAT as a general tax on the consumption of goods is to impose a tax on consumer capacity, which is demonstrated by consumers’ expenditure of assets to procure a consumable benefit (supply or service) So you have to distinguish from non-consumable benefits The expenditure of money for money is the archetype of payment for a non-transaction  (‘we cannot eat money’ ). From the point of view of VAT law, money is only the means of procuring a consumable benefit (consumer good), not a consumable benefit as such. Prof. Dr. David Hummel Barcelona 23.10.2018

Value Added Tax (VAT): Main Principles II. Consumption Tax The aim of VAT: Important: not any payment is a payment for a service or a supply. It has to be a payment for a consumable benefit Compensation for pecuniary damage (such as compensation for lost profit or damage caused by delay) amounts to the same thing since, in that case, too, no consumable benefit is obtained, only adequate compensation for prevention of the possibility of earning money. Prof. Dr. David Hummel Barcelona 23.10.2018

Value Added Tax (VAT): Main Principles III. Undertaker as a tax collector VAT must indeed be paid in any event by the trader as the tax debtor. However it is settled case-law of the Court of Justice that VAT is an indirect tax on consumption to be borne by the consumer.  The taxable trader is ‘simply’ acting as tax collector on behalf of the State.  Article 73 of the VAT Directive: the taxable amount consists of everything constituting consideration which is obtained by the supplier. Prof. Dr. David Hummel Barcelona 23.10.2018

Value Added Tax (VAT): Main Principles III. Undertaker as a tax collector (!) Problems of an indirect consumption-tax: Undertaker (collector) (Taxpayer) Civil-Court Financial-Court VAT ??? Consumer (charged with VAT) Financial administration (tax creditor) Prof. Dr. David Hummel Barcelona 23.10.2018

Value Added Tax (VAT): Main Principles III. Undertaker as a tax collector The Court of Justice  has explicitly ruled on several occasions that ‘the taxable amount serving as a basis for the VAT to be collected by the tax authorities cannot exceed the consideration actually paid by the final consumer which is the basis for calculating the VAT ultimately borne by him.’ If the final consumer does not pay the trader, the trader therefore does not substantively owe any VAT. The basis for charging VAT is not applicable because the trader has not ultimately provided any goods or services for consideration within the meaning of Article 2 of the VAT Directive. Prof. Dr. David Hummel Barcelona 23.10.2018

Value Added Tax (VAT): Main Principles IV. Neutrality Furthermore, the principle of neutrality of tax law must also be taken into account in the interpretation of Article 90(2) of the VAT Directive. The principle of neutrality represents a fundamental principle of VAT derived from its nature as a tax on consumption  and comprises two main elements. First, it requires that economic operators who effect the same transactions must not be treated differently in respect of the levying of VAT. Prof. Dr. David Hummel Barcelona 23.10.2018

Value Added Tax (VAT): Main Principles IV. Neutrality Second, the principle of neutrality in VAT law therefore requires that the trader, as tax collector on behalf of the State, is in principle to be relieved of the final VAT burden,  inasmuch as the purpose of the economic activity itself is to achieve sales revenue that is (in principle) subject to tax. Prof. Dr. David Hummel Barcelona 23.10.2018

Value Added Tax (VAT): Main Principles V. Proportionality However, the measures adopted by the Member States must not go beyond what is necessary to achieve the objectives pursued. Therefore, they cannot be used in such a way that they would have the effect of systematically undermining the right to deduct VAT and, consequently, the neutrality of VAT. On several occasions, the Court has held that the authorities may not oblige a taxable person to undertake complex and far-reaching checks as to that person’s supplier, thereby de facto transferring their own investigative tasks to that person. Prof. Dr. David Hummel Barcelona 23.10.2018

Value Added Tax (VAT): Main Principles VI. Exkurs: Proportionality in case of fraud? Consequence 1: No right of deduction Consequence 2: No exemption for the intra- community delivery Consequence 3: Punishment via criminal law (under certain circumstances) Prof. Dr. David Hummel Barcelona 23.10.2018

Value Added Tax (VAT): Main Principles (!) Overcompensating of the damage in case of fraud Switzerland Austria Bulgaria Product delivered through Y 100 120 X Y Z i.-c. supply V ded. 20 i.-c.t. i.-c.a. 20 20 FA FA Customs declared in the customs proceedings 42 EU import tax: 0 (Art. 143) FA In case of fraud: Y does not pay VAT -> Loss in the amount of 20 in Bulgaria Bulgaria: Y owes 20 und has no right of deduction (in total: 40) Austria: Y gets no intra-community transfer (20) and the EU import tax gets fixed at V (20) Tax revenue in total: 80 because of a fraud over 20 Prof. Dr. David Hummel Barcelona 23.10.2018

Value Added Tax (VAT): Main Principles The ECJ and the fight against fraud Two lines in the jurisprudence of the ECJ are recognisable:  1. Protection of the undertaker who is in good faith ECJ of 18.5.2017 – C-624/15 – Litdana, ECJ of 14.6.2017 – C-26/16 – Santogal, ECJ of 20.6.2018 – C 108/17 – Enteco Baltic  2. No protection of the fraudster ECJ of 18.12.2014 – C 131/13 – Italmoda, ECJ of 5.10.2016 – C 576/15 – Maya Marinova, 3. Exciting: Dealing with the link of one exemption with another exemption for a delivery through a third party (pending case: C-531/17 - Vetsch). Prof. Dr. David Hummel Barcelona 23.10.2018

Value Added Tax (VAT): Main Principles Thank you for your attention Prof. Dr. David Hummel david.hummel@curia.europa.eu 23.10.2018