1. Current issues for public bodies EC Perspective
17th October 2006
Carmen MUÑIZ
10/11/2018
Présentation Powerpoint

2. Current issues for public bodies EC Perspective
Latest update on issues affecting public sector
Future Commission proposal on public bodies
Commission proposal on VAT and postal services - COM (2003) 234 of 5 May 2003 modified by COM (2OO4) 468 of 8 July 2004
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3. Présentation Powerpoint
MAIN PROBLEMS CONCERNING THE VAT TREATMENT OF PUBLIC BODIES UNDER THE SIXTH DIRECTIVE
Current rules applicable to public bodies create
Complexity of the VAT system
A lack of economic neutrality
A lack of harmonisation within the Community
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4. Présentation Powerpoint
Complexity : Determining a public body's VAT liability is a complicated affair
Public activities
Outside the scope
Inside the scope
Taxable
Exempt
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5. Présentation Powerpoint
Taxation of outputs
Public activities
Outside the scope
Inside the scope
No VAT
on supplies of goods and services
Taxable
Exempt
VAT
on supplies
of goods and services at standard or reduced rate
No VAT
on supplies
of goods and services
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6. Présentation Powerpoint
Deduction on inputs
Public activities
Outside the scope
Inside the scope
No right of deduction
Taxable
Exempt
Right of deduction
No right of deduction
Article 17.2 of 6th Directive: right of deduction for taxable activities only.
Article 17.5 and Article 19.1 of 6th Directive: pro rata of deduction when inputs
used both for taxable activities and activities in respect of which VAT is not
deductible. Optional inclusion of non-taxable subsidies for pro rata calculation.
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7. Lack of economic neutrality
Distortion of competition between public and private sector
Non-deduction in the public sector results in:
Lower rates of investment
No outsourcing of activities which could more efficiently be performed by specialized providers
Cascade effect of exemptions in supplies to businesses
Expensive tax avoidance "mitigation" schemes.
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8. Lack of harmonisation within the Community
No community approach on VAT treatment of public activities
Too much room for interpretation in the wording of the Sixth Directive: to a certain extent, Member States define the conditions under which public bodies will have taxable or non taxable activities
Member States define:
what a public body is
when it acts as a public authority
when there is a significant distortion of competition
when an economic activity is significant
Member States define the conditions of the exemptions
Member States allowed to consider exempt activities of public bodies as activities in which they engage as public authorities
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9. Treatment of some public activities
Information provided by MS in 2000
Provision by the local authority of:
Taxable (T)
Exempt (E)
Non-business activities (NB)
parking sites on public roads
D(T/NB), DK(T/NB),E, EL, FIN, I, NL(T/NB), P, S, UK(T/NB)
A, B, F, IRL, L
parking sites on non-public roads
A(T/E), B, D(T/NB), DK(T/NB), E, EL, F, FIN, I, L(T/E), NL, P, S, UK(T/NB)
IRL
Air traffic control services to airlines
A(T/E), B, DK, E, FIN(T/E), IRL, UK
I, S
EL, F, L, NL, P
Veterinary services in respect of live stock
A, DK, F, FIN, I, IRL, NL, P, S, UK(T/NB)
B, D, E, EL, L
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10. Présentation Powerpoint
Measures taken by Member States to overcome problems with current VAT treatment of public bodies
Restriction of the scope of non-taxation or exemption
VAT refund systems for outside the scope activities
(on the fringe of Sixth Directive) UK SW FI PT FR LX AT NL
Pros: corrects distortions due to non-deduction of VAT at national level
Cons: - worsens distortions with private sector unless the "significant distortion of competition” test is applied strictly
- distinguishing input VAT belonging to out of scope and exempt activities may be difficult.
- source of lack of harmonization at Community level
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11. A strategy for the future
Achieve greater neutrality, harmonization
and simplification of the tax
Different possible scenarios going from the most ambitious to the least one
Scenario 1 : Full Taxation 0ption
Scenario 2 : Taxation at Zero or Reduced Rate Option
Scenario 3 : Hybrid Exemption Option
Scenario 4 : Pure Exemption Option
Scenario 5 : Limited selective changes to the Sixth Directive
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12. A strategy for the future
Achieve greater neutrality, harmonization
and simplification of the tax
Scenario 1 : Full Taxation 0ption
Treat public sector as a taxable person
Tax all activities of public sector at standard rate
Allow full input tax deduction to all public bodies
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13. A strategy for the future
Achieve greater neutrality, harmonization
and simplification of the tax
Scenario 2: Taxation at Zero or Reduced Rate 0ption
Treat public sector as a taxable person
Tax all activities of public sector, other than “Merit activities”, at standard rate
Tax “Merit activities” at a zero or a reduced rate
Allow full input tax deduction to all public bodies
Note: “Merit activities” are e.g. health, education, culture, sport, child welfare
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14. A strategy for the future
Achieve greater neutrality, harmonization
and simplification of the tax
Scenario 3: Hybrid Exemption 0ption
Treat public sector as a taxable person
Tax all activities of public sector, other than “Merit activities”, at standard rate
Maintain exemptions for “Merit activities”
Add regulatory services such as local services, licenses, permits, filling of documents, passports, property registration, court fees, to the exempt list
Allow a full or partial rebate for input tax paid by public bodies even when related to exempt activities
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15. A strategy for the future
Achieve greater neutrality, harmonization
and simplification of the tax
Scenario 4: Pure Exemption 0ption
Treat public sector as a taxable person
Tax all activities of public sector, other than “Merit activities”, at standard rate
Maintain exemptions for “Merit activities”
Add regulatory services such as local services, licenses, permits, filling of documents, passports, property registration, court fees, to the exempt list
Allow no rebate for input tax related to exempt activities paid by public bodies
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16. A strategy for the future
Achieve greater neutrality, harmonization
and simplification of the tax
Scenario 5: Limited selective changes to the Sixth Directive
Review of Annex D to the Sixth Directive in order to broaden its scope (add new activities to current list of taxable activities)
Deletion of option to treat exempt activities as out of scope
granting of a right of deduction for input VAT relating to outside the scope activities
Review of certain exemptions in article 13 A
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17. Commission's Timetable
An assessment of the social and economic impact of any possible solutions will be undertaken by the end of 2006;
A Working Paper with proposed measures will be discussed with Member States and put in the Commission's Web site for public consultation in 2007 (second half of the year);
A legislative proposal is programmed for 2008.
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18. VAT TREATMENT OF POSTAL SERVICES STATE OF PLAY
Review of VAT treatment of public bodies started in 2003 by focussing on postal sector
(see Commission proposal, COM (2003) 234 of 5 May 2003 modified by COM (2004) 468 of 8 July 2004)
Postal market liberalised by Directive 97/67/EC of 15 December 1997 which provides for a full accomplishment of the Postal Internal Market in 2009
VAT exemption distorts competition between former monopolies that benefit from that exemption and new market entrants that do not
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19. VAT TREATMENT OF POSTAL SERVICES STATE OF PLAY
Commission proposal intends to remove VAT exemption on public postal services and postage stamps while introducing an option for Member States to apply a reduced rate to a wide range of postal services in order to limit the impact on prices for private customers
Commission proposal remains blocked in the Council of the European Union
In April 2006, infringement proceedings launched against three Member States (the UK, Germany and Sweden) that where not applying correctly the current VAT exemption, either because it is being applied too extensively or not at all – see Press release IP/06/484
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20. VAT TREATMENT OF POSTAL SERVICES STATE OF PLAY
Commission takes the view that postal VAT exemption should only apply as far as the strict discharge of the universal service obligation is concerned
To solve problems of distortions of competition and lack of harmonization in the application of current rules, the Commission urges the Council to resume discussion and adopt the Commission proposal concerning VAT rules on postal services
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21. Questions and Answers session
Question 1 : Public bodies and the UK unjust enrichment provisions
Where a taxpayer has paid VAT incorrectly, the taxpayer has a right to a refund of the VAT paid subject to time limits.  However, the right to repay the taxpayer could be refused under the unjust enrichment provisions. The burden of proving that the unjustment provisions apply rests with the tax authorities.  It is necessary to prove, inter alia, that the VAT overpaid was passed to the taxpayer's customer.  Public bodies provide a number of services that are subsidised by government funds and local taxes.  Given this funding regime, it is inconceivable how the unjust enrichment provisions could ever apply to a repayment of  VAT overpaid by public body.  Does the EC share this view?
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22. Questions and Answers session
Question 2 : The three year capping provisions in UK
The three year capping provisions implemented by the UK is currently under challenge.  It has been said that where an entitlement for a credit to VAT has arisen, this cannot be taken away retrospectively by any time limits.  What this means is that where a claim for input tax arose before the imposition of the three year capping provisions in the UK, the right to a claim still remains.  Could we have the EC views on this please?
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23. Questions and Answers session
Question 3 : UK Refund mechanism for public bodies
There has been much speculation that the EC changes to the VAT treatment of activities undertaken by public bodies will not affect the refund mechanism (section 33) used by the UK for public bodies.  Could we have your views on this please?
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24. Thank you for your attention
Carmen MUÑIZ
European Commission, DG Taxation and Customs Union
10/11/2018
Présentation Powerpoint