Overview Of Eu Legislation Currently In Force Law European Essay

Published Date: 02 Nov 2017

The Value Added Tax, or VAT, in the European Union is a general, broadly based consumption tax assessed on the value added to goods and services. It applies more or less to all goods and services that are bought and sold for use or consumption in the Community. Thus, goods which are sold for export or services which are sold to customers abroad are normally not subject to VAT. Conversely imports are taxed to keep the system fair for EU producers so that they can compete on equal terms on the European market with suppliers situated outside the Union .

Value added tax is

a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services.

a consumption tax because it is borne ultimately by the final consumer. It is not a charge on businesses.

charged as a percentage of price, which means that the actual tax burden is visible at each stage in the production and distribution chain.

collected fractionally, via a system of partial payments whereby taxable persons (i.e., VAT-registered businesses) deduct from the VAT they have collected the amount of tax they have paid to other taxable persons on purchases for their business activities. This mechanism ensures that the tax is neutral regardless of how many transactions are involved.

paid to the revenue authorities by the seller of the goods, who is the "taxable person", but it is actually paid by the buyer to the seller as part of the price. It is thus an indirect tax.

VAT: Overview of EU legislation currently in force and eLearning course

The essential piece of EU VAT legislation since 1 January 2007 has been Directive 2006/112/EC. That 'VAT Directive' is effectively a recast of the Sixth VAT Directive of 1977 as amended over the years. The recast brings together various provisions in a single piece of legislation. It provides a clearer overview of EU VAT legislation currently in force.

As it is usual practice, the Directive contains a correlation table providing the bridge between the provisions of the Sixth VAT Directive and those of the new Directive.

This table features at the end of the Directive. An eLearning course has been developed by the European Commission to help tax officials and others get a good basic knowledge of the VAT Directive. The course is freely available for download from our web page.

What is a taxable person?

For VAT purposes, a taxable person is any individual, partnership, company or whatever which supplies taxable goods and services in the course of business.

However, if the annual turnover of this person is less than a certain limit (the threshold), which differs according to the Member State, the person does not have to charge VAT on their sales.

How is it charged?

The VAT due on any sale is a percentage of the sale price but from this the taxable person is entitled to deduct all the tax already paid at the preceding stage. Therefore, double taxation is avoided and tax is paid only on the value added at each stage of production and distribution. In this way, as the final price of the product is equal to the sum of the values added at each preceding stage, the final VAT paid is made up of the sum of the VAT paid at each stage.

Registered VAT traders are given a number and have to show the VAT charged to customers on invoices. In this way, the customer, if he is a registered trader, knows how much he can deduct in turn and the consumer knows how much tax he has paid on the final product. In this way the correct VAT is paid in stages and to a degree the system is self-policing. The system operates as follows:

Example

Stage 1

A mine sells iron ore to a smelter. The sale is worth €1000 and, if the VAT rate is 20%, the mine charges its customers €1200. It should pay €200 to the treasury, but as it has bought €240 worth of tools in the same accounting period, including €40 VAT, it is only required to pay €160 (€200 less €40) to the treasury. The treasury also receives the €40 and now gets €160 making €200 - which is the correct amount of VAT due on the sale of the iron ore.

Supply: €1000

VAT on supply: €200

VAT on purchases: €40

Net VAT to be paid: €160

Stage 2

The smelter has paid €200 VAT to the mine and, say, another €20 VAT on other purchases, such as furniture, stationery, etc. So when the smelter sells €2000 worth of steel it charges €2400 including €400 VAT. The smelter deducts the €220 already paid on his inputs and pays €180 to the treasury. The treasury receives this €180 from the smelter plus €160 from the mine, plus €40 paid by the supplier of tools to the mine, plus €20 paid by the furniture/stationary supplier to the smelter.

Supply: €2.000

VAT on supply: €400

VAT on purchases: €220

Net VAT to be paid: €180

€180 (paid by the smelter) + €160 (paid by the mine) + €40 (paid by the supplier to the mine) + €20 (paid by the supplier to the smelter) = €400 or the correct amount of VAT on a sale worth €2000.

VAT coverage and VAT rates

Given that EU law only requires that the standard VAT rate must be at least 15% and the reduced rate at least 5% (only for supplies of goods and services referred to in an exhaustive list), actual rates applied vary between Member States and between certain types of products. In addition, certain Member States have retained separate rules in specific areas.

The most reliable source of information on current VAT rates for a specified product in a particular Member State is that country's VAT authority. Nevertheless, it is possible to get an overview of the different rates applied from the VAT rates in the European Union information document.

VAT on imports and exports

For the purpose of exports between the Community and non-member countries, no VAT is charged on the transaction and the VAT already paid on the inputs of the good for export is deducted - this is an exemption with the right to deduct the input VAT, sometimes called 'zero-rating'. There is thus no residual VAT contained in the export price.

However, as far as imports are concerned, VAT must be paid at the moment the goods are imported so they are immediately placed on the same footing as equivalent goods produced in the Community. Taxable people registered for VAT will be allowed to deduct this VAT in their next VAT return.

VAT on goods moving between Member States

No frontier controls exist between Member States and therefore VAT on goods traded between EU Member States is not collected at the internal frontier between tax jurisdictions.

Goods supplied between taxable persons (or VAT registered traders) are exempted with a right to deduct the input VAT (zero-rated) on despatch if they are sent to another Member States to a person who can give his VAT number in another Member State. This is known as an "intra-Community supply". The VAT number can be checked using the VAT Information Exchange System (VIES).

The VAT due on the transaction is payable on acquisition of the goods by the taxable customer in the Member State where the goods arrive. This is known as "intra-Community acquisition". The customer accounts for any VAT due in his normal VAT return at the rate in force in the country of destination.

VAT on services

VAT on services is paid at the place where the service has been supplied. This will most often, but not always, be where the service supplier is established. The trader will in those cases account for VAT on his services in the Member State where he is established, applying the VAT rate of that country.

Depending on the nature of the service, VAT may need to be paid in another Member State than that where the supplier is established. This is for example the case with services connected to immovable property; transport of passengers or goods; cultural, artistic, sporting, scientific, educational, and entertainment services.

How do the Member States apply VAT?

The detailed application of VAT varies according to the administrative customs and practices of each Member State within the framework set out by Community legislation.

Why do all Member States use VAT?

At the time when the European Community was created, the original six Member States were using different forms of indirect taxation, most of which were cascade taxes. These were multi-stage taxes which were each levied on the actual value of output at each stage of the productive process, making it impossible to determine the real amount of tax actually included in the final price of a particular product. As a consequence, there was always a risk that Member States would deliberately or accidentally subsidise their exports by overestimating the taxes refundable on exportation.

It was evident that if there was ever going to be an efficient, single market in Europe, a neutral and transparent turnover tax system was required which ensured tax neutrality and allowed the exact amount of tax to be rebated at the point of export. As explained in VAT on imports and exports, VAT allows for the certainty that exports there are completely and transparently tax-free.

The history of VAT in the European Union until 1993

On 11 April 1967 the first two VAT Directives were adopted, establishing a general, multi-stage but non-cumulative turnover tax to replace all other turnover taxes in the Member States. However, the first two VAT Directives laid down only the general structures of the system and left it to the Member States to determine the coverage of VAT and the rate structure. It was not until 17 May 1977 that the Sixth VAT Directive was adopted which established a uniform VAT coverage.

On 1 January 2007, the Sixth Directive was replaced by the VAT Directivepdf (Directive nº 2006/112/EC). It brings together the various provisions into one piece of legislation, so gives a clearer overview of EU VAT legislation currently in force. The VAT Directive guarantees that the VAT contributed by each of the Member States to the Community's own resources can be calculated. It still however, allows Member States many possible exceptions and derogations from the standard VAT coverage. Moreover, it does not set out the rates of VAT to be applied in Member States, only a minimum rate of 15% fixed until 31 December 2010. This means that VAT rates differ widely. Currently, Member States apply a standard rate of between 15% and 25%. They may also apply 1 or 2 reduced rates of at least 5%. There are a number of temporary derogations, e.g. zero rates in the United Kingdom and Ireland . The VAT coverage also still differs from one Member State to another.

VAT and the Single Market - 1993 to now

The realisation of the single market in 1993 resulted in the abolition of controls at fiscal frontiers. To achieve this, the Commission proposed moving from the pre-1993 "destination based" system, where VAT is effectively charged at the rate of VAT applicable where the buyer is established, to an "origin based" system, with VAT being charged at the rate in force where the supplier is established. This would have effectively abolished fiscal frontiers within the EU.

This was, however, not acceptable to Member States as rates of VAT were too different and there was no adequate mechanism to redistribute VAT receipts to mirror actual consumption.

Therefore, until the conditions were right the Community adopted the Transitional VAT System which maintains different fiscal systems but without frontier controls. The intention is still eventually to have a common system of VAT where VAT is charged by the seller of goods - an origin based VAT system. The transitional system is an origin based system for sales to private persons who can go and buy tax paid anywhere they like in the Union and take the goods home without having to pay VAT again. There are some exceptions to this general rule however (e.g. the purchase of new means of transport and distance selling). For transactions between taxable persons it is still a destination based VAT system.

http://ec.europa.eu/taxation_customs/taxation/vat/how_vat_works/index_en.htm

Common system of value added tax (VAT) (‘the VAT Directive’)

This directive codifies the provisions implementing the common system of VAT, which applies to the production and distribution of goods and services bought and sold for consumption within the European Union (EU). To ensure that the tax is neutral in impact, irrespective of the number of transactions, taxable persons for VAT may deduct from their VAT account the amount of tax which they have paid to other taxable persons. VAT is finally borne by the final consumer in the form of a percentage addition to the final price of the goods or services.

ACT

Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax [See amending acts].

SUMMARY

Value added tax (VAT) is a general tax on consumption applied to commercial activities involving the production and distribution of goods and the provision of services. This VAT Directive codifies the provisions governing the introduction of the common system of VAT in the European Union (EU).

The common system of VAT applies to goods and services bought and sold for consumption within the EU. The tax is calculated on the basis of the value added to goods and services at each stage of production and of the distribution chain.

The tax is collected through a system of partial payments which allows taxable persons (firms identified for VAT) to deduct from their VAT accounts the amount of tax which they have paid to other taxable persons on their purchases for commercial purposes during the preceding stage. This mechanism means that the tax is neutral, irrespective of the number of transactions.

In the end, VAT is borne by the final consumer in the form of a percentage addition to the final price of the goods or services. This final price is the total of the value added at each stage of production and distribution. The supplier of goods or services (the taxable person) pays the VAT paid on the goods or services to the national tax administration after deducting the VAT already paid to his suppliers.

Scope

Transactions carried out for consideration on the territory of an EU country by a taxable person acting in that capacity are subject to VAT. Imports by any person are also subject to VAT.

Taxable transactions include:

supplies of goods by a taxable person;

intra-EU acquisitions in an EU country of goods from another EU country;

supplies of services by a taxable person;

imports of goods from outside the EU (a third territory * or a non-EU country).

An intra-EU acquisition of goods occurs only when goods are transported from one EU country to another. It occurs when goods sold by a taxable person in the EU country of departure are purchased in another EU country (of arrival) by a taxable person acting in that capacity or by a non-taxable legal person. It also occurs in the case of new means of transport * and of products subject to excise * duty purchased by other persons.

If the total amount of intra-EU acquisitions of goods by non-taxable legal persons and certain categories of exempt taxable persons does not exceed a minimum threshold of EUR 10 000 per year, these acquisitions are subject to VAT only if the purchaser decides to register.

Intra-EU acquisitions of second-hand goods, works of art, collectors’ items and antiques are not subject to VAT when the vendor is a taxable dealer or an organiser of sales by public auction who has paid the tax on these goods by using the special scheme of taxation of the profit margin.

Territorial scope

EU VAT does not apply in the following third territories:

the Island of Heligoland, the territory of Büsingen, Ceuta, Melilla, Livigno, Campione d’Italia and the Italian waters of Lake Lugano (territories which do not form part of the EU customs territory);

Mount Athos, the Canary Islands, the French overseas departments, the Ã…land Islands and the Channel Islands (territories which form part of the EU customs territory).

In accordance with the Treaty, VAT also does not apply in Gibraltar or the part of Cyprus which is not under the effective control of the government of the Republic of Cyprus. These regions are treated as third territories.

Since the Principality of Monaco, the Isle of Man and the United Kingdom’s sovereign base areas of Akrotiri and Dhekelia are not regarded as non-EU countries, VAT applies there.

Taxable persons

A taxable person is a person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity. Economic activity includes any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions. To the extent that they are bound to their employer by a contract of employment or by any other legal ties creating the relationship of employer and employee, the activities of salaried and other persons are not regarded as being carried out independently.

Any person who, on an occasional basis, supplies a new means of transport transported to another EU country is also regarded as a taxable person.

An EU country may also regard as a taxable person anyone who carries out, on an occasional basis, an operation relating to an economic activity and, in particular, the supply, before first occupation, of a building or part of a building and of the land on which the building stands or the supply of building land.

States, regional and local government authorities and other bodies governed by public law are not regarded as taxable persons in respect of the activities or transactions in which they engage as public authorities, except where their treatment as non-taxable persons would lead to significant distortions of competition. When they carry out certain commercial operations, such bodies are nevertheless taxable persons.

Taxable transactions

The supply of goods is the transfer of the right to dispose of tangible property as owner.

Any transaction which does not constitute a supply of goods constitutes a supply of services.

The intra-EU acquisition of goods is the acquisition of the right to dispose as owner of movable tangible property transported to the person acquiring the goods in another EU country.

The importation of goods is the entry into the EU of goods which are not in free circulation. The entry of goods which are in free circulation from a third territory is also an importation.

Place of transactions

The place of a supply of goods is:

the location of the goods at the time of supply (where the goods are not dispatched or transported);

the location of the goods at the time when dispatch or transport to the customer begins (where the goods are dispatched or transported);

the place of departure of the passenger transport operation (where the goods are sold on board ships, aircraft or trains);

the place where the customer is located (in the case of the supply of gas through a natural gas system within the EU or any network connected to such a system, the supply of electricity or the supply of heat or cooling energy through heating or cooling networks).

The place of an intra-EU acquisition of goods is deemed to be the place where transport of the goods to the person acquiring them ends.

The place of supply of services to taxable persons is deemed to be the place where the customer has established his business or, if provided to a fixed establishment that the customer has elsewhere, the place where that fixed establishment is located or, in the absence of any establishment, the place where the customer has his permanent address or usually resides. The place of supply of services to non-taxable persons is deemed to be the place where the supplier has established his business or, if provided from a fixed establishment that the supplier has elsewhere, the place where that fixed establishment is located or, in the absence of any establishment, the place where the supplier has his permanent address or usually resides.

There are, however, some exceptions to these general rules. The services concerned include those connected with immovable property, passenger transport and transport of goods, those relating to activities relating to culture, art, sport, science, education and entertainment, those of restaurant and catering services and those of short-term hiring of means of transport. The main purpose of these exceptions is to ensure that the service is taxed at the place where it is actually consumed.

In relations with non-EU countries, to avoid double taxation, non-taxation or the distortion of competition, the EU countries may consider:

the place of supply of certain services situated within their territory as being situated outside the EU, if effective use and enjoyment takes place outside the EU;

the place of supply of certain services situated outside the EU as being situated within the EU country, if effective use and enjoyment takes place within their territory.

The place of importation of goods is the EU country where the goods are located when they enter the EU.

Chargeable event and chargeability of VAT

Except in a number of specifically listed cases, the chargeable event * for tax occurs and tax becomes chargeable * when the goods or services are provided.

In the case of intra-EU acquisition of goods, the chargeable event occurs when the acquisition is made and the tax becomes chargeable on the 15th day of the month following the acquisition. However, if an invoice is issued before that date, the tax becomes chargeable on the date the invoice is issued.

However, from 1 January 2013, when Directive 2010/45/EU comes into force, VAT shall become chargeable on issue of the invoice, or on expiry of the time limit referred to in Article 222 of this directive if no invoice has been issued by that time.

In the case of the importation of goods, the chargeable event occurs and tax becomes chargeable when the goods are introduced into an EU country.

Taxable amount

In respect of the supply of goods and services and the intra-EU acquisition of goods, the taxable amount includes everything which constitutes consideration obtained by the supplier for transactions by the customer. This includes subsidies directly linked to the price of these transactions. The amount also includes taxes, duties, levies and charges (excluding the VAT itself) and incidental expenses charged by the supplier to the customer but excludes certain price reductions, rebates and price discounts and repayments of expenses incurred.

In the case of importations of goods, the taxable amount is the value for customs purposes. It includes taxes, duties, levies and other charges due outside the EU country of importation, and those due by reason of the importation (excluding the VAT itself) and incidental expenses (packing, transport, etc.).

Rates of VAT

Taxable transactions are taxed at the rates and under the conditions set by the EU country where they take place. The standard rate of VAT is set as a percentage of the taxable amount which, until 31 December 2015, may not be less than 15 %.

EU countries may apply one or two reduced rates of not less than 5 %. The reduced rates may only be applied to supplies of goods and services in the categories listed in Annex III to the VAT Directive (as last amended by Directive 2009/47/EC).

The EU countries may also, after consultation of the VAT Committee, apply a reduced rate to supplies of natural gas, electricity and district heating.

Finally, by way of derogation from the normal rules, certain EU countries have been authorised to maintain reduced rates, including those lower than the minimum, or zero rates, in certain areas.

Some of these derogations provided for in the act of accession of the ten countries which joined the EU on 1 May 2004 only applied until 31 December 2010. Others have been extended or incorporated into the general rules by Directive 2009/47/EC.

Exemptions

Goods and services which are exempt from VAT are sold to the final consumer without VAT applying to the sale. However, where the supply of goods or services is exempt, the supplier may not deduct the VAT on purchases. Such exemption without a right to deduct means that ‘hidden’ VAT remains included in the price paid by the consumer. This exemption should be clearly distinguished from a zero rate of VAT which certain EU countries have a derogation to retain and which means that the final price to the consumer includes no residual VAT.

There are also exemptions with a right to deduct whose main aim is to take into account the place where the goods or services are deemed to have been consumed and so taxed: these transactions are relieved of all VAT in their EU country of origin because they will be taxed in the country of destination.

Exemptions without a right to deduct

For socio-economic reasons, the following are exempted:

certain activities of general interest (such as hospital and medical care, goods and services linked to welfare and social security work, school and university education and certain cultural services);

certain transactions including insurance, the granting of credit, certain banking services, supplies of postage stamps, lotteries and gambling and certain supplies of immovable property.

To facilitate trade, certain importations of goods from outside the EU are exempt. These include the final importation of goods the supply of which is exempt in the EU country of importation and goods the final importation of which is governed by Directives 2007/74/EC (goods carried in travellers’ luggage), 2009/132/EC (goods imported for non-commercial purposes) and 2006/79/EC (small consignments of goods of a non-commercial character).

Exemptions with a right to deduct

To take account of the place where goods and services are deemed to have been consumed and hence taxed, the following transactions are exempt with a right to deduct:

intra-EU supplies of goods, including new means of transport and products subject to excise duty dispatched from one EU country to another;

exports of goods from the EU to a third territory or a non-EU country;

certain transactions relating to international transport or treated as exports;

supplies of services by intermediaries when they take part in transactions relating to exports;

certain transactions relating to international trade, such as those concerning customs warehouses and other warehouses.

Deductions

A taxable person who purchases goods or services has the right to deduct the amount of the VAT in the EU country where these transactions are carried out if the goods and services are used for his professional economic activity. A taxable person who has paid VAT in an EU country where s/he is not established may secure reimbursement through a special electronic procedure. There is no right to deduct in the case of an exempt economic activity or if the taxable person qualifies for a special scheme (e.g. exemption from VAT for small firms).

In certain cases deductions may be limited or adjusted. To exercise the deduction requires certain conditions to be fulfilled, particularly the obligation to hold an invoice.

Obligations of taxable persons and certain non-taxable persons

VAT is payable:

by any taxable person carrying out a taxable supply of goods or services, except in certain specific cases where the tax is payable by another person, particularly a customer using the reverse charge procedure;

by the person making an intra-EU acquisition of taxable goods;

on an importation by the person designated or recognised as liable by the EU country of importation.

A taxable person must state when his activity as a taxable person commences, changes or ceases and must keep sufficiently detailed records.

A taxable person must ensure that a sufficiently detailed invoice is issued for goods and services which s/he supplies to another taxable person or a non-taxable legal person. An invoice must also be issued in certain other cases.

Derogations

Under certain conditions, EU countries may be authorised to introduce derogations to simplify the collection of VAT or to avoid certain tax fraud or evasion.

Special schemes

There are special VAT schemes for:

small firms;

farmers (common flat-rate scheme);

second-hand goods, works of art, collectors’ items and antiques;

investment gold;

travel agents;

electronically supplied services.

Consumers

Some VAT schemes concern not only economic operators directly but also private persons and final consumers. This is the case for example where a private person buys goods in another EU country. When the consumer takes the goods home him-/herself, VAT is paid in the EU country where they were sold and bought (i.e. at their origin). Some exempt taxable persons and non-taxable legal persons also have the right to acquire a limited quantity of goods in another EU country as a result of the rules governing the taxation of trade between the EU countries. For those persons, the scheme is already based on the principle of taxation in the EU country of origin of the goods and services supplied (see end of this summary).

However, the origin principle does not apply when the goods are sold at a distance, i.e. when the purchaser and the seller are in different EU countries and the goods are being dispatched. If the value of goods sold on an annual basis exceeds a certain threshold (EUR 35 000 or EUR 100 000 depending on the EU country), the supplier must apply the destination principle, and must do so in any event in the case of distance sales of products subject to excise duty. Under this principle, the supplier accounts for VAT in the EU country of destination at the rate applicable there.

The origin principle does not apply when new means of transport are bought in another EU country. In that case, the purchaser pays the VAT in the EU country of destination.

Combating tax evasion

Tax evasion obstructs the functioning of the internal market by creating unjustified flows of goods and by allowing goods to be placed on the market at abnormally low prices.

To combat this scourge, Directive 2008/117/EC introduces the following measures:

the establishment of a one-month deadline for information on intra-EU supplies of goods;

the introduction of the same tax period for both the supplier and the purchaser or customer in the context of intra-EU transactions;

the reduction of administrative burdens;

an authorisation for operators to submit on a quarterly basis the recapitulative statements concerning intra-EU supplies of goods.

BACKGROUND

This VAT Directive is a recast of the Sixth Directive 77/388/EEC on the common system of value added tax and the uniform basis for assessment which has been amended more than thirty times since it was adopted. It codifies the provisions of Directive 77/388/EEC from 1 January 2007 without altering the substance of the legislation in force.

Key terms in the act

Third territories: territories forming part of an EU country but regarded for VAT purposes as lying outside the EU.

New means of transport:

land vehicles the capacity of which exceeds 48 cubic centimetres or the power of which exceeds 7.2 kilowatts, where the supply takes place within six months of the date of first entry into service or where the vehicle has travelled for no more than 6 000 kilometres;

vessels exceeding 7.5 metres in length (with the exception of vessels used for navigation on the high seas and carrying passengers for reward, and of vessels used for the purposes of commercial, industrial or fishing activities, or for rescue or assistance at sea, or for inshore fishing), where the supply takes place within three months of the date of first entry into service or where the vessel has sailed for no more than 100 hours;

aircraft the take-off weight of which exceeds 1 550 kilograms (with the exception of aircraft used by airlines operating for reward chiefly on international routes), where the supply takes place within three months of the date of first entry into service or where the aircraft has flown for no more than 40 hours.

Products subject to excise duty: energy products, alcohol and alcoholic beverages and manufactured tobacco, as defined by current EU legislation, but not gas supplied through a natural gas system situated within the territory of the EU or any network connected to such a system.

Chargeable event: the occurrence by virtue of which the legal conditions necessary for VAT to become chargeable are fulfilled.

Chargeability of VAT: when the tax authority becomes entitled under the law, at a given moment, to claim the tax from the person liable to pay, even though the time for payment may be deferred.