NEW SYSTEM OF TAXIMG
B2C DIGITAL SUPPLIES
Notion of services
- no definition of services in the VAT
directive – means any transactions which
does not constitute a supply of goods
 - some categories of services are separately
difened
 - of particular relevance to digital commerce
are the definitions of „telecommunications
services“
and
„electronically
supplied
servies“
 - the EU VAT Directive provides for an
indicative list of „electronically supplied
services“ which is supplemented by the
related Council Implementing Regulation

Notion of services




- the Regulation provides that electronically supplied
services include services which are delivered over the
Internet or an electronical network and the nature of
which tenders their supply essentially automated and
involving a minimal human intervention and
impossible to ensure in the absence of information
technology
- hotels and services related to accommodation – will
be treated as ancillary to the service, so their place of
supply is the place of the accommodation
- lease, license and other similar supplies of goods
are treated as supply of services to the extent that
the customer does not receive the right to dispose of
the goods as owner
- relevant not only for the determination of rules –
where – rate – even time when VAT becomes payable
PLACE OF SUPPLY OF SERVICES

The place of taxation is determined by
where the services are supplied. This
depends not only on the nature of the
service supplied but also on the status of
the customer receiving the service. A
distinction must be made between a
taxable person acting as such (a
business acting in its business capacity) and
a non-taxable person (a private individual
who is the final consumer).
PLACE OF SUPPLY OF SERVICES
The concept of a taxable person covers
anyone who independently carries out
an economic activity, even if that person
is not identified for VAT purposes, but it
also includes a non-taxable legal person
identified for VAT purposes.
 Only once the exact nature of the service
and the status of the customer are
known can the place where the services are
supplied be correctly determined.

PLACE OF SUPPLY OF SERVICES

- General rules – general rules are in effect fall-back
rules in case when particular provisions do not apply

B2B supplies – the place where the CUSTOMER has
established its business

B2C supplies – place where the SUPPLIER has
established its business (even non-taxable legal persons
– public bodies, charities…)
Reverse charge – the customer is liable for the
payment of the VAT, whenever the supplier is not
established within the territory of the customer's MS
 The supplier has to makes recapitalutive statements –
identifying customers which are liable for VAT

PLACE OF SUPPLY OF SERVICES – B2B

Example 1: The place of supply of services supplied by a company
in Zagreb (CRO) to a business client in Rijeka (CRO) will be Zagreb.
As the supplier is established in Croatia, he will charge Croatian VAT
to his client.

Example 2: For legal services supplied by a German company to a
business customer with his place of business in Austria, Austrian VAT
must be charged. If the German supplier is not established in
Austria, the Austrian customer will account for VAT under the reverse
charge mechanism.

Example 3: Finnish VAT must be charged (by the customer using
the reverse charge procedure) where legal services are supplied by a
Polish company to a customer whose place of business is in Sweden
but provided to the customer's fixed establishment in Finland.

Example 4: Advertising services supplied by an Italian company to a
public authority in Spain which, because of its intra-Community
acquisitions of goods, is identified for VAT purposes, are taxed in
Spain
using
the
reverse
charge
mechanism.
PLACE OF SUPPLY OF SERVICES – B2C

Example 1: For consultancy services provided
by a supplier established in Lisbon to a private
customer who resides in Denmark, Portuguese
VAT must be charged.

Example 2: A supplier established in Greece will
need to charge Greek VAT to a business
customer established in Romania who
acquires legal services to be used for his
private purposes.
Place of business establishment



The place of business establishment is „the place
where the functions of the business's central
administration are carried out“
However, if the services are provided to a fixed
establishment of the customer located in a MS
other than the customer's place of business, the
place of supply is the place where that fixed
establishment is located
A fixed establishment is any establishment other
than the place of business establishment – that is
characterised by a sufficient degree of permanence
and a suitable structure in terms of human and
technical resources to enable it to receive and use
the services supplied to it for its own needs.
Electronically supplied services – place of supply
-
services which are delivered over the Internet or an electronic
network and the nature of which renders their supply
essentially
automated
and
involving
minimal
human
intervention, and impossible to ensure in the absence of
information technology.
Both the supplier and the customer are situated in the EU –
place of business of the SUPPLIER (general rule)
Buying electronically supplied services online if the seller
is established inside the EU (OUTBOUND)
When buying electronically supplied services online, VAT is due.
Currently the seller will charge the VAT rate applicable in the
country where he is established, but from 1 January 2015, he will
have to charge the VAT rate applicable in the country where the
buyer is established.

Buying electronically supplied services online if the seller
is established outside the EU (INBOUND)
When buying electronically supplied services online, VAT is due.
The seller will charge the VAT rate applicable in the country
where the buyer is established, have his permanent address or
usually resides.

Telecommunication services,
broadcasting services
Telecommunications services are defined as services
relating to the transmission, emission or reception of signals,
writing, images and sounds or information of any nature by
wire, radio, optical or other electromagnetic systems, including
the related transfer or assignment of the right to use capacity
for such transmission, emission or reception, and the provision
of access to global information networks.
Broadcasting services includes services consisting of audio
and audio-visual content, such as radio or television
programmes which are provided to the general public via
communications networks by and under the editorial
responsibility of a media service provider, for simultaneous
listening or viewing, on the basis of a programme schedule.
PARTICLUAR PROVISIONS
- same rules as for electronically supplied services
 HOWEVER – and this is where the approach for
telecommunication currently differs from that for
electronically supplied services - if the CUSTOMER is
situated in the EU, but the SUPPLIER is outside the
EU, MS are currently required to consider the place of
supply as being within their territory „if the effective
use and enjoyment of the services takes place
within their territoy“
 - given that this requirement only applies where the
services are supplied to a customer who is established,
has its permanent address or usually resides in a MS,
the result (taxation at customer location) appears to be
the same as for electronically supplied services (but for
a different reason)

Rules applicable until the end of
2014
Supplies into or from the EU
Type of service transaction
VAT payable
supply")
in
("place
of
Telecoms/broadcast/electronic Country
where
customer
services from:
belongs
(has
their
main
business or fixed premises, their

outside the EU to a customer
permanent address or usually
in the EU or
lives). In some cases, subject to

inside the EU to a customer a 'use and enjoyment' override
outside the EU
Rules applicable until the end of 2014
The effects of this (PREVIOUS SLIDE) are as follows:
EU BUSINESSES supplying to (OUTBOUND):
Business or consumer outside the Usually no EU VAT charged
EU
(CUSTOMER NOT IN THE EU). But
if the service is effectively used &
enjoyed in an EU country, that
country can decide to levy VAT.
NON-EU BUSINESSES supplying to (INBOUND):
Business in the EU (B2B)
No foreign VAT charged. Customer
must account for the national VAT
(reverse-charge mechanism).
Consumer in the EU - electronic Must charge VAT in the EU country
services (B2C)
where that consumer belongs (is
registered,
has
their
permanent
address or usually lives)
Consumer in the EU - telecoms or Must charge VAT in the EU country
broadcasting services (B2C)
where the service is effectively
used and enjoyed (MAY BE THE
COUNTRY WHERE THE CONSUMER
BELONGS).
Rules applicable until the end of 2014
Supplies between EU countries
Type of service transaction
VAT payable
supply")
in
("place
of
Telecoms/broadcast/electronic B2B – EU country where the
services supplied within the EU customer belongs
B2C – EU country where the
supplier belongs
Rules applicable as from 2015
The effects of this are as follows:
EU BUSINESSES supplying to:
Business in another EU No VAT charged. Customer must account for the tax
country
(reverse-charge mechanism).
 Consumer
From
1 another
January
2015, telecommunications,
Must charge VAT in the EU country where the customer
EU
country
belongs
(not where the
business is based).
broadcasting
and
electronic
services
will always be
in
Example A Polish customer downloading an App on his mobile
phone from a Finnish supplier. The Finnish company must
charge the customer Polish VAT.
Business or consumer No EU VAT charged.
outside the EU
Example A Hungarian company sells an anti-virus program to
be downloaded through its website to businesses or private
individuals in Australia. NO VAT But if the service is effectively
used & enjoyed in an EU country, that country can decide to
levy VAT (option for Member States).
Rules applicable as from 2015
NON-EU BUSINESSES supplying to:
Business in the EU
No VAT charged. Customer must
account for the tax (reverse-charge
mechanism).
Consumer in the EU (telecoms, Must charge VAT in the EU country where
broadcasting
or
electronic the customer belongs.
services)
Example A person living in Barcelona
pays a US company for access to
American TV channels. The US company
must charge the customer Spanish VAT.
APPLICATION OF STATE
AID RULES TO TAX
RULINGS
Background

-Although the Commission has no direct authority
over national tax systems, it can investigate
whether certain fiscal regimes, including in the
form
of
tax
rulings,
would
constitute
“unjustifiable” State aid to companies.

The EU’s State aid rules are set out in the Treaty
on the Functioning of the European Union (TFEU)
and constitute part of the TFEU’s provisions on
competition law. In general, Member States are
prohibited from granting financial assistance
in a way that distorts competition, unless the
aid measure has been notified to and
authorized by the Commission.
Background

Article 107(1) TFEU prohibits “any aid
granted by a Member State or through
State resources in any form
whatsoever which distorts or
threatens to distort competition by
favouring certain undertakings or the
production of certain goods, in so far
as it affects trade between Member
States.”
Application of the prohibition
The prohibition applies to any form of
financial aid, including in the form of tax
rulings.
 Although not problematic in themselves,
tax rulings may amount to unlawful State
aid if they provide selective advantages
to a specific company or group of
companies that are not approved under
EU State aid rules.

Unlawful State Aid
Article 108(3) TFEU requires Member
States to notify non-exempted State
aid measures, including in the form of
tax measures, to the Commission
before their implementation, and to
await the Commission’s approval
before implementing such measures (the
so-called “standstill obligation”).
 If either of those obligations is not
fulfilled, the State aid measure is
considered to be unlawful.

Preliminary investigation of the
Commission

A notification triggers a preliminary
investigation by the Commission.

The Commission can also investigate
unnotified State aid that has already been
granted on its own initiative or
following a third-party complaint.
Recovery of the State Aid
If, following an in-depth investigation, the
Commission finds that a measure constitutes
illegal State aid, the Commission will require
the Member State to recover the aid from the
beneficiary (unless such recovery would be
contrary to a general principle of EU law).
 In the case of tax measures, the amount to be
covered is calculated “on the basis of a
comparison between the tax actually paid and
the amount that should have been paid if the
generally applicable rule had been applied”.
Interest is added to this basic amount.
Recovery of past benefits can be ordered for up
to ten years.

Investigations
The
European
Commission’s
(the
Commission’s) actions in late 2014 confirmed
that the application of EU State aid law to
Member States’ tax ruling practices will be a
priority for the new Commission.
 On 20 November 2014, Margrethe Vestager, who
replaced Joaquin Almunia as competition
commissioner as of November 2014, indicated
that by the second quarter of 2015 the
Commission aims to conclude investigations
aimed at four companies:
 - Amazon,
 - Apple,
 - Fiat Finance and Trade (FFT), and
 - Starbucks

Investigations

All four cases concern tax rulings dealing
with transfer pricing arrangements
between
entities
of
the
same
corporate group, which the Commission
believes may involve illegal State aid.
Investigations





Measures taken to exempt a company from an
obligation to pay taxes can amount to unlawful
State aid if the following conditions are met:
- First, the tax measure must grant an
economic advantage
- Second, the advantage must be financed
through State resources
- Third, the tax measure must distort or
threaten to distort trade and competition
between Member States
Finally, the tax measure must be specific or
selective in that it benefits “certain
undertakings or the production of certain
goods”
First condition – economic advantage:




In the case of tax rulings, an advantage will in principle
exist where the tax payable under the tax ruling is
lower than the tax that would otherwise have to be
paid under the normally applicable tax system.
The general rule is that the allocation of profit between
companies of the same corporate group must comply with
the “arm’s length principle” as set in Article 9 of the
OECD Model Tax convention.
In the case of transfer pricing agreements, this means that
arrangements between companies of the same corporate
group must not depart from arrangements that a prudent
independent operator acting under normal market
conditions would have accepted.
The Court of Justice of the European Union has confirmed
that if the method of taxation for intra-group transfers
does not comply with the arm’s-length principle and
leads to a lower taxable base than would result from
a correct implementation of that principle, it
provides a selective advantage to the company
concerned.
Second condition – financing through
State resources

In cases where a tax authority lowers the
effective tax rate that would otherwise be
payable, the resulting loss of revenue for
the State is equivalent to the use of State
resources.
Third condition – tax measure must
distort or threaten to distort trade and
competition between Member States

Where the beneficiary carries out an
economic activity in the EU, this criterion
is easily met.
Fourth condition – tax measure must
be specific or selective in that it
benefits “certain undertakings or the
production of certain goods”
According to the Commission, “every decision of the
administration that departs from the general tax rules to
the benefit of individual undertakings in principle leads to
a presumption of State aid and must be analysed in
detail.”
 Thus, a tax ruling that merely interprets general
tax rules or manages tax revenue based on
objective criteria will generally not constitute State
aid, while a ruling that applies the authorities’ discretion
to apply a lower effective tax rate than would otherwise
apply may amount to State aid.
 In the case of transfer pricing agreements, a tax
ruling that deviates from the arm’s-length
principle is likely to be considered as specific and
hence qualify as State aid under EU law.

Tax benefit


The classification of a tax benefit as general or
specific is therefore crucial to determine its validity.
Even a measure that appears prima facie to be
general may be selective in practice. Thus, in
the Gibraltar case, a corporate tax reform for
companies operating in Gibraltar was found to be
selective
because
it
favoured
off-shore
companies, even though it appeared to be
applicable to all undertakings domiciled in
Gibraltar.
The ECJ ruled that “the fact that offshore companies
are not taxed is… the inevitable consequence of the
fact that the bases of assessment are specifically
designed so that offshore companies, which by
their nature have no employees and do not
occupy business premises, have no tax base
under the bases of assessment adopted in the
proposed tax reform.”
Exemption

If one of the tax measures in question
constitutes State aid, it could in principle
benefit from an exemption under the TFEU,
but such exemptions generally apply to
tax relief granted for a specific project,
such as investing in disadvantaged areas
or promoting culture and heritage
conservation, and are limited to the
costs of carrying out such projects. In
the Opening Decisions, the Commission has
indicated that, at this stage of the
investigations, it has no indication that the
contested rulings can benefit from an
exemption under the TFEU.

The European Commission has decided that
Luxembourg and the Netherlands have
granted selective tax advantages to Fiat
Finance and Trade and Starbucks,
respectively.

These are illegal under EU state aid rules.

Therefore, the Commission has ordered
Luxembourg and the Netherlands to recover
the unpaid tax from Fiat and Starbucks,
respectively, in order to remove the unfair
competitive advantage they have enjoyed
and to restore equal treatment with other
companies
in
similar
situations.
The
amounts to recover are €20 - €30 million
for each company. It also means that the
companies can no longer continue to
benefit from the advantageous tax
treatment granted by these tax rulings.
Fiat
Finance
and
Trade,
based
in
Luxembourg, provides financial services,
such as intra-group loans, to other Fiat
group car companies. It engages in many
different transactions with Fiat group
companies in Europe.
 The Commission's investigation showed that
a tax ruling issued by the Luxembourg
authorities in 2012 gave a selective
advantage to Fiat Finance and Trade, which
has unduly reduced its tax burden since
2012 by €20 - €30 million.


Given that Fiat Finance and Trade's activities
are comparable to those of a bank, the
taxable profits for Fiat Finance and Trade
can be determined in a similar way as for
a bank, as a calculation of return on capital
deployed by the company for its financing
activities. However, the tax ruling endorses
an
artificial
and
extremely
complex
methodology that is not appropriate for the
calculation of taxable profits reflecting
market conditions.
In particular, it artificially lowers taxes paid
by Fiat Finance and Trade in two ways:
 Due to a number of economically
unjustifiable assumptions and downward adjustments, the capital base
approximated by the tax ruling is much
lower thanthe company's actual capital.
 The estimated remuneration applied to this
already much lower capital for tax purposes
is also much lower compared to market
rates.


As a result, Fiat Finance and Trade has only
paid taxes on a small portion of its actual
accounting
capital
at
a
very
low
remuneration. As a matter of principle, if the
taxable profits are calculated based on capital,
the level of capitalisation in the company has
to be adequate compared to financial industry
standards. Additionally, the remuneration
applied has to correspond to market
conditions. The Commission's assessment
showed that in the case of Fiat Finance and
Trade, if the estimations of capital and
remuneration applied had corresponded to
market conditions, the taxable profits declared
in Luxembourg would have been 20 times
higher.