The European Union 6th VAT Directive: Basic features and general compliance of the Serbian Law on VA

1
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

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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.

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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.

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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.

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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).

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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).

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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).

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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

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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

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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

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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

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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)

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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 ?)

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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

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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

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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?

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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?