Common system of VAT (the 'VAT Directive')

21 December 2009
by Ina Dimireva -- last modified 25 December 2009

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 Community.

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 the 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.

SUMMARY

The VAT Directive codifies the provisions governing the introduction of the common system of VAT in the Community. The common system of VAT applies to goods and services bought and sold for consumption within the EC. 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 the 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 suppliers.

Scope

Transactions carried out for consideration on the territory of a Member State 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-Community acquisitions in a Member State of goods from another Member State;
• supplies of services by a taxable person;
• imports of goods from outside the EC (a third territory or a third country).

An intra-Community acquisition of goods occurs only when goods are transported from one Member State to another. It occurs when goods sold by a taxable person in the Member State of departure are purchased in another Member State (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-Community acquisitions of goods by non-taxable 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-Community 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

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 EC customs territory);
• Mount Athos, the Canary Islands, the French overseas departments, the Åland Islands and the Channel Islands (territories which form part of the EC 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 third 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 Member State is also regarded as a taxable person.

A Member State 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-Community 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 Member State.

The importation of goods is the entry into the EC 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 gas through the natural gas distribution system, or electricity).

The place of an intra-Community 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 is deemed to be the place where the supplier has established his business or has a fixed establishment from which the service is supplied. In the absence of such a place of business or fixed establishment, the goods are deemed to be supplied from the place where he has his permanent address or usually resides. It should be noted that Directive 2008/8/EC, which amends this Directive in several stages between 1 January 2009 and 1 January 2015 in order to take into account changes in the trade in services, has been adopted.

There are, however, some exceptions to this general rule. The services concerned include those of estate agents, those relating to activities relating to culture, art, sport, science, education and entertainment and those of consultants, engineers, lawyers and accountants. 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 third countries, to avoid double taxation, non-taxation or the distortion of competition, the Member States may consider:

• the place of supply of certain services situated within their territory as being situated outside the EC, if effective use and enjoyment takes place outside the EC;
• the place of supply of certain services situated outside the EC as being situated within the Member State, if effective use and enjoyment takes place within their territory.

 

The place of importation of goods is the Member State where the goods are located when they enter the EC.

 

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-Community 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.

In the case of the importation of goods, the chargeable event occurs and tax becomes chargeable when the goods are introduced into an EC Member State.

Taxable amount

In respect of the supply and intra-Community acquisition of goods and services, 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 Member State 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 Member State where they take place. The standard rate of VAT is set as a percentage of the taxable amount which, until 31 December 2010, may not be less than 15%.

Member States may apply one or two reduced rates of not less than 5%. The reduced rates may apply only 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).

However, the Member States may, subject to certain conditions, apply a reduced rate to supplies of natural gas, electricity and district heating.

Finally, by way of derogation from the normal rules, certain Member States 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 Member States which joined the European Union on 1 May 2004 will apply 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 the 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 Member States have a derogation to retain and which means that the final price to the consumer includes no residual VAT.

There are also exemptions with the 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 operations are relieved of all VAT in their Member State of origin because they will be taxed in the country of destination.

Exemptions without the 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 or the provision of foodstuffs);
• 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 EC are exempt. These include the final importation of goods the supply of which is exempt in the Member State of importation and goods the final importation of which is governed by Directives 69/169/EEC (goods carried in travellers’ luggage), 83/181/EEC (goods imported for non-commercial purposes) and 2006/79/EC (small consignments of goods of a non-commercial character).

 

Exemptions with the 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:

• intra-Community supplies of goods, including new means of transport and products subject to excise duty dispatched from one Member State to another;
• exports of goods from the EC to a third territory or a third 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 Member State 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 a Member State where he is not established may secure reimbursement through a special 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. tax-free allowance for small firms).

In certain cases deductions may be limited or adjusted. They require 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 carrying out an intra-Community acquisition of taxable goods;
• on an importation by the person designated or recognised as liable by the Member State 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 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, the Member States 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, work of arts, 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 Member State. When the consumer takes the goods home himself, VAT is paid in the Member State 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 Member State as a result of the rules governing the taxation of trade between the Member States. For those persons, the scheme is already based on the principle of taxation in the Member State of origin of the goods and services supplied.

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 Member States when the goods are dispatched. If the value of these goods exceeds a certain threshold (EUR 35 000 or EUR 100 000 depending on the Member State), 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 invoices the VAT in the Member State of destination at the rate applicable there.

The origin principle does not apply when new means of transport are bought in another Member State. In that case, the purchaser pays the VAT in the Member State 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-Community supplies of goods;
• the introduction of the same tax period for both the supplier and the purchaser or customer in the context of intra-Community transactions;
• the reduction of administrative burdens;
• an authorisation for operators to submit on a quarterly basis the recapitulative statements concerning intra-Community supplies of goods.

BACKGROUND

This VAT Directive is a recasting of the Sixth Directive 77/388/EEC on the common system of value 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.

REFERENCES

Directive 2006/112/EC
Entry into force: 1.1.2007
Deadline for transposition in the Member States: 1.1.2008
Official Journal: OJ L 347, 11.12.2006

Amending acts:

Directive 2006/138/EC
Entry into force: 29.12.2006
Deadline for transposition in the Member States: 1.1.2007
Official Journal: OJ L 384, 29.12.2006

Directive 2007/75/EC
Entry into force: 29.12.2007
Deadline for transposition in the Member States: 1.1.2008
Official Journal: OJ L 346, 29.12.2007

Directive 2008/8/EC
Entry into force: 20.2.2008
Deadline for transposition in the Member States: According to the provisions, between 1.1.2009 and 1.1.2015
Official Journal: OJ L 44, 20.2.2008

Directive 2008/117/EC
Entry into force: 21.1.2009
Deadline for transposition in the Member States: 1.1.2010
Official Journal: OJ L 14, 20.1.2009

Directive 2009/47/EC
Entry into force: 1.6.2009
Deadline for transposition in the Member States: -
Official Journal: OJ L 116, 9.5.2009

RELATED ACTS

Council Directive 2008/9/EC of 12 February 2008 laying down detailed rules for the refund of value added tax, provided for in Directive 2006/112/EC, to taxable persons not established in the Member State of refund but established in another Member State [Official Journal L44, 20.2.2008].

This Directive lays down the detailed rules for the refund of value added tax to taxable persons not established in the Member State of refund but established in another Member State. It will apply to applications for refunds lodged from 1 January 2010.

Council Directive 2006/79/EC of 5 October 2006 on the exemption from taxes of imports of small consignments of goods of a non-commercial character from third countries (codified version) [OJ L 286, 17.10.2006].

Communication from the Commission to the Council and the European Parliament of 5 July 2007 on VAT rates other than standard VAT rates [COM(2007) 380 final – Not published in the Official Journal].

Council Regulation (EC) No 1798/2003 of 7 October 2003 on administrative cooperation in the field of value added tax and repealing Regulation (EEC) No 218/92 [Official Journal L 264, 15.10.2003].