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Paul Bater, International Bureau of Fiscal Documentation (IBFD) April 2005

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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Paul Bater, International Bureau of Fiscal Documentation (IBFD) April 2005

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  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

  2. The EU 6th VAT Directive: Basic features and generalcompliance 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.

  3. The EU 6th VAT Directive: Basic features and generalcompliance 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.

  4. The EU 6th VAT Directive: Basic features and generalcompliance 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.

  5. The EU 6th VAT Directive: Basic features and generalcompliance 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).

  6. The EU 6th VAT Directive: Basic features and generalcompliance 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).

  7. The EU 6th VAT Directive: Basic features and generalcompliance 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).

  8. The EU 6th VAT Directive: Basic features and generalcompliance 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

  9. The EU 6th VAT Directive: Basic features and generalcompliance 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

  10. The EU 6th VAT Directive: Basic features and generalcompliance 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

  11. The EU 6th VAT Directive: Basic features and generalcompliance 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

  12. The EU 6th VAT Directive: Basic features and generalcompliance 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)

  13. The EU 6th VAT Directive: Basic features and generalcompliance 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 ?)

  14. The EU 6th VAT Directive: Basic features and generalcompliance 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

  15. The EU 6th VAT Directive: Basic features and generalcompliance 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

  16. The EU 6th VAT Directive: Basic features and generalcompliance 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?

  17. The EU 6th VAT Directive: Basic features and generalcompliance of the Serbian Law on VAT with the Directive • European Commission Proposal: • Good or bad for charities?

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