ECJ finally confirms: VAT is due if and when you get paid

If you have attended any of my webcasts or training seminars (I do this 6-8 times per year), you may remember that one of my “key” statements is to remember that VAT is due on everything that you get paid for.

VAT is an expenditure tax, not a tax on consumption. My professor indirect taxes back in the day (at Leiden University, if you’re Dutch you know who I mean!) always taught that if you buy a bottle of milk and drop it (i.e. not consume the milk), you won’t get a VAT refund.

This dogma has now finally been embraced by the European Court of Justice, in their Judgment in Joined Cases C-250/14 and C-289/14 Air France-KLM and Hop!-Brit Air v Ministère des Finances et des Comptes Publics.

The short and sweet of it is that if you sold and collected payment for a service or a good, you still have to account for VAT. Even if your buyer decides not to make use of the supply made.

In a previous ruling, the ECJ decided that compensation for damages is not taxable (Société Thermale d’Eugénie-les-Bains, C-277/05) (link to pdf). But that is not at all the case here – there are no damages, but simply no-shows in an airplane.

There are plenty of practical implications here. Think of hotels and restaurants that charge for no-shows, or telco companies that must charge VAT on unused balances.

Interestingly, the rules for unused gift cards are different – issuing gift cards is generally VAT free and VAT is due on the purchase of a good or service where the gift card is a “consideration”/payment.

The summary in the ECJ’s press release (link to pdf) states:

“The Court notes firstly that VAT is payable where, first, the sum paid by the customer to the airline company is directly linked with a service (in the present case, air transport) and, secondly, that service is performed.

However, the Court states that the consideration for the price of the ticket does not depend on the physical presence of the passenger at boarding, but that it consists of the passenger’s right to benefit from the performance of the transport service, regardless whether the passenger exercises that right. In other words, for VAT to be payable, it is sufficient that the airline company enables the passenger to benefit from the transport service. In that regard, the Court states that VAT becomes chargeable on receipt of payment of the ticket price.”

The entire ruling is here. Actually, I would recommend using this in VAT training and academic indirect tax classes. The ruling is a well-researched read with clear reasoning and step-by-step replies to the questions raised by the referring lower court.

Download (PDF, 842KB)

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Happy holidays!

Merry Christmas and our best wishes for a happy and healthy 2016!

This is from March 2015. For Xmas 2015 the forecast is in the high sixties – around 19 degrees Celsius!

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KPMG’s survey of global trade and customs

Customs and global trade structuring continues to play an important role in supply chain management – KPMG and Thomson Reuters have published a round-up of the current challenges and how customs managers respond:

“The survey examines operational practices in global trade. Survey respondents also indicated their top challenges, identified key trends and goals for the profession, and described how the right global trade management system plays a role in an increasingly complex global trade landscape.”

Download (PDF, 10.44MB)

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Update on VAT and M&A

Christoph Zenner at PWC in Belgium provides an updated overview of the current state of affairs in the M&A world. He says:

“M&A stakeholders who plan to acquire/sell companies should take a closer look at the following:

  1. VAT status of the recipient: what’s the VAT status of the (holding) companies in the group?
  2. Nature of costs incurred: are costs (banking and financing, as well as lawyer, notary and advisory fees) subject to VAT, VAT exempt or out-of-scope of VAT?
  3. Roles and responsibilities of the group’s companies:
  • Is/will the holding company (be) involved in the management of all direct (daughter) subsidiaries?

  • Is the holding company able to demonstrate a link between transaction costs and its (taxable) output transactions?

  • Can input VAT deduction at group level be maximised in a post-deal stage?”

The pdf is here: 

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B2C online sales: Russia is next…

Just received word that Russia is seriously considering an EU-like set of rules that would require non-residents (i.e. US companies) to register and pay VAT on online sales of downloads (music, video, games etc.) to Russian individuals.

EY Russia says that even though the concept is the same as in the EU,

“the scope of electronic services, VAT payment mechanism, registration and reporting procedures, VAT offset/refund rules, control measures and many other aspects will be specific in Russia”

Proposed start date is January 1, 2017.

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Success factors for automating tax

Geoff Peck wrote on his blog about a workshop where he discussed 5 secrets of success for automating tax determination. He writes:

  1. “Put communication first in all aspects and at every level amongst stakeholders and project members

  2. Think of the solution in terms of the entire end-to-end VAT function and not just one piece at a time

  3. Put the business before the technology – the technology is important but ultimately it must serve the business, not the other way around

  4. Put the solution design before the project methodology – methodologies can provide a great framework, but no matter how sophisticated, can never deliver a great solution by itself

  5. Assume nothing – front-load your project, document comprehensively but with meaningful essentialness, test everything.”

Geoff’s post is worth your time – I recommend that you read the context here as well:

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GST in India – still uncertain…

Here is a nice, brief overview of the current state of affairs with the Goods and Services Tax that India is planing to introduce at some point.

“The GST bill, which subsumes all indirect taxes to create one rate and integrate the country into a single market is the biggest tax reform that is being undertaken since Independence.”

(note the comments)

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