The Green Paper on the future of VAT in EuropeDeloitte Belgium Tax Quarterly, Issue 44 - June 2011 |
In December 2010, the European Commission released its “Green Paper on the future of VAT – towards a simpler, more robust and efficient VAT system”. With the publication of this “Green Paper”, the European Commission wanted to initiate a public consultation and debate on the current VAT system’s modernisation.
The public was invited to provide the European Commission with its comments on the proposals set forth in the Green Paper by 31 May 2011. As this Green Paper is merely a first step of what is likely to be a lengthy modernisation process of the current VAT system, it is expected that, in the coming years, more communications by the European Commission will follow.
The common VAT system as we know it has been introduced in Belgium in 1971. Although many changes have been made to the system (see also our articles on the ‘VAT package’ in previous Quarterly editions) the current VAT legislation is no longer adapted to the contemporary economical and technological environment.
In this context and to mark 40 years of VAT in Belgium, Deloitte Belgium has organised a number of round table discussions around 4 sectors: public sector, retail, financial services and real estate. The round table discussions were aimed at discussing the European Commission’s view on the VAT system’s modernisation and to outline the changes that could be of interest for each of these sectors. The audience was also invited to provide its views on the current VAT system and on the proposed changes.
All round tables were chaired by a Deloitte Partner and we collected below their impressions of the various round table discussions.
Round table discussion - Public Sector
The first round table was organised for the public sector in Belgium, with simultaneous Dutch and French speaking streams. Rony Wuytjens, Belgium’s Indirect Tax Leader and Benoît Vanderstichelen, Indirect Tax Partner report back on their sessions:
1. What VAT issues does the public sector in Belgium struggle with?
VAT issues for the public sector are as diverse and complex as the numerous authorities in the public sector playing field and the activities they develop to deliver a modern and cost effective service to the public.
The general rule under the current EU VAT system states that any person carrying out economic activities, whatever the person’s status (private or public), is to be considered as tax liable.
Special rules are however foreseen for public bodies when they undertake transactions as a public authority. In practice, this different set of VAT rules for public bodies and private entities can give rise to significant economic distortions and can impact economic efficiency and welfare. This competitive distortion plays both on a buy (input) as on a sell (output) level.
On the input side, the VAT incurred by public bodies creates an additional cost. The VAT incurred cannot be fully or partially deducted by a public body.
In the decision making process to outsource certain non-core activities (such as IT, bookkeeping or any other back-office services), this irrecoverable VAT plays an instrumental role. Even though some services could be supplied more efficiently and at a lower cost (excluded VAT) by a private sector company, the issue of the non deductible VAT certainly decreases the incentive for public bodies to outsource these services. This results in a non-efficient allocation of public resources.
The distortion may also affect the output side through reduced competitiveness of private entities versus public entities. If a public body and a private entity offer a similar service and compete in the same market, the public body will possess the advantage of not having to charge VAT to its clients. The private entity, on the other hand, will have to charge VAT to its clients. An example can be found in waste collection services: the waste services performed by private waste collectors will be subject to VAT whereas waste services provided by public bodies are in principle not subject to VAT. Hence, the public body may have a competitive advantage over the private provider of the same service.
But it is exactly this “playing field” that has been (and certainly will continue to keep) changing over the last 40 years.
2. Is there a need for change?
The VAT regime covering public authorities is no longer able to cope with the complex way in which public entities interact, often as economic operator, with the public and the services they provide. Private businesses are becoming more active in sectors which used to be the privileged domain of public authorities such as public transport, postal services, energy, waste management, healthcare, education, etc. Furthermore, we notice that public bodies are increasingly involved in complex arrangements with private companies (e.g. public private partnerships) and that privatisation and deregulation of public authorities’ activities are to be considered normal evolutions.
"The VAT regime covering
public authorities is no longer
able to cope with the complex
way in which public entities interact..."
It is on this more unified playing field where the difference in VAT treatment between public and private bodies inevitably leads to distortions. And this problem will only continue to increase unless a clear set of rules is set forth…
3. What does the green paper propose?
The text in the Green paper acknowledges that the VAT treatment of public bodies is a longstanding issue within the EU. It also clearly outlines the shortcomings of the current VAT system for public bodies:
- the problems of distortion of competition which may occur because the same activity may be taxed if carried out by a private body but not taxed if carried out by a public body,
- the lack of harmonisation due to the wide discretion the VAT Directive leaves the Member States to define notions such as ‘public body’, and
- the complexity of the current system due to the categorisation (taxable, outside scope, taxable but exempt) and the imprecise definition of the exemptions of public interest.
As a way forward, the Commission is contemplating wide-ranging options such as extending the regular VAT system to all the activities by public bodies. This ‘full taxation’ model would have major advantages in terms of tax neutrality. However, it also raises a number of issues, such as the decision on the final VAT rate. The Commission quotes more limited reforms such as an option to tax public bodies or a further modernisation/clarification of the current exemptions and legal framework.
Finally, the Commission contemplates the option to give Member States the freedom to implement national refund schemes outside the VAT system. The latter should provide a lot of flexibility to Member States.
4. How did the audience react on the round table and what was the outcome of the discussions?
Taking into account the general trends in the public sector, the round table confirmed that in the current economic environment, it is not sustainable to defend a different VAT treatment of public bodies and private operators performing similar activities.
In light of the round table discussion, it was concluded that public bodies should be subject to VAT if they are engaged in economic activities similar to those undertaken by a private body. In that reasoning,the principle that the activity performed cannot, in its nature, be carried out by an economic operator would become a criterion for excluding public bodies from the scope of VAT.
Furthermore, it was generally considered as beneficial that Member States would be able to tax at reduced rates, to exempt or even preferably zero rate certain activities in the general public interest. The same VAT regime would then equally be applicable for the private operators.
By following the approach described above, public bodies could potentially have activities both outside and within the scope of VAT. Activities in the latter category would be subject to VAT, exempt or zero rated. Determining the extent and right to deduct input VAT could therefore remain a complex but agreeable matter for public bodies.
Round table discussion - Retail sector
The second round table was chaired by Guy Decoene, Indirect Tax Partner . An overview of his impressions follows.
1. What VAT issues does the retail sector in Belgium struggle with?
Key issues for the retail sector in Belgium are the VAT bookkeeping formalities they have to comply with as well as the complex VAT treatment of promotional actions.
On the one hand, the reporting of cash sales (sales transactions that are not invoiced) and the storage of the underlying documents are very burdensome for the retail sector. Furthermore, retail businesses tend to struggle with (a) the very strict invoicing rules in supplying goods or services to private persons, and (b) the upcoming certified cash register system in the restaurant and catering sector.
On the other hand the VAT treatment of typical promotional actions such as retail vouchers, joint offers, rebate vouchers and loyalty programs is very complex, especially as there is very little guidance on these points from the Belgian VAT authorities.
2. Is there a need for change?
Where the VAT bookkeeping formalities are concerned, it had been demonstrated that the Belgian VAT authorities did take into account the technological evolutions to both reduce the administrative burden for retailers (they now have a.o. the possibility to store their cash receipts electronically), to also improve their own possibilities to audit the VAT bookkeeping of retailers and to reduce fraud possibilities in this sector.
Nevertheless, it seems that the VAT authorities have not yet been able to cope with the marketeers’ speed in the field of promotional actions as only few guidelines on how to treat these actions are developed in some ECJ Court Cases. Neither the European nor the Belgian legislator have been able to issue concrete guidelines in this respect. A new directive on the VAT treatment of vouchers could probably bring further clarification but it will always remain difficult for the VAT legislator to closely follow the commercial and technological evolution. This is not always to be considered as negative for taxpayers, as it still leaves some room for planning ideas. Business should however be aware and always consider the possible VAT impact when introducing new promotional actions.
3. What does the green paper propose?
Unfortunately, it seems that the Green Paper has actually overlooked the retail sector, considering that, apart from the general comments on the aim to reduce administrative burden for taxpayers, it does not mention any of the above mentioned issues in the retail sector.
4. How did the audience react on the round table and what was the outcome of the discussions?
"...the Belgian VAT authorities
did take into account the technological
evolutions to reduce the administrative
burden for retailers ...and to reduce
fraud possibilities in this sector."
In general, the session participants expressed great enthusiasm towards the concepts well as the content. A majority questioned whether the current and future rules strictly and formally imposed by the VAT authorities with respect to the VAT bookkeeping formalities of retailers are and will remain compatible with commercial practice. A shared conclusion was that in the coming 40 years, a lot of changes are still to be expected in the retail sector.
Round table discussion - Financial Services Industry
This third round table was chaired by Johan Van Der Paal, Indirect Tax Partner overlooking Deloitte’s tax services towards financial institutions.
1. What VAT issues does the financial sector in Belgium struggle with?
VAT is indeed a concern for the financial services (FS) industry, particularly in the EU. This is because VAT is a significant cost factor in the FS industry whose VAT recovery is generally limited and may even be close to zero for insurance companies or banks which are predominantly active in local markets. This is the consequence of the VAT exemption foreseen in the EU and Belgian VAT legislation for many insurance and financial services.
From a Belgian point of view, the introduction in 1978 of the option to tax for payment operations has been an incentive for banks established in Belgium. A further determining point was the Administrative Circular dated 1995 on the right to deduct input VAT for banks and financial institutions, something which paved the way for alternative deduction methods used frequently by banks. In 2007, the financial sector received further VAT incentives with the introduction of VAT unity and the VAT-exemption for the management of some pension funds.
With all these changes, the VAT legislation has however not taken away the key points related to the cost impact of VAT on financial institutions and the uncertainty with respect to the precise VAT rules.
2. Is there a need for change?
From a European point of view, since 1995, the FS sector is mainly driven by the European Court of Justice issuing binding rulings on the scope of exemptions and deduction methodologies, rather than legislator intervention. This would however change by the pending proposal of a new EU VAT Directive related to financial services. Important work is indeed currently being performed in order to provide new definitions of the VAT exemptions related to financial services, to take into consideration its evolution and ECJ case law, as well as improve neutrality, harmonisation and legal certainty within the EU financial sector. Our roundtable discussion highlighted the key changes from a Belgian perspective which this proposed EU VAT Directive would bring if it were adopted today, showing a slight tendency for increasing exemptions.
"The participants expressed
the need for a legislative initiative
regulating financial services and
insurance from a VAT perspective,
instead of letting the European
Court of justice’s jurisprudence
adding conditions to the
existing VAT law."
In a nutshell, many building blocks for change are available but the EU level decision process results in a significant slowdown of the much needed modernisation process.
3. What does the green paper propose?
In addition to the proposed EU VAT Directive and Regulation for the financial services, the Green Paper puts some more general questions on the table, challenging the exemption for financial services as such. The Green Paper also addresses the structural issues facing large and pan-European businesses, soliciting input from businesses on the possible ways forward for cross border services within the same legal entity, the use of VAT grouping and cost sharing arrangements on a more international level. Although the tax planning in internationally active financial services groups takes these topics into account, the Green Paper attracted quite some interest from the sector.
4. How did the audience react on the round table and what was the outcome of the discussions?
The positive feedback from the session demonstrates that the VAT environment for the financial sector is a world of its own. The participants expressed the need for a legislative initiative regulating financial services and insurance from a VAT perspective, instead of letting the European Court of justice’s jurisprudence adding conditions to the existing VAT law. The Green Paper as well as the current draft legislation are assessed by the sector participants both from the viewpoint of how they impact their own business and from the discussions and responses prepared in the framework of sector organisations. While there is a broad consensus that change is needed, the importance of VAT on the cost and revenue profile of financial institutions requires a thorough impact assessment to evaluate the best way forward.
Round table discussion - Real Estate
The last round table organised was chaired by Piet Vandendriessche, Managing Partner of the Belgian Tax practice and Deloitte’s Global Indirect Tax leader.
1. What VAT issues is the real estate sector in Belgium is struggling with?
Forty years after its introduction, VAT is still high on the agenda as far as real estate is concerned.
"Contrary to most other member
states, Belgian regulation does not
even foresee an option to subject
immovable rent to VAT when the
tenant is a business enterprise."
The main cause for this is the VAT exemption that applies in Belgium to ‘immovable rent’. Immovable rent has been exempt from VAT since the introduction of VAT in Belgium. It was then considered that immovable property should remain subject to transfer taxes whilst VAT should apply primarily to movable goods. Several exceptions on the general exemption were foreseen from the outset (rent of a car park and the hotel sector), but this was due to the unclear nature of the services concerned and whether it involved immovable rent or not. The way VAT is applied on real estate in our neighbouring countries does not contain such broad exemptions and results in a much more tax neutral environment for real estate developers and investors, as was highlighted in the presentation by Deloitte colleagues from France and the Netherlands.
2. Is there a need for change?
Compared to the other EU member states, it is fair to say that Belgian VAT regulation is fairly exceptional. Contrary to most other member states, Belgian regulation does not even foresee an option to subject immovable rent to VAT when the tenant is a business enterprise. There have been various attempts to change this, but so far, these attempts have not been successful.
The main reason for the option being 'blocked' is the negative impact on the Belgian treasury. Where a property is constructed with the aim of renting it out, the VAT incurred on the construction costs is not recoverable. This constitutes a cost for the land lord, but also generates revenues for the treasury. Allowing owners to recover the VAT on buildings once they have opted to subject the rent to VAT is feared to be leading to a serious revenue leakage for the Belgian treasury. However, one could question whether the impact of the option to tax can be limited to VAT, as non-recoverable VAT and its inclusion in rental fees lead to a ‘stepped up’ basis for depreciation and costs and thus reduces the corporate income tax base. Furthermore, one can ask: how can one compute the impact of the application of VAT to immovable rent, as buildings can also be subject to an agreement for which VAT is effectively applied (business centres; financial leases, usufruct rights etc.)? This means that the computation is to be exercised almost at the level of each individual building.
3. What does the green paper propose?
In view of this background, the European Commission’s Green Paper offers an interesting question: are VAT exemptions still useful? As far as immovable rent is concerned, this question is most certainly a relevant one. The EU Commision indeed tables an approach wherein the VAT exemption would be limited to three specific situations : the letting of houses to private individuals, supplies of buildings that are not new and where the supplier has not recovered input VAT on the building’s acquisition, and supplies of land other than building land.
4. How did the public react on the round table and what was the outcome of the discussions?
During the session, the Belgian VAT regulation on immovable rent was benchmarked with the regulation in France and The Netherlands. These countries allow immovable rent to become subject to VAT via option. The comparison with two neighbouring countries highlighted the ‘particularity’ of the Belgian regulation. In addition, where transfer taxes and other immovable property taxes were also included in the equation, it appeared that immovable property as an ‘asset’ is subject to a substantial tax burden. One exception is the sale of ‘shares’ in real estate owning companies, as these are mostly tax free, for the time being at least.
All participants recognised that the debate proved to be very useful, as the comparison with other jurisdictions and the ideas put forward in the Green Paper forced them to look at the current Belgian real estate VAT regime from a new perspective. It will certainly fuel further discussions, especially on the option to apply VAT to immovable rent.
The series of roundtable discussions was closed on a positive note, as it was welcomed by all participants as an interactive way of reflecting on key VAT issues affecting their day-to-day business activities. They generated a lot of peer-to-peer debate which will certainly lead to similar get togethers in the future.
