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Summary Learning Goals European VAT Law
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TAX 4005 SummaryWeek 1
1. How do terms such as 'consumption tax’, ‘indirect tax’, ‘turnover tax’ and ‘value added
tax' relate to each other?
A consumption tax is a tax that aims to tax private consumption of goods and services of
private individuals. A direct consumption tax would make every consumer report their
consumption on a periodical basis and pay the tax. EVAT however is an indirect tax which
means that tax is paid at the supply of a good. The taxable person has to pay tax over its
turnover, the amount of money he adds to the value of the product, which makes VAT a
turnover tax. VAT is a kind of turnover tax.
Source: Nellen, F., Van Doesum, A., Cornielje, S., & Van Kesteren, H. (2020). Fundamentals of EU
VAT Law (2nd edition). Kluwer Law International B.V, p. 18.
2. What are the advantages and the disadvantages of turnover taxes?
Advantages:
- A stable revenue for the government at relatively low rates and low costs of collection.
- Less depending on the economic circumstances, in comparison to direct taxes (income
and corporation tax).
Disadvantages:
- Personal circumstances of the taxable person are not taken into account.
- It is difficult to enforce the (tax) law on service providers that have no physical presence
in or link with an EU country.
, 3. Why did the EU Member States decide to harmonize their turnover taxes?
The countries used to have multiple-stage, cascading turnover taxes. This resulted in having
difficulties with export, as the goods then have to be relieved of the burden of tax. The
cumulative tax made it hard to actually calculate the exact amount of the tax burden. Also,
this system resulted in the encouragement of vertical concentration of enterprises (as the
more stages meant, the more tax to be paid).
So, in short:
- Intrinsically hindered international trade
- Caused distortions to trade, such as vertical integration of enterprises
- Maintenance of tax frontiers caused barriers to the free circulation of goods
4. Why did the EU Member States choose a VAT system over other forms of taxing
consumption?
If the Member States would choose a system based on which the customer should keep
track of their own consumptions, this would be unworkable. Therefore, they use VAT to
approximate consumption by looking at the transactions.
VAT is therefore more effective than a system in which the customer would have to register
its consumption by himself and it is also lessening the administrative and supervising burden
for the governments of the Member States.
5. What are the (key) sources of EU VAT Law, what is their scope and how should they
be applied?
EU VAT Directive This is the main source of VAT legislation. It is secondary
EU law. The fact that it is a directive means that it has to be
implemented in national laws by the Member States.
EU VAT Regulation The VAT Regulation is also secondary EU law. As this is a
regulation, the provisions are directly applicable. The VAT
Regulation takes precedence over national laws in case of
conflict.
Refund Directives The refund Directives give provisions on the topic of VAT
refunds. The directives have to be implemented in national
laws.
CJEU Case law In the case law an interpretation of EU law is given. It
provides guidelines. The case law has ex tunc effect which
means its interpretation must be regarded as having been
applicable from the outset.
Guidelines VAT committee Advisory committee with no legislative powers. The
guidelines are not binding for the Commission or the
Member States. They are to be considered soft law.
Explanatory notes These notes from the European Commission aim at
providing a better understanding of the EU legislation.
However, they are not legally binding.
Communication European These are also considered to be soft law.
Commission
6. How is EU VAT law 'translated' to national VAT law in the 27 EU Member States?
,The VAT Regulation, which lays down implementing measures for the VAT Directive, is
directly binding upon EU institutions, Member States and individuals. Both the taxpayers and
the tax authorities can rely on the provisions of the VAT Regulation.
The VAT Directive has to be transposed into national laws. If this implementation is not
consistent, the national provisions have to be interpreted in a way that is in accordance with
the VAT Directive. If that is not possible, then the provisions in the VAT Directive might have
direct effect. This direct effect can never be horizontal though, even if the relevant provisions
are unconditional and sufficiently precise.
7. How does the VAT Directive, the VAT Regulation and national VAT law relate to each
other?
The VAT Directive is a legal instrument which aims to harmonizes the European VAT. This
directive consists of provisions that the Member States have to implement in their national
laws. The VAT Regulation gives provisions on the implementation of the VAT Directive. The
national laws have to be in accordance with the VAT Directive and the VAT Regulation.
8. How has the EU VAT system been designed and how does it function?
The EU VAT is an indirect tax. Furthermore, it is also a non-cascading all stages tax. This
results in the fact that at each stage of the supply chain, the tax authorities collect a small
amount of the total VAT. The advantages of this system are that the risk of tax fraud is spread
and divided into smaller amounts than the total amount of VAT on the eventual consumption.
In order to guarantee that tax is not cascaded, a taxable person is allowed a right to deduct
VAT.
Source: Nellen, F., Van Doesum, A., Cornielje, S., & Van Kesteren, H. (2020). Fundamentals of EU
VAT Law (2nd edition). Kluwer Law International B.V, p. 20.
9. What is the legal character of EU VAT?
The EU VAT is a general tax on consumption. It aims to tax all consumption of goods and
services. This general character requires that exceptions are to be interpreted strictly, as they
restrict the scope of the tax base. It should also be noted that the EU aims to tax only the
consumption that takes place within the EU.
, Another characteristic of the EU VAT law is that it aims to tax exactly proportional to the price
of goods and services. This has to do with the fact that EU VAT is an all-stages tax and a
neutral tax. Proportionality is achieved by allowing for a right to deduct input VAT.
Lastly, the right of deduction is one of the most important provisions of the EU VAT laws. This
right is necessary to achieve the goal of a neutral consumption tax. It furthermore forms an
incentive to a taxable person to check the correct application and invoicing of VAT, as any
mistakes may cause the input VAT not to be deductible.
10.How, and to what extent, do the fundamental principles underlying the EU VAT
system affect the application of EU VAT in real-life cases?
Three different fundamental principles have to be distinguished.
The principle of neutrality
Firstly, the principle of neutrality. This principle has to be applied concurrently with other
principles of interpretation, as the principle is not a rule of primary law. The principle of
neutrality has both an economic and a legal dimension. The economic dimension entails that
the VAT should be exactly proportional to the price of the goods and services and is referred
to as ‘system neutrality’. This also means that VAT should not cascade and double or
non-taxation should not occur. The economic dimension of the neutrality principle is
expressed in the right to deduction. It ensures that businesses are not burdened with tax.
The legal dimension is the reflection of the principle of equal treatment in VAT. This means
that the general principle of equal treatment serves as a lex generalis in the field of VAT. The
purpose of this legal dimension is to ensure that similar goods and services are treated
equally for VAT purposes. For example, in cross-border cases this plays an important role.
The principle of prohibition of abuse community law (fraus legis)
The CJEU ruled in Halifax, that the principle of prohibiting abusive practices also applies in
the VAT field. This principle is applicable, regardless of any national measure giving effect to
it in the domestic legal order, even with respect to transactions undertaken prior to its
judgment in Halifax. The purpose for this principle to be applicable is to bar wholly artificial
arrangements which do not reflect economic reality and are set up with the essential aim of
obtaining a tax advantage. The principle entails a breach of the principle of legal certainty
and can therefore only be applied if the following criteria are met:
1. The transactions concerned result in the accrual of a tax advantage
2. The grant of that tax advantage would be contrary to the purpose of those provisions
3. It is apparent from a number of objective factors that the essential aim of the
transactions concerned is to obtain a tax advantage.
The principle of prohibition of tax fraud
From CJEU case law it follows that the principle of fiscal neutrality prevents any general
distinction between lawful and unlawful transactions. However, if a taxable person commits a
tax fraud, he cannot rely on the VAT Directive to obtain advantages of an exemption or a right
of deduction.
The application of this principle is not restricted to taxable persons carrying out the fraudulent
transactions themselves. They can also be applied if the taxable person knew or should have
known that it was participating in evasion of VAT committed in the context of a chain of
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