VAT in the EU - EU Taxation

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					             EU Taxation

European VAT – General Principles
          Arvind Ashta
                      ESC Dijon
 Introduction
 Territory
 Taxable Person
 Taxable Transaction
 Place of Taxable Transaction
 Chargeable event
 Taxable Amount
 Tax Rates
 Exemptions
 Deductions
 Persons liable for payment of tax


                                     1
                    Introduction

•   1967: First Directive (introduce by 1970)
•   1973: Nine different systems
•   1977: Sixth Directive on Harmonization
•   1991: Intra-community borders abolished
•   1999: Labour-intensive services
•   2000: Tax representation made optional
•   2002: Imports of radio, TV and electronic services
    taxed at place of consumption
                                                     2
                 Territory
• All of EU
• Excluded
  – Canary Islands
  – French DOMs
• Included
  – Monaco in France
  – Isle of Man in UK

                             3
                  Taxable Persons

• A person who engages in
          – Economic Activity
          – Independently
          – Even occasionally
• Exemptions
          –    Illegal
          –    Free
          –    Public bodies (except for commercial activities)
          –    Private consumers
• Inclusions
          – Any person buying new means of transport from another
            member-State
          – Imports : taxable person includes consumers

                                                                    4
        Taxable Transactions
• Supply of Goods
     • Transfer of economic ownership
     • Deemed supply of goods (for self, employees)
• Supply of Services
     • Any transaction which is not a supply of goods
• Imports
• Intra-Community Acquisitions

                                                        5
        Place of Taxable Transaction
• General rule
       • Where transport begins
       • Where Supplier has fixed establishment
• Exceptions
  –   Many services (real estate, entertainment)
  –   Works contracts (registration number)
  –   Imports (country of import)
  –   Intra-community acquisitions (destination generally)
                                                             6
Supplier- OSP – Customer
             Goods bought and processed in one Member
             State and sent to principal in another State
     Member State 1                         Member State 2
  Supplier A


           G
           o
           o                                      C   Principal
           d
           s

  Processor B


   Member State 1


          A and B invoice directly to C (HT). C includes this in
          his intercommunity acquisitions

                                                                   7
Principal- OSP1-OSP2-Principal
                   Goods sent for processing in two different States
                   before being returned to principal

         Member state 1                                 Member state 2
                                                  B Processor 1


    Principal A                                     Partly
                                                    processed goods




                                                  C Processor 2

                                                          Member state 3


           B and C invoice A only to the extent of value of processing work.
           Acquisition is made in State 1
           (Transfer of goods are not deemed to be acquisitions for VAT)

                                                                               8
         Intra-Community Acquisitions

• General Rule:
         – Supplies exempt, Purchases Taxed, In Destination country
         – Taxable Persons:
             » Intra-community acquisitions added to sales
             » But also deducted from purchases
• Conditional exceptions:
         – Country of origin: Small farmers, consumers buying < € 10000
         – Mail orders, etc shipping < € 100,000 (or € 35,000)
• Exceptions
         – Transport, Ancillary services to transport, Intermediaries in
           transport
• Inclusion:
         – Consumer buying transport
                                                                           9
Intra-Community Transactions
Place of Taxable Transaction in Intra-Community Transactions


Shipment to Customer with VAT number
Shipment to Customer with VAT number                            Invoice
                                                                without VAT

Shipment in country of origin to Customer without VAT number
                                                                Invoice with
                                         Sales to country       VAT of origin
                                         below its threshold    State
  Shipment to
  country of                             (100,000 or 35,000)
  destination to
  customer without                       Sales to country       Invoice with
  VAT number                             beyond its threshold   VAT of
                                                                destination State

                                                                Invoice with
Shipment to Customer with installation                          VAT of country
                                                                of installation

                                                                                    10
   Triangular Sales
Goods dispatched directly
      Triangulation
      (3 parties - A,B,C, 3 States 1,2,3)
      A in 1 sells to B in 2 who sells to C in 3.
      Goods despatched from A directly to C

Member State 1                                Member State 3
                       Goods
      A                                                  C



    Invoice                                         Invoice


                            B

                   Member State 2

                                                               11
                 EXAMPLE
• B is French (VAT 19.6%). He purchases goods
  worth € 50,000 from A, an English company
  (VAT 17.5%), and directs that send goods directly
  to C in Italy (VAT 20%). The English company,
  bills B for the transport of € 5000 also. B bills his
  Italian customer, C, for € 75,000. The diagram in
  the above box therefore describes the situation.
  The taxation would depend on where B is
  registered.
                                                     12
    REGISTERATION and VAT
If French company        Treatment of transaction for VAT
had     identification
number
- in UK and France



In Italy and France




- in France only



                                                            13
     REGISTERATION and VAT
If French company                               Treatment of transaction for VAT
had     identification
number
- in UK and France The English comp any makes a local sale to B in UK and charges VAT of 17.5%
                         of 50000 = € 8750.
                         B’s sale to C is exemp t. He has still to get a refund of € 8750.
                         C’s acquisition is taxable in Ireland at 20% of 75000 = € 15000.


"- in     Italy    and A’s supp ly to B is exemp t.
                         B, the French comp any, receives goods in Italy .
France
                         It has to pay VAT on intra Community acquisitions in Italy
                         20% of 50000 = € 10000.
                         He then makes local sale to C, charges and collects VAT of 20% on 75000 = €
                         15000 from C.


- in France only         C, the Italain comp any declares intra-community acquisition of 75000 and p ay s
                         VAT of 20% or € 15,000.
                         A is exemp t because he supp lied.
                         B is exemp t for the A to B acquisition transaction because of triangular sale
                         disp osition. B is exemp t for the B to C transaction because it is a supp ly .


                                                                                                      14
   Example 2: In the above triangular sale case, if the English company
   wants to charge the French company € 5,000 for transporting goods
       directly to Ireland, what would be the tax on the transport.
If French company Transport (if VAT registration number given)
had    identification
number

- in UK and France


  - in Italy and
France

- in France only




                                                                          15
   Example 2: In the above triangular sale case, if the English company
   wants to charge the French company € 5,000 for transporting goods
       directly to Ireland, what would be the tax on the transport.


If French company Transport (if VAT registration number given)
had    identification
number

- in UK and France   VAT of UK on transport (since both parties are registered in UK).
                     17.5% of 5000 = € 875


  - in Italy and VAT of Italy on transport
                 20% of 5000 = € 1000
France

- in France only     VAT of France on transport
                     19.6% * 5000 = € 980


Note:                If no VAT registration number is provided to transporter, UK’s VAT would
                     apply (country of departure): 17.5% on 5000 = € 875.


                                                                                          16
                      Chargeability
• General rule
   – Chargeable event
           – Delivery of goods
           – Performance of service
   – Tax becomes chargeable
           – When authority entitled to it
              » On delivery of goods
              » On payment by customers for services
              » On importing (crossing customs barrier)
• Exceptions to general rule
   – Repeated payments (for services & construction work)
           – At time of billing: last installment
   – On-account payment
           – Each payment


                                                            17
                 Tax liability
• Goods/services
     • Earlier of invoice or delivery / performance
• Imports
     • Time of importing or included in tax return
• Intra-community transactions
     • Later of chargeable event or Invoice but before 15th
       of month after acquisition


                                                          18
 Example: ABC Limited, a French company buys
shoes from Italy. Delivery is made on 20th of April.


Invoice date   Chargeability Declared in Return Filed
                  of tax    VAT return of     in

    h
 15 April
   th
 25 April

  5th M ay

 25th M ay

                                                    19
 Example: ABC Limited, a French company buys
shoes from Italy. Delivery is made on 20th of April.


Invoice date   Chargeability Declared in Return Filed
                  of tax    VAT return of     in

    h              th
 15 April        20 April      April         M ay
   th              th          April         M ay
 25 April        25 April

  5th M ay       5th M ay       M ay         June

 25th M ay       15th M ay      M ay         June


                                                    20
                  Tax Rates
•   Vary from one country to another
•   Minimum 15%
•   One or two lower rates, at least 5%
•   No refunds should result
•   No new Zero tax rates



                                          21
                     Exemptions
• Within the country
   –   Public Interest
   –   Others (insurance, credit, real estate)
   –   No deductions allowed
   –   Option to be taxed for some of these
• International transactions
   –   Exports
   –   Deductibility allowed
   –   Import of items which are exempt from domestic VAT
   –   Temporary imports, VAT warehouses
                                                        22
                 Deductions
• Deduction of input VAT by taxable persons
     • Not by final customers
     • Not by holding companies


• As soon as invoice received

• If taxable and non-taxable business,
  proportional deductibility allowed
                                          23
 Example: A buys inputs of € 500 and sells for €
           1000 to B. B makes a local sale for € 2000.

                                  VAT Return of A               VAT return of B
Case I: A and B are from Luxembourg
VAT Collected                    15% of 1000 = 150             15% of 2000=300
VAT deductible                   15% of 500 = 75               15% of 1000=150
VAT paid                          150 –75   = 75               300 – 150 = 150

Case II: A is Danish, B is Luxembourgois

A. Hypothetical (doesn’t happen)
VAT collected                 Exempt Intra-community 1000      15% of 2000=300
                                           = 0
VAT deductible                    25% of 500 = 125             Exempt of 1000= 0
VAT paid (refund)                  0 - 125 = (125)              300 – 0 = 300

Case II B: Actual (what is done)
VAT collected                    Exempt Intra-community 1000   15% of 2000= 300
                                              = 0
VAT      collected  :     Intra-                               15% of 1000 = 150
community acquisitions
VAT deductible (on purchases)        25% of 500 = 125          15% of 1000 = 150
VAT paid (refund)                     0 - 125 = (125)           450 – 150 = 300

                                                                                   24
     Persons liable for payment

• Taxable person
• If reverse charge is applied, the receiver
• If identification number issued, the
  registered person
• For imports, the importer
• Taxable representative optional

                                               25
                 Calculate VAT due
ABC Ltd, a French comapny                                       April

Turnover in France (VAT 19,6%)                                  10000
Exports to USA                                                   9000
Intra-community sales (Denmark 25%)                              8000
Intra-Community Sales (Germany 15%)                              7000
Transfers to VAT registered warehouse in Portugal (VAT17%)       6000
Transfers to VAT non-registered warehouse in Sweden (VAT 25%)    5000
Total                                                           45000

Raw Materials bought in France                                  15000
Imports from India                                               5000
Purchases from Spain (VAT16%)                                    4000
Fixed Assets bought in France                                    3000
Fixed Assets bought from Sweden                                  2000
Total                                                           29000

                                                                   26
                Calculation of VAT due

Return Filed by ABC
Tax Collected




Exempt




Deductible




Tax to be paid / (Refund due)

                                         27
                Calculation of VAT due

Return Filed by ABC
Tax Collected
Sales in France                                       10000
Transfers to non-registered warehouse in Sweden        5000
Purchases from Spain: Intracommunity acquisitions      4000
Purchases from Sweden : Intracommunity acquisitions    2000
                                                      21000   19,60%    4116
Exempt
Exports to USA                                         9000
Intra-community sales (Denmark and Germany)           15000
Transfers to registered VAT warehouse                  6000
                                                      30000
Deductible
Raw Material bought in France                         15000
Imports from India                                     5000
Purchases from Spain                                   4000
Fixed assets bought from France                        3000
Fixed Assets bought from Sweden                        2000
                                                      29000   19,60%    5684

Tax to be paid / (Refund due)                                          -1568

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