VAT Focus n° 2 - March 2006

We attach our new issue of VAT Focus. As agreed, and as previously announced, we report further on the simplifications of the reverse charge mechanism and the issuing of amended invoices with regard to highway tolls.
In addition, the introduction of a new concept of abuse of EU law, and the proposal made by the Attorney General that IRAP should be considered as incompatible with Article 33 of the 6th VAT Directive are also discussed in detail.
Our team is available to reply to your questions or provide you with assistance in taking any action required in conjunction with the issues discussed here.

Contents
1. Taxable person and extension of the reverse charge mechanism, the new article 283 of the French Tax Code ("CGI")
2. Recovery of VAT on motorway tolls
3. VAT, abuse of law and EU law: the Halifax decision
4. French administrative commentaries and legislation: new developments
5. IRAP: opinion of the Advocate General Stix-Hackl, Banca populare di Cremona case, of March 14, 2006, case C-475/03. What effects will this have on ECJ case law and on pending cases in France?
6. ECJ Agenda - VAT

The lawmaker's intention was to embark on simplification of the administrative obligations borne by foreign suppliers and service providers carrying out taxable transactions in France. Nevertheless, the practical application of this new Article necessarily raises several issues, and this has led to postponement of the date of entry into force of the new article until September 1, 2006.
As we announced in our previous VAT Focus in January, the amended French finance bill for 2005 (Article 94, amending Article 283 of the French Tax Code) has extended the situations in which it is the responsibility of a customer registered for VAT in France to pay the VAT due itself, thus dispensing with the need for foreign suppliers and service providers to register for VAT in France.

The lawmaker has adopted this measure with the aim of combating certain types of VAT fraud.

The objectives sought by the lawmaker have been severely criticized, although in our view without foundation. Whatever these objectives are, however, we can only say that we are pleased about this new measure. It is in fact aimed at simplifying administrative obligations for suppliers and service providers established outside France carrying out taxable transactions in France for customers established in France: this simplification was long awaited by businesses and is in line with the spirit of proposal COM (2004)178 made by the European Commission aimed at extending the scope of the reverse charge mechanism.

From now on, in addition to the situations for which the reverse charge mechanism was already applied (in particular, provision of intangible services, work and expert appraisals of tangible moveable property, etc.), the following transactions carried out by a company established outside France in favor of a customer registered for VAT in France will give rise as from September 1, 2006 to payment of this tax by the customer: internal supplies, supplies after assembly and installation, services relating to property located in France, cultural, artistic, sporting, scientific, educational and recreational services, as well as services other than intra-Community transport and related services.

In respect of these transactions, suppliers and service providers established outside France will not be obliged to register for VAT in France and may apply for a refund of the VAT borne in France in accordance with the procedure provided for by the 8th and 13th Directives inasmuch as they do not carry out any other taxable transactions in France with regard to which they are liable for VAT. A customer registered in France must levy the VAT and will be able to deduct the VAT thus paid under the customary conditions.

Between January 1 and the end of September 2006, the tax authorities will therefore verify that foreign companies that are not established in France but are already registered or wish to register, do indeed carry out taxable transactions in France in respect of which they are liable for VAT. If this is not the case, these companies will either have to deregister or their application for registration will be rejected, as applicable.

However, a few uncertainties still remain that will have to be removed prior to September 1, 2006:

1- Firstly, application of the reverse charge mechanism to sales with installation and assembly carried out by a supplier established outside the European Union. No clarification is given with regard to the person liable for the tax on imports: if the supplier is considered to be liable (as the end customer is neither the owner, nor the beneficiary, nor the user before installation of the item), it must therefore continue to register in France and appoint a representative to pay VAT on the import. Can the supplier then carry out subsequent sales with installation under its French VAT number?

2- On a broader scale, secondly, a question is raised as to whether the reverse charge mechanism as provided for is of a compulsory or optional nature and, accordingly, whether or not the VAT number has a "force of attraction": if a foreign company that has a French VAT number that is justified for transactions for which it is liable for VAT in France, can it use this number for other transactions where it is the beneficiary's responsibility to pay the tax itself? The reply to these questions will have a large number of practical consequences with regard to administrative obligations and cash flow constraints (advance payment of the VAT, timing of recovery of input VAT).

To remove these uncertainties, the tax authorities should comment on the new measure in a guideline that is due to be published in the next few weeks.

There is every reason to believe that this forthcoming guideline:

- will not in any way change the system of VAT applicable to imports,
- will ensure that no additional cash costs are created for companies,
- will specify what will happen to the relaxation measures applicable up until now in specific situations.

Without waiting until September 2006 it would therefore be appropriate for foreign companies carrying out transactions in France to draw up an inventory of the transactions which justified registration in the past and to wait for publication of the tax authorities' commentaries before modifying the treatment to be extended to transactions falling within the scope of the new measure (registration, reverse charge mechanism, configuration of invoicing or financial reporting, etc.).

The decision made by the French Supreme Administrative Court (Conseil d’Etat) of June 29, 2005 revived the debate with regard to the deduction of VAT for users of highways under concession. How will these users be able to recover the VAT they paid from 1996-2000? This question, that was already mentioned at the time of our last VAT Focus, has now been clarified to a certain extent (Replies by the Minister on March 30, 2006).

On September 12, 2000, the European Court of Justice held that the highway tolls charged by highway concession holders should be subject to VAT.

The Amended Finance Act for 2001 drew the conclusions from this decision for the future, by providing for highway tolls to be subject to VAT at the normal rate.

As regards the past, the same Act proposed that concession holders apply for deduction of the VAT borne in the past. The amount of VAT refunded was calculated using a complex formula. Only two concession holders chose to elect for this system.

However, the Act did not look into the possibility for users of the highways under concession to recover VAT.

Faced with this gap in the law and in light of the size of the financial stakes involved, the government endeavored to restrain the impulse for users to ask to recover VAT. In this regard, in 2001, the Secretary of State for the Budget stated that road transport companies would not be able to obtain the refund of VAT paid prior to January 1, 2001. Similarly, it was stated, in 2003, that concession holders would not be justified in issuing amended invoices, except for those that had chosen to apply the proposed mechanism.

Following an application for judicial review initiated by several road transport companies, on June 29, 2005, the Conseil d'Etat quashed these last two administrative decisions. The Conseil d'Etat considered that it is not possible to refuse the right to deduct VAT previously paid (no distinction should therefore be made depending on whether the concession holders had made an election or not) and that the concession holders have to issue amended invoices.

Once again, because of the budgetary issue involved, an article of the Amended Finance Bill for 2005 had provided that the price for a transaction not subject to VAT pursuant to provisions considered to be incompatible with EU law can only be deducted on presentation of an amended invoice showing that the amount of such VAT was paid in addition to the price shown on the initial invoice.

This Article was held to be contrary to the constitution as its purpose was to restrict the right for users to recover VAT paid prior to January 1, 2001.

Accordingly, it is necessary to determine the attitude that should be adopted in order to obtain the deduction of VAT paid to highway concession holders between 1996 and 2000. In this regard, the time period for restitution should begin as from the date of the decision by the ECJ in 2000.


ACTION:

1. Provision of automatically produced amended invoices

Internet sites making it possible to obtain a document showing the VAT paid are currently in the process of being developed by highway concession holders and the tax authorities, according to several replies by the Minister. Thus, the reply by the Minister to Mr. Souvet, on March 30 of this year, stated as follows: "The general management division of the French tax authorities has commenced discussions with highway concession holders in order to set up the methods for automatically issuing amended invoices under satisfactory conditions as regards security."

This reply confirms the opinion that we gave in the last VAT Focus, where we suggested that the best approach was to wait and see before deciding on the practical terms and conditions for recovering the VAT involved (management in-house or outsourcing of the task of recovery to an external service provider). It is very likely that at least subscribers to the CAPLIS system (Inter-Company Goods Vehicle Subscribers Card) will be able to benefit from this possibility. This should make it possible to decrease the internal costs for companies that wish to obtain the amended invoices themselves.

For those who are unable to benefit from the mechanism set up, it would be logical for the tax authorities to accept the system of a form sent to the concession holder referring to the various invoices. In practice, the highway concession holder will then only have to validate this form.

In the event of a request to the highway concession holder, any refusal to issue amended invoices should not, in our opinion, be a barrier to subsequent recovery of VAT.

2. Recovery of VAT

Once the amended invoices or a document attesting to the refusal to issue invoices have been obtained, the possibility could be considered of deducting the VAT on the CA3 return, with a note expressly indicating the amount of the VAT deducted as well as the origin of such VAT.

This deduction could potentially be combined with tax claims in order to protect the company in the event that the tax authorities were to challenge this deduction. In this regard, further to decisions that had recognized the deductibility of certain entertainment expenses, the tax authorities only accepted the deduction of the amended invoice up to the end of the limitation period for deduction of the original invoice (up to December 31 of the second year following the year of the original invoice).

This position is open to criticism, as it seems to us that an amended invoice extends the time period for deduction whatever the reasons for issuing such amended invoice (tax reassessment, challenge of a system, etc.).

In every case, the claim should be sent to the tax authorities before December 31, 2007.

In the case of users who are not registered for VAT in France, amended invoices should also be obtained and an application should then be submitted for a refund according to the normal procedure.

The concept of abuse of law with regard to VAT has recently been explicitly recognized and defined by the European Court of Justice. The concept thus outlined is very similar to the concept of abuse of law applied by French law without being completely identical. What impacts will this difference in concept have for the French taxpayer?

Under French national law, abusive tax practices have long been penalized, in accordance with Article L64 of the Book of Fiscal Procedures which provides that "acts which conceal the real effect of a contract or an agreement cannot be enforced against the tax authorities". This provision specifically applies to certain taxes, including VAT.

The French concept of abuse of law covers fraudulent evasion of statutory provisions (a fictitious act with an implicitly tax purpose) and simulation (an act with an exclusively tax purpose characterized by an artificial tax and legal transaction).

Nevertheless, the abuse of law procedure is rarely implemented with regard to VAT since, in 2004, the report by the consultative committee for the prevention of abuse of law only mentioned two cases with regard to VAT.

By two decisions dated February 21, 2006 (C-255/02, Halifax and C-223-03, University of Huddersfield), the ECJ expressly enshrined the principle of abuse of law with respect to VAT.

In these cases, reference for preliminary rulings had been made to the ECJ by the British courts, with regard to the following issues:

- is a transaction carried out for the sole purpose of obtaining a tax advantage irrelevant in determining whether it constitutes a supply of goods or services and an economic activity?

- is a taxable person entitled to deduct input VAT where the transactions from which this right derives constitute an abusive practice?

To the first question, the Court replied that the concepts of supply of goods or supply of services are of an objective nature and accordingly apply regardless of the aims and results of the transactions concerned. Thus, the question of whether the sole aim was to obtain a tax advantage is irrelevant in determining whether it involves a supply of goods or a supply of services.

With regard to the second question, the ECJ began by specifying that the application of Community legislation could not be extended to cover abusive practices by economic operators, that is to say transactions carried out in the context of normal commercial operations, but solely for the purpose of wrongfully obtaining advantages provided for by Community law.

On this basis, the principle of prohibition of abusive practices also applies to the field of VAT, a tax that is in essence of a Community nature.

Thereafter, while it is stated, as a preliminary point, that taxpayers may choose to structure their business so as to limit their tax liability, the ECJ then went on to provide the definition of abuse of law with regard to VAT.

Firstly, it is necessary that the transactions concerned result in the accrual of a tax advantage the grant of which would be contrary to the purpose of the provisions of the Sixth VAT Directive and secondly, the transactions must have the essential aim of obtaining a tax advantage.

The concept of abuse of law with regard to VAT as laid down by the ECJ therefore requires that two cumulative criteria be met, namely:
- the transaction concerned must be contrary to the purpose of the provisions of the Sixth Directive;
- the disputed transaction must have the essential aim of obtaining a tax advantage.

The concept under Community law is finally quite similar to the French concept of abuse of law that has long been defined by the Conseil d’Etat and the Cour de cassation (French Supreme Civil Court) with the only difference being that the cases of abuse of law appear to be more limited inasmuch as the only purpose of the disputed transaction must be to evade tax, whereas, according to the ECJ, It is sufficient for the aim to be essentially of a tax-related nature.

What importance should be attached to this lexical difference?

French judges will have to comply, in the field of VAT, with the interpretation made by the European Community courts of the concept of abuse of law once it has been stabilized.

We therefore wonder whether the eventual alignment of the two concepts of abuse of law adopted in national law and European Community law will not have the consequence of providing for an additional condition in national law, namely that the transaction will be held to be abusive not only if it enables an unjustified tax advantage to be obtained but also if it is contrary to the purposes of the provisions of the Sixth Directive; this latter condition does not exist in French domestic law for the time being (see the above-mentioned Art L64 of the French Book of Fiscal Procedures).

On the other hand, it may be noted that, as regards certain aspects, the French concept of abuse of law is more extensive for the time being than the Community concept as it covers not only acts carried out solely for tax purposes, that is to say artificial but real transactions, but also fictitious acts.

Nevertheless, it is necessary to put into perspective the importance of the choice of the terms used by the ECJ since, unless the European community courts' intention was to create concepts of abuse of law that differ according to the taxes to which they relate, it can be noted that, in the Imperial Chemical Industries decision of July 16, 1998 (case C-264/96), the purpose of the transactions was neither exclusively nor essentially to grant a tax advantage. In this regard, purely artificial transactions carried out for the purpose of bypassing tax law would also be considered as abusive.

However, we have doubts as to whether the ECJ intended to bring the debate on the issue of abuse of law onto such a subtle terminological terrain. The purpose of this decision was probably not to "refine" the concept of abuse of law for Member States who already have such a notion in their domestic legislation but rather to cause it to introduced for the first time in the national legislation of Member States who do not recognize such a notion and in which aggressive tax optimization structures exist.

What effects will this decision have on ECJ case law and on cases currently pending in France?

Within the scope of the dispute that arose between the Banca popolare di Cremona and the Italian Government on the lawfulness of IRAP in light of European Community law, the tax court of Cremone referred, in substance, the following question for a preliminary ruling. What are the criteria for classifying a tax as a "turnover tax" within the meaning of Article 33(1) of the Sixth VAT Directive? This provision provides that the Sixth VAT Directive prohibits Member States from introducing all taxes that have the character of turnover taxes.

On March 14, 2006, the Advocate General Stix-Hackl delivered her opinion whereby she considers that a tax having the features of IRAP falls within the scope of the prohibition in Article 33(1) of the above-mentioned Sixth VAT Directive. It should be noted that the Attorney General first of all stated that IRAP is a generally applied tax (as it is levied on all persons who regularly carry on an activity with the object of producing or trading in goods or providing services), secondly that it is imposed on value added, which is defined as the difference between the proceeds and costs of the taxable activity, as it is charged in respect of each stage in the production and distribution process, and finally that it imposes a burden which is globally proportional to the price at which the goods or services are supplied.

The Advocate General adds a condition for implementation of the prohibition in the above-mentioned Article 33(1): for a representative sample of businesses subject to the disputed tax and VAT, the ratio between the amounts paid in VAT and the amounts paid in the disputed tax must be substantially constant.

This recognition of the incompatibility of IRAP is based on a broad interpretation of the provisions of European Community law and ECJ case law:

- the scope of Article 33 of the Sixth VAT Directive also seems to have been assessed in light of the provisions of the First VAT Directive, the prohibitions on multi-stage taxes and on taxes other than VAT with the character of turnover taxes are tending to become increasingly similar;
- the economic analysis of a tax and its effects on economic operators was taken into account, regardless of the practical terms and conditions of collection and deduction of the tax.

If the ECJ follows the opinion of its Advocate-General, it will therefore be up to the judge to whom the case is referred back (the Italian national judge) to apply the principles laid down, and in particular the complex and uncertain principle of the "substantially constant ratio between the amounts paid in VAT and the amounts paid in IRAP" which does not in any way help to simplify the understanding of this rule of law.

Finally, with regard to the limitation of the effects of this incompatibility over time, which led, exceptionally, to the reopening of the procedure before the Court, the Attorney General offers a midway solution by proposing that the incompatibility of IRAP may not be relied upon in order to claim reimbursement of IRAP levied in the past, in respect of periods of assessment prior to the Court's judgment or the period during which that judgment was delivered, except by taxpayers who initiated legal proceedings or raised an administrative claim before March 17, 2005, the date of the opinion of Advocate General Jacobs.

It will be necessary to wait for the final decision by the ECJ in order to determine specifically what conclusions should be drawn from this case, with regard to the compatibility of certain taxes levied in France.

However, we wish to express regrets, make observations or express pleasure regarding the following elements:

- our regrets concern the fact that the Court reopened the procedure due to the budgetary impacts for the Italian government, the difficulty in practice of modeling the "substantially constant ratio between IRAP and VAT" and the increasingly frequent proposal of a limitation in time of the effects of an ECJ ruling;

- as far as the observations are concerned, we have noted the increasing similarity of case law reasoning between direct and indirect taxes with a certain primacy being given to the economic effect of a tax, rather than its method of functioning, that could ultimately lead to a direct tax with regard to valued added becoming incompatible with the Sixth VAT Directive;

- finally, we note in the positive contributions, the richness of the debates and the wealth of analysis made by the two Advocates General on this topic.

With regard to this latter element, it may be noted in this respect that the decision by the Paris Administrative Court of July 28, 2005, in the Banque Paribas case, that considers the tax on wages to be compatible with Article 33 of the Sixth VAT Directive, has not in our opinion exhausted the basis for technical debate on this topic and the comparison with the reasoning adopted with regard to IRAP seems to us to be all the more interesting as the basis for assessment of IRAP corresponds in practice to a great extent to salaries (as the basis for assessment of IRAP corresponds to the difference between proceeds and costs, excluding salaries, it is equal in practice for producers to a concept of Value added determined as the sum of salaries and the margin generated).

Guideline 3 A-6-06 No. 50 of March 20, 2006, VAT – Transfer of a complete or partial set of assets.

Article 89 of the Amended Finance Act for 2005 transposes Article 5§8 of the Sixth VAT Directive into French national law. Article 257bis of the French Tax Code now provides that supplies of goods or services carried out within the scope of transfers of complete or partial sets of assets are exempt from VAT.

Thursday 6 April
First chamber

Judgment in case C-245/04 EMAG Handel Eder

Reference for a preliminary ruling - Verwaltungsgerichtshof - Interpretation of Article 8, para. 1, sub-paragraph a) of Sixth Council Directive 77/338/EEC of May 17, 1977 on the harmonization of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment (JO L 145 p. 1) – Place of supply in triangular transactions or transactions involving successive supplies – Purchase of goods by a company established in one Member State from another company, established in the same Member State, that obtains its supplies from companies established in other Member States, with the goods being dispatched directly by suppliers to the acquiring company.

Advocate General Kokott

Oral pleadings in case C-251/05 Talacre Beach Caravan Sales

Reference for a preliminary ruling - Court of Appeal (Civil Division) – Interpretation of Article 28, para. 2, sub-paragraph a) of Sixth Council Directive 77/338/EEC of May 17, 1977 on the harmonization of the laws of the Member States relating to turnover taxes - Common system of value added tax: uniform basis of assessment (JO L 145 p. 1) – Zero rated goods (caravans) sold equipped with goods taxed at the standard rate – Criteria to be used to determine whether the transaction should be classified, from a VAT standpoint, as a single supply

Oral pleadings in case C-228/05 Stradasfalti

Reference for a preliminary ruling - Commissione tributaria di primo grado di Trento - Interpretation of Article 17, para. 7 and Article 29 of Sixth Council Directive 77/338/EEC of May 17, 1977 on the harmonization of the laws of the Member States relating to turnover taxes - Common system of value added tax: uniform basis of assessment (JO L 145 p. 1) – Right to deduct input VAT – Provision of national law limiting the right of deduction without consultation of the committee provided for by Article 29 of the Directive