Date held: 15th & 22nd April 2020
Author: Christabel Spiteri
In general tax, is a sensitive subject. Why? Because nobody enjoys paying it. However, most fail to understand that it is necessary to provide us with essential state infrastructure and services.
Value Added Tax, or VAT, is a form of indirect taxation that is normally referred to as a general, broadly based consumption tax assessed on the value added to goods and services:
- It is a general tax because in principle, it applies to all economic activities involving the production and distribution of goods and the provision of services.
- It is a consumption tax because it is ultimately borne by the final consumer and hence, for neutrality reasons, it is not always a cost to businesses.
The VAT system was introduced in Europe a lifetime ago, not only to serve as an additional source of income to the European Union (‘EU’) but the intention was of replacing a complex set of historical indirect taxes, make cross border trade easier and more transparent and, eventually help pave the way for a single market.
The main EU VAT Legislative instrument is Council Directive 2006/112/EC (the ‘VAT Directive’). It sets up goals in the form of VAT provisions, that are binding on all Member States of the EU, with the scope for a harmonised system of VAT. The VAT Directive had been transposed into Malta’s National Legislation and the corresponding legal instrument is The Malta VAT Act, Chapter 406 of the Law of Malta, (‘VATA’).
The VAT Directive can be described as a puzzle whereby each fragmented piece represents different topics interdependent on each other. As a result of this, any person who seeks to apply the VAT legislation to his economic activities or to those of their customers, respectively, must think methodically, in arriving at the correct VAT treatment to those activities.
The VAT legislation outlines and interprets definitions which are fundamental to analysing the VAT treatment of any VAT transaction. It starts with the interpretation of the scope of VAT and defines when, a transaction falls within such scope.
In Article 2, the VAT Directive provides for, the following four (4) criteria that should be met cumulatively for transactions to fall within the scope of VAT:
- A transaction, be it a supply of goods, supply of services, intra-Community acquisition of goods or importation of goods;
- taking place within the territory of EU;
- made by a taxable person acting as such;
- in return for a consideration.
It follows that in determining if all the above criteria are met, the respective definitions should be well understood; What are these definitions? ? What is the extent covered by the territory of EU? Who is a taxable person, acting as such? How is consideration ‘in return for making a supply’ interpreted? Is it defined?
Whilst most of the definitions are laid down in the same Directive, there are instances where the Directive remains silent on defining certain terminology, as is the case with the term consideration. In such circumstances, different Member States may come up with their own vast interpretations that may cause, lack of consistency throughout the EU and even a deviation from the primary scope of the VAT Directive. This is where The European Court of Justice (‘ECJ’) comes in.
The ECJ is one of the institutions of the EU and its main role is to ensure that EU law is interpreted and applied uniformly in every EU country as well as to ensure that Member States and EU institutions abide by the same EU law. It, therefore, sets out its interpretation of specific provisions of the VAT Directive in ECJ Case Law and given that the interpretations are made by this High Court, these are also binding on Member States.
Having grasped the respective definitions and once determined that an activity fall within the scope of VAT, one should move on to determine whether such activity is subject to tax or otherwise. A methodical way of dissecting a VAT transaction to determine its correct VAT treatment is, by adopting the following a five-question approach::
- Who is carrying out the transaction, for whom?;
- What is the nature of transaction?;
- Where does the transaction take place?;
- Is an exemption possible?;
- Who is liable to pay the VAT?
In conclusion, the VAT treatment of any particular transaction cannot be determined unless the correct information is identified immediately, keeping in mind the criteria for a transaction to fall within the scope of VAT. Applying the above mentioned methodical approach would positively direct any relevant professional in addressing the VAT treatment of any transaction correctly.