Current issues for public bodies EC Perspective

1. Current issuesfor public bodiesEC Perspective 17th October 2006 Carmen MUÑIZ Présentation Powerpoint

2. Current issuesfor public bodiesEC Perspective Latest update on issues affecting public sector • Future Commission proposal on public bodies • Commission proposal on VAT and postal services - COM (2003) 234 of 5 May 2003 modified by COM (2OO4) 468 of 8 July 2004 Présentation Powerpoint

3. MAIN PROBLEMS CONCERNING THE VAT TREATMENT OF PUBLIC BODIES UNDER THE SIXTH DIRECTIVE Current rules applicable to public bodies create • Complexity of the VAT system • A lack of economic neutrality • A lack of harmonisation within the Community Présentation Powerpoint

4. Complexity : Determining a public body's VAT liability is a complicated affair Public activities Outside the scope Inside the scope Taxable Exempt Présentation Powerpoint

5. Taxation of outputs Public activities Outside the scope Inside the scope No VAT on supplies of goods and services Taxable Exempt VAT on supplies of goods and services at standard or reduced rate No VAT on supplies of goods and services Présentation Powerpoint

6. Deduction on inputs Public activities Outside the scope Inside the scope No right of deduction Taxable Exempt Right of deduction No right of deduction Article 17.2 of 6th Directive: right of deduction for taxable activities only. Article 17.5 and Article 19.1 of 6th Directive: pro rata of deduction when inputs used both for taxable activities and activities in respect of which VAT is not deductible. Optional inclusion of non-taxable subsidies for pro rata calculation. Présentation Powerpoint

7. Lack of economic neutrality • Distortion of competition between public and private sector • Non-deduction in the public sector results in: • Lower rates of investment • No outsourcing of activities which could more efficiently be performed by specialized providers • Cascade effect of exemptions in supplies to businesses • Expensive tax avoidance "mitigation" schemes. Présentation Powerpoint

8. Lack of harmonisation within the Community No community approach on VAT treatment of public activities Too much room for interpretation in the wording of the Sixth Directive: to a certain extent, Member States define the conditions under which public bodies will have taxable or non taxable activities • Member States define: • what a public body is • when it acts as a public authority • when there is a significant distortion of competition • when an economic activity is significant • Member States define the conditions of the exemptions • Member States allowed to consider exempt activities of public bodies as activities in which they engage as public authorities Présentation Powerpoint

9. Treatment of some public activities Information provided by MS in 2000 Présentation Powerpoint

10. Measures taken by Member States to overcome problems with current VAT treatment of public bodies • Restriction of the scope of non-taxation or exemption • VAT refund systems for outside the scope activities (on the fringe of Sixth Directive) UK SW FI PT FR LX AT NL Pros: corrects distortions due to non-deduction of VAT at national level Cons: - worsens distortions with private sector unless the "significant distortion of competition” test is applied strictly - distinguishing input VAT belonging to out of scope and exempt activities may be difficult. - source of lack of harmonization at Community level Présentation Powerpoint

11. A strategy for the future Achieve greater neutrality, harmonization and simplification of the tax Different possible scenarios going from the most ambitious to the least one • Scenario 1 : Full Taxation 0ption • Scenario 2 : Taxation at Zero or Reduced Rate Option • Scenario 3 : Hybrid Exemption Option • Scenario 4 : Pure Exemption Option • Scenario 5 : Limited selective changes to the Sixth Directive Présentation Powerpoint

12. A strategy for the future Achieve greater neutrality, harmonization and simplification of the tax Scenario 1 : Full Taxation 0ption • Treat public sector as a taxable person • Tax all activities of public sector at standard rate • Allow full input tax deduction to all public bodies Présentation Powerpoint

13. A strategy for the future Achieve greater neutrality, harmonization and simplification of the tax Scenario 2: Taxation at Zero or Reduced Rate 0ption • Treat public sector as a taxable person • Tax all activities of public sector, other than “Merit activities”, at standard rate • Tax “Merit activities” at a zero or a reduced rate • Allow full input tax deduction to all public bodies Note: “Merit activities” are e.g. health, education, culture, sport, child welfare Présentation Powerpoint

14. A strategy for the future Achieve greater neutrality, harmonization and simplification of the tax Scenario 3: Hybrid Exemption 0ption • Treat public sector as a taxable person • Tax all activities of public sector, other than “Merit activities”, at standard rate • Maintain exemptions for “Merit activities” • Add regulatory services such as local services, licenses, permits, filling of documents, passports, property registration, court fees, to the exempt list • Allow a full or partial rebate for input tax paid by public bodies even when related to exempt activities Présentation Powerpoint

15. A strategy for the future Achieve greater neutrality, harmonization and simplification of the tax Scenario 4: Pure Exemption 0ption • Treat public sector as a taxable person • Tax all activities of public sector, other than “Merit activities”, at standard rate • Maintain exemptions for “Merit activities” • Add regulatory services such as local services, licenses, permits, filling of documents, passports, property registration, court fees, to the exempt list • Allow no rebate for input tax related to exempt activities paid by public bodies Présentation Powerpoint

16. A strategy for the future Achieve greater neutrality, harmonization and simplification of the tax Scenario 5: Limited selective changes to the Sixth Directive • Review of Annex D to the Sixth Directive in order to broaden its scope (add new activities to current list of taxable activities) • Deletion of option to treat exempt activities as out of scope • granting of a right of deduction for input VAT relating to outside the scope activities • Review of certain exemptions in article 13 A Présentation Powerpoint

17. Commission's Timetable • An assessment of the social and economic impact of any possible solutions will be undertaken by the end of 2006; • A Working Paper with proposed measures will be discussed with Member States and put in the Commission's Web site for public consultation in 2007 (second half of the year); • A legislative proposal is programmed for 2008. Présentation Powerpoint

18. VAT TREATMENT OF POSTAL SERVICESSTATE OF PLAY • Review of VAT treatment of public bodies started in 2003 by focussing on postal sector (see Commission proposal, COM (2003) 234 of 5 May 2003 modified by COM (2004) 468 of 8 July 2004) • Postal market liberalised by Directive 97/67/EC of 15 December 1997 which provides for a full accomplishment of the Postal Internal Market in 2009 • VAT exemption distorts competition between former monopolies that benefit from that exemption and new market entrants that do not Présentation Powerpoint

19. VAT TREATMENT OF POSTAL SERVICESSTATE OF PLAY • Commission proposal intends to remove VAT exemption on public postal services and postage stamps while introducing an option for Member States to apply a reduced rate to a wide range of postal services in order to limit the impact on prices for private customers • Commission proposal remains blocked in the Council of the European Union • In April 2006, infringement proceedings launched against three Member States (the UK, Germany and Sweden) that where not applying correctly the current VAT exemption, either because it is being applied too extensively or not at all – see Press release IP/06/484 Présentation Powerpoint

20. VAT TREATMENT OF POSTAL SERVICESSTATE OF PLAY • Commission takes the view that postal VAT exemption should only apply as far as the strict discharge of the universal service obligation is concerned • To solve problems of distortions of competition and lack of harmonization in the application of current rules, the Commission urges the Council to resumediscussion and adopt the Commission proposal concerning VAT rules on postal services Présentation Powerpoint

21. Questions and Answers session Question 1 : Public bodies and the UK unjust enrichment provisions Where a taxpayer has paid VAT incorrectly, the taxpayer has a right to a refund of the VAT paid subject to time limits.  However, the right to repay the taxpayer could be refused under the unjust enrichment provisions. The burden of proving that the unjustment provisions apply rests with the tax authorities.  It is necessary to prove, inter alia, that the VAT overpaid was passed to the taxpayer's customer.  Public bodies provide a number of services that are subsidised by government funds and local taxes.  Given this funding regime, it is inconceivable how the unjust enrichment provisions could ever apply to a repayment of  VAT overpaid by public body.  Does the EC share this view? Présentation Powerpoint

22. Questions and Answers session Question 2 : The three year capping provisions in UK The three year capping provisions implemented by the UK is currently under challenge.  It has been said that where an entitlement for a credit to VAT has arisen, this cannot be taken away retrospectively by any time limits.  What this means is that where a claim for input tax arose before the imposition of the three year capping provisions in the UK, the right to a claim still remains.  Could we have the EC views on this please? Présentation Powerpoint

23. Questions and Answers session Question 3 : UK Refund mechanism for public bodies There has been much speculation that the EC changes to the VAT treatment of activities undertaken by public bodies will not affect the refund mechanism (section 33) used by the UK for public bodies.  Could we have your views on this please? Présentation Powerpoint

24. Thank youfor your attention Carmen MUÑIZ maria-del-carmen.muniz-sanchez@cec.eu.int European Commission, DG Taxation and Customs Union Présentation Powerpoint