Rita de la Feria

Options for Taxing Financial Supplies in Value Added Tax: EU VAT and Australian GST Models Compared

The taxation of financial services is one of the most vexing aspects of a Value Added Tax (VAT). Conceptually, VAT should apply to any fee for service but where financial services are concerned there is a difficulty in identifying the taxable amount, ie the value added by financial institutions. As a result, most jurisdictions, including the EU, simply exempt financial services from VAT. Treating financial services as exempt, however, gives rise to significant legal and economic distortions. Consequently, a few countries have in recent years attempted an alternative VAT approach to financial services. Amongst these is Australia, which in 2000 introduced a Goods and Services Tax (GST) with a ‘reduced input tax credit’ system. This paper compares the current treatment of financial supplies, under a VAT-type system, in the EU and in Australia. The aim is to ascertain whether the Australian GST treatment of financial services is, as commonly thought, superior to the EU one, and consequently, whether introducing an Australian-type model should constitute a policy consideration for the EU.

VAT and the EC Internal Market: The Shortcomings of Harmonisation

From the outset, turnover taxes have played a fundamental role in the European integration process. Harmonisation of these taxes was perceived an integral part of achieving a common market, and for this reason it was given priority. Over forty years since the introduction of a common VAT system, VAT is usually regarded as a broadly harmonised tax. Paradoxically, however, it is precisely this high level of harmonisation which seems to have allowed the preservation of some aspects of VAT law which constitute an obstacle to the establishment of the EC internal market. The aim of this paper is to highlight the shortcomings of harmonisation within the VAT area, and namely how harmonisation has prevented the European Court of Justice (ECJ) from applying the EC Treaty provisions to the field of VAT, resulting in the maintenance of laws which could arguably be regarded as contrary to the EC internal market and as restrictions to the fundamental freedoms.

EU VAT Principles as Interpretative Aids to EU VAT Rules: The Inherent Paradox

The EU VAT system is founded on two basic principles, namely the principle of VAT as a general consumption tax, and the principle of fiscal neutrality. Based on key elements of the VAT system as it was introduced in the 1960s, they have been both developed by the Court as fundamental principles of the system over an extended period, spanning almost five decades. Once exclusions from the tax base, such as exemptions and reduced rates, are introduced, however, these two principles became contradictory. This results in a dialectic struggle, whereby a choice must be made when interpreting VAT rules on exclusions, namely: interpreting these rules in light with the principle of VAT as a tax on consumption, and its corollary, the principle of strict interpretation, will result in a less neutral system; interpreting these rules in line with the principle of fiscal neutrality, will result in further erosion of the tax base, and legal uncertainty. The paper starts by presenting a typology of European VAT principles based upon the jurisprudence of the CJEU. It then assesses that jurisprudence insofar as exclusions from the tax base are concerned, namely rules on VAT exemptions, and rules on VAT reduced rates, highlighting this dialectic struggle, and identifying both the Court’s traditional stand on it, and its more recent approach. An empirical assessment of the hypothesis is then presented, by reviewing a five years sample of cases on the interpretation of the scope of VAT exemptions, and identifying for each case whether the CJEU decided on the basis of the principle of fiscal neutrality, or on the basis of the principle of strict interpretation. Whilst not meant to be taken as an accurate method of determining the Court’s preferences as regards interpretative methods, the exercise demonstrates not only a growing preference for fiscal neutrality, but also the increasingly casuistic nature of interpreting VAT rules on exclusions of the tax base. The paper concludes that these tendencies are likely to continue in the face of new economic realities, and that the challenge for the CJEU will be to reach the right balance between promoting neutrality and eliminating distortions, without creating an environment of legal uncertainty, which will undermine confidence and economic growth.