Attribution, Apportionment and Allocation inevitable consequences of exemptions and activities outside the scope? Ben J. M. Terra

Attribution, Apportionment and Allocation inevitable consequences of exemptions and activities outside the scope? Ben J. M. Terra

The ennobled turnover tax 1917 Wilhelm von Siemens Der veredelte Umsatzsteuer Brutoumzatz minus Vorumsatz (gross turnover minus input)

The ennobled turnover tax Vorumsatzbuch later total account of invoices To be excluded from input nicht abzuchfähige Vorumsatz, such as wages, telephone, city-gas (since tax free), Einkäufen für den Haushalt, but inclusive electricity supplied by private EL company.

Le cancer des exonérations 10 April 1954 introduction of VAT in France (until 1966 exclusive of retail) Maurice Lauré il invente (!) un impôt indirect sur la consummation: la taxe sur la valeur ajoutée 1957 Au secours de la TVA l éxonération equivaille en fait à une taxation occulte Lauré suggested replacement of the fractioned payment by the old French suspensive regime

Outside the scope For physical persons there is by definition an area of nicht abzuchfähige Vorumsatz or outside the scope Is there for legal persons a world beyond VAT?

Case C-81/89 (Hong Kong Trade Council) 10. Where a person s activity consists exclusively in providing services for no direct consideration, there is no basis of assessment and the free services in question are therefore not subject to value added tax. In such circumstances the person providing services must be assimilated to a final consumer because he is at the final stage of the production and distribution chain.

Notwithstanding outside the field of application of VAT Theorem 1 All activities of legal persons lead ultimately to a supply of some sort.

Case C-60/90 (Polysar) Is a pure holding company performing economic activities? 13. The mere acquisition of financial holdings in other undertakings does not amount to the exploitation of property for the purpose of obtaining income therefrom on a continuing basis because any dividend yielded by that holding is merely the result of ownership of the property. 14. It is otherwise where the holding is accompanied by direct or indirect involvement in the management of the companies in which the holding has been acquired, without prejudice to the rights held by the holding company as shareholder.

The wider context test Theorem 2 Based on the economic reality, an holding company should be treated as a taxable person if it forms a link in and an integral part of a world-wide group of undertakings which in the main outwardly appears under a single name, the group name.

Consistency of the Court? Should dividends be included in the denominator or only sums received by the taxable person in respect of the performance of transactions subject to VAT or expressly exempt from VAT, i.e. to the exclusion of income which did not relate to any activity giving rise to turnover and did not fall within the scope of VAT? (Case 333/91 (Satam), Case C- 142/99 (Floridienne))

Case C-80/95 (Harnas & Helm CV ) The unanswered question: In the event that a taxable person carrying out the activities entitled to deduction is also the holder of shares, falling outside the scope of VAT, can the input tax charged to that taxable person be deducted in full or is the input tax relating to the possession of the shares debarred from being deducted? If so, according to what yardstick must the amount disqualified from deduction be calculated?

Case C-16/00 (CIBO) Is a mixed holding company entitled to deduct the input tax on costs which it has incurred in the course of acquiring stakes in undertakings?

Case C-16/00 (CIBO) 32. Clearly, there is no direct and immediate link between the various services purchased by a holding company in connection with its acquisition of a shareholding in a subsidiary and any output transaction or transactions in respect of which VAT is deductible.. 33. On the other hand, the costs of those services are part of the taxable person s general costs and are, as such, cost components of an undertaking s products. Such services therefore do, in principle, have a direct and immediate link with the taxable person s business as a whole

Case C-465/03 (Kretztechnik) Is a company allowed to deduct VAT paid by it on supplies relating to the issue of shares?

Case C-465/03 (Kretztechnik) 26., a company that issues new shares is increasing its assets by acquiring additional capital, whilst granting the new shareholders a right of ownership of part of the capital thus increased. From the issuing company s point of view, the aim is to raise capital and not to provide services. As far as the shareholder is concerned, payment of the sums necessary for the increase of capital is not a payment of consideration but an investment or an employment of capital.

Case C-465/03 (Kretztechnik) 27. It follows that a share issue does not constitute a supply of goods or of services for consideration within the meaning of Article 2(1) of the Sixth Directive. Therefore, such a transaction, whether or not carried out in connection with admission of the company concerned to a stock exchange, does not fall within the scope of that directive.

Case C-465/03 (Kretztechnik) 38. The answer to the third question must therefore be that Article 17(1) and (2) of the Sixth Directive confer the right to deduct in its entirety the VAT charged on the expenses incurred by a taxable person for the various supplies acquired by him in connection with a share issue, provided that all the transactions undertaken by the taxable person in the context of his economic activity constitute taxed transactions.

Theorem 3 If the issuing of shares has a direct and immediate link with the whole economic activity of the taxable person so does disposing of them. Case C-29/08 (Skatteverket v AB SKF) Where a taxable person liable for tax on sales of services to a subsidiary sells the interests in the subsidiary, is that transaction subject to VAT?

The dancing procession of Echternach Three steps forward are taken, then two back, so that five steps are required in order to advance one pace.

Case C-435/05 (Investrand) 32. No document in the case would support an assertion that, had it not carried out economic activities which were subject to VAT as from 1 January 1993, Investrand would not have obtained the advisory services at issue in the main proceedings. It thus appears that, whether or not it carried out such activities as from that date, Investrand would have obtained those services with a view to safeguarding the financial consideration for the sale of shares to Hi-Tec Sports which took place in 1989.

Case C-435/05 (Investrand) 33. In those circumstances, it cannot be considered that the costs relating to those services were incurred for the purposes of and with a view to Investrand s taxable activities.

Case C-437/06 (Securenta) If a taxable person simultaneously engages in a business activity and a non-business activity, is the entitlement to deduct input tax determined according to the proportion of taxed transactions, on the one hand, to the taxed and exempt transactions, on the other hand or is the deduction of tax allowed only to the extent that the expenditure connected with the issue of shares and silent partnerships is to be attributed to the applicant s economic activity?

Case C-437/06 (Securenta) 29 In the main proceedings,, the expenditure connected with supplies of services carried out in the context of the issue of shares and financial holdings was not solely attributable to downstream economic activities carried out by Securenta and was not therefore among the elements which, alone, go to make up the cost of the transactions relating to those activities. If, however, that had been the case, the supplies of services concerned would have had a direct and immediate link with the taxpayer s economic activities (see Abbey National, and Cibo).

Case C-437/06 (Securenta) However, it is apparent from the documents before the Court that the costs incurred by Securenta for the financial transactions at issue in the main proceedings were, at least in part, for the performance of non-economic activities. Conclusion Not all costs connected with non-economic activities are outside the scope, only in part.

Case C-437/06 (Securenta) The determination of the methods and criteria for apportioning input VAT between economic and noneconomic activities within the meaning of the Sixth Directive is in the discretion of the Member States who, when exercising that discretion, must have regard to the aims and broad logic of that directive and, on that basis, provide for a method of calculation which objectively reflects the part of the input expenditure actually to be attributed, respectively, to those two types of activity

Theorem 4 Apportionment between economic and noneconomic activities is only required when there is (unlikely) proof of other than economic downstream activities. Failing this proof input has a direct and immediate link with the taxpayer s whole economic activities.

Case C-29/08 (SKF) We argued that if the acquisition of shares in subsidiaries does not constitute an economic activity for VAT purposes the sale is not an economic activity for VAT purposes either. The management of shares in subsidiaries is a good example of the distinction between a passive financial activity and business activities. AB SKF and its subsidiaries are creating value through industrial activities and in that context AB SKF is supplying management services for consideration to the subsidiaries.

The infallibility of the Court As held in BLP the disposal is an economic activity coming within the scope of those directives. A disposal of shares such as that at issue must be exempted from value added tax. That transaction has a direct link with the organisation of the activity carried out by the group and constitutes accordingly the direct, permanent and necessary extension of the taxable activity of the taxable person.

New rules on attribution and allocation?! In order to establish whether there is such a direct and immediate link, it is necessary to ascertain whether the costs incurred are likely to be incorporated in the prices of the shares which SKF intends to sell or whether they are only among the cost components of SKF s products.

New rules on attribution and allocation?! In other words There is a right to deduct input VAT paid on services supplied for the purposes of an exempt disposal of shares (no direct attribution) if there is a direct and immediate link between the costs associated with the input services and the overall economic activities of the taxable person (allocation to taxed activities).

New rules on attribution Theorem 5 In cases of mixed economic activities, attribution to exempt activities is only required in so far as costs are incorporated in the price of the exempt activities.

New rules on attribution, apportionment and allocation Theorem 6 Allocation to the sector of taxed economic activities is required unless apportionment objectively reflects the part of the input expenditure actually incorporated in the prices of the taxed and exempt activities.