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Saturday, 20th April 2024 |
| New developments on VAT at EU level |
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| The Advocate General of the European Court of Justice has published an opinion on a case of significance to funds, and also in a separate case involving cross border insurance, Terry O'Neill reports. |
BBanque Bruxelles Lambert (BBL)
The BBL case concerned fund management services provided by a Belgian company to a fund based in Luxembourg. At issue was whether or not VAT in Belgium was chargeable on the fee for the services. Had it been chargeable the fund would have borne an additional expense and would not have been able to recover input credit, since it did not make taxable supplies.
The liability to tax in Belgium depended on whether or not the Luxembourg fund was a “taxable person” for VAT purposes. If it were such a person, then the services would have been deemed to have been supplied in Luxembourg and would, if they were liable to VAT, be accounted for on what in Ireland we know as “Fourth Schedule” basis. A secondary issue, which arose only in a direct way if it were held that Belgium was entitled to charge VAT on the transaction, was whether the transaction was in any event a supply of an exempt service.
The Advocate General held that the Luxembourg fund, a SICAV, was a taxable person for VAT purposes in that it actively exploited its resources with a view to profit. The Advocate General concluded that the position would have been the same had the SICAV not had corporate form, but rather had been organised in a trust or contractual form.
The judgement contrasts with an earlier decision of the European Court of Justice that the Wellcome Foundation, which in the early 1990s managed a portfolio of almost Stg?300,000,000 and did so in an active manner employing staff and consultants for the purpose, was no more than an ordinary portfolio investor and not a taxable person. The distinction made between the Wellcome Trust, and the Luxembourg SICAV, is a debateable one.
Having decided that the SICAV was a taxable person, the Advocate General necessarily had decided that the place of supply of the service was in Luxembourg and not Belgium, and that accordingly they were “Fourth Schedule” services. He did not therefore have to decide whether or not the services were exempt or taxable since he had decided that Belgium had no taxing rights anyway.
Luxembourg had not charged VAT since it believed the place of supply was in Belgium.
His opinion did set out the range of arguments on the question of whether the services were exempt or taxable, without arriving at any conclusion. A distinction emerged in the arguments between services closely related to dealing in investments, and more general administrative services. The suggestion was that the investment services constituted “management” and were exempt, whereas the more general administrative services did not constitute management of the fund and were taxable. This same issue, of what services may be regarded as exempt fund management services, is due to be decided by the European Court of Justice shortly in the Abbey National case.
The conclusion that funds are taxable persons will be reassuring to the fund management industry in Dublin, who have provided services to overseas funds on that basis. Such cross border supplies of services entitle the fund manager in Ireland to input credit on his related costs and thus reduce his cost base. This can have the paradoxical result that the cost base (after taking VAT into account) can be lower for the provision of services across border than for the provision of the same services to a domestic fund, where input credit is not recoverable on related costs.
WHA – Cross Border Insurance
The WHA case related to arrangements which a UK motor insurance company entered into with a view to minimising VAT cost on repair bills on motor cars insured by it. In the ordinary way a UK insurance company could not claim input credit on garage bills. This is because the insurance services are exempt. WHA was structured so that it was a claims handling agent for a Gibraltar associate insurance company with whom the motor business was reinsured. That Gibraltar company had in turn reinsured with a second Gibraltar associate insurance company. The claims handling agent, WHA, not merely dealt with the normal processing of the claim but also paid off the garages and was invoiced by the garages. It charged the Gibraltar insurance company with the full sums which it paid to the garages, and a further fee.
The UK courts rejected the argument that the garages did not supply services to WHA but only to the car owner. It held that where WHA instructed the garage, paid it, and was invoiced by it, it was the recipient of a service in addition to the car owner. Given that its services were being rendered to another business established outside the EU, it was entitled to input credit. However the court held that only a small portion of the total charge from WHA to its Gibraltar associate was exempt as being insurance related services. Only the fee for claims handling was exempt. The recharge of the sums paid to the garage was held to be taxable.
If matters had rested here, the arrangement would have lost much of its effect. However the Gibraltar insurance company counter claimed that it would be entitled to reclaim any VAT charged to it, under the 13th Directive. This was on the basis that had it been established within the UK it would be entitled to input credit because it itself would be supplying cross border services to another company established outside the EU – the second Gibraltar reinsurance company with whom it had reinsured. The courts upheld this position so that, overall, the arrangement proved effective.
The entitlement of the Gibraltar company to reclaim the VAT charged to it by WHA in relation to payments to garages, was based on what the court determined was an aspect of UK domestic legislation that went beyond the requirements of the VAT directives. Irish legislation is not identical to UK domestic legislation. However the case has potential relevance in Ireland and may point towards possibilities of minimising VAT costs.
What the two cases emphasise is the central importance of VAT in the economics of financial services. Corporation tax normally bites only where there are profits. VAT, if badly managed, has the potential to wipe out profits. Financial Service companies should have their VAT arrangements professionally reviewed regularly. |
Terry O’Neill is a tax partner at KPMG.
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| Article appeared in the July 2004 issue.
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