VAT - Changing Face Of Article 9

JOHN VOYEZ reviews Article 9 of the Sixth Directive, and contemplates how it will have to develop to stay relevant in an increasingly global business environment.
The intention of this article is to review the performance of Article 9 of the Sixth European Directive by reference to some of the relevant decided cases and to consider whether it has achieved its intended objectives. What then are those objectives, and what issues does the Article cover? Its main overriding purpose is to fix the place of supply of services for VAT purposes in order to avoid situations of double taxation or no taxation. A brief review of the legislation will set the scene.
Article 9(1)
The fundamental rule is that the place where a service is supplied is deemed to be the place where the supplier has established a business presence or has a fixed establishment from which the services are supplied, or in the absence of either, the place where the supplier has a permanent address or usually resides.
Article 9(2)
Like all good tax legislation, having established the basic rule, there are a number of exceptions to consider.
Article 9(2)(a) states that the supply of services connected with immovable property shall be the place where the property is situated. Article 9(2)(b) directs that the place where transport services are supplied shall be the place where transport takes place having regard to the distances covered.
Article 9(2)(c) deals with the place of supply of services which require some physical performance, and deems those services to be supplied where they are physically carried out.
Article 9(2)(e) deals with the services which are contained in Schedule 5 to the VAT Act 1994. These services are deemed to be supplied, when performed for persons (both taxable and non-taxable) established outside the European Union, or for taxable persons established within the European Union, but not in the same country as the supplier, as being the place where that person has established his business or has a fixed establishment to which the service is supplied. In the absence of either, it means the place where the person has a permanent address or usually resides. It is interesting to note that telecommunication services, which were included in Article 9(2)(e) in 1997, are the only services which the legislators have attempted to define within Article 9, noting that such services are deemed to relate to the transmission or reception of signals, writing images and sounds or information of any nature by wire, radio, optical or other electro magnetic systems, including the related transfer or assignment of the right to use capacity for such transmission, emission, or reception.
Article 9(3)
This confirms that the intention of the Article is to avoid double taxation or non-taxation or the distortion of competition between Member States. It advises that with regard to the Article 9(2)(e) services, and the hiring out of transport, Member States may apply a 'use and enjoyment' test which will dictate the place of supply, depending on whether the services are enjoyed inside or outside the European Union.
Article 9(4)
Unlike Article 9(3), this paragraph indicates that in the case of telecommunication services, the Member States will make use of the use and enjoyment test.
The above legislation can be found at sections 7, 8 and 9 of, and Schedule 5 to, the VAT Act 1994, and the VAT (Place of Supply of Services) Order 1992.
Problem areas
Having outlined the legislation, it is worth looking at precisely what the problem areas are for Article 9.
In relation to Article 9(1), how does one decide where the supplier is established? For Article 9(2)(a) and (c), in practice it is necessary to consider the problems that arise in cases where the client may need to register in another member state. Further, for Article 9(2)(c) and (e), how is one to decide the nature of the service provided? With Article 9(3), one needs to consider where the service is used and enjoyed.
It is the author's experience in practice, that if there is one thing that clients believe they know about VAT, it is that if they are dealing with a non-United Kingdom customer they do not need to charge VAT. Unfortunately, few clients bother to distinguish between supplies of goods and services, let alone the complex place of supply rules outlined above in relation to the different types of services. The position is further complicated by the different approach taken by many Member States. In the United Kingdom, a management charge, per se, does not fall within Schedule 5, although with a little examination of the precise nature of the supply, it is often possible to identify a service which does fall within Schedule 5, e.g., consultancy. However, certain Member States (Denmark, Finland, Sweden and Spain) appear to treat management charges as falling within Article 9(2)(e).
A good example of the problems and confusion that can arise were evidenced in the recent tribunal decision Vision Express Ltd (16848). Vision Express was acquired in October 1997 by a French company, and an invoice was raised by the French parent for management fees in respect of services provided during the group reconstruction. Initially the services were charged with the addition of TVA. The parent company then decided that the services were outside the scope of French TVA and credit notes were issued. Not surprisingly, Customs decided that Vision Express should apply the reverse charge procedure, as it considered these services to be consultancy in nature. The company, no doubt wishing to avoid the charge which would have given rise to irrecoverable VAT, adopted an interesting argument maintaining that the services could not be consultancy in nature since they were not provided by an independent third party, and were not of the type provided by a consultant. The tribunal however found in favour of Customs. It considered that the services were indeed consultancy in nature, and that there was no need for such services to be provided by an independent person.
Where is the supplier established?
There are numerous VAT cases at European Court level which raise the question of where the supplier is established, and therefore which Member State has the right to tax. Most of the cases inevitably seem to involve the Netherlands and Belgium, or ferries travelling backwards and forwards between Germany and Denmark, but a small selection of some of the more high profile decisions follows.
ARO Lease BV v Inspecteur der Belastingdienst Grote Ondernemingen Amsterdam (Case C-190/95) [1997] STC 1272 involved a company incorporated in the Netherlands for the purpose of leasing cars to Belgium clients. ARO had no offices in Belgium, but the Belgium authorities took the view that the leasing took place in Belgium. Could the presence of a car fleet in Belgium be considered to represent an establishment? The courts held that the only establishment of ARO was in the Netherlands, and the services were therefore supplied in the Netherlands. In this particular case, there was a danger of double taxation with both Member States trying to tax.
G Berkholz v Finanzamt Hamburg-Mitte-Altstadt (Case C-168/84) established the need for human and technical resources to be present in order for there to be a fixed establishment. While this guideline no doubt still holds true, the author would question whether, with the advances of technology, at a future date the presence of human and technical resources may no longer be necessary (see below in relation to e-commerce).
Faaborg-Gelting Linien A/S v Finanzamt Flensburg (Case C-231/94) [1996] STC 774 concerned the supply of catering on a ferry travelling between Denmark and Germany. Following the Berkholz decision, it was held that the place of supply is where a business is established unless this leads to an irrational result.
The more recent decision in Syndicat des Producteurs Indépendants v Ministère de l'économie, des Finances et de L'Industrie (Case C-108/00) [2001] STC 523 concerns not so much the question of where the supplier is established, but whether Article 9(2)(e) still applies where the supply of advertising services is made indirectly to the client via a third party. The Advocate General's opinion confirmed that regardless of whether such supplies are made directly or indirectly, they should fall within Article 9(2)(e).
The writer questions why it is that after some 25 years of Article 9 such questions should still to be raised in the courts. Indeed a recent question put to the European Court of Justice in Auto Lease Holland BV v Bundesamt für Finanzen (Case C-185/01) considered the position of a lessee filling up a leased car with petrol at the expense of the lessor. The question was whether this represents a supply of goods by the lessor to the lessee, or, if the supplies are included in the leasing charge, does the supply of services fall within Article 9, and if so where is the place of supply?
No doubt the final decision in this case will resolve some fundamental point of importance for someone. But if such difficulties continue to arise, then it must be questionable as to whether Article 9 has achieved successfully the clear and authoritative guidance that advisers and businesses look for from tax legislation.
Branches, agencies and subsidiaries
The problems concerning the place where a supplier is established are further highlighted in the two cases below.
DFDS A/S (Case C-260/95) [1997] STC 384 and Commissioners of Customs and Excise v Chinese Channel Ltd (Hong Kong) [1998] STC 347 both concerned the place of supply in relation to an overseas supplier carrying on business in the United Kingdom through an agency. Customs' view is that the existence of a branch or agency through which a business is carried on can create a business establishment in the United Kingdom. However, many question whether section 9(5)(a), VAT Act 1994 is in fact in conflict with Article 9.
Chinese Channel considered whether broadcasting services were supplied from a business establishment in Hong Kong, or from a fixed establishment created by the agency of an associated United Kingdom company, Chinese Channel (United Kingdom) Ltd. In finding that supplies were made from Hong Kong, the tribunal cast doubt on Customs' views. Customs appealed the decision to the High Court.
In the interim, the European Court of Justice delivered a judgment in DFDS A/S. This case questioned whether a tour operator established in Denmark was supplying its services from a fixed establishment in the United Kingdom created by the agency of its United Kingdom company. The European Court considered the dependency of the United Kingdom subsidiary. The fact that DFDS Ltd was a separate legal entity with its own offices was insufficient to demonstrate independence. There were a number of factors which did indicate dependency, and it was held that DFDS Ltd was of the requisite size in terms of human and economic resources to provide the services. The court concluded that DFDS A/S had a fixed establishment in the United Kingdom from which services were provided.
The High Court relied on the DFDS decision in Chinese Channel, and held that although a typical agency was an auxiliary of the parent, it was not restricted to this. The reality, function and substance of the arrangements are important. Chinese Channel (United Kingdom) was an associate of the Hong Kong company, but with no financial risk and could not act for competitors. It was not therefore truly independent. However, the High Court held that the services were supplied from Hong Kong since the broadcasting activity took place there and programs originated from there.
Customs vindicated
In Customs' Business Brief 12/98 (21 May 1998), Customs indicated that these judgments supported their view that an agency can create a fixed establishment. A United Kingdom subsidiary, or an associate of an overseas business, or a United Kingdom business unrelated to the overseas business, will be treated as the latter's United Kingdom fixed establishment if it meets the following criteria:
 it is of a certain minimum size with permanent human and technical resources;
 it is not in function and substance operating independently of the overseas business;
 it actually supplies, or receives, the service.
These decisions have important implications for the place of supply rules, and the VAT liability of the services provided. In the writer's opinion they do not receive the attention in day to day practice that they deserve. They need to be considered in the context of Article 9.
Restrictive interpretation
In practice, it is often possible to fall into the trap of sweeping a range of services under the generic heading of consultancy and applying the appropriate VAT rules. However, there is a danger with taking such a relaxed approach to Article 9(2)(e).
Maatschap MJM Linthorst and others v Inspecteur der Belastingdienst/Ondernemingen Roermond (Case C-167/95) concerned a vet practising in the Netherlands, and not established elsewhere, who supplied services to Belgium farmers. Dutch VAT was accounted for and a claim was made to recover this VAT on the basis that the services were supplied in Belgium, and therefore subject to Belgium VAT. The European Court of Justice considered whether veterinary services fall within Article 9(2)(e) or alternatively, were the services of a consultancy nature, in which case they are supplied where the customer is established? If either applied, the services fell to be treated as made in Belgium. If not, the basic rule operates under Article 9(1) and the services are supplied where the supplier is established. The European Court view is that the purpose of the provisions is to avoid conflicts of jurisdiction which might result in double or no taxation. Although Article 9(1) does not take automatic precedence over Article 9(2), it was held in this case that the place of supply was where the supplier was established.
Von Hoffman v Finanzamt Trier (Case C-145/96) [1997] STC 1321 concerned a German law professor working for the International Chamber of Commerce in Paris. He worked as an arbitrator in relation to a dispute between two parties established outside France. The European Court considered a service as being similar to one of those listed in Article 9(2)(e) only if it serves the same purpose. Settlement of a dispute by an arbitrator did not serve the same purpose as a lawyer (there was no negotiation involved), and therefore the place of supply is where the arbitrator is established.
I suggest that most advisers would generally have considered these services to fall within Article 9(2)(e), but in both cases the European Court deliberately took a narrow view in arriving at its conclusions when looking at the nature of the services supplied. Current rulings may be more generous in their interpretation and lean towards treating a much wider range of services as made where the customer belongs in order to resolve certain of these Article 9 problems.
Practical issues
So far in this article it has been said that the purpose of Article 9 is to avoid double taxation or no taxation, but we have already seen the problems which can arise. This can cause considerable problems for the profession, and the author is aware of one case where Customs have argued that bookkeeping does not fall within Schedule 5 as not being a similar service to one of accounting.
An adviser is likely to tell a client that provided the services supplied fall within Schedule 5, when invoicing an European Union (non-United Kingdom) client, the client's VAT number should be obtained as evidence that the supply is being received in the course or furtherance of business. In most cases, this will provide adequate comfort, but it does ignore situations which can arise when, unknown to the supplier, the client may possibly be (say) a quasi government body, and in fact is not receiving services in the course of a business activity, see Omnicom UK plc (12605).
The reverse charge, or tax shift as it is sometimes referred to by other Member States, will be a familiar concept to advisers, but explaining the mechanics to a client is not always easy. Similarly, explaining to, say, an architect client working in the United Kingdom for a United Kingdom client in respect of a villa in Spain that registration in Spain for VAT purposes may be necessary, is often meet with a quizzical look followed by an unrepeatable response. Also, telling a United Kingdom conference organiser of the need to register in every member state where a conference may be taking place, or appoint a local fiscal representative, often meets with a similar reaction.
Although a number of so called simplification rules apply throughout the European Union, in reality far from simplifying matters, they amount to complication rules! Assuming the adviser is able to find out whether these rules operate or not in a particular Member State, it is then necessary to discover the precise manner in which they are applied as this may well differ from one member state to another. For example, for supplies related to land in Germany it is necessary to know the VAT status of the client in order to decide whether the Abzugsverfahren or the Null-Regelung procedures are to apply. Similar problems exist in Spain.
In view of the range of practical problems highlighted above, the need to amend and update Article 9 has existed for a long time. However, the advent of telecommunications and e-commerce issues has provided the impetus needed.
Telecommunications and e-commerce
The Sixth Directive was produced in an era when computers occupied whole floors of buildings, and Article 9 reflects the nature of supplies being made at that time; it does not cater for the recent advances in technology.
By the mid 1990s acceptable VAT planning led to businesses acquiring telecom services from non-European Union suppliers in order to avoid the reverse charge. This led to major savings for exempt businesses. By 1997 this was no longer acceptable to the authorities, and so telecom services were introduced into Article 9 making them subject to the reverse charge. This change highlighted the fact that Article 9 was out of step with the modern day. It was possible to resolve the telecom problem with a quick workable fix, but further problems with Article 9 have been highlighted with the advent of e-commerce.
The issues were recently highlighted by the United Kingdom Internet provider Freeserve threatening to move to the United States if a level VAT playing field is not created. The growth of e-business is resulting in an increasingly globalised market and further underlines the fact that current VAT rules are not workable. With the momentum for change, a growing number difficulties remain unresolved, and it is useful to note the poor performance of Article 9 against the e-commerce objectives which have been set:
 Neutrality – there remain a number of situations where Article 9 does not achieve its objective of avoiding double taxation or no taxation.
 Efficiency – numerous cases concerning the place of supply continue to find there way to the European Court; this cannot be administratively efficient.
 Clarity and simplicity – Article 9 has clearly not resolved the place of supply problems.
 Effectiveness and fairness – Article 9 has failed to be effective.
 Flexibility – Article 9 has not kept pace with advances in technology.
With the rapid development of business to business and business to customer supplies, Article 9 is in desperate need of change if the integrity of the tax collection system is to be maintained. While the business to business problem may possibly be resolved by an extension of the reverse charge (which in itself relies on the customer's integrity), the business to customer problem remains.
Article 9(f)?
The draft e-commerce directive was to require non-European Union businesses to account for VAT on supplies to European Union private individuals. Services currently taxed where performed would be taxed under the proposed Article 9(2)(f) where consumed when supplied by electronic means including cultural, artistic, sporting, scientific, educational, entertainment or similar activities, this might include downloading games, music, film, books, distance learning, etc. Radio and television broadcasting, subscription and pay to view television would also fall under this category. It would also include software, data processing, computer services, including web hosting and information. If Article 9(2)(f) were to be introduced, decisions in cases such as Chinese Channel would be reversed in that taxation would take place where the television services were consumed or enjoyed.
However, differences of opinion between Member States over interpretation and approach remain. Article 9(2)(f) might resolve some of these differences. For example, it might resolve the place of supply problems arising out of electronically delivered educational services where the teacher, student and Internet service provider are all located in different places. However, as we are now aware, the British Government decided not to support this change at the meeting of ministers earlier this year in Sweden, and instead proposed a moratorium on e-commerce in line with the United States, until technology exists to collect the tax from the consumer.
This is not intended to be an article on e-commerce, but the proposals concerning the taxation of services where they are consumed are due to come before the ministers again before the end of this year. Whether it is possible at that meeting to agree a change along the lines of Article 9(2)(f) remains questionable. However, with advances in technology, the author queries whether Article 9(2)(f) would just represent another short-term solution. As already noted, the Berkholz decision which requires the presence of human and economical resources in order for there to be a business establishment may become outdated. Although currently it is hard to see how the presence of a website or a piece of computer equipment sitting in the corner of a room could, by itself, represent a permanent establishment (although Spain and Portugal appear to have slightly differing views from the other Member States), it may well be that views in this area will change in time.
Improving the European Union system
The e-commerce debate has certainly highlighted the need for a general review of the way in which VAT operates within the Member States, and in particular the areas concerning verification of customer status, registration thresholds, technology based tax collection systems, international administrative co-operation, simplification, compliance and long-term strategies.
It is to be hoped that this review will also lead to the necessary changes to Article 9.
Think long-term
One point which has not been raised in this article is to mention that we are in a transitional period with the intention to move to a true single market and an origin based VAT system. While many doubt whether the true origin system will ever be seen, it must be said that the problems outlined above would disappear if there was a genuine single market with a single place of taxation.
There is a clear need to change Article 9, as it has failed to provide the clear guidance required of tax legislation and by European Union businesses and consumers. However, the nature of the change required remains unclear. Article 9(2)(f) might be a short term solution, but many of its detractors consider that it is too prescriptive in its approach with its designated list of services which will fast become outdated as technology moves on.
There does appear to be a compelling argument to treat all services (possibly with limited exceptions) as being taxed where consumed, but the writer is concerned that whatever changes are made to Article 9, they will represent no more than a quick fix rather than the fundamental surgery that is undoubtedly now required.
John Voyez is VAT partner for Smith & Williamson and can be contacted on 020 7637 5377; e-mail: jhv@smith.williamson.co.uk.

Issue: 3836 / Categories: