Comments on EU place of supply of services rules: June 30, 2003.

On June 30, 2003, TEI President Drew Glennie sent the following letter to John Bain of the European Commission on the VAT place of supply of services rules. The comments were prepared under the aegis of TEI's International Tax Committee, with guidance from TEI's European Chapter and Canadian Commodity Tax Committee. Fabio DeAngelis, chair of the European Chapter's Indirect Taxes Committee, and Mark Keogan, its vice chair, contributed materially to the development of the comments.

On behalf of Tax Executives Institute, I am pleased to provide comments to the European Commission on the Consultation Paper, VAT--The Place of Supply of Services, issued in May 2003. As the pre-eminent international association of business tax professionals, TEI has a significant interest in promoting sound tax policy, as well as in the fair and efficient administration of the tax laws, at all levels of government. TEI applauds the Directorate-General Taxation and Customs Union for seeking to reduce the administrative burdens and complexity inherent in the VAT place of supply rules for services. We also commend your efforts to consult with the business community on these proposals.

TEI welcomes further dialogue on these or any other issues.

1. Background

   TEI was founded in 1944 to serve the professional needs of business tax professionals. Today, the organization has 53 chapters in North America and Europe. Our 5,300 members represent 2,800 of the largest companies in the United States, Canada, and Europe. In 1999, TEI chartered its first chapter in Europe. The European Chapter encompasses employees of a wide cross-section of European and multinational companies.

   TEI members are accountants, lawyers, and other corporate and business employees responsible for the tax affairs of their employers in an executive, administrative, or managerial capacity. The Institute espouses organisational values and goals that include integrity, effectiveness and efficiency, and dedication to improving the tax system. TEI appreciates the opportunity to comment on the rules for the place of supply of services.

2. General Comments

   Since July 2000, the European Commission has been reviewing various proposals in the value-added tax (VAT) area. The most recent Consultation Paper reports on the current status of the review of the place of supply of services rules and outlines the framework in which the work has progressed.

   TEI agrees that the initial focus for any changes in the place of supply rules for services should be limited to B2B transactions. In the short term, however, this will result in additional complexity in determining the correct place of supply for those businesses involved in B2B and B2C transactions. The European Commission should ensure that Member States appreciate the additional burden on businesses and guard against aggressive assertion of penalties.

   The Institute also agrees that the current place of supply rules for services are no longer appropriate for most B2B transactions. (1) In particular, the current rules are often a barrier to business transactions because of their breadth and complexity, as well as the uncertainty that exists on their interpretation within the Member States. At the heart of any changes must be a simplification of existing rules that reduces the VAT burdens on both suppliers and customers, while ensuring that compliance with the appropriate laws is maintained.

   TEI believes that it is imperative that the European Commission provide clear and detailed guidance to minimise differing interpretations by the tax authorities in the Member States. In addition, the European Commission should work to ensure that the rulings by the European Court of Justice (ECJ) in interpreting legislation are applied uniformly within the Member States.

   Paragraph 3.1: Change From Origin To Destination Principle

   Article 9(1) of the Sixth VAT Directive currently sets forth the general rule that the place where a service is supplied shall be deemed to be the place where the supplier has established its business or has a fixed establishment from which the service is supplied, or, in the absence of such a place of business or fixed establishment, the place where it has its permanent address or usually resides. Article 9(2)(e) provides an exception for certain services (such as assignments of copyrights or patents, advertising, consulting, banking and other financial transactions) performed for customers outside the EU or for taxable persons within the EU but not in the same country as the supplier. In these circumstances, the place of supply is where the customer has established its business or has a fixed establishment to which the service is supplied.

   The Consultation Paper proposes to amend the general rule and base the...