TEI comments on EU consultation paper on modernising VAT treatment of vouchers.

• Position: Tax Executives Institute

On April 13,2007, Tax Executives Institute submitted comments to the European Commission on its consultation paper relating to modernising the VAT treatment of vouchers and other issues. The comments were prepared under the aegis of TEI's European Indirect Tax Committee, whose chair is Keith Miller of SABMiller PLC. Contributing substantially to the development of TEI's comments were Mr. Miller and Thorsten Lang of Hewlett-Packard Company, as well as Karl-Heinz Haydl of General Electric Company.

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The Directorate-General Taxation and Customs Union of the European Commission released a Consultation Paper on modernising Value Added Tax obligations for vouchers and related issues. The purpose of the paper is to (i) identify problems with the treatment of vouchers that arise from outdated provisions or the inconsistent application of current rules, (ii) highlight options for changes to the Sixth Directive, and (iii) solicit input from stakeholders. On behalf of Tax Executives Institute, I am pleased to submit the following comments on the consultation paper.

Background

Tax Executives Institute was founded in 1944 to serve the professional needs of business tax professionals. Today, the organization has 53 chapters in North America, Europe and Asia. 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. Our 7,000 members represent 3,200 of the largest companies in the United States, Canada, Europe, and Asia. In 1999, TEI chartered a chapter in Europe, which numbers nearly 250 today. 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 for the benefit of taxpayers and tax administrators alike.

Comments

TEI commends the Commission for undertaking consultations to identify and address the problems encountered by tax authorities and businesses in applying the current VAT rules to vouchers. We agree that the scope, nature, and use of vouchers and related marketing initiatives pose a host of complex compliance and administrative challenges that the current VAT rules do not adequately address.

The consultation paper touches briefly on the VAT treatment of business gifts and states that "the VAT treatment of business gifts set out in the Sixth Directive is clear." TEI disagrees with the Commission's assessment of business gifts. As explained in section 2 of our comments, the scope and nature of VAT issues associated with the treatment of business gifts including rebates, samples, free merchandise and other forms of marketing, advertising, and promotional activities are significant and complex. Consequently, TEI urges the Commission to consider expanding the scope of its vouchers project in order to address the VAT treatment of business gifts.

Finally, the consultation paper discusses the consequences of numerous decisions of the European Court of Justice (ECJ), including the Elida Gibbs case. (1) Although that decision relates primarily to the VAT treatment of money-off or cash-back vouchers given by a manufacturer to consumers, the principles enunciated by the ECJ apply broadly, but often inconsistently, to discount and rebate transactions in both business-to-business and business-to-consumer supply chains. The lack of consistent VAT treatment, reporting rules, and documentation requirements for transactions substantially similar in economic effect to money-off vouchers creates significant uncertainties and compliance challenges for businesses. The comments and examples in section 3 illustrate the compliance challenges faced by businesses, including the ramifications of the Elida Gibbs decision, and explain why we believe the Commission should expand the scope of its voucher consultations in order to address the uncertainties it creates.

1. Vouchers

   The consultation paper acknowledges that business practices and technology affecting the use of vouchers are evolving rapidly, especially the increasing use of vouchers as payment vehicles. Hence, proposals to revise the VAT treatment of vouchers must be flexible in order to accommodate future developments. In addition, TEI believes that the statement of principles set forth in section 2 of the consultation paper provide a workable framework for legislative proposals. Specifically, proposals for change (i) must be able to cope with supplies in more than one country as well as cross-border redemptions; (ii) should ensure neutrality between different payment systems that produce the same result; and (iii) should be enforceable by tax administrators without creating disproportionate burdens for business. In TEI's view, a key element to avoid imposing onerous administrative obligations on businesses is to ensure the adoption of uniform definitions, consistent interpretations, consistent administrative practices, and consistent compliance requirements by all Member States.

   1. Definition and Description of Vouchers. There are many forms of vouchers including tickets, tokens, cards, and electronic messages embedded on a chip or magnetic strip. We agree with the paper's conclusion that vouchers should not be categorised according to their medium.

      The consultation paper defines vouchers, as follows:

      In general terms, a voucher, whatever the medium, ... carries a right to receive goods or services, or to obtain a discount, when acquiring those goods or services, or to obtain a discount, when acquiring those goods or services, or to receive a refund, at the time of the redemption. That right might be shown as a value expressed in terms of monetary value or of percentage (percentage reduction) or of units or of quantity. This concept of voucher would in any case exclude the voucher from categorisation as legal tender. (2) Based on current practices and technologies, TEI believes the definition and description of a voucher in the consultation paper are sound. But, as the paper recognises, there is potential for convergence between vouchers per se and vouchers as a general means of payment. That convergence may, in turn, call the suggested definition into question. In other words, a multi-purpose voucher may soon be issued with a right for the user to exchange the voucher for a plethora of goods or services and to redeem an unused balance for cash.

   2. Single-Purpose Vouchers (SPVs). The consultation paper provides that a single-purpose voucher (SPV) includes "all the elements provided for in the general definition [of a voucher] but limited to an identified good or service per voucher, redeemed by an individual redeemer (or refunder)." TEI agrees with the consultation paper's definition of an SPV. (3) We disagree, however, with the conclusion that an SPV should be subject to tax upon its issuance. The consultation paper confuses a payment for an SPV with a payment on account for the goods or services provided when the voucher is ultimately redeemed. Until the voucher is redeemed, we do not believe there is sufficient link between the consideration for the supply and goods or services to be supplied. Indeed, many SPVs will never be redeemed and the place (or Member State) where a voucher will be redeemed (and the corresponding VAT rate on the supply) is unpredictable. For these reasons, consideration paid for an SPV should not be treated as a prepayment for a future supply.

   3. Multi-Purpose Vouchers (MPVs). The general definition of a voucher encompasses all vouchers, including multi-purpose vouchers, except for those, such as discount vouchers or SPVs, that are specifically defined. Hence, MPVs would...