Comparative studies of national law in the EU harmonized VAT

As mentioned above, several provisions in the VAT Directive are not compulsory to implement. This applies, for example, to VAT groups (article 11), transfer of a business or part of a business (article 19 and 29) and the option to tax financial services, supplies of buildings and land under certain conditions as well as the letting and leasing of immovable property for business purposes (article 135). Reduced tax rates are also optional. When differences have been identified, it is interesting to find out why the Member States have chosen different solutions. Changes in implementing the optional provisions are also interesting. Sweden’s VAT group provisions can serve as an example.

Sweden became a member of the EU 1 January 1995. By then, Sweden chose not to implement what now is article 11 of the VAT Directive (Article 4.4 (2) of the Sixth Directive) regarding VAT groups (consolidation of groups of companies for VAT purposes). One explanation to this is that Sweden does not consolidate groups of companies for income tax purposes. Instead, group contributions are used to equalize profit and loss in income tax. Soon after the EU membership the Swedish groups of companies with mixed activities–taxable and non-taxable activities–and hence a limited right to deduct input VAT on internal supplies got difficulties in their competition with corresponding companies in other Member States, since the Swedish groups had to bear substantive VAT costs. The lines of business where the problems were most severe were the insurance and financial sectors. In order to mitigate the problems, Sweden implemented VAT group rules for the insurance and financial sectors by 1 July 1998.

Chapter 6 a SVATA, 1994:200, changed by SFS 1998:346.

Under article 176 (2) of the VAT Directive, Member States may, as mentioned above, retain all the exclusions from the right to deduct input VAT provided for under their national laws on 1 January 1979 or, in the case of the Member States that acceded to the EC

European Community.

Even though these differences are expected, they are interesting to analyze. When the VAT is harmonized within the EU, one would expect that such a central part of the VAT system as the right of deduction should be harmonized. The exclusions may not be extended after the time of the accession of the Member States. They may not be general in that sense that they change the general principle in article 168 of the VAT Directive, that in so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable persons shall be entitled to deduct the input VAT. Research questions regarding this provision that could be asked and answered within a comparative study are:

Which exclusions from the right of deduction have the Member States introduced?

There are several other exclusions from the VAT directive that the Member States are allowed to retain. General derogations for all Member States that were EU Members on 1 January 1978 are found in article 370–374 of the VAT Directive. Furthermore, there are derogations that are allowed after authorization in article 394–395 of the VAT Directive.

When new members enter the EU, it is common that the Member States negotiate derogations from the VAT Directive. Such an example is §10 (2) Nr. 4 b in the Austrian VAT Act

Umsatzsteuergesetz, UStG 1994.

The three categories of differences because of the discretion of the Member States are expected. The most expected differences of the three are the ones depending on that some provisions of the VAT Directive are optional for the Member States to implement. It cannot be assumed that every Member State has implemented the optional rules. When optional rules are implemented, the Member State has a certain margin of appreciation.

See C-480/10 European Commission v Kingdom of Sweden, ECLI:EU:C:2013:263 which shows that the Member States have a certain margin of appreciation when they implement optional rules, in this case VAT group rules.

It can also be expected that especially Member States that have entered the EU rather recently have maintained some exclusions from the right of deduction under article 176 of the VAT Directive. For the original Member States, some exclusions from the right to deduct input VAT may have played out their role.

Derogations due to the accession treaties were previously difficult to find. Since they nowadays are included in the VAT Directive, this does not apply anymore. It is, however, not necessarily the case that the Member States actually make use of the derogations. To find this out, it is necessary to examine national VAT law.

When there is no support in EU law for differences between the VAT laws of the Member States, it would be expected that the VAT laws would achieve the same result. The same kind of persons would be taxable persons, the same kind of transactions would be taxable transactions, the same kind of transactions would be exempted, and the requirements for deduction would be the same. When VAT is studied in detail, this is not always the case. For example, if a temperance society runs a cinema in Sweden, the sale of tickets would not be subject to VAT.

Chap. 4 Sec. 8 SVATA.

One reason for differences is built into the procedural system of the EU. Under article 267 TFEU

Treaty of the Functioning of the European Union.

Furthermore, as mentioned above, preliminary rulings under article 267 regard interpretation and not application of the law. To apply the law is always a matter for the national court. It is difficult to draw a sharp line between application and interpretation, but it can be concluded that even if the interpretation is the same, the application may differ.

The only procedural way to deal with different application in different Member States is that the commission (or another Member State) brings a matter of non-fulfillment of the obligations laid down in the treaty before the CJEU.

The procedure for such an action is laid down in article 258 and 259 TFEU. The procedural reasons are practical explanations on why differences may occur. If neither the interpretation nor the application of a provision in the VAT Directive is clear, and not all cases that should need to be clarified reach the CJEU, differences may occur.

The theory of legal transplants, developed by Watson (1974), launches that society’s laws do not usually develop as a logical outgrowth of its own experience. Instead, the laws of one society are primarily borrowed from other societies. Consequently, most law operates in a society very different from the one for which it was originally created. This borrowing is what he calls legal transplants (Watson (2000)). Since the VAT Directive is developed by the Member States as a collective, it is a farrago of influences from the different Member States that shall be implemented in each Member State. Therefore, the theory of legal transplants is worth some attention in this article.

Watson writes about legal transplants:

“Legal borrowing I would equate with the notion of legal transplants. I find it difficult to imagine that anyone would deny that legal borrowing is of enormous importance in legal development. Likewise I find it hard to imagine that anyone would believe that the borrowed rule would operate in exactly the way it did in its other home. What I think is significant in the context of this article is not the identity of interpretation but the fact that identity of rule does lead to much greater similarity between the two systems. In no way should one neglect the differences. They are also fundamental in understanding how, why and when law changes, the direction of legal change, and how law develops in the society in which it operates”

Watson (2000)

An interesting notion in the quotation above when discussing unexpected differences in the harmonized field of VAT is “Likewise I find it hard to imagine that anyone would believe that the borrowed rule would operate in exactly the way it did in its other home”. If a legal rule is taken from somewhere and is placed somewhere else, the outcome will not be the same. I suggest that the same applies when a directive is implemented in different jurisdictions, and I even suggest that the same applies for regulations that shall not be implemented, but have general application.

Article 288 TFEU.

Even before Watson did his research on legal transplants, it was a well-known phenomenon that the content of the law changed depending on in which legal culture and in which society it operated. Already in 1928, Pound discussed what had happened with the English and French law that once was transferred to the US (Pound (1928)). What can be seen in Pounds analysis is the importance of the perspective of time as well as of the societal influences:

“According to the American legal theory, the colonists brought the common law of England with them as part of their inheritance. But, as often has happened, the law in the books and the law in action prove to be quite different. The charters usually provided that colonial legislation should not be repugnant to the common law of England, and colonial statutes were sometimes disallowed by the Privy Council on this ground. In the everyday administration of justice, however, there was for a long time little or no need of so advanced and technical a body of precepts as the seventeenth-century English law. According to legal theory, Michigan, Illinois and Wisconsin were once governed by the Custom of Paris. Yet, French law has not left the slightest mark upon the actual law of those states.”

When the society changes–as the US society did after the American Civil War and in the beginning of last century due to a massive industrial growth–the law had to be understood differently. Pound suggests: “If we are to proceed wisely in creative juristic activity in the complex society of today, we must study scientifically the legal materials of the whole world. Thus we shall know better the possibilities of our own legal materials, which have come down to us from the last century.” (Pound (1928))

Pound comments on the difference between law in the books and law in action, and that the law in action differs from the law in the books, due to the situation in the surrounding society (Pound (1928)). This difference stems fromJustinians book Institutes from30 December 533 (Watson (2008)).Watson assumes that the distinction between the law in the books and the law in action is valid, but that the concept of the law in the books must be subdivided into two categories; first, law that reflects the conditions, needs, and desires of the society in which it operates; and second, borrowed law, which does not, but must hence not be unsatisfactory (Watson (2008)).

The theory of legal transplants has been heavily criticized. Legrand, for example, suggests that it is pointless to discuss legal transplants, since the only thing that can be transferred to one country from another is rules (Legrand (1997)). Rules are transferred from one country to another, and the rules are often not defined. The concept of legal is hence, according to Legrand, reduced to rules. The main criticism, however, is regarding how law changes–if the law changes because of a massive borrowing of rules (so Watson) or if the law changes due to societal factors (so Legrand). This could be of some relevance for harmonized EU VAT law, when analyzing the original provisions and later changes in the VAT Directive. Do they come from the national laws of the Member States or are they results of the demands of the surroundings society, for example, a well-functioning common market or an efficient tax administration? For the topic of this article, focusing on national VAT law in the Member States, it is not of greater relevance. Legrand’s view results in another comparative approach than the one of Watson. The aim of comparative studies should therefore not be to find analogies and parallels, but on the contrary, to find individuality of developments. The causes of the specific characteristics should then be analyzed.

Comparative law researchers criticizing the theory of legal transplants, such as Legrand, share the view that the content of the law–or of the rules–become different depending on in which context they operate. Legrand takes the following example:

“In enacting a rule for the reasons they do and in the way they do, as a product of the way they think, with the hopes they have, in enacting a particular rule (and not others), the French, for example, are not just doing that: they are also doing something typically French and are thus alluding to a modality of legal experience that is intrinsically theirs. In this sense, because it communicates the French sensibility to law, the rule can serve as a focus of inquiry into legal Frenchness and into Frenchness tout court. It cannot be regarded only as a rule in terms of a bare propositional statement. There is more to ruleness than a series of inscribed words which is to say that a rule is not identical to the inscribed words.”

Due to the importance of the societal factors, Legrand’s opinion is that, at best, what can be displaced from one jurisdiction to another is, literally, a meaningless form of words. In his opinion, to claim more is to claim too much. His conclusion is that in any meaningful sense of the term, legal transplants cannot happen (Legrand (1997)).

In VAT, the directive is the set of rules that through implementation is transformed into national law. Different from when, for example, the German Bundes Gesetzbuch (BGB) was adopted by Estonia, in EU law, the CJEU provides a vehicle for common interpretation. Therefore, it does not apply that just words are transferred. Most interpretation and application of VAT rules are, however, not done by the CJEU, but by national courts. The implementation of the directive as such enables an adaption to national circumstances, since it is only binding as to the result to be achieved.

Article 288 TFEU.

Even within one and the same jurisdiction, law is not always consistently applied (Rizal Salim (2009)). The fact that different administrative courts of first instance or different districts courts interpret and apply the law in different ways is dealt with by having supreme administrative courts and supreme courts that can clarify how the law should be understood. In my opinion, this is not a failure, but a part of the legal system. This is how law works in practice. As long as the laws are general and not casuistic, there will always be different understanding of their content. Hence, the imperfection of the EU VAT system is a part of the system. From a practical point of view, the imperfections may cause problems. Different classification of the same goods or services in different tMember States may lead to double taxation or non-taxation in cross-border trade; it may result in distortion of competition because one Member State deems a supply exempt whereas another Member State does not or because of different understanding on limitations in the right of deduction of input VAT.

Also, the theory of legal formants in comparative law can add some knowledge to differences within the field of harmonized law. The theory was developed by Sacco (1991). Legal formants are everything that constitutes the law, not only formal rules and a hierarchy of relevant sources. Sacco illustrates the importance of legal formants with the following example:

“Suppose we were to study how two different legal systems resolved a problem, for example, the problem of liability of the manufacturer of defective products or damage caused to someone other than the direct purchaser. Suppose we found that the statutes of the two legal systems were the same. We might find either that the judges of both systems applied the same rules or that they applied different ones. If they applied the same rules, the reason might be that these rules actually were consequences of the statutes. If, however, they applied different rules, it would be clear that the statutes alone were not responsible for the rules followed by the judges. We could then ask what, if not the statute, might be influencing the judges. A comparative method can thus provide a check on the claim of jurists within a legal system that their method rests only on logic and deduction.”

An important aim of comparative studies is hence to destroy “scientific” methods of legal reasoning, showing that a judicial decision may announce one rule, even though the judge is following another one (Sacco (1991)). The legal formants of a legal system are not necessarily all of legal character. Canon law can hardly be explained without the notion of God. Former Soviet law is difficult to explain without the ideas taken from Engels, Marx, and Lenin (Sacco (1991)). The legal formants may differ from court to court and from judge to judge within one and the same legal system (Sacco (1991)). A judge appointed from an academic position might stress on scholarly opinions more than a judge with a background as a legal practitioner (Bussani (1997)).

Just like the theory of legal transplants, the theory of legal formants departs from the idea that what looks the same does not turn out the same in reality, due to complexity inwhat constitutes a legal systemand the content of the law. The legal formants in a system are more than formal lawand other relevant sources dealt with in a certain manner. The potential of that the law in practice turns out exactly the same in all Member States after a harmonization of the law seems to be fairly low.

In private law, the common core approach has been put forwards as a vehicle of harmonization. An aim of comparative studies is, when applying the common core approach, to identify similarities in nonharmonized lawand propose harmonization due to these similarities. See Bussani (1997, 339–356).

As mentioned above, Cappacioli has made a comparative study on the VAT treatment of bitcoin.

The facts in this section 4.3.4 are based on Cappacioli, Stefan. 2014. “VAT and Bitcoin”. EC Tax Review [2]: 361–362.

Under article 2 (d) of the VAT Directive, the supply of services for consideration within the territory of a Member State by a taxable person acting as such shall be subject to VAT. A supply of services is any transaction that does not constitute a supply of goods.

Article 24 of the VAT Directive.

Services may be exempt from VAT. There are some exemptions in the VAT Directive that could apply on the exchange of bitcoin, article 135.1 d and e of the VAT Directive: (d)

transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques, and including debt collection;

The VAT treatment of bitcoin was recently clarified by the CJEU in case Hedqvist.

C-264/14 Hedqvist ECLI:EU:C:2015:718.

In Estonia and Poland, transactions with bitcoin were not exempt from VAT due to a strict interpretation of article 135.1. The exemptions in article 135 shall, according to the case law of the CJEU, be strictly interpreted, and the transactions with bitcoin or similar unofficial means of payment are not expressively exempted in article 135.1 or elsewhere.

In Sweden, the Board of Advanced Rulings

Skatterättsnämnden.

In Germany and the UK, transactions with bitcoin were exempted under article 135.1 d. An alternative reason for tax-freeness was in the UK that the transactions do not constitute economic activities.

This example shows that even where the VAT Directive is very detailed, different interpretations and applications may occur. The problems with the bitcoin case occurred due to a change in the society. When the exemptions in article 135.1 regarding financial activities were written, the bitcoin did not exist. For economical, business, and academic interests, it is of great value to reveal such differences.

Froman academic point of view, different understanding of harmonized law proofs that rules are unclear and hence difficult for taxpayers and the tax administrations to deal with. In tax law, this may lead to legal uncertainty.

From an economic point of view. the main reason for harmonizing the VAT rules is to achieve awell-functioning common market. If the treatment is still after the harmonization different, measures might have to be taken for further harmonization.

Froma business point of view, the inconsistenciesmay be used for international tax planning. The taxpayers are more likely to carry out their business in a jurisdiction where transactions with bitcoin are not taxed than where they are subject to VAT.