Value-added tax is otherwise known as value-added tax (VAT). It is an indirect and turnover tax, collected at each successive stage of the turnover of goods or services. It is charged on revenues derived from the sale of goods and services. In view of this, it can be said that the object of taxation in turnover taxes is the undertaking of activities that result in the passage of goods through the various stages in the process of production and exchange. In accordance with the fundamental feature of value-added tax – the universality of taxation – all activities performed by a taxpayer in the course of his business should be subject to this tax.
Value-added tax under the law of the European Union area is extremely important – it is one of the few to have lived to see harmonization in EU law. This was influenced especially by economic reasons; it follows that the goal of the member states is, among other things, to create a common market with a high level of competitiveness, which would be characterized by the abolition of obstacles between specific countries to the movement of goods, services, capital and people. This would not be possible without the removal of tax barriers and the elimination of factors that could interfere with this flow. This led to the need to work on the creation of appropriate Community regulations on turnover taxes in this regard on value-added tax, since the construction of this tax affects the shape of the common market and its proper functioning.
It is worth mentioning at this point how the history of the introduction of this tax in the European arena developed – it was introduced in France in 1954, and since then it has become in the countries that are members of the European Union the basic way of taxing income. However, it is Council Directive 2006/112/EC of November 28, 2006 on the common system of value added tax that is among the most important acts regulating value added tax in the European Union. It replaced the Sixth Directive, which was an elaboration and detailing of the principles of common value-added taxation indicated in the First Directive of April 11, 1967 on the harmonization of the laws of the Member States on turnover taxes. According to Article 1 of Directive 2006/115/EC, the principle of the common system of value added tax is to apply to goods and services a general consumption tax exactly proportional to the price of the goods and services, regardless of the number of transactions that take place in the production and distribution process preceding the stage of charging this tax. Value-added tax, calculated on the prices of a good or service at the rate that applies to such good or service, is due on each transaction, after deducting the amount of tax incurred directly in the various cost components. The common VAT system applies up to and including the retail sales stage. Value-added tax should also be characterized by neutrality (it should be price-neutral for the taxpayer of this tax during the period when the goods are in circulation) and proportionality (it consists in applying to goods and services a general consumption tax exactly proportional to the price of the goods and services, regardless of the number of transactions that take place in the production and distribution process preceding the stage of charging this tax).
The territorial scope of application of value-added tax is important in determining the scope of the European Union’s own revenues. The interpretation of the provisions of Article 5(2) of the Directive is therefore of considerable practical importance, which is why they have been examined by the Court of Justice on several occasions. According to the Court’s jurisprudence, the scope of the territorial application of the Directive coincides, for each Member State, with the scope of application of national tax legislation on this tax. This does not limit the freedom of states to extend the scope of application of their national legislation beyond the limits so defined, as long as it does not encroach on the tax competence of other member states and as long as the state complies with the Community principles established by the Sixth Directive, in particular by subjecting international transport performed on their territory to taxation.
Taxation of goods and services is subject to:
- the supply of goods and services for consideration on the territory of the country,
- export of goods,
- importation of goods,
- intra-Community acquisition of goods for consideration on the national territory, and
- intra-Community supply of goods.
Intra-Community acquisition of goods for consideration is the acquisition of the right to dispose as owner of goods that, as a result of the supply, are dispatched or transported into the territory of a Member State other than the country of dispatch. This will include:
- the export of goods from the territory of the country (the country in which the taxpayer is established) to the territory of another member state, and
- movement by a taxpayer of goods belonging to his business from the territory of the country to the territory of another member state.
Bearing in mind the aforementioned provisions, it should be stated that the activities of providing services against payment cover a very wide range of transactions. Polish regulations on the provision of services are based on the aforementioned provisions of the VAT Directive. For the most part, these provisions are a faithful reflection of the EU regulations.
Types of VAT rates
VAT rates may vary depending on which goods or services they apply to. This topic is addressed in a separate section of the EU Directive on the Common System of Value Added Tax. It defines, in turn, the standard rate and reduced rates, and also addresses the special provisions under which member states may establish special rates.
The basic rate is a percentage of the tax base determined by each member state. It has the same value for supplies of goods and services, covering most of them. Its rate cannot fall below 15 percent, but there is no set upper limit – currently the highest rate in the European Union and the world is in Hungary, at 27 percent. The rule applies throughout the European Union and is intended to counteract the situation where discrepancies between countries’ base rates, for example, would lead to distortions of competition.
Reduced rates can function in one or two variants in member states. They apply only to strictly defined goods and services such as foodstuffs, water supply or pharmaceuticals. Their value cannot be less than 5% of the tax base.
Special rates may be introduced as a result of decisions of member states, applying to selected goods or services. Within them there are: a super reduced rate, a zero rate and an intermediate rate.
The issue of VAT in Poland
The standard rate that currently applies in Poland is 23%. It was introduced in 2011, under Article.146a(1) of the VAT Law, abandoning the previous 22 percent rate. Reduced rates are provided for certain goods and services: 8% and 5%. The first applies primarily to services such as the supply, construction, renovation or reconstruction of buildings included in the construction covered by the social housing program. The second applies to basic food products, books printed or published on media, and specialized magazines. There is also a rate of 7% – this is charged by the purchaser of goods from a flat-rate farmer (Article 115(2) of the Value Added Tax Law). This is not actually the rate at which goods or services are taxed, but a flat amount of VAT reimbursement to the flat-rate farmer, who is exempt from VAT.
VAT imposes greater tax discipline on all players in the supply chain and a greater incentive to avoid grey market purchases – because the basis for tax deduction is the invoice. If this basis is not there, the business in question must pay an undiminished amount of VAT. Each entity in the supply chain is involved in calculating, deducting and remitting tax, as well as recording sales through invoices or cash registers.
The concept of a taxpayer
It is worth mentioning at this point what the definition of the concept of a taxpayer is in European legislation. It is defined in Article 9 of Directive 2006/112. The provision of Article 9(1) stipulates that a taxpayer is any person who independently carries out in any place any economic activity, regardless of the purpose or results of such activity. In light of this provision, anyone who meets two criteria together: he performs an economic activity and carries out that activity independently should be considered a taxpayer. This formulation of the definition of a taxpayer demonstrates the intention to include all types of economic activity under the value added tax. This, moreover, is consistent with the concept of this tax as a general and universal consumption tax. The definition of economic activity cited above has a very broad meaning. It includes all sectors of economic activity. This circumstance has been repeatedly confirmed both in EU jurisprudence and in the jurisprudence of individual Member States .It can be pointed out that the Court of Justice has held that the activity of a manager of a jointly owned property, consisting of investing in financial institutions the funds entrusted to him by the co-owners and tenants of the property he manages, constitutes an economic activity and is therefore subject to value added tax.
Also from the Court’s jurisprudence, the acquisition of a claim giving the right to acquire in the future the ownership of a building that is just being erected, with the intention of leasing it in the future, has been considered an economic activity (Rompelman Judgment of January 14, 1985, 268/83, ECR 1985). It is very interesting to note that the very acts preparatory to the commencement of an economic activity must be considered an economic activity, while at the same time the individual acts aimed at the commencement of this activity cannot be differentiated.
In another ruling, the Court held that a company that has merely declared its intention to start an economic activity must be considered a taxpayer, even if it has not yet obtained the results of the studies of the profitability of the intended activity that it has commissioned, which will only allow it to decide to start the activity (INZO Judgment of December 29, 1996, C-110/94). It follows that a person acquires the status of a taxpayer already from the moment he undertakes the first preparatory activity for economic activity, even if he would not undertake taxable activities in the future, provided that the activity was undertaken by him with the intention of starting economic activity.
It is worth mentioning at this point one more ruling of the European Court of Justice – the ruling concerned a rental agreement between a farmer and a civil partnership of which he was a partner. In this case, the ECJ ruled that a person whose only economic activity is renting movable property to the company is carrying out an independent activity and for this reason is subject to value added tax (Heerman Judgment of January 27, 2000, C-23/98).
Tax exemptions for activities performed on the national territory
An important issue in terms of the impact of value-added tax on the shape of the common market is the question of tax exemptions for activities performed by a taxpayer on the national territory. This catalog is contained in the provisions of Articles 132-137 of the Directive. These provisions, according to the case law of the Court of Justice of the EU, must be interpreted narrowly. The provisions of Articles 132-137 of the Directive distinguish two groups of tax exemptions:
1) exemptions for activities carried out in the public interest, and
2) other exemptions, the nature of which is different from the exemptions listed in point 1 of the directive.
The directive does not establish a tax exemption for all activities that are carried out in the public interest, but contains a detailed catalog of them. It is a closed catalog in which individual exemptions have been regulated in a casuistic manner. This is to ensure that all European Union countries apply a uniform system of tax exemptions in their legislation. Covered by the exemptions are, among others, postal services, health care services including medical and hospital care, the provision of services and the supply of goods closely related to social care and social security, including by nursing homes. Also covered by the exemptions are, among others: the provision of services and the supply of goods closely related to the protection of children and young people, carried out by bodies governed by public law and by other organizations recognized by the Member State as having a social character.
Also exempted is the education of children or young people, general or higher education, vocational training or retraining, including the provision of services and the supply of goods closely related to such activities, carried out by relevant public law entities or other institutions operating in this field, whose objectives are recognized as similar by the member state concerned.
It is worth mentioning at this point that the Polish legislator erroneously implemented Article 132 of Directive 2006/112/EC into the national legal order (it follows from the aforementioned directive that in order for educational services provided by non-public entities to be covered by the exemption, they must pursue objectives related to the public interest. In the Polish VAT Act, the exemption covers all education services, regardless of their purpose and nature). The issue was resolved by a judgment of the Supreme Administrative Court of July 8, 2009, ref. I FSK 1244/08.
The court shared the arguments that the Polish legislator erroneously implemented Article 132 of Directive 2006/112/EC into the national legal order and stressed that the provisions are incompatible with European Union law. According to the court, this means that educational services provided by non-public entities are also exempt, but only if their purpose is to serve the public interest. According to the court, the Polish legislator, by extending the exemption to all educational services, regardless of their nature, erroneously implemented EU regulations.
The NSA also pointed out that a taxpayer has the right to invoke the provisions of the directive directly, if two conditions are jointly met: the member state has failed to implement the directive or has done so incorrectly, and the content of the directive is sufficiently clear and precise.
It is worth emphasizing once again that the task of Community law in the field of value-added tax is to harmonize national VAT regulations, with particular emphasis on efforts to avoid double taxation or non-taxation of goods and services within the European Union. Despite consistent regulations, dishonest entrepreneurs and organized crime groups are taking advantage of VAT refund mechanisms in connection with the export or intra-Community supply of goods to defraud undue amounts of tax. Not only national tax audits, but also supervision with an international, pan-European dimension has become necessary. This is what the EUROFISC network for the rapid exchange of information on value added tax, established by Council Regulation No. 904/2010 of October 7, 2010 on administrative cooperation and combating fraud in the field of value added tax, is intended to serve.
As can be seen, value-added tax, due to its direct impact on the prices of goods and services, thus determines their competitiveness in the internal and international markets. Therefore, it is important that in the European Union, where there is a single internal market for goods and services, taxes should not be an obstacle to the development of trade and economic cooperation between member states. For these reasons, the establishment of a uniform taxation system for the countries of the European Union, or at least partial harmonization of the tax laws in force within them, has been one of the most important subjects of discussion since the Treaty of Rome. Freedom to provide services, along with freedom of movement of goods, is fundamental to the single market. One of the most significant obstacles to creating a single market and ensuring fundamental freedoms within it, including freedom of movement of services, would be the diversity of tax systems, particularly in the area of turnover taxes, which include value-added tax.
“Tax Law of the European Union,” edited by B. Brzezinski, M. Kalinowski, ODDK, Gdańsk 2017
Case law of the Court of Justice of the European Union and the Supreme Administrative Court in Poland
“VAT and the freedom to provide services in the European Union,” Beata Rogowska-Rajda, Ministry of Finance
“The principle of neutrality of value added tax in the jurisprudence of the Court of Justice of the European Union” Dariusz Gibasiewicz