The treatment of credit in EU VAT and an evaluation of the ...



The treatment of credit in EU VAT and an evaluation of the cash-flow method applied to it Theodora-Eirini Dimogianni HARN60 Master Thesis Tutor Oskar Henkow 02/06/2014 Academic year 2013-2014Table of contents TOC \o "1-3" \h \z \u Table of contents PAGEREF _Toc389593441 \h 2Abbreviations PAGEREF _Toc389593442 \h 41.Introduction PAGEREF _Toc389593443 \h 51.1Background PAGEREF _Toc389593444 \h 51.2Purpose PAGEREF _Toc389593445 \h 71.3Method and material PAGEREF _Toc389593446 \h 71.4Delimitations PAGEREF _Toc389593447 \h 81.5Disposition PAGEREF _Toc389593448 \h 82.Exemptions for credit services PAGEREF _Toc389593449 \h 82.1Introduction PAGEREF _Toc389593450 \h 82.2Credit service in the VAT Directive PAGEREF _Toc389593451 \h 92.3Granting of credit PAGEREF _Toc389593452 \h 102.3.1What is it a granting of credit? PAGEREF _Toc389593453 \h 102.3.2The issue of the identity of the lender PAGEREF _Toc389593454 \h 102.3.3Incidental credit transactions and the right to deduct PAGEREF _Toc389593455 \h 112.3.4Credit granting in Leasing PAGEREF _Toc389593456 \h 132.4Negotiation of credit PAGEREF _Toc389593457 \h 132.4.1Definition of credit negotiation PAGEREF _Toc389593458 \h 142.4.2Applicability of Article 135(1) (b) RVD PAGEREF _Toc389593459 \h 152.5Management of credit PAGEREF _Toc389593460 \h 152.5.1The meaning of credit management PAGEREF _Toc389593461 \h 152.5.2Case law of credit management PAGEREF _Toc389593462 \h 162.6Which are the effects of a VAT exempt credit service? PAGEREF _Toc389593463 \h 162.6.1A ‘Hidden VAT’ PAGEREF _Toc389593464 \h 162.6.2Distortion of competition PAGEREF _Toc389593465 \h 173.Reforms PAGEREF _Toc389593466 \h 173.1Commission’s Proposals on November 2007 PAGEREF _Toc389593467 \h 173.1.1Background PAGEREF _Toc389593468 \h 173.1.2Proposal for a Council Regulation PAGEREF _Toc389593469 \h 183.1.3Proposal for a Council Directive PAGEREF _Toc389593470 \h 193.2Commission’s Proposal on September 2011 PAGEREF _Toc389593471 \h 204.Suggestions for taxing financial services PAGEREF _Toc389593472 \h 214.1Cash-flow method PAGEREF _Toc389593473 \h 214.1.1Introduction PAGEREF _Toc389593474 \h 214.1.2How could the cash-flow method work? PAGEREF _Toc389593475 \h 224.2Cash-flow method with Tax Calculation Account (TCA) PAGEREF _Toc389593476 \h 234.3Truncated cash-flow method with a TCA PAGEREF _Toc389593477 \h 244.4How could the cash-flow method operate on the credit services? PAGEREF _Toc389593478 \h 254.4.1Granting of credit PAGEREF _Toc389593479 \h 254.5Evaluation of the cash-flow method applied to credit services PAGEREF _Toc389593480 \h 304.5.1Granting of credit PAGEREF _Toc389593481 \h 304.5.2Negotiation and management of credit PAGEREF _Toc389593482 \h 315.Conclusion PAGEREF _Toc389593483 \h 32List of references PAGEREF _Toc389593484 \h 34AbbreviationsAGAdvocate General of the ECJCFEConfédération Fiscale EuropéenneDIRECTIVECouncil Directive 2006/112/EC of 28 November 2006 on the common system of value added taxECEuropean CommissionECJEuropean Court of JusticeEUEuropean UnionFECMAFederation of European Credit Management AssociationsIBFDInternational Bureau of Fiscal DocumentationMSMember StatePwCPricewaterhouseCoopersRVDRecast VAT Directive 2006/112/EC of 28 November 2006 on the common system of value added taxTCATax Calculation AccountUKUnited KingdomVATValue Added TaxIntroduction BackgroundAccording to Article 1(2) RVD, ‘VAT is a general tax on consumption applied to commercial activities involving the production and distribution of goods and the provision of services. The common system of VAT applies to goods and services bought and sold for consumption within the EU.’ Notwithstanding, there are some VAT exemptions that are applied to specific categories of transactions. For instance, the majority of the financial services including credit are VAT exempt according to Article 135(1) RVD. Financial services can be defined as ‘contractual arrangements regarding intermediation in money, property and credit, as well intermediation in time, risk and persons. They can take various forms, they are simple to produce and can move where the costs of production are lower within the EU or outside of the EU.’ Consultancy services, commissions charged by brokers on acquisitions and dispositions of securities supplied by a financial services company via the charging of fees and commissions, are services which are taxed under the normal VAT system. The complexity on the subject of taxation arises with margin-based products such as the bank lending. According to PwC, one of the difficulties for calculating and imposing the VAT on the financial services is the determination of the fee which must be charged. For instance, a bank’s value added which relates to services provided to both depositors and borrowers, includes also reimbursement for possible risk of loss and thus it is not easy to allocate the value added between the two sides of a financial transaction. In addition to the fee issue, CFE observes that due to the fact that money is the consideration for supplies of financial services and simultaneously is the subject of the transaction, an obstacle is generated for estimating the remuneration. Moreover, CFE argues that most of the times the transactions include different parties who receive the fee and therefore it is much harder to estimate the relevant consideration. The necessity of correctly estimating and defining the value added is reflected by the fact that the financial services’ VAT exempt status causes several negative consequences. For example, when a financial service is supplied before the last stage in the production procedure, the claiming of input tax credits earlier in the production chain is blocked by the exempt status of the financial service. The disadvantage is that the non-creditable tax of the financial organization will be included in the selling price of non-financial goods/services, which will be subject to VAT on the full sale price. The tax in this case cascades, that is it applies on both inputs and the final selling price. As a result, for sales of other goods and services which include financial services as inputs there is over-taxation in comparison to other goods and services and this leads to higher prices. Another complexity which derives from the VAT exempt services’ status is the distortion in competition. CFE claims that a distortion may arise from the fact that the VAT Directives allow a number of several methods for defining the amount of input VAT that should be attributed to taxable and non taxable supplies. Additionally, CFE supports that giving Member States the opportunity to grant an option to tax, results in distortions in competition between Member States that permit the option and those which do not. Under PwC, the characteristics of the VAT system which maintain distortions of competition are several. For instance, differences between Member States are caused regarding the interpretation of financial services’ notion and a doubt relating to each EU tax authority treatment of particular transactions. PwC also claims that the distortion of competition can exist with various forms. For example, the financial services firms in EU Member States have an embedded VAT cost which could lead to higher service costs in comparison with undertakings which they don’t have any embedded VAT costs. Furthermore, higher interest rate charges could be generated by the distortion. This distortion relates directly to unfair competition, but probably has also consequences for the competitiveness of the general enterprise sector. Moreover, the country location is another form of distortion since a lower standard rate of VAT and/or a particularly favorable VAT treatment of some type of financial service might attract businesses for establishing their offices to the most suitable for them location. If the country which is selected using VAT-related criteria is not optimal in other issues like the language, then this has a goal to impair the competitiveness of the corporation. PurposeThe credit constitutes a significant financial service which plays a vital role to the transactions between the financial and non-financial enterprises with their customers. This thesis will give an effort of making more understandable the VAT treatment of credit in EU via the analysis of how the granting, negotiation and management of credit operate and their current VAT handling. Due to the fact that the tax exemption status of the credit services is a major problem in EU which provokes a lot of serious consequences for the economy and the market, various proposals for imposing the VAT on the financial services have been derived from a number of different methods which have already been referred in several books and articles. One of them, it has been considered to be the most important of all. This is the cash-flow method which will be generally described and analyzed in order to find a solution for entering the credit services into the normal VAT system. So, the purpose of this thesis is to focus on the importance of the credit services’ VAT treatment in EU, to illustrate the merits and demerits of the cash-flow method and thus to try to succeed the taxation of the granting, negotiation and management of credit. Method and materialInitially, for reaching the goal of successfully writing this thesis the method which is followed is the traditional legal. Afterwards, books and articles represent the basic sources from where the relevant material and information have been mostly gathered. With regard to the examination of financial services’ VAT treatment and more specifically of credit, RVD is frequently used so as to mention and analyze its respective Articles. Moreover, for showing the consequences which are generated from the current VAT exemptions status and for describing how the suggested methods could operate for taxing the exempt financial services, various studies from the most important multinational companies to the financial advisory part, as for instance are PwC and Ernst & Young, are used as a precious spring for the integration of this purpose. Finally, a number of cases from ECJ are utilized for investigating and thus understanding in which way the granting, negotiation and management of credit are faced respecting VAT within the EU economy. DelimitationsAs it has been previously reported, the subject of discussion in this thesis is the VAT treatment of the credit services within EU. For the thesis correct analysis, it is comprehensible that there have to be specific delimitations. First of all, there won’t be any reference to the way that the credit services are handled outside of the Community. Then, there won’t be any analysis of how the rest financial services, except granting, negotiation and management of credit, are VAT treated within the EU. In addition, since the type of tax which is discussed is VAT, there won’t be examined any other forms of tax which are relevant with the financial services, as for instance is the Financial Transactions Tax. Moreover, regarding Article 135(1) RVD, it will be analyzed only the (b) provision as it includes the granting, negotiation and management of credit. The other provisions of the same Article won’t be investigated. For suggesting a way for taxing the credit services, the cash-flow method will be the only method evaluated. Finally, it has to be noted that the material which is utilized has been collected until the 1st of November 2013. No inclusion of any other material has been done after this date. DispositionThis thesis is divided into 5 parts. Originally, the introduction chapter makes a general reference to the notion of financial services, their VAT treatment, the reasons which have kept these services from not being taxed under the normal credit invoice system and the respective consequences of this VAT exemption status. Then, the second part of the thesis is wholly focusing to the credit services. It describes the way that the granting, negotiation and management of credit function and also it refers to the relevant Articles of RVD which concern their VAT handling. Furthermore, in the same chapter is investigated the relative case law and are emphasized the effects of their VAT exemption condition. Thereafter, the third chapter covers the Commission’s proposals for reforming the VAT legislation regarding the taxation of the financial services. Then, in the fourth part there is a report to the forms of the cash-flow method which is suggested for taxing the financial services and more specifically there is an assessment of it as a means of taxing the credit. Finally, the last part is the conclusion where the final comments for the problem of the VAT treatment of the credit services in EU and its suggested solutions are included.Exemptions for credit services IntroductionThe notion of credit derives from the Latin word credere which means to trust a person. The basis of this word focus on the real meaning of credit granting, which is the confidence in someone’s capacity and purpose to complete his/her obligations that he/she has agreed to take on when being entrusted with a loan, or instead, goods or services without a direct payment. In the EU economy, concerning the transactions which take place between the financial and non-financial businesses with their customers, credit is a core economical service. It facilitates businesses or consumers for effectively settling up their economic obligations which have arisen as a result from their purchases. The customers can request for a delay on their payments even for very small amounts and short terms of period. The actions of negotiation and management of credit are considered to play an important role for the successful integration of the credit granting. Occasionally these three services can shape a cyclical route. This hypothesis can be justified from the fact that they can start from the part of negotiation with the customer, to move on the management section, then go to the granting and to finish again with the procedure of management. Additionally, if there is a problem with the payment of the loan or there is a non scheduled deferral of invoice’s payment regarding supplies of goods and/or services, there is always a potential to go back from the management to negotiation. Credit service in the VAT DirectiveOn the subject of the VAT for credit, Article 135(1) (b) RVD clearly states that ‘Member States shall exempt the granting and the negotiation of credit and the management of credit by the person granting it’. Due to the fact that the VAT exemptions which are applied can cause various negative consequences, in several cases it was stated by ECJ that ‘the terms used to specify the exemptions covered by Article 135(1) RVD are to be interpreted strictly, since they constitute exceptions to the general principle that VAT is to be levied on all services supplied for consideration by a taxable person’. Nonetheless, there are specific credit services which are normally taxed under the credit invoice system. For instance, leasing is one of these services. The definition of lease is given by KPMG, where it declares that ‘a lease is the agreement whereby the lessor conveys to the lessee, in return for a payment or series of payments, the right to use an asset for an agreed period of time.’Concerning the right to deduct VAT, under Article 168 RVD ‘’…a taxable person shall be entitled to deduct the input VAT in the MS where the transactions take place in so far as the goods and services which obtains are used for taxed transactions.’’ Particularly, for the exempt financial services under points (a) to (f) of Article 135(1) RVD, Article 169(c) RVD states that ‘’… a taxable person shall be entitled to deduct the input VAT in so far as the goods and services are used for transactions where the customer is established outside the Community or where those transactions relate directly to goods to be exported.’ Therefore, when the undertakings provide VAT exempt financial services including credit within the Community, they are not capable to recover the input VAT which they pay on the goods and services obtained for the correct function of their businesses and this has as an outcome a ‘hidden VAT’. This non-recoverable tax is a remarkable source of revenue for the governments of the Member States. Granting of credit What is it a granting of credit?Granting of credit can be characterized as the economical service where a financial institution or a non-financial enterprise decides to provide to its customer when he/she will ask for it, an economical facilitation. There are two basic ways of granting a credit to a business or consumer. Firstly, when a financial enterprise makes available the amount of loan which the customer requests and secondly, when a non-financial undertaking accepts for a specific period of time a deferral on the purchase invoice’s payment. The deal between the undertaking and the customer includes an interest as reward for the supply of the granting.The late payment as problem and the willingness for its limitation is shown also in Directive 2000/35/EC, which states that ‘late payment constitutes a breach of contract which has been made financially attractive to debtors in most Member States by low interest rates on late payments and/or slow procedures for redress. A decisive shift, including compensation of creditors for the costs incurred, is necessary to reverse this trend and to ensure that the consequences of late payments are such as to discourage late payment.’ The issue of the identity of the lenderIn ECJ case law with reference to the credit granting, the subject of the identity of the lender was a remarkable issue of dispute and for this reason a deeper interpretation of the expression ‘by the person granting it’ which is stated in Article 135(1) (b) RVD was needed.In the Muys case, AG Jacobs mentioned that ‘it had become a widespread practice of suppliers to make their own financing arrangements and a limitation of the exemption based on the identity would lead to distortion of trade and of competition.’ It seems that the Court in the end rightly declared that there was no limitation based on the supplier’s identity, since the granting of credit is usually provided by both financial and non-financial firms and a possible limitation could cause discrimination and thus a distortion in the competition. Then, with regard to the interest paid as reward for the granting of credit, the Court issued that where a supplier of goods or services had granted his customer deferral of payment of the price, in return for payment of interest only until delivery, that interest did not constitute consideration for the grant of credit but part of the remuneration obtained for the supply of goods or services. The Court properly expressed that this amount could not be characterized as interest for the payment’s deferral because generally the customers are not obligated to settle up the required invoice’s amount before the goods or services are delivered /supplied to them. A deferral on payment would have been caused if the service had been provided on a specific time point and after this date, the customer would have delayed the payment.The identity of the lender was also argued in SDC case but regarding the occasions where points (d) and (f) of Article 135 (1) RVD were implemented. The ECJ issued that the expressions 'the person granting it' and 'the person who is granting the credit' which were derived from points (b) and (c) of Article 135(1) RVD respectively, verified the fact that the identity of the persons effecting the transactions was irrelevant in determining the transactions exempted under points (d) and (f) of Article 135(1) RVD. Thus, these services had to be VAT exempt regardless of the fact if the lender or even the borrower was a commercial or a financial undertaking. The Court through its decision tries again to keep a balance between the banks and the commercial businesses and to handle both these categories as equal so as to avoid causing them an unfair competition.Incidental credit transactions and the right to deductThe credit with the form of a loan granted from a holding company to its subsidiaries was discussed in the EDM case. In this occasion, the issue was if the credit granting constituted an economic activity and then if it could be defined as an ‘incidental transaction’ for the computation of the VAT which had to be deducted. AG Léger stated that ‘the granting of loans by a holding company to its subsidiaries couldn’t be an occasional activity. On the contrary, it had to take place with a degree of regularity so that the holding company could obtain income from it on a continuing basis.’ In the end, ECJ decided that the annual granting by a holding company of interest-bearing loans to companies in which it had a shareholding and placements by that holding company in bank deposits or in securities, constituted economic activities carried out by a taxable person and so as financial transactions were VAT exempted. From my view, the ECJ correctly expressed that the holding company provides a financial service that is to say, grants credit which is VAT exempt since it facilitates economically its subsidiaries not free of charge but with exchange a specific interest. Afterwards, in this case another important matter was the deduction of VAT. The Court stated that for calculating the deductible proportion and so if the services had to be excluded from the computation under Article 174(2) (b) RVD, were to be regarded as ‘incidental transactions’ thereof in so far as they involved only very limited use of assets or services subject to VAT.Similar questions like these which were stated in the EDM case with regard to the definition of the ‘economic activity’ and the computation of the deductable VAT arose also in case Floridienne and Berginvest. The Court held that the loans which were granted by a holding company to its subsidiaries did not constitute an economic activity of that holding company. Consequently, the interest paid as remuneration had to be excluded from the denominator of the fraction used to calculate the deductible proportion. The ECJ here operated exactly the opposite from the EDM case. Its decision of not characterizing as economic activity the granting of credit, it shows how complex and simultaneously crucial is to righty judge so as to not arise any discriminations between the enterprises.Afterwards, in the Régie case the main question was if the receipt of interest from the placements by property management companies from lessees’ advances constituted or not the direct, permanent and necessary extension of the taxable activity of these companies. The Court finally decided that it constituted the permanent and essential extension and that such placements couldn’t be characterized as incidental financial transactions within the meaning of Article 174(2) RVD. Consequently, they couldn’t be excluded from the calculation of the deductible proportion of VAT.The question why the incidental financial transactions have to be excluded from the denominator of the fraction which is used to calculate the deductible proportion was answered in the Nordania Finans A/S case. The ECJ held that the main goal is to comply with the objective of complete neutrality guaranteed by the common system of VAT. The justification for this statement was that if all receipts from a taxable person’s financial transactions linked to a taxable activity were to be included in that denominator, even where the creation of such receipts did not entail the use of goods or services subject to VAT or, at least, entailed only their very limited use, calculation of the deduction would be distorted.In the Bausystem case was discussed the inclusion to the basis for the turnover tax assessment of an interest which was imposed on account of late payment. ECJ agreed with AG Rozès and declared that the basis of assessment referred to in Article 78 RVD, did not include interest awarded to an undertaking by a judicial decision where such interest had been awarded to it by reason of the fact that the balance of the consideration for the services provided had not been paid in due time. It seems that ECJ properly stated that the interest could not be included to the tax basis, since it wasn’t the payment for instance for an additional service e.g packing or transport for the primary service. It was the remuneration for the deferral of payment and according to Article 135(1) (b) RVD had to be VAT exempt.Credit granting in LeasingThe occasion of a supply of credit vis-à-vis the customer was faced in the Auto Lease Holland case. The supplier called Auto Lease offered the lessee the option inter alia of entering into a fuel management agreement with it. So, the agreement permitted the lessee to fill up his motor vehicle with fuel in the name and at the expense of Auto Lease. The lessee had to pay to Auto Lease each month in advance one twelfth of the likely annual petrol costs. At the end of the year, the account was settled up according to the actual consumption. Additionally, there was a supplementary charge for fuel management. As AG Légermentioned, the company acted like any finance or credit institution and its role could not be distinguished from that played by the credit card company, which nobody claimed was in receipt of fuel. ECJ declared that the fuel management agreement was not a contract for the supply of fuel, but rather a contract to finance its purchase. Auto Lease acted as a supplier of credit vis-à-vis the lessees and received a specific payment relating to its services. The Court rightly declared that this transaction constituted a granting of credit since this action completed the most basic characteristic of credit, the deferral of payment in exchange for an interest paid by the customer. Negotiation of creditDefinition of credit negotiationNegotiation of credit is an action of intermediation which is completed usually before and sometimes after the granting of credit. During the procedure of the negotiation before the granting, the supplier discusses and tries to reach to a deal with the customer concerning the amount of the credit, the number of credit days, the interest and the way of settling up the sum e.g installments. After the granting, if the customer hasn’t been consistent with his/her obligations there is always a possibility for a second negotiation to start for treating the credit terms in a new basis.A further analysis of the expression ‘negotiation of credit’ is given by the CSC Financial Services case. As the Court stated, the negotiation is an action of mediation, which may consist, amongst other things, in pointing out to one of the parties to the contract suitable opportunities for the conclusion of such a contract, in making contact with another party or negotiating, in the name and on behalf of a client, the detail of the payments to be made by either side, the purpose of such an activity being to do all that is necessary in order for two parties to enter into a contract, without the negotiator having any interest of his own in the terms of that contract. Another case which had referred to the term of credit negotiation was the Ludwig case. The ECJ stated that when a taxable person has analyzed the financial situation of some clients canvassed by him with a view to obtaining credit for them, did not preclude recognition of the service supplied as being a negotiation of credit which is exempt under Article 135(1)(b) RVD, if the negotiation of credit offered by that taxable person fell to be considered as the principal service to which the provision of financial advice was ancillary, in such a way that the latter shared the same tax treatment as the former. Additionally, ECJ mentioned that for characterizing a service as credit negotiation and thus to be VAT exempt, it wasn’t mandatory for the supplier to have a contractual link with any of the parties in the credit agreement. The Court through this decision tries to ensure again the equality between the undertakings that are linked to the parties of the agreements and those which are not.According to ECJ in DTZ Zadelhoff case, the precise meaning of the word ‘negotiation’ which appeared in Article 135(1)(b) to (e), it wasn’t mandatory to be taken into consideration so as to show that the context of Article?135(1)(f) RVD was referring to another interpretation of this term. It was declared that negotiation was the activity of an intermediary who did not occupy the position of any party to a contract relating to a financial product, and whose activity amounted to something other than the provision of contractual services typically undertaken by the parties to such contracts. It was a service rendered to, and remunerated by, a contractual party as a distinct act of mediation. Applicability of Article 135(1) (b) RVDThe direct applicability of Article 135(1) (b) RVD was the main issue in the Becker case. In particular, the dispute was for the Germany’s delay to apply the VAT exemption status for the negotiation of credit. For granting and management, Germany had already complied with the rules. As AG SIR Gordon Slynn correctly declared, the question was not whether the directive was "directly applicable" but whether its terms were such that the individual could rely upon it against the MS who in breach of duty had failed to implement it. Finally, the ECJ stated that as from 1 January 1979 it was possible for the provision concerning the exemption from turnover tax of transactions consisting of the negotiation of credit contained in Article 135(1) RVD to be relied upon, in the absence of the implementation of that directive, by a credit negotiator where he had refrained from passing that tax on to persons following him in the chain of supply, and the State could not claim, as against him, that it had failed to implement the directive. Management of creditThe meaning of credit managementManagement of credit is the procedure, after the negotiation and before the granting of credit, which includes the checking of the customer’s essential documents that can verify his/her financial condition and therefore to reduce or even better to eliminate the risk of not settling up the loan in the end. Management of credit is also applied after the granting with the intension of ensuring that the process of payment is successfully completed and that there is no late payoff. Generally, several types of management exist. ‘A centralized management of credit’ is one suggested form with the purpose of facilitating the situation where companies with an existing network of international subsidiaries have a variety of credit management systems in place and they are not always capable of communicating with each other, resulting in additional costs and inconsistent data sets.Case law of credit managementThe credit management is an important financial service. With the intention of understanding how it is treated generally in EU, the ECJ case law has to be analyzed. Unfortunately for this credit service we cannot find a lot of cases. As Oskar Henkow mentioned, the ECJ has made one comment for this credit service in the SDC case. In this occasion the Court stated that, the VAT exemption had to be applied for the management of loans only if those operations firstly were separate in character and secondly specific to and essential for the appropriate and successful function of the exempt transactions. Nevertheless, as the management is only exempt when the person granting the credit is exempt, management provided by other persons is normally taxed by the credit invoice system. Which are the effects of a VAT exempt credit service?A ‘Hidden VAT’As we observed before, the fact that the financial services are not taxed can generate several problems. The effects of the VAT exemptions for the credit services are reflected in different ways. First of all, the problem of the ‘hidden VAT’ and which are its consequences is illustrated by EC. For example, a bank grants credits which are exempt according to Article 135(1) (b) RVD to taxable persons (business clients) and to non-taxable persons (private consumers). The VAT which the bank pays on consultancy for developing the whole structure of the credit cannot be deducted by the bank and thus becomes a part of its overall costs. With regard to the private consumers, the fee for the credit services which the bank supplies, contains this input VAT. Nevertheless, this situation is more than compensated by the fact that the banks’ supplies are also provided without VAT. Similarly, the price for the credit services which the bank supplies to business consumers also includes this input VAT. The point is that if these credit services were taxed, the business client could have the opportunity to deduct the VAT. Consequently, the non-deductible VAT contained in the price of the credit service is an operating cost for the bank's business client and as a result the business will invoice VAT upon VAT when it supplies its goods or services.In ECJ case law, the problem of the non-recoverable VAT relating to the credit services was illustrated by Newey case. In this occasion was reflected the effort by Mr. Newey to solve the problem of the non-recoverable VAT. The loan broking services supplied by him in the UK were in accordance with Article 135(1) RVD VAT exempt. By contrast, the advertising services supplied to him in the UK, were subject to VAT with the result that the tax borne on the advertising costs was not recoverable. In order to avoid that non-recoverable tax burden, he incorporated a company in Jersey, a territory in which the Sixth Directive did not apply. Thus, the broking contracts were concluded directly between the lenders and the company in Jersey. The ECJ stated that it was conceivable that the effective use and enjoyment of the services at issue in the main proceedings took place in the UK.Distortion of competitionIn some occasions the problem of the ‘hidden VAT’ can result to a distortion of competition. For instance in the Newey case, it seems that Mr. Newey had the idea of establishing a second company to one country where the Directive didn’t apply, with only goal to deduct the input VAT. Probably a lot of enterprises have already thought in the same way as was described in Newey and from the State’s perspective it can be sometimes very difficult to ascertain the cases if someone does it with sole purpose to avoid the burden of the non-recoverable VAT or not. However, if the State cannot find these cases, then a distortion in the competition can easily arise. An example could be the case where companies ‘A’ and ‘B’ are in the same country and they are both supplying credit services. Then, company ‘A’ regarding its expenses, decides to establish a second enterprise to another country with only goal to achieve the deduction of input VAT from its transactions. This would be totally unfair for company ‘B’ which won’t have the opportunity of deducting the VAT and will shoulder this burden. Consequently, company ‘B’ will be in a less favorable economical situation in comparison with company ‘A’.Reforms Commission’s Proposals on November 2007BackgroundThe Commission has actively pursued the modernization of the financial services VAT regime since early 2006, when it commenced a public consultation process and engaged PwC to study the economic effects of the VAT system as it applied to the financial and insurance services. The Commission recognized that the VAT exemptions, largely drafted in the 1970s, were no longer fit for purpose in the current global financial marketplace. Furthermore, the PwC study concluded that EU financial services enterprises were in a point less profitable than their non-EU equivalents (such as United States undertakings), and that important embedded VAT costs might contribute to this difference in profitability.In November 2007 following a lengthy consultation procedure initiated in the wake of the ruling from the Court of Justice in Accenture case, the EC presented two proposals. More specifically, on 28 of November 2007 the Commission presented its Proposal for a ‘Council Directive amending Directive 2006/112/EC on the common system of VAT, as regards the treatment of insurance and financial services’ together with the Proposal for a ‘Council Regulation laying down implementing measures for Directive 2006/112/EC on the common system of VAT, as regards the treatment of insurance and financial services’.Proposal for a Council RegulationThe objectives of this proposal were to increase the legal certainty for economic operators and national tax administrations, while reducing their administrative burden for correctly applying the rules for the VAT exemption of insurance and financial services and reducing the impact of ‘hidden VAT’ in costs of insurance and financial services providers. According to Commission, the objectives of this proposal could be achieved by breaking down the concept and the conditions stipulated in Article 135(1) (a) to (g) and (1a) and in Article 135a of Directive 2006/112/EC to specific economic scenarios. This would result in non-exhaustive enumerations of cases for which the Regulation stipulated that they were either covered by the exemption from VAT for insurance and financial services or excluded from it. In fact, in many cases economic operators needed fiscal advice from independent consultants and often had to verify in burdensome and lengthy negotiations with national ministries of finance, whether a specific service supplied was or was not covered by the VAT exemption. Local tax administrations also had to bear high administrative charges for clarifying with the national ministries of finance how they had to proceed in specific cases. In those cases where the Regulation provided a clear solution, economic operators and administrations would be able to apply the exemption from VAT for insurance and financial services correctly without this burden being involved. For intermediation in insurance and financial services the proposal could only provide a clear solution in a limited number of cases. This was due to the fact that the concepts and forms of intermediation were very much rooted in national civil laws and therefore varied substantially. To improve legal certainty also with regard to such services, the Regulation additionally specified objective criteria to be applied in evaluating whether a service represented a distinct act of mediation.The Council of the European Union adopted this Regulation where in Article 3 the definition of the "granting of credit" had to cover for instance, credit arrangements under which a person was entitled to dispose of funds up to a fixed amount and loans secured on real property, including mortgage loans. On the other hand, firstly the granting of credit in connection with hire purchase and lease purchase agreements where the consideration for the credit constituted an integral part of the consideration for the hire and lease purchase and secondly agreements under which payments by installments or an extended period for payment, were provided for the supply of goods or services had to be excluded from the definition of ‘granting of credit’. Additionally, valuation of non-financial collateral and the issuance of credit derivatives were transactions which under Article 15 had to be considered to have the specific and essential character of ‘granting of credit’.Proposal for a Council DirectiveThe objectives as have already been mentioned in the proposal for a Council Regulation could have been achieved by the three following measures : clarification of the rules governing the exemption from VAT for financial services, broadening of the existing option for taxation by transferring the right to opt from the Member States to the economic operators, introduction of a cost-sharing group which would allowed economic operators to pool investments and re-distribute the costs for these investments exempt from VAT from the group to its members.The clarification of the rules governing the exemption from VAT for financial services had the objective to provide a more uniform application of the VAT exemption, creating more legal certainty for economic operators and reducing the administrative burden for economic operators to comply with the rules. This clarification consisted of the following elements: a) the conditions for applying the VAT exemption were based on objective economic criteria decoupling them from an interpretation based on national private law concepts, which was one of the main reasons for different interpretation and application in the Member States. These objective economic criteria ensured that also new services which would have been developed in the future would be covered by the VAT exemption if they have fulfilled these criteria, b) the new rules introduced the concept that the exemption had to cover the supply of any constituent element of a financial service, which constituted a distinct whole and had the specific and essential character of the exempt service concerned, c) a common harmonized concept of intermediation was introduced for insurance and financial services, d) where this was possible, the new definitions also created more consistency with internal market rules (e.g. investment funds).Then, under the broadened option for taxation, it would be the economic operator who decided if he wanted to be fully taxable and where he was exercising this right, he would be able to deduct input VAT on his investments like any other economic operator. In this way a level playing field for the financial industry was created that was not achieved so far as only very few Member States have granted the option to business and this under differing conditions. At the same time Member States were given the necessary flexibility to specify themselves the rules for applying that option, adapting it to their national tax supervision structures. Additionally, under the proposed cost-sharing model, in particular smaller economic operators could pool their investments in groups which could buy these investments at better market conditions and re-distribute them exempt from VAT to the members of the group. Commission’s Proposal on September 2011‘The VAT amendment Directive on insurance and financial services is vitally important not only for the creation of a single and effective European market for insurance and financial services, but also to ensure that EU businesses are not put at a disadvantage to their non-EU competitors. Over the last years, considerable effort has been expended by the EC, different Presidencies and Member States’ negotiation teams in an attempt to arrive at legislation that clearly defines which insurance and financial services should be exempt from VAT. The latest definition of exempt services on 2011 is not, however, sufficiently robust. It will not keep pace with new developments within the insurance and financial services sector or create legal certainty for Members States and businesses, nor will it remove actual, or potential, competitive distortions between insurance and financial services supplied across different Member States, and between EU and non-EU businesses. Given the importance of the issues at stake and the considerable effort expended on the review, it would be unfortunate if any new Directive were found to be inadequate on or within a few years of adoption by the Member States.’‘According to the Proposal for a Council Directive amending Directive 2006/112/EC on the common system of value added tax, as regards the treatment of insurance and financial services on 30 September 2011 and particularly under Article 1, the Article 135 of Directive is amended as follows: Regarding the credit, it is exempt the granting of credit and management of credit by the creditor and not ‘by the person granting it’. Granting of credit means the lending of money or the promise to lend money, as well as the granting of a deferment of payment of a debt [, provided that the consideration for granting the credit and the grounds for determination the consideration are separately identified]. Furthermore, ‘’intermediation in insurance and financial transactions’’ means a distinct act of mediation rendered by a third party who [brings the parties together and] does what is necessary in order for the parties to enter into, maintain, renew or alter a contract in insurance or financial transactions as referred to in points (a) to (gb) of the Directive.’Suggestions for taxing financial services Cash-flow methodIntroductionAs it has already been mentioned, the fact that most of the financial services are VAT exempt can cause a lot of complications. For this reason, various methods have been proposed for entering the exempt financial services to the credit invoice VAT system. The cash-flow approach is one of them and is characterized as the most adequate for this purpose.Initially the method appeared as another form of VAT and as a substitution for the firms’ income tax (Meade 1978). Later in 1987, it was for the first time suggested as a method for calculating the VAT for the exempt financial services provided by a financial institution. The cash-flow method would apply only to these financial services where the consideration is implicit and hidden in the margin on the exchange of funds. The method wouldn’t be implemented for the financial services where their remuneration is explicit because these would be treated in the same way as the non-financial services under the credit invoice VAT system. A significant issue that the cash-flow method is focusing on is the successful compliance with the basic principle that VAT is estimated on each transaction separately. The supporters of the cash-flow method claim that after all the relevant estimations it could be feasible to have exactly the same results as it was possible for a financial institution to estimate the value added for each transaction, to impose the relevant VAT and so the respective firms liable for VAT, to claim a refund or a deduction of the input tax.A number of merits are the main reason for determining the cash-flow method as the most appropriate mechanism for imposing VAT on the financial services. The elimination of tax cascading is one of the positive results that occur, since the registrants who accept the financial services are able to claim for a refund or a deduction of the input tax regarding the cash outflows and are obliged to pay the tax on the cash inflows. Moreover, the fact that the financial institutions don’t impose VAT to their transactions with the non-residents helps notably the institutions to be in a similar or in a better position in comparison with their competitors.How could the cash-flow method work?The cash-flow method could operate in a very convenient way for taxing the financial services of a capital nature. A cash-flow system has two types of flows, that is to say the cash inflow and outflow. When a financial institution accepts money, a cash inflow takes place and when it takes out money of its accounts, a cash outflow occurs. Concerning the cash inflow, it is presumed that the institution has supplied taxable sales and the amount received is its reward. So, an output VAT will be imposed and have to be paid to the State. Relating to the cash outflow, it is assumed that the institution takes out money of its accounts for paying a service rendered to it or for a good that is purchased by it. Therefore, the cash outflow has to be considered as the amount of settling up a taxable financial purchase and an input VAT is going to be imposed on it. Thus, the institution can claim an input tax credit for this purchase. The spread between the cash inflow and outflow reflects the value added of the financial services supplied by the financial institution to the registrants.The cash-flow method simplifies the procedure of taxing the financial services by precluding particular transactions from its tax base. According to the survey of Ernst & Young one instance of financial transaction that is excluded is with the shareholders/owners of a business. Cash inflows from the issuance of shares won’t be treated as taxable sales and cash outflows from dividends won’t be handled as taxable purchases. Another exception relates to the financial transactions between non-financial businesses and non-registered persons and among non-registered persons. The reason for precluding these transactions is not to attribute credit tax with regard to a loan from a private individual, where the individual is not registered and does not pay tax to the State. Cash-flow method with Tax Calculation Account (TCA) The basic cash-flow method has been proposed as a suitable solution for entering the exempt financial services to the normal VAT system. However despite its merits, it presents a few difficulties. In particular, regarding transactions where margin services include cash flows of a capital nature, one problem appears when the borrower receives a loan from a financial institution. The borrower has to pay the respective tax imposed on this cash inflow at the moment of receiving the loan and thus his economical obligations are increased significantly. Moreover, another problem shows up when a tax rate changes because it cannot be imposed a different rate to the cash inflow from this one utilized on the cash outflow. An additional difficulty is any probable adjustments at the beginning of the system. In order for these problems to be handled successfully a new method has been suggested, the cash-flow method with the usage of a tax calculation account.The TCA is a temporary tax account which has as a basic aim to defer the payments and credits of tax. It keeps a record of all the tax obligations from the State’s and taxpayers’ perspective for a specific time period where the cash flows of a capital nature take place. The account is debited by the taxes imposed on the cash inflows and is credited by the input tax credits on the cash outflows related to a financial instrument. The TCA transfers these tax data to the next period where reversed transactions happen. In the end the spread between the tax attributable and the credit tax presents the net value which is subject to interest charges at the government borrowing rate and is payable or refunded periodically.The fact that the TCA allows a deferral on tax payments and credits on capital transfers, leads to a decrease of the cash-flow calculations complexities. This constitutes one of the cash-flow method’s with TCA significant advantages. Furthermore, a second merit is the reduction of government’s risk regarding the tax deferrals. This is achieved because tax payments on cash inflows which happen in the first period are assumed to be reversed by the tax credits on cash outflows in the second period. Nevertheless, there are some disadvantages which come from the implementation of this method. A characteristic demerit is the notable compliance cost which the non-financial enterprises face in order to have an access to the input tax credits. This cost is caused by the estimations and keeping the record of debit and credit entries in the TCA for the financial transactions. Moreover, an additional disadvantage derives from the indexing rate which is utilized for taxing the net balance. This rate is by design lower than the loan interest rate and thus an input tax credit is always being derived by the system’s tax computations which include the loan cash flows with unregistered persons. Truncated cash-flow method with a TCA Several complexities which are relevant with the usage of the basic cash-flow method are faced successfully with the assistance of the cash-flow method with TCA. Notwithstanding, the difficulties and the high cost that the non-financial small-medium sized companies face regarding the completion of their cash-flow calculations, constitute an unsolved problem. The truncated cash-flow method with TCA suggests the manner of solving this complication.According to the truncated cash-flow method, VAT would be imposed to financial services provided for a fee or commission, on the profit margin on financial instruments acquired by a financial institution for the purpose of resale and on the interest spread on deposits and loans by financial institutions. The truncated cash-flow method with TCA, exploit the fact that the financial institutions’ cash-flow calculations reflect the businesses’ cash-flow estimations. Thus since there is no necessity for completing the same calculations twice, the suggestion is only the financial intermediaries to complete the relevant cash flow estimations which are required. With the usage of the truncated cash-flow method, the financial intermediary could complete the TCA estimations by issuing a periodical statement regarding the input tax credit which is claimable by the business registrants. With the exception of the indexing adjustment, the TCA entries would equal the tax rate multiplied by the entries in the deposit or loan account. The final statement on the basis of the TCA estimations operates in the same way as a tax invoice for non financial goods and services. The difficulties which are relevant with the truncated method are similar to those which exist with the cash-flow method with TCA. An additional complexity is the lack of input tax credits respecting bearer transactions with financial institutions. However despite its few difficulties, the truncated cash-flow method with TCA has been characterized as an ideal method for taxing the financial services because it has similar results like the basic cash-flow method’s and provides a successful response to the various fundamental difficulties which are generated. How could the cash-flow method operate on the credit services? Granting of creditA loan provision is a type of credit granting where the remuneration for this service is implicit and hidden in the profit margin. For demonstrating how the cash-flow method could operate, three different situations are analyzed where a bank will be the intermediate which provides economical services to a depositor and a borrower. For simplifying the examples’ analysis and their between comparison it is very convenient to utilize illustration 1, which contains a mutual set of assumptions concerning the deposit and loan interest, the government rate, the VAT rate and the value of services provided to the depositor and the borrower.Illustration 1Common set of assumptionsDeposit Interest 5%Loan Interest 14%Pure Rate of Interest=Interest earned by Government 11%Value of services to depositor 6%Value of services to borrower 3%Total value of financial service 9%VAT Rate 10%Consumer depositor - consumer borrower In this example we have an occasion where both the depositor and borrower are consumers, that is to say they are not liable for VAT. The cash-flow method would function effectively in taxing the granting, only if the tax is eventually calculated on the value added of the financial service provided to both of them, as they reflect the notion of the personal consumption. As it is observed by illustrations 2 and 3, in period 1 the bank receives the amount of 100€ from the depositor. This cash inflow automatically leads to a VAT of 10€ (10% * 100) which the bank has the obligation to remit to the State. However, in the same time period the bank grants loan of 100€ to the borrower and this cash outflow generates for the bank the right to claim an input tax credit of 10€. As a result for this time period, the government won’t gather any tax revenue and thus no tax implications will arise for the bank.Period 1Illustration 2 Deposit- Credit granting Bank 100 100 Depositor BorrowerIllustration 3Bank’s cash-flow system/ tax implicationsCash inflow (+)Cash outflow (-)SubtotalDeposit= 100Granting of loan= -1000TaxCreditSubtotalTax on deposit= 10Credit tax on loan= -100In period 2, as it is shown by illustrations 4 and 5 below, the borrower repays the loan and the depositor withdraws the deposit. These cash inflow and outflow of the same amount, lead to zero tax revenue and in non-existent tax liabilities for the financial institution. Besides these transactions, the bank additionally gets from the borrower an interest of 14€ which generates an attributable tax of 1.4€ and pays to the depositor an interest of 5€ which implies an input tax credit of 0.50€ (5% * 100). The spread between the interest received and that paid, reflects the total value added for the supply of the financial services to both the depositor and borrower, that is to say (14-5) 9€. With reference to the tax obligations which show up, the bank has to remit to the State the amount of 0.90€. The final tax comes as a result from the credit tax on the deposit interest which is subtracted from the tax imposed on the loan interest. In other words it results if the value added is multiplied by the VAT rate. As a conclusion, it is demonstrated that the cash-flow method operates appropriately in this case, since the tax of 0.90€ reflects the VAT imposed on the supply of services provided to both the depositor and borrower. Period 2Illustration 4Loan repayment- Deposit withdrawal (plus interest) Bank 100+14 100+5 Borrower DepositorIllustration 5Bank’s cash-flow system/ tax implicationsCash inflow (+)Cash outflow (-)TotalLoan repayment= 100Deposit withdrawal= -1000Loan Interest= 14Deposit interest= -59TaxCreditTotalTax on loan repayment= 10Credit tax on deposit withdrawal= -100Tax on loan interest= 1.4Credit tax on deposit interest= - 0.50.9Consumer depositor - business borrower In this instance, the depositor is a consumer and the borrower is a business entity. For estimating the total VAT on the financial services provided, the business’s and bank’s cash flows are both analyzed because now tax consequences arise for both of them. In this example, the cash-flow method would operate correctly if a net tax is to be received only on the value added of the service supplied to the depositor. This is justified by the fact that only the depositor symbolizes the personal consumption. In period 1, as it has already been referred in example A, the bank’s tax obligations are zero. For the same time period, it is shown by illustration 6 that the business borrower receives the loan of 100€ and this cash inflow results to an attributable tax of 10€ (10% * 100). So, the VAT paid for this period is 10€ as it results from both the bank’s and business’s cash flow calculations. However, additionally to the total tax the State desires to earn a rate of return. So, the tax of 10€ is multiplied by the government rate and the amount of 1.1€ comes up. Consequently, the final tax which has to be paid off to the government for this period is totally 11.1€.Period 1Illustration 6Business’s cash-flow system/ tax implicationsCash inflow (+)Cash outflow (-)SubtotalReceiving loan = 100100TaxCreditSubtotalTax on loan=1010As it has already been estimated in example A, in period 2 the bank has to remit a tax of 0.90€ to the government. With reference to the borrower’s transactions, illustration 7 below points up the business’s cash flows and the relevant tax consequences. More analytically, the business repays the loan to the bank and this cash outflow of 100€ causes an input tax credit of 10€ (10% * 100). Furthermore, a second cash outflow occurs, that is to say the payment of loan interest of 14€ to the bank which generates a tax credit of 1.4€ (10% * 14). An input tax credit of 10.5€ is the tax result for this time period and derives from the spread between the attributable tax of 0.90€ and the credit tax received of 11.4€. Period 2Illustration 7Business’s cash-flow system/ tax implicationsCash inflow (+)Cash outflow (-)SubtotalLoan repayment= -100-100Loan interest= -14-14TaxCreditSubtotalCredit tax on loan repayment = -10-10Credit tax on loan interest= - 1.4-1.4After the appropriate cash flow calculations for both time periods, the VAT which the government earns in the end is 0.60€ and results from the spread between the tax paid to the State of 11.1€ in the first period and the input tax credit received of 10.50€ in the second one. The final VAT is equal to 10% tax on 6€ of the value added which is the consideration for the supply of financial services to the depositor. So, in the end it is verified that the cash-flow method functions properly because in this case a net tax had to be imposed only on the value added of the service supplied to the depositor, as it happens in this occasion. Resident consumer depositor- non-resident borrower In this case, the financial institution provides services to a resident consumer depositor and a non-resident borrower. With regard to period 1, illustration 8 shows that the bank has a cash inflow of 100€ caused by the resident’s deposit and thus a VAT of 10€ has to be remitted to the State. In the same time period the bank grants loan of 100€ to the non-resident borrower, but this cash outflow doesn’t generate any tax liabilities. The cash-flow method doesn’t include to its tax base the transactions with non-residents and therefore no VAT will be estimated for the bank’s supply of financial services to the borrower. As a result for period 1, the total attributable tax is 11.1€ which comes as a result from the tax of 10€ plus the government’s rate of return amount 1.1€ (11% * 100).Period 1Illustration 8Bank’s cash-flow system/ tax implicationsCash inflow (+)Cash outflow (-)SubtotalDeposit = 100Loan= -1000TaxCreditSubtotalTax on deposit= 10Credit tax on loan= 010Regarding period 2, illustration 9 indicates that the non-resident borrower settles up the loan of 100€ plus a loan interest of 13.5€ (13.5% * 100), without any VAT implications to arise from these two cash inflows for the bank. The loan interest in this situation is 13.5% and is reduced in comparison with the general interest which is 14%, due to the bank’s aim to become more attractive to non-residents in comparison with their domestic banks. On the other hand, the depositor receives back from the bank the deposit of 100€ plus an interest of 5€. These cash outflows cause an input tax credit of 10€ and 0.50€ respectively, which reflect the bank’s tax consequences for period 2. As a result from both periods, the tax which has to be remitted to the government is 0.60€, that is to say the spread between the tax paid to the State of 11.1€ in the first period and the input tax credit received of 10.50€ in the second one, exactly like in example B.Period 2Illustration 9Bank’s cash-flow system/ tax implicationsCash inflow (+)Cash outflow (-)SubtotalLoan repayment = 100Deposit withdrawal= -1000Loan interest= 13.5Deposit interest= -58.5TaxCreditSubtotalTax on loan repayment= 0Credit tax on deposit withdrawal= -10-10Tax on loan interest= 0Credit tax on deposit interest= -0.5-0.5 Evaluation of the cash-flow method applied to credit servicesGranting of creditThe credit is granted by a financial institution with the form of a loan where this is asked by businesses or consumers who are in a difficult economical situation and they desire to facilitate their current condition. With reference to the tax which has to be imposed on the value added of this financial service, despite the complexities that it faces, the cash-flow method would successfully apply for calculating accurately the relevant VAT. As it has been analyzed through the description of the examples above, the cash-flow method could operate effectively for taxing the financial services of a capital nature which include an exchange of funds, as it is the granting of credit with the form of a loan provision. The exchange of funds is between the financial institution and the borrower and the consideration for the provision of the loan is hidden in the profit margin. Nevertheless, the cash-flow method lays some restrictions regarding the identity of the borrower and the lender. For instance, the tax which has to be imposed on the value added of a loan supplied by a non-financial business to a customer who is consumer wouldn’t be able to be determined since the cash-flow method excludes these transactions from its tax base. The cash-flow approach works only in the cases of transactions between financial institutions with registered and non-registered persons, that is to say businesses and consumers. More analytically, in the case where the borrower is a consumer which means not liable for VAT and where also the depositor is a consumer, there is no need for two cash-flow systems to exist for estimating the tax imposed on the value added for the service provided to them. Then, where the borrower is a business and on the other hand the depositor is still a consumer, there is a necessity for two cash-flow systems to operate because the borrower is now liable for VAT and has to estimate separately the tax attributable and the credit tax. In the case where the borrower is a non-resident and the depositor is a resident consumer, one cash-flow system has to be implemented for both transactions since none of them is liable for VAT. The fact is that in all these situations, the cash-flow method functions in an accurate and correct way. For handling any problems which may arise, like for instance are the tax rate changes and the difficulties that the small businesses borrowers face with the cash-flow calculations, the most suitable to utilize are the cash-flow method with TCA and the truncated cash-flow method with TCA. Consequently, for taxing the credit granting there is no need to canvass for another method.Negotiation and management of creditThe negotiation and management are two financial services which contribute to the accurate function and effective completion of the credit granting procedure. The suppliers can either charge remuneration for the services’ provision or not. In the case where no fee is charged, the supply is out of the VAT scope. On the contrary, when the providers charge a consideration, the reward’s nature has to be examined with the aim of canvassing how the services could be taxed and if eventually the cash-flow method could work for them.With reference to the credit negotiation, when a financial institution treats with the amount of loan which the borrower would like to receive, the first and simplest case is where the negotiation’s fee would be an explicit one. As a result, the negotiation’s entrance to the VAT system would be straightforwardly completed by following the common procedure of taxation and so there is no need to examine the implementation of the cash-flow method. The second occasion is where the negotiation’s fee would be implicit and hidden in the profit margin. Under these circumstances the negotiation could be effectively VAT taxed by the cash-flow method. The negotiation could be characterized as the ancillary service of the credit granting since it facilitates the loan process. Thus, it is understandable that in the absence of the fundamental service which is the credit granting, we won’t had provided the negotiation to the customers. Consequently, the cash-flow method would face granting and negotiation as a single service and as a result the already mentioned process for taxing the credit granting will be followed for estimating the respective VAT. As regards the management, this service is usually supplied by the financial institution after the granting of credit for checking that the process which has been agreed with the customers to be followed is finished without any problems and delays to appear from the borrower’s perspective. The VAT matter of this service is treated like the case of negotiation, that is to say the two different natures of the remuneration have to be described so as to find the proper method of taxation for each of them. The initial case is where the management’s reward would be a definite one. In this occasion, there would be no necessity to put into practice the cash-flow method for calculating the tax because the management could be very easily taxed under the normal VAT system like the rest services. The next case would be if the management is a service of capital nature and its fee is hidden in the profit margin. Likewise the occasion of negotiation, the cash-flow method would successfully operate for correctly estimating and imposing the VAT. The credit management could not be characterized as the main service but as an auxiliary to the granting of credit process which means that it wouldn’t had been supplied as a discrete service to businesses and consumers. As a result, for estimating the respective tax, granting and management could be handled by the cash-flow method as one sole service and not as two separate. ConclusionWithin the EU economy, the financial services are frequently provided by any economic or non-economic enterprise to its customers. As regards their tax condition, most of them are VAT exempt according to Article 135(1) RVD. This VAT exempt status is mostly provoked due to the interpretation lack of what can be defined as the relevant remuneration which is charged by the provider of the economical service. However, this complexity relates only to the margin based products and not to the financial services where their reward is explicit, as for instance are the consultancy services or the safe-deposit box rental charges which are normally taxed under the credit invoice VAT system. The intense concern for the more than a few negative consequences which arise from the VAT exempt condition of these services, with the non-recoverable tax to be referred as one of the most important, is reflected also by the Commission’s various proposals for reforming the current VAT treatment of the financial services by focusing mostly on their re-definition and the right of opting the taxation. The granting, negotiation and management of credit are core economic services where each of them plays an important role to the commercial transactions between the firms and their customers. Their basic aim is to facilitate and normalize the customers’ tricky economical situations. According to the provision (b) of Article 135(1) RVD, these services are VAT exempt and from this status some negative consequences are generated for the businesses operation, as for example is the distortion of competition. As it has already been analyzed through the relevant case-law, it is very easy for quite a lot of misunderstandings to arise, as for instance is what an economical exempt service is and how it has or not to be treated regarding taxation. As a result, for the correct VAT treatment of these services it is absolutely necessary to be more specific to their definition and to find the most suitable method for entering them to the normal VAT system.The cash-flow method constitutes an influential suggestion for taxing the exempt financial services which are only of capital nature and their remuneration is implicit and hidden in the profit margin. As a method has significant advantages, but also holds some disadvantages which have kept it until now out of practice. However, the truncated cash-flow method with TCA and the cash-flow method with TCA have tried to solve some of its difficulties. In particular, the cash-flow method could properly calculate and impose the relevant tax on the credit granting’s value added. Concerning, the negotiation and management of credit if the remuneration charged by the provider would be an explicit one, then these services could be normally taxed under the credit invoice system and there is no need to examine if the cash-flow method could work for them. Alternatively, if the negotiation’s and management’s reward would be implicit and hidden in the profit margin, the cash-flow method could effectively estimate the VAT. The method in order to calculate the tax, it would face these services and granting of credit as one sole service and not as two or three different since the negotiation and management are recognized as ancillary services to the provision of credit. The necessity of taxing the exempt financial services in general and more specifically the granting, negotiation and management of credit is more forceful than ever. The total gain which could be derived from the full taxation of the financial services would be significant for both the EU governments and for the businesses. All the current negative consequences like the distortion of competition will be disappeared and the enterprises’ function will be improved. So, more research has to be done from both a legal and economical perspective within the EU in order to get over the obstacles which exist for effectively taxing the financial services and eventually solving this major problem of the VAT exemption.List of referencesSources of lawCommission of the European Communities Brussels, 28.11.2007 SEC(2007) 1555, Commission Staff Working document accompanying the Proposal for a council Directive amending Directive 2006/112/EC on the common system of value added tax, as regards the treatment of insurance and financial servicesCommission of the European Communities Brussels, 28.11.2007 COM(2007) 746 Final, Proposal for a Council Regulation laying down implementing measures for Directive 2006/112/EC on the common system of value added tax, as regards the treatment of insurance and financial servicesCommission of the European Communities Brussels, 28.11.2007 COM(2007) 747 Final, 2007/0267 (CNS), Proposal for a Council Directive amending Directive 2006/112/EC on the common system of value added tax, as regards the treatment of insurance and financial servicesCouncil of the European Union Brussels, 30.09.2011 Proposal for a Council Directive amending Directive 2006/112/EC on the common system of value added tax, as regards the treatment of insurance and financial servicesDirective 2000/35/EC of the European Parliament and of the Council of 29 June 2000 on combating late payment in commercial transactionsEuropean Commission, Consultation Paper on modernizing Value Added Tax obligations for financial services and insurancesRecast VAT Directive 2006/112/EC of 28 November 2006 on the common system of value added taxBooks, Articles, Other MaterialAndersson, P. 2001, Expertise in Credit Granting: Studies on Judgment and Decision-Making Behavior, Stockholm School of EconomicsComments by the European Association of Co-operative Banks (EACB), the European Association of Public Banks (EAPB), the European Banking Federation (EBF), the European Fund and Asset Management Association (EFAMA), Insurance Europe (formerly the CEA) and the European Federation of Insurance Intermediaries (BIPAR) on the EC’s proposal to reform the VAT rules applied to financial and insurance services, EBF Ref. N° 0120, Brussels, May 2012De la Feria, R. & Krever, R., Ending VAT Exemptions: Towards A Post-Modern VAT, Oxford University Centre for Business Taxation, Working Paper 12/28De la Feria, R. & Lockwood, B. 2009, Opting for Opting In? An Evaluation of the Commission’s Proposals for Reforming VAT for Financial ServicesErnst & Young, Value Added Tax: A study of Methods of Taxing Financial and Insurance Services, 1996FECMA Magazine for European Credit Managers, Credit Management goes straight up, 1/2012Henkow, O. 2007, Financial Activities in European VAT: A Theoretical and Legal Research of the European VAT System and the Actual and Preferred Treatment of Financial Activities, Lund UniversityInternational Monetary Fund, Tax Policy Handbook, 1995KPMG & Leaseurope publication, European Leasing, 2007The Institute for Fiscal Studies 1978, The Structure and Reform of Direct Taxation, Report of a Committee chaired by Professor J.E. MeadeOpinion Statement on Proposals by CFE for a VAT Directive and Regulations regarding Financial Services, (TAXUD/2144/07 Rev. 1 – EN Brussels, 16 July 2007 and TAXUD/2146/07 – EN Brussels, 13 July 2007)Poddar, S. 2003, Consumption Taxes: The Role of the Value-Added Tax, in Taxation of Financial Intermediation: Theory and Practice for Emerging Economies, Honohan P.Poddar, S. & English, M. 1997, Taxation of Financial Services under a Value-Added Tax: Applying the Cash Flow Approach, National Tax Journal, pp.89-112PwC, Study to Increase the Understanding of the Economic Effects of the VAT Exemption for Financial and Insurance Services, November 2006PwC, Study How the EU VAT exemptions impact the Banking Sector, October 2011PwC, VAT Bulletin Financial Services, November 2007VAT Survey, Financial Services, Survey on the recovery of input VAT in the financial sector, 2006, IBFDTerra, B. 2010, VAT and Financial Services: The Proposals for Change, University of Lund, Vol.9Terra, B. & Kajus, J. 2011, A Guide to the European VAT Directives, Introduction to European VAT, Vol.1Case-LawOpinion of Advocate General Sir Gordon Slynn delivered on 18 November 1981 in Case C-8/81, Ursula Becker v. Finanzamt Munster-Innenstadt, ECR [1982] P. 00053Case C-8/81, Ursula Becker v. Finanzamt Munster-Innenstadt, ECR [1982] P. 00053Case C-222/81, B.A.Z Bausystem AG v Finanzamt München für K?rperschaften, ECR [1982] P. I-02527Case C-348/87, Stiching Uitvoering Financi?le Acties v. Staatssecretaris van Financi?n, ECR [1989] P. 01737Opinion of Mr. Advocate General Jacobs delivered on 3 March 1993 in Case C-281/91, Muys' en De Winter's Bouw- en Aannemingsbedrijf BV v Staatssecretaris van Financi?n, ECR [1993] P. I-05405Case C-281/91, Muys' en De Winter's Bouw- en Aannemingsbedrijf BV v Staatssecretaris van Financi?n, ECR [1993] P. I-05405Case C-306/94, Régie Dauphinoise- Cabinet A. Forest SARL v. Ministre du Budget, ECR [1996], P. I-03695Case C-2/95, Sparekassernes Datacenter (SDC) v. Skatteministeriet, ECR [1997] P. I-03017Case C-142/99, Floridienne SA, Berginvest SA v. Belgian State, ECR [2000] P. I-09567Case C-235/00, Commissioners of Customs & Excise v. CSC Financial Services Ltd, ECR [2001] P. I-10237Case C-185/01, Auto Lease Holland BV v. Bundesamt für Finanzen, ECR [2003] P. I-01317Opinion of Advocate General Léger delivered on 12 September 2002 in Case C-77/01, Empresa de Desenvolvimento Mineiro SGPSSA (EDM) v. Fazenda Pública, ECR [2004] P. I-04295Case C-77/01, Empresa de Desenvolvimento Mineiro SGPSSA (EDM) v. Fazenda Pública, ECR [2004] P. I-04295Case C-472/03, Staatssecretaris van Financi?n v. Arthur Andersen & Co. Accountants c.s., ECR [2005] P. I-01719Case C-453/05, Volker Ludwig v Finanzamt Luckenwalde, ECR [2007] P. I-05083Case C-98/07, Nordania Finans A/S, BG Factoring A/S v Skatteministeriet, ECR [2008] P. I-01281Case C-259/11, DTZ Zadelhoff vof v. Staatssecretaris van Financi?nOpinion of Advocate General Sharpston delivered on 8 May 2012 in Case C-44/11, Finanzamt Frankfurt am Main V-H?chst v Deutsche Bank AGCase C-44/11, Finanzamt Frankfurt am Main V-H?chst v Deutsche Bank AGCase C-653/11, Her Majesty’s Commissioners of Revenue and Customs v. Paul Newey ................
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