Some concepts to determine the place of taxation of services (EU Regulation implementing EU VAT Directive)

This is the first of some articles in which we will try to explain some concepts clarified by the Regulation implementing the EU VAT Directive 2006/112/EC. Perhaps, the most interesting issues are those related to the place of taxation of international services. These ones will be treated in this and the following articles.

It has to be reminded that the Regulation seeks to clarify various issues (for example, the rules of location of services, the condition of the taxpayer, etc ….) in order to uniform application of the current VAT system by laying down rules implementing Directive 2006/112/EC”. This regulation, also, recast the the Regulation 1777/2005, updating the articles mentioned and adding some useful concepts.

Also, we have to recall that the amendments made by the VAT package implied the most important reform of the tax not only in Spain but throughout Europe. Much of these changes focused on the rules that determine the taxation of international services. Overall, what is intended with these modifications was to tax services wherever they are consumed and, therefore, that consumption is taxed in the Member State where it takes place.

Since then, the general rule for determining the place of taxation for services is the place where the client of the services is established, rather than when the supplier is established.

When the services are provided to non taxable persons, services will be taxed in the place of business of the supplier.

However, as always happens with VAT, there are many exceptions to the general rules. Reason why some concepts and issued should be clarified.

Three key concepts treated by the Regulation: the place of business, permanent establishment and residence

In this article we are only going to deal with such concepts needed to properly determine the place of taxation of international services. In the next, we will emphasis on the recipient’s status (entrepreneur or professional) and his place of business. Later, we will treat issues such as taxable status taxable persons as well as the concepts of restaurant and catering services for the purposes of its location, etc..

Regarding the place of business, specified in Article 10 of Regulation “the place where the business of a taxable person is established shall be the place where the functions of the business’s central administration are carried out.”, i.e., “the place where essential decisions concerning the general management of the business are taken, the place where the registered office of the business is located and the place where management meets.”

Article 12 of Regulation clarifies the concept of “permament address.” The address for an individual, whether or not taxable person, will be “the address entered in the population or similar register, or the address indicated by that person to the relevant tax authorities, unless there is evidence that this address does not reflect reality.” Now the most controversial concetp: the permanent establishment. The regulation states this as any establishment, characterised by a sufficient degree of permanent degree of permanence and a suitable structure in terms of human and technical resources to enable it to receive and use the services supplied to it for its own needs.

Now, the most controversial concept: the permanent establishment. The regulation defines it as any establishment, other that the place of business, characterized by a sufficient degree of permanence and adequate infrastructure in terms of human and technical resources to enable it to receive and use the services provided for their needs or to provide the services provided. For this purposes, the regulation specifies that the fact of having a VAT number is not sufficient to conclude that there is a permanent establishment and adequate infrastructure in terms of human and technical resources to enable it to receive and use the services provided for their needs or to provide the services provided. For this purpose, the regulation specifies that the fact of having a VAT number is not sufficient to conclude that there is a permanent establishment.

The definition given by the regulation is interesting because it does not coincide entirely with the concept of permanent establishment granted by Spanish tax rules which are not fully in line with the jurisprudence of the European Court of Justice (in which the Regulation is based). Nevertheless, as stated in the previous article, EU regulations are directly applicable and do not require any national law in order to be in force. Consequently, it is possible that in the future, the Spanish tax rules and decisions will have to modify their position in order to be in line with the Regulation and the ECJ.

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