Skattenytt nr 4 2019 s. 209
Territorial Allocation of VAT in the European Union, a book review
This is a book review of the doctoral dissertation with the title Territorial Allocation of VAT in the European Union – Alternative approaches towards VAT allocation and their application in the internal market. It is written by Mariya Senyk and was successfully defended at the Department of Business Law, School of Economics and Management at the University of Lund September 14, 2018. I acted as the faculty opponent. This review summarizes my impression of the thesis and gives a few critical remarks which were also raised during the public defense. The thesis has an extensive scope, covers an important and relevant topic and brings interesting perspectives to an area where more research needs to be carried out.
2 THE RESEARCH SUBJECT
This thesis is about value added tax (VAT) – particularly the EU VAT. Within the EU, the basis for consumption taxation through a value added tax added in each step of the production- and distribution chain is harmonised to a large extent at EU level. The legislative basis for this harmonisation is the EU treaties, the VAT directives and regulations, court cases from the Court of Justice and guidelines from the VAT Committee plus explanatory notes from the Commission. Hence, the material is vast and complex to its nature. It is, however, the Member States that collect the tax and apply the tax through their different tax authorities and national court systems. The driving force behind harmonising the EU VAT is the establishing and functioning of an internal market, creating a level playing field between businesses located in different member states. The constitutional basis for the EU VAT is thus the different EU treaties and accession treaties with the different member states.
VAT is a tax on different forms of supplies or acquisitions (goods or services – using the EU VAT terminology) – basically what can be constituted as taxable transactions (the different objects being sold or transferred). Objects are sold from a supplier to a purchaser, either another business, organisation or consumer (the transactions). The different market actors (sellers and buyers of different sorts) are in the EU VAT regulated as taxable or non-taxable persons. Depending on which type of object and in between which actors (subjects) this object is sold or transferred, different rules deciding which state that has the right to tax the object apply, if more than one state is connected to the objects or subjects involved. If such rules do not exist, several states can claim the right to tax the object (since it is a tax on taxable transactions), which can lead to double taxation. If no state claims the right to tax an object, such cases lead to double non-taxation. Both double taxation and non-taxation are equally distortive for VAT purposes, hence the rules governing which jurisdiction that has the right to tax an object is fundamental for the functioning of the internal market. The VAT is collected from the subject deemed to be taxable for the object (the supplier or the buyer), which is not necessarily established the same state as the state that has the right to tax the object.
The different rules allocating taxing rights are based on proxies, which are legal criteria such as where the transport of goods begins or ends, where an immovable property is located or where a business has its fixed establishment. The proxies are based upon principles (Mariya Senyk also refers to these as regimes, approaches and methods), such as the principle of origin or destination of how the taxing rights is allocated between states.
The overarching theme for this thesis is thus the different principles (namely origin and destination) underpinning the EU VAT system in particular, but it is also compared with how the different principles are understood from studying WTO law and the OECD policy framework, where international VAT/GST guidelines have been developed. One important task of a researcher is to explain and justify the research subject from a societal, theoretical and practical perspective. Going into the first chapter and particularly the background presented in section 1.2 starting on p. 19 Mariya Senyk describes the EU VAT gap (the gap between the VAT that should have been collected and the VAT actually collected) and the different principles (origin and destination) functioning as possible tools for allocation taxing rights between states. She also describes different perspectives on this from the OECD and the WTO, such as that there may be differences between how goods and services or intangibles are treated. These differences are discussed from the basis of EU, OECD and WTO policies and legal frameworks and from the point of view of the Court of Justice of the European Union (CJEU). My conclusion is that a comparison between the three different frameworks is interesting and increases the understanding of how the concepts are understood for VAT purposes. Allocation of taxing rights between states is fundamental to understanding the effects of tax systems to cross-border transactions.
3 THE OBJECTIVE
The specified objective with the thesis is to increase the knowledge on the origin and destination principle and that it may contribute to the EU legislator in developing a coherent future EU VAT system compatible with the requirements of the internal market (p. 22). One of my questions during the defense was if the objective of coherence is compatible with a functioning internal market. Even if coherence in a legal system, tend to lead to a more efficient and effective legal system, coherence as such is a value that also needs to be questioned since coherence is just a mean to reach another objective such as certainty or legality. I think the meaning of coherence and how it has affected the perspective in the thesis could have been further explained. The choice of coherence is logic if the theoretical base for the study follows a positivistic understanding of law, but it also implies that certain values influence the perspective of the research, such as that a coherent legislation better fulfils its objective. In an EU setting where law is based on a step-by-step harmonization process, coherence may be difficult to uphold above other values such as a certain and practically applicable legislation. Since the thesis focus on the EU VAT, the degree of harmonization and what actually is understood with a functioning internal market could have been further discussed.
The level of ambition presented with the objective of the thesis is dual. It partly aims at increasing knowledge and partly has a high ambition in terms of future policy work within the EU VAT system. I agree that the EU VAT system could learn a lot from non-EU systems. There are, however, particular problems following the division of competence between the EU level and the Member State level which poses additional difficulties as how the internal market can or should function.
4 PURPOSE, RESEARCH QUESTIONS AND GIVEN DELIMITATIONS
The main task of any thesis is to give an answer to the purpose(s) and its research questions, if the understanding of the questions and the purpose(s) are questionable, also the results can be questioned. The following section presents the different purposes and questions from the thesis.
The thesis presents three different purposes. The first purpose is “to establish what the content and function (legal status) of the origin principle and the destination principle are, and to consider whether these two principles have the same meaning in the different international legal frameworks that have been selected for the purpose of the analysis”. Connected to this purpose is also two research questions, where the second is twofold:
RQ 1(1): Do there exist different conceptions of the origin and destination principles in the chosen international legal frameworks? Are they used consistently within each of the frameworks?
RQ 1(2): Do the origin and destination principles have a coercive effect in the WTO and the EU legal orders, and in the OECD framework? In particular:
- Are there any limitations on the application of the origin principle and the destination principle imposed by WTO law?
- Can the origin and destination principles be regarded as fully-fledged principles of law in the EU legal order?
My interpretation of the first purpose is that it aims at establishing three things, which are:
- to systematize the meaning(s) and use of origin and destination principles in the three frameworks with the objective of identifying similarities and differences,
- to establish or discuss if there are hierarchical effects (coercive forces) between the three different frameworks, with a particular WTO focus, and
- to establish whether or not the origin and destination principle (within the EU VAT?) can be regarded as principles from a general EU law perspective.
During the public defense my interpretation of the first purpose was discussed and Mariya Senyk clarified that the second indent of my interpretation is not as wide as I have interpreted her purpose. Mariya Senyk concludes in her thesis that from a WTO perspective no such coercive effects exist, even if the OECD refers to the destination principle as an international norm sanctioned by the WTO (p. 323). Hence, the coercive effects between the frameworks are not analysed in accordance with the second indent above, but refers to the possible references made between the different frameworks. The potential coercive effects between the three frameworks (WTO, OECD and EU) are not analysed in the thesis. From my perspective, this would have been an interesting research gap to fill.
The second purpose is: “to analyse the EU VAT system, as well as the proposals presented by the Commission for the future VAT system and the legislative acts adopted by the Council in relation to the establishment of the Digital Single Market from the perspective of territorial allocation of VAT, and in particular, to find out what approaches towards allocation of VAT are reflected in the current legal provisions governing the application of VAT in cross-border trade within the EU, as well as in cross-border trade with third countries and territories. This part of the research consitutes de lege lata research.” (p. 24). The second purpose is somewhat differently expressed on p. 217 of the thesis where it says: “One purpose of this thesis is to analyse the EU VAT framework from the perspective of tax allocation. [...] this chapter looks at how these approaches towards allocation of VAT are reflected in the effective legal provisions, in particular, how VAT is allocated in cross-border transactions within the internal market and also how it is applied in trade with third countries and territories.”
The third purpose is “to evaluate the origin principle and destination principle in the light of the legal character of VAT and the requirements of the internal market with the objective of presenting de lege ferenda assertions.” This third purpose also covers two research questions:
RQ 3(1): Are the origin principle and the destination principle consistent with the legal character of VAT as a tax on consumption?
RQ 3(2): Are origin-based and destination-based taxation compatible with the concept of the internal market as defined in Art. 26 of the TFEU?
In the methodology there is yet another purpose, “the purpose of this study is to contribute to consistensy of the use of the origin and destination principles by legal actors”(p. 31) My understanding of this purpose is that it is linked to the first research question of the first research purpose as well as the first research question of the third purpose.
The main delimitations are three-fold; they are WTO related, referring to the national level of the EU VAT and theoretical aspects of principles. The WTO related delimitations are justified by keeping the focus on the imposition of indirect taxes on cross-border transactions. Also, the focus purely on the EU level of the EU VAT can be justified due to the scope of the thesis. The third part of the delimitations are referring to the understanding of what constitute a principle from a theoretical point of view. This is more difficult to grasp since the second indent of the second research questions related to the first purpose is designed to answer if the origin and destination principles can be considered as fully-fledged principles from a wider EU law perspective. Besides the delimitations presented in section 1.6 of the thesis, there are also other substantive delimitations presented throughout the thesis. In order to give a full description of the scope of the research task presented in the thesis they are also listed here:
- p. 32, note 59: the binding nature of WTO law for the EU,
- p. 83, note 308: the phenomena of VAT/GST double taxation and possible remedies thereon,
- p. 220: tax collection techniques,
- p. 301, note 1300: the compliance of the proposals [single EU VAT area] with the principle of conferral of powers,
- p. 306, note 1321: the legal status of VAT revenues collected in the new definitive system, and
- p. 308, note 1334: a thorough analysis of compatiblity of EU simplification measures for e-commerce with the WTO agreement.
To sum-up, my overall impression of the scope of the aims and research questions of the thesis is that there is an inherent logic to the different questions. It is logical to systematize and analyse the understanding of the origin and destination principle in the three covered frameworks. The interconnection between how these frameworks have developed over time can explain similarities and differences between the different frameworks. If this is done to better understand the EU VAT, this could have been further clarified. But if there are no coercive effects between the different frameworks, then which purpose does the systematization fulfil? My main critizism is that it is important to strive for transparency in how the purpose of a research study is understood. Further clarification of how the different purposes and research questions had been linked to each other or if they are part of one overall purpose, would have helped Mariya Senyk to increase the transparency of her research. Hence, even if the research process is circular, the presentation of the research results is linear in the form of a thesis.
5 SHORT SUMMARY OF THE THESIS
The thesis is divided into seven chapters. The first being introductory, setting the scene for the task and the final chapter, which is summarizing the findings from previous chapters and giving the overall conclusions from the research that has been carried out. The second chapter (17 pages), describes the basis for the evaluation, explaining the legal character of VAT and the internal market requirements. The identification of the legal character of a VAT is mainly based upon the CJEU case law covering the characteristics that it is a general tax on consumption, levied at each stage of the production and distribution chain with the aim of reaching expenditure of final consumers (indirect character) (p. 56). Mariya Senyk also brings up the core characteristics given by the OECD for a VAT (at p. 54), these are:
- a broad-based tax on final consumption,
- collection through a staged process,
- the application of the destination principle in international trade in goods, services and intangibles, and
- the application of the Ottawa Taxation Framework Conditions, which lay down the generally acctepted tax policy principles in relation to VAT (neutrality, efficiency, certainty and simplicity, effectiveness and fairness, flexibility).
The differences and similarities between these two different characteristics of a VAT are not discussed in detail, particularly the reference to the Ottawa Taxation Framework Conditions and what that actually means for the analysis. They do not only cover the principles mentioned previously, but they also pin point particular elements of consumption taxation and establish an agenda for the ongoing work for the OECD. Particularly the first point of the particular element is of essence for the research and also the first point of the agenda that is an explanation now 20 years later of the ongoing work with establishing an internationally accepted principle for how to establish further co-ordination to reach a taxation at the place of consumption. Mariya Senyk does not discuss the principles of taxation at the place of consumption as an essential characteristic of the VAT, but present it as part of the findings of the EU legal order on p. 325.
The third chapter (36 pages), describes the basis for fiscal jurisdiction in VAT. Mariya Senyk explains the intended content of the chapter to cover an introduction of the origin and destination principles based on doctrinal sources and to provide insight into the exercise of tax jurisdiction and the limits thereon. As Mariya Senyk discusses the exercise of tax jurisdiction she mainly focuses on questions on territoriality. There is one part of this discussion that is more general and one part that puts particular focus on the exercise of tax jurisdiction for consumption tax purposes. In the first more general part, it would have been interesting to see how the discussion could be linked to eg. Jerome Monsenegro’s thesis also discussing territoriality in an EU setting, however, from a direct tax perspective.
Another part of the third chapter introduces the origin and destination principle, which starts off with a general definition and explanation of the term ’principle’. Thereafter the discussion continues with the dichotomy of origin and destination. The later part of the discussion is more closely linked to economic theories, even if that is not an outspoken intent if compared to the description of the use of economic materials in section 1.4.1 (p. 29). Perhaps is would have been beneficial to discuss both theoretical and methodological choices to clarify this further.
The fourth chapter (37 pages) covers the more descriptive analysis of the origin principle in the three frameworks. It is connected to the first purpose of the thesis. Mariya Senyk points outs that there is not much material on the origin principle but based on the materials she has found, the conclusion that can be drawn is that the WTO framework is the most consistent framework in its conceptual use of the origin principle. The same conclusion is also valid for the destination principle which is discussed in the fifth chapter (70 pages). The more descriptive analysis of both the origin and destination principle is concluded in two different tables, table 1 and 2 in section 220.127.116.11 (p. 317) and section 18.104.22.168 (p. 321). The findings presented by Mariya Senyk show that there is a high degree of relativity in how both the origin principle and the destination principles is understood and used, particularly within the EU VAT and the OECD framework. This conclusion needs to be linked to how Mariya Senyk describes her understanding of principles co-existing at different levels in section 3.3. There she concludes that the origin and destination principles need to be understood from their contextual use. From my perspective this is inherent in the relativity of principles if they are understood as values used for eg. policy decisions or as interpretative tools. The descriptive systematization is, however, an independent contribution in the thesis, particularly since it is based on how the different frameworks have developed from also an historical perspective.
As mentioned above, particular emphasis in the thesis is put on the EU VAT. Besides the issues already described in this short summary, also a more detailed discussion of the current and proposed EU VAT system and its use of origin-based or destination-based taxation is carried out in the sixth chapter (95 pages) of the thesis. The proposed EU VAT system covered in the thesis includes materials up until 16 May 2018. There have been several changes to the EU VAT system also after this date so the reader needs to take that into consideration when reading the thesis. Mariya Senyk describes the EU VAT system as a hybrid system mixing the origin and destination principle for allocating the right to tax the different objects to different member states if transactions are carried out between member states and that the hybrid system will remain even if the future VAT system is claimed to be destination based. Previously the EU VAT system has been held to be origin based since that has been considered to be more compatible with the establishing and functioning of the internal market. Mariya Senyk presents three different sub-categories of the EU VAT in her thesis, namely:
- B2B transactions; where taxable persons (subjects) do not fall under any special schemes and have the full right to deduct input VAT (transfer of tax burden onto the next step in the production and distribution chain) (Mariya Senyk refers to this as a destination-based system).
- B2C transactions (Mariya Senyk refers to this as an origin-based system), there are however a lot of specific provisions for several different types of services that in fact are destination based instead.
- Cross-border transactions of taxable persons falling within the special schemes, exempt taxable persons, non-taxable legal persons and taxable persons with reduced right to deduct input VAT (Mariya Senyk refers to this as a hybrid system).
The seventh chapter (40 pages) summarises the conclusions from the previous chapters and connects the different parts of the thesis, aiming at answering the previously presented research questions and the three different purposes (see section 4 above). My main impression is that Mariya Senyk does answer her overall objective with the thesis which was discussed in section 3 above. The thesis provides both a descriptive and analytical systematization of the origin and destination principle in WTO law, OECD materials and the EU VAT. The analysis is mainly found in chapter 7. The first purpose is mainly discussed in chapter 4 (origin principle) and chapter 5 (destination principle) and the results are summarized in section 7.2.1–7.2.2. The results based on the second purpose are summarised in section 7.4.1 (the current system) and 7.4.2 discusses the future VAT system. The third purpose covers using the internal market requirements discussed in section 2.2 of the thesis and the result of the evolution is presented in section 7.5.2 (p. 345–350).
6 CONCLUDING COMMENTS
The systematization of different understandings of the origin and destination principle in the three frameworks is well carried out and explained. This is one of the main contributions of the thesis. My main critique is that the results could have been even further penetrated if the research tasks had been presented with higher precision. Examples of this is found on p. 325 in respect to if the destination and origin principle are fully-fledged principles or not, where the answer is no. Perhaps because there is no definition of what a fully-fledged principle are, and a research question should open up for in-depth analysis and not an answer of yes or no. At the same page it is concluded that the principle of taxation at the place of consumption is a genuine principle of law, I am however, not convinced that it is a genuine principle of law, but a wanted result, or an aim, of where allocation preferably should take place.
When these questions were brought up during the final defense Mariya Senyk explained her views more in detail and in some areas, we agree and in others it is perhaps a matter of how the research is phrased. One such example is that I refer to that the objective of the place of supply rules within the EU VAT are based on reaching a rational tax result, whereas Mariya Senyk refers to this as a legal principle. At the same time, it is unclear what a legal principle actually is.
The thesis is mainly based on a traditional legal dogmatic method or doctrinal research. There are, however, also other methodological considerations where there is a historical perspective on the origin and destination principle in the EU VAT, the OECD materials and the WTO materials. The historical approaches are somewhat different in the three frameworks, where secondary sources and related research concerning the OECD is left out of the study in chapter 5.2 concerning the destination principle in the OECD legal framework. I find that delimitation of the material unjustified, creating an unbalance in between the different frameworks also affecting the presented findings of the research. Especially since there are also related research where the OECD framework has been linked to the EU VAT in other studies such as the one carried out by Marie Lamensch in her thesis and in my own thesis. Both Marie and I have different approaches to the questions so there is no risk of overlapping research, instead it could have been a helpful contextualization. As the EU VAT framework is discussed in chapter six, Mariya Senyk uses related research in a different way also reaching further in her discussions. Also, the book by Arthur Cockfield, Walter Hellerstein, Rebecca Millar and Christophe Waerzeggers called Taxing Global Digital Commerce, could have given valuable input to both the understanding of the principles, the character of VAT and also the EU VAT framework.
I would also hold that there is a normative approach in the evaluation from the perspective of the legal character of VAT and the requirements of the internal market, based on the assumption that these are met if the EU VAT is consistent and coherent. This is not a problem if the research objective is phrased under that notion. Different perspectives on which research questions to raise is enriching, it is, however, important to be transparent in such perspectives.
To conclude, my impression is that the thesis covers an important topic, not least considering the ongoing discussions on how the EU VAT should change to better meet the conditions of a functioning internal market, but also how the EU VAT functions in a more globalized and digitalized world. Allocation principles and their understanding is one key issue in to understanding the causes for double taxation and non-taxation.
Pernilla Rendahl is associate professor in tax law at the School of Business, Economics and Law, Gothenburg university.