Licensing know-how to benefit from a lower VAT rate is not automatically ‘abusive’ from a VAT perspective

The ECJ decision on the WebMindLicenses case (published 17 Dec 2015) - provides guidance on points to consider when determining whether a licensing agreement amounts to VAT ‘abuse’ (and, accordingly, points to watch to make sure your licensing agreement is not abusive!) 

In this particular case, know-how had been licensed from Hungary to Madeira, an autonomous region of Portugal which has a preferential VAT rate compared to Hungary (mind you, almost everywhere has a preferential VAT rate when compared to Hungary!). The know-how was used to provide online services from Madeira to consumers worldwide, charging VAT in Madeira. Note that this sort of arrangement isn’t a lot of use now from a VAT-reduction perspective – the VAT rate charged on supplies to consumers is now the rate where the consumer is located, not the rate where the supplier is located.

The Hungarian tax authorities claimed that the know-how transfer was essentially a sham and that the know-how continued to be exploited in Hungary, so that Hungarian VAT should have been applied.

Given that there is freedom of establishment etc within the EU, it is not automatically VAT abusive to arrange a business in order to ensure that it benefits from a lower VAT rate.

Essentially, a licensing agreement will be considered VAT abusive where it is artificial and intended to disguise the fact that the relevant services are actually provided from another EU country. In considering this, the place of performance of services will be critical – taking into account the location of staff and equipment in particular, and whether the location from which services were said to be supplied had the appropriate resources to provide such services on its own behalf and at its own risk.

The place of creation of the know-how is not decisive - even in a case such as this, where the creator had significant control/influence over the business. Similarly, the location of back office functions and the location of subcontractors was not a decisive factor.

CJEU rules on variable VAT rates for e-books and paper books

The Court of Justice of the European Union gave a ruling today in Cases C-479/13 and C-502/13 Commission v France and Commission v Luxembourg on the taxation of e-books.  According to the Curia website's media release:

France and Luxembourg cannot apply a reduced rate of VAT to the supply of electronic books, in contrast with paper books

In France and in Luxembourg, the supply of electronic books is subject to a reduced rate of VAT. Accordingly, since 1 January 2012, France has applied a VAT rate of 5.5% and Luxembourg a rate of 3% to the supply of electronic books.

The digital or electronic books at issue include books supplied, for consideration, by download or web streaming (‘streaming’), from a website so that they can be viewed on a computer, a smartphone, electronic book readers or other reading system.

The Commission has asked the Court to declare that, by applying a reduced rate of VAT to the supply of electronic books, France and Luxembourg have failed to fulfil their obligations under the VAT Directive [that's Council Directive 2006/112 on the common system of value added tax].

In today’s judgments, the Court upholds the Commission’s action for failure to fulfil obligations.

The Court points out, first of all, that a reduced rate of VAT can apply only to supplies of goods and services covered by Annex III to the VAT Directive. That annex refers in particular to the ‘supply of books ... on all physical means of support’. The Court concludes that the reduced rate of VAT is applicable to a transaction consisting of the supply of a book found on a physical medium. While admittedly, in order to be able to read an electronic book, physical support (such as a computer) is required, such support is not included in the supply of electronic books, meaning that Annex III does not include the supply of such books within its scope.

Moreover, the Court finds that the VAT Directive excludes any possibility of a reduced VAT rate being applied to ‘electronically supplied services’. The Court holds that the supply of electronic books is such a service. The Court rejects the argument that the supply of electronic books constitutes a supply of goods (and not a supply of services). Only the physical support enabling an electronic book to be read could qualify as ‘tangible property’ but such support is not part of the supply of electronic books.

The Commission also criticises Luxembourg for applying a super-reduced VAT rate of 3%, even though the VAT Directive prohibits, in principle, VAT rates lower than 5 %. The Court recalls that, according to the VAT Directive, a Member State may apply reduced VAT rates lower than 5%, provided that, among other things, the reduced rates are in accordance with EU legislation. Since the Court held earlier that the application of a reduced rate of VAT to the supply of electronic books does not comply with the VAT Directive, the requirement that it comply with EU legislation is not met with the result that Luxembourg cannot apply a super-reduced VAT rate of 3% to the supply of electronic books.

The judgments delivered by the Court today do not prevent Member States from introducing a reduced rate of VAT for books on physical support, such as paper books.

This blogger is somewhat confused as to where the court is heading. It seems that computer programs sold online, which are analogous in many respects to e-books, are treated like real books when it comes to exhaustion of rights, as in Case C‑128/11 UsedSoft, but that real books and e-books are treated quite differently when it comes to VAT.  Comments, anyone?

Supply of commercial research: Imperial College VAT recovery claim upheld

This blogger will not even pretend to understand the subtleties of Imperial College of Science, Technology & Medicine v Revenue & Customs [2015] UKFTT 0033 (TC), a United Kingdom First-Tier Tax Tribunal decision of 22 January 2015 which has recently come to his attention. Is looks, however, as though it might be of interest to the research and development side of the British IP sector, since it involves a claim for repayment of Value Added Tax that had been paid by leading academic research institution Imperial College, London, as long ago as 1973 and as recently -- if that be the right word -- as 1994. According to the short summary in the subscription-only Lawtel note,

The Revenue had approved a retrospective partial exemption special method with a university outside its agreement with the Committee of Vice-Chancellors and Principals Guidelines regarding interpretation of the law concerning VAT within the university context. The exemption method was in respect of claims for repayment of residual input tax as a proportion of overhead costs incurred by the university's academic departments on the supply of commercial research. The approval was not ultra vires and the Revenue was bound by the exemption method to repay the university's claim, subject to the university satisfying the appropriate evidential burden.

Knowing how precious is any sort of revenue to research institutions, this blogger wonders whether other colleges may also be able to avail themselves of this ruling, or whether it is so fact-specific to Imperial that it will be of little assistance to anyone else.

Bitcoins & VAT - mostly confusion

Bitcoins have been in the finance news again, this time with regard to VAT in the UK. Although HMRC have not (yet) produced a definite policy statement on Bitcoins and VAT, it seems that they have for some time regarded them as 'vouchers' – so, something like a book token, in that you buy them from one person and can use them to buy things from anyone else who will take Bitcoins.

With most vouchers, there's no VAT on issue (unless the voucher can only be used for something for which the VAT treatment is identifiable on issue of the voucher), so that VAT gets accounted for on the eventual purchase for which the vouchers is used.

The wrinkle is that, if you buy a voucher from someone other than the issuer (i.e.: an intermediary), that someone is making a VATable supply (if they make supplies over the VAT threshold, currently £79k in twelve month - again, simplified – or have registered voluntarily). The question, of course, is who's the issuer of a Bitcoin? Arguably, it's the software used to generate the things, and not a VATable person. So, anyone selling a Bitcoin is likely to be an intermediary for these purpose.

The intermediary is then required to account to HMRC for VAT on the sale of the voucher (there's no actual requirement to charge the VAT to the purchaser - HMRC mostly just cares that the vendor pays the right amount to HMRC). This seems to be what has bothered people selling Bitcoins, with cries of anticompetiveness etc (i.e.: they have to account to HMRC for 20% of the sale price of the Bitcoin, apparently biting into their profits). However, under usual rules, intermediaries can reclaim VAT on the sale of vouchers – even where the issuer (software or otherwise) didn't actually charge them any VAT – so there should be balancing input tax for the output tax. Not sure whether the Bitcoin sellers have worked that one out, or whether HMRC is being sticky about it, as there's nothing official from HMRC on the point and the virtual currency articles aren't wholly clear about it either.

Some of the press have also suggested that retailers accepting Bitcoins face a double tax on transactions -- probably because it may be regarded as barter, with VAT on both sides (but, see above for the reclaim available).

All of which confusion basically suggests it's about time HMRC actually had a published coherent policy on virtual currencies that can be used to acquire actual goods and services – I doubt they're worrying too much about in-game purchases using World of Warcraft gold …

HMRC considers changing Bitcoin taxes, here, in The Telegraph
UK Weighs How to Tax Dealings in Bitcoin, here, in the Wall Street Journal

VAT and R&D services: Kronospan

Kronospan Mielec sp zoo v Dyrektor Izby Skarbowej w Rzeszowie (Case C-222/09): the ECJ has confirmed that where R&D services carried out by engineers are supplied ‘on a contract basis for the benefit of a recipient established in another Member State’, they were ‘services of engineers’ and so the place of supply is the country in which their work is carried out, not the country in which the supplier is based. Given that VAT varies between 15% and 25% across the EU, describing the service correctly can make quite a difference in cross-border services.

In this case, Kronospan, a Polish company provided R&D services to a Cypriot company. The services were described as ‘research and development work relating to the environment and technology, carried out by engineers’.

Poland claimed that some of the services were ‘scientific activities’ - this would mean that the place of supply for VAT purposes was Poland and so Polish VAT (22%) should have been charged by Kronospan. The company disputed this and argued that the services were services of engineers, so that the place of supply was in Cyprus where the work was carried out, so that Cypriot VAT was due - at 15%.

The general rule on the place of supply of services for VAT purposes changed from 1 January 2010, so that the general rule is that services are supplied where the customer is based – but this remains subject to overriding provisions in certain areas, including cultural and scientific activities, and use and enjoyment provisions. It’s important to review exactly what is being done and to make sure that the contract is accurately depicting the services.

What is a "sample"? CJ opinion next month

The Advocate General's Opinion in Case C-581/08 EMI Group Ltd v The Commissioners for Her Majesty's Revenue & Customs, a reference to the Court of Justice for a preliminary ruling, will be delivered on 15 April. The reference is not a copyright issue, since it turns on the interpretation of Sixth Council Directive 77/388 (on the harmonization of the laws of the Member States relating to turnover taxes - Common system of value added tax: uniform basis of assessment). However, it relates to the manner in which recorded materials have been used-- the giving of samples of recorded music that are not generally available to the public in order to boost sales and to promote artists --and to the tax liability for such forms of marketing. The questions before the court are as follows:

"How is the last sentence of Article 5.6 of the Sixth Directive to be interpreted in the context of the circumstances of the present case?
In particular, what are the essential characteristics of a "sample" within the meaning of the last sentence of Article 5.6 of the Sixth Directive?
(c) Is a Member State permitted to limit the interpretation of "sample" in the last sentence of Article 5.6 of the Sixth Directive to-
(i) an industrial sample in a form not ordinarily available for sale to the public given to an actual or potential customer of the business (until 1993),
(ii) only one, or only the first of a number of samples given by the same person to the same recipient where those samples are identical or do not differ in any material respect from each other (from 1993)?
(d) Is a Member State permitted to limit the interpretation of "gifts of small value" in the last sentence of Article 5.6 of the Sixth Directive in such a way as to exclude-
(i) a gift of goods forming part of a series or succession of gifts made to the same person from time to time (to October 2003),
(ii) any business gifts made to the same person in any 12-month period where the total cost exceeds £50 (October 2003 onwards)?
(e) If the answer to question (c)(ii) above or any part of question (d) above is "yes", where a taxable person gives a similar or identical gift of recorded music to two or more different individuals because of their personal qualities in being able to influence the level of exposure the artist in question receives, is the Member Stale permitted to treat those items as given to the same person solely because those individuals are employed by the same person?
(f) Would the answers to questions (a) to (e) above be affected by the recipient being, or being employed by, a fully taxable person, who would be (or would have been) able to deduct any input tax payable on the provision of the goods consisting of the sample?"

When is a digital book a book?

Risbey's Photography Ltd and Digital Albums Ltd v Revenue & Customs Commissioners, VAT & Duty Tribunal, Manchester, 22 August 2008 (noted on the Lawtel subscription service), is a decision on the tax status of so-called 'digital books' in the United Kingdom.

Risbey's digitally produced wedding books which were created from photographs taken by it. Those books were supplied to customers as part of a general 'wedding package'. Risbey's also designed wedding books for outside photographers, who commissioned it to produce the book using photographs which hey supplied. The books displayed selected images of the wedding day, accompanied by text appropriate to the occasion. Once bound, the books could not be altered.

Risbey's submitted that the wedding books had all the physical characteristics of a book and met the zero rating requirements in the Value Added Tax Act 1994 Sch.8 Group 3. The VAT Commissioners disagreed. In their opinion the wedding book did not share the physical characteristics of a book and did not fall within the meaning of book in sch.8 at all. Rather, Risbey's was supplying a single photographic service, which was standard-rated for VAT purposes.

The Tribunal upheld the assessment of the Commissioners that the supply of Risbey's wedding books attracted VAT at the standard rate. In its opinion

* the wedding book did not fall within the ordinary meaning of a book, even though it shared many of the physical characteristics of a book. This was because it was not an object which had the characteristics of being read or looked at. Instead it was a pictorial record, of interest only to persons immediately connected to the event, and the text used had no value in its own right.

* the wedding book was, to all intents and purposes, a wedding album. To restrict the meaning of "wedding albums" to traditional forms would be contrary to the Community principle of equal treatment, which ensured that similar goods in competition with each other were not treated differently for VAT purposes.

* the restriction of the meaning of "wedding albums" to the traditional format would be a failure to acknowledge advances in digital photography--the mere fact that the wedding book could not be altered after publication did not alter its function as a wedding album. Accordingly Risbey's supply of wedding books was standard rated for VAT purposes.

* Risbey's principal activity was the supply of photographic services. The supply of the wedding book was ancillary to, and a means of better enjoying, those services and was entirely dependent on the photographs being taken in the first place.

* Risbey also made a single supply of photographic services when it applied digital photographic processes to the photographs supplied by outside photographers when producing the wedding book.