Court of Justice of the European Union – AG Opinion on cross-border transactions involving VAT Groups with overseas members
Ryan Bevan 29 November 2015 No comments
This case (Skandia America Corporation USA C-7/13) concerns the VAT treatment of supplies of software services purchased by a US parent company that were used by its Swedish branch, which was a member of a Swedish VAT Group, to make supplies within the Swedish Group.
The Advocate General recently opined that the services supplied within the VAT Group should be taxed in Sweden. If the opinion is followed by the CJEU it could have significant ramifications for businesses with international branch structures that take advantage of VAT grouping provisions. Usually supplies between a head office and its branches are not subject to VAT since they are part of the same legal entity and cannot therefore be treated as separate taxable persons for VAT purposes. Also supplies between VAT Group members are typically disregarded for VAT purposes.
The Swedish tax authority had in this case registered the US parent as a non-established taxable person and assessed for output VAT on the services supplied to the VAT Group. The main question submitted to the Court was whether the allocation from a US parent to its EU branch of services purchased from a third party constituted a taxable transaction if the branch belongs to a local VAT group. The AG is of the view that the Swedish tax authorities should not have accepted the branch as a VAT Group member without including the entire company as a member since they are not separate legal persons. The potential implications of this are that if the branch was excluded from the VAT Group then the supplies between the branch and VAT Group would be subject to Swedish VAT. Alternatively if both the branch and its US parent were included in the VAT Group then the services purchased in the US and allocated to the Swedish VAT Group would be liable to Swedish VAT via the reverse charge procedure.
It will be interesting to see in due course whether the CJEU follows the AG’s opinion or takes a different view on the issue. The case could impact on all EU countries that have implemented VAT grouping provisions and whilst local rules vary from country to country, the majority do not apply VAT to the type of cost allocations considered here. Also of concern is the possibility that this treatment could be extended to cover reallocations of internal costs which are not currently taxed. International businesses that operate through branch structures and use VAT group registrations should look out for the final judgement in this case and depending on the outcome consider whether changes to their VAT accounting arrangements are required.