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European Commission
TAXUD/C1
[email protected]
From: Confederation of Swedish Enterprise
Register ID number “code d’utilisateur”: Conde528332257
Stockholm April 24, 2014
The confederation of Swedish Enterprise answer to the
consultation “Review of existing VAT legislation on public
bodies and tax exemptions in the public interest”
The Confederation of Swedish Enterprise (Sw: Svenskt Näringsliv) is the most
prominent Swedish business organization and represents 49 separate employer and
trade associations. The Confederation has approximately 60 000 member
companies with about 1,5 million employees. The Confederation welcomes the
initiative from the European Commission and appreciates the possibility to give input
to this consultation.
Summary
An increasing number of member-companies are engaged in business activities
covered by the exemptions in the public interest and they experience difficulties due
to current legislation regarding Value Added Tax (VAT). The Confederation wants to
highlight the importance of neutral, simple and modern VAT rules that work for all
parties and that facilitates, rather than limits, the economic growth in the EU.
Initially the Confederation wants to highlight that the Swedish system with VATcompensation for public bodies results in less VAT-related problems compared to
other member states. However, private companies engaged in businesses
especially within health, social care and education have experienced a number of
difficulties due to current VAT-rules. The main issue for VAT exempt business is the
fact that input VAT is non-deductible. This may lead to a disincentive to invest or to
outsource even where services could be provided more efficiently by other private
parties. Further, it is a difficult issue to establish whether a specific service is taxable
or non-taxable for VAT purposes. Finally, a number of VAT-related problems occur
due to the Swedish implementation of the directive to the Swedish VAT Act.
The Confederation believes there is a major need to reform the EU VAT Directive.
Article 13 should be limited to be used only for situations when the public body is
acting in its exclusive capacity as an authority. Further, the right to deduct input VAT
is a fundamental issue for companies active in this sector and must be allowed to
ensure equal treatment with public bodies. A preferred solution within the scope of
VAT would be to allow a zero or reduced rate rather than a separate refund-system.
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Background
The Commission describes that a number of problems have been identified related
to the VAT-rules for public bodies or the exemptions in the public interests.
The EU VAT Directive1 contains both rules that exclude a public body to be a
taxable person as well as exemptions for certain activities in the public interest.
These rules are harmonized on EU-level and date from the 1970s when many of
these services were only provided by public bodies. However, due to increased
privatization, deregulation and since public bodies more and more engage in other
kind of activities, the current rules has been questioned. The criticism being that the
rules lead to distortions of competition, are to complex and not enough harmonized.
The issue of the VAT treatment of the public bodies and the exemptions was part of
the work initiated by the EU-Commission and the presentation of the Green Paper
on the future of VAT year 2010. To prepare the ground for a possible future
legislative initiative in this area the EU-Commission is now launching this public
consultation2 to give all interested stakeholders a further opportunity to express their
views on this issue. Several possible future alternatives for taxation are presented
together with a number of questions related to the current rules. The main questions
are the following.
1.
2.
3.
4.
5.
General evaluation of the current rules.
Is the competition clause efficient?
Relevant reform measures?
A need for sectorial reform?
Should option to tax to be considered?
Evaluation of the current rules
Initially the Confederation wants to highlight that the Swedish system with VATcompensation for public bodies results in less VAT-related problems compared to
other member states. Municipalities are compensated for their input VAT and also
for a percentage of the input VAT non-deductible for the private company when
acting as their supplier. The purpose of this system is that VAT should not have any
impact on a public body when making spending decisions. Furthermore, the VAT
Act contains competition clause resulting in a transaction made by a public body
being subject to VAT when such activities are performed in competition with private
companies. The purpose is to eliminate VAT-related distortion of competition.
However, private companies engaged in businesses especially within health, social
care and education industry have experienced a number of difficulties due to current
VAT-rules. Health, social care and education are publicly funded but the activities
could be performed either by a public body or a private company.
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2
Article 13, 132-134 of the Council Directive 2006/112/EC
Consultation paper - Review of existing VAT legislation on public bodies and tax exemptions in the public interest, se lank:
http://ec.europa.eu/taxation_customs/resources/documents/common/consultations/tax/public_bodies/consultation_document_en.pdf
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Increased costs due to non-deductible VAT
As mentioned above the current rules are dated from the 1970s when many of these
services were only provided by public bodies. VAT was introduced in Sweden year
1969 and a VAT rate of 11,11 % was used. Today Sweden has one of the highest
VAT rates in EU of 25 %. This result in a high VAT-related cost for companies with
no input VAT deduction.
The main problem in a VAT-exempt
sector is illustrated to the left. VATexempt private businesses have no right
to deduct input VAT in their VAT return.
Therefore, the business expense will
increase with all or part of the VAT
amount.
For similar activities performed by a public body there is, as mentioned above, a
system with VAT-compensation. This system may to some extent result in some
compensation to private companies for non-deductible VAT when negotiating the
price with municipalities for the purchase of services. For private companies
performing education services a percentage will be added to the consideration in
order to compensate for VAT-costs. For health and social care any coverage for
non-deductible VAT will be a discussion between the parties when deciding the
price for the service.
Any VAT compensation allowed to a private company will, however, not amount to
the actual VAT paid since a standard percentage is used. Therefore, the actual
amount received, if any, will lead to different views on whether this system works
well or not. The difference is considerable between companies having a large
number of invoices with a substantial VAT-amount (for example business with heavy
investments) and companies with few invoices with VAT (for example staff intensive
business).
The Swedish VAT-treatment of the sector has been questioned due to lack of
neutrality between public and private sector. Any VAT-compensation that may be
received by private companies is unfair since it does not cover the actual VATamount. Further, non-deductible VAT may lead to a disincentive to invest or to
outsource even where services could be provided more efficiently by other private
parties.
Difficult to establish whether a service is taxable or non-taxable
Another problem raised by member-companies, mainly for health, social care and
education, is the difficulty in establishing whether a specific service is taxable or
non-taxable for VAT purposes. The Confederation has experienced an increase in
numbers of disputes and rulings regarding services in this sector.
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Limited possibilities for VAT-grouping result in non-effective organisation
A third problem experienced by Swedish companies is the VAT-grouping rules. In a
VAT-group all members are regarded as “one company” for VAT-purposes. No VAT
should, therefore, be charged when invoices are sent within the group. The purpose
of these rules is to facilitate for non-taxable business to organize in an effective way
without a negative VAT-effect. In Sweden VAT-grouping is possible for companies
placed under the surveillance of the finance inspectorate and for certain
commissioner agents and principals defined by the Swedish Income tax-law. For
private companies active in health, social care and education, VAT-grouping is only
possible if the above mentioned commission link is established. This result in that
only a limited numbers of companies in this sector could use a VAT-group.
Companies without possibilities to deduct input VAT or forming a VAT-group, have
high VAT-costs when organized in several different legal persons. This leads to less
possibility to be organized in the most effective way. The Swedish government has
announced that the VAT-grouping rules may be abolished as from next year. If this
will become a reality it will increase the problems even further.
Non-taxable companies have difficulties in finding useful premises
A fourth problem is that the VAT-rules make it difficult for non-taxable business to
find premises. Leasing and letting of real estate is according to the main rule VATexempt with a possibility for the landlord to opt for taxation if certain specific
conditions are met. A landlord often seeks for a high proportion of taxable turnover
in order to maximize their deduction of input VAT. One condition for the option to tax
is that the premises should be leased to a tenant that uses the premises for taxable
business. A landlord could also opt for taxation when leasing to a public body even if
the public body use the premises for non-taxable business as health, social care
and education. However, the landlord could not opt for taxation when the lease
concerns a private company who perform non-taxable business in the premises. A
non-taxable company could therefore have difficulties in finding premises due to the
existing VAT-rules. The fact that, for example, preschools and health centers have
difficulties to be established close to the population will of course have negative
socioeconomic effects.
No deduction for costs related to “permanent homes”
A fifth problem is the Swedish VAT rule that prohibit a deduction of input VAT for
costs related to permanent homes. This limitation causes difficulties when deciding
whether a premises is to be regarded as a ”permanent home” or not. Further, this
limitation result in negative effects not in line with fundamental VAT-principles.
A landlord could normally opt for taxation when leasing out premises. However, this
is not possible if the premises is regarded as ”permanent home”. The same applies
when leasing out premises to a public body and regardless of the natures of the
activities that these premises are used for. Even if social housing has elements of
health and social care it has been regarded as permanent homes by Swedish tax
authorities and courts. The highest administrative has found that a landlord cannot
opt for taxation when leasing out premises for the use as social housing to a
municipality. This result in that a landlord cannot deduct input VAT on their
investments or expenses related to such premises.
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However, a municipality may receive VAT-compensation for certain social housing.
This lead to a lack of neutrality between a private landlord and a municipality as it is
much more favorable for a municipality to run social housing in own premises than
in leased premises. With an aging population with a need for an increased number
of social housing, these VAT-rules are more and more becoming an obstacle for this
sector.
Administrative burden and an obstacle for economic growth
VAT is a turnover tax and the burden of the tax should in the end be borne by the
consumer. The right to deduct input VAT is fundamental to ensure that the tax is
neutral for business and the burden of VAT should be neutral until it reaches the
consumer. No possibility to deduct VAT leads to a hidden tax burden and cumulative
effects.
The VAT-rules, together with bookkeeping and accounting, causes the highest
administrative burden for private businesses. This despite that VAT is a
consumption tax and companies act as an unpaid tax collector. The administrative
burden affects not only companies, but also tax authorities, courts and public
bodies. Further, other negative effects as the ones mentioned above occur. The
view of the Confederation is that the VAT-rules are an increasing obstacle for
economic growth and, therefore, there is a major need to reform the EU VAT
Directive.
Need for reform measures
In the consultation the EU-commission presents the following alternatives for the
future of VAT regarding this sector.
1. Full taxation of public bodies and activities in the public interest.
2. Full compensation of input VAT at EU level.
3. Deletion of special rules relation to public bodies while keeping most of the
current exemptions in the public interest.
4. Sectorial reform.
5. Selective amendments of current rules.
The current VAT-rules in the EU VAT Directive are not neutral and cause distortion
of competition. Different studies referred to in the consultation, states that a full
taxation is, in theory, the way forward. However, such option is considered to be
politically impossible to implement.
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How member states choose to organize and finance public activities differs why their
future challenges also are very different. This may indicate that the EU VAT
Directive should allow member states to use alternative solutions instead of aiming
for a total harmonization in this area. However, such alternatives should not distort
the international competition.
The view of the Confederation is that article 13 should be limited to be used only for
situations when the public body is acting in its exclusive capacity as an authority. As
mentioned above, the main problem for Swedish companies is the non-deductible
input VAT. Too keep the exemptions in articles 132-134 is therefore not a
sustainable situation for the future. With higher standard VAT-rates within EU the
cost for the blocked input VAT will continue to rise. Ensuring that these companies
are able to recover VAT is a very important reform measure. Solutions within the
scope of VAT, through an option to tax to a zero or reduced rate, are preferred to a
separate refund systems. The VAT-rules for this sector needs a necessary update
with a transition from social exemptions to social VAT-rates.
The Confederation appreciates the possibility to comment on this subject and is
willing to be engage in a constructive dialogue in the work to form the future VATsystem.
Svenskt Näringsliv, The Confederation of Swedish Enterprise
Krister Andersson
Head, Tax Policy Department
Anna Sandberg Nilsson
Senior Advisor VAT