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VAT Newsletter Hot topics and issues in indirect taxation

December 2016

NEWS FROM THE CJEU

The winner takes it all – no VAT on prize money CJEU, ruling of 10 November 2016 – case C-432/15 – Pavlína Baštová

A participant in a race does not have to pay VAT on prize money won as a result of being successfully placed in the race.

The Court of Justice of the European Union (CJEU) has issued a ruling to this effect in a referral from the Czech Republic on the VAT liability of an operator of horse racing stables.

The case Ms Baštová operates a horse racing stable where she keeps and trains both her own horses and those of other owners. Her horses are either intended for sale or are used for agrotourism or training.

She is paid by the horse owners for training the horses for races and for stabling and feeding them.

The horses also take part in horse racing. Ms Baštová receives prize money for her own horses being placed in races and also earns the

trainer's share of prizes won by the horses of other owners.

The Czech tax authorities confirmed Ms Baštová's right to deduct input tax on the sale of her own horses, the supply of advertising services, agrotourism and the trainer's share of prize money. However, the tax authorities did not view the prize money won by her own horses as a consideration for a taxable supply and therefore refused the right to deduct input tax. Moreover, the authorities did not approve the application of the reduced rate of VAT of 10 percent to the operation of racing stables, finding that it should be subject to VAT at the standard rate.

Ruling The temporary cession of a horse by its owner to the organizer of a horse race constitutes a supply of services for consideration if the race organizer pays remuneration irrespective of whether or not the horse in question is placed in the race. This could be an appearance fee or other direct remuneration.

Prize money, on the other hand, does not constitute effective consideration, even if it is fixed

Content News from the CJEU The winner takes it all – no VAT on prize money

Reverse charge mechanism: Reasonable fines allowed

In brief 19 percent VAT on lifestyle magazine

Determination of customs valuation for transfer pricing

Other Electronic business transactions and Online companies in the EU are to be enhanced

Wish for reduced VAT rates on ebooks & Co.

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and known in advance. The award of the prize money is subject to a specific performance and to a degree of uncertainty. This uncertainty precludes the existence of a direct link between the temporary cession of horse and obtaining a prize.

However, even if the temporary cession of the horses to the race organizer does not constitute a supply for a consideration, there may still be a right to deduct input tax relating to the preparation for horse races and participation in those races if the costs are part of the general costs of the taxable person's economic activity. The test that is applied here is that the costs of the individual transactions must have a direct and immediate link with the taxable person's overall economic activity. This condition is met in the following cases:

• The costs relate to racehorses that are actually intended for sale (since the sale price of a racehorse depends on the state of its preparation for races, its experience and the reputation it may have gained by participating in races);

• The participation of the horses in races can be seen objectively as a means of promoting the economic activity (since the success of the horses could enable an operator of racing stables to gain publicity or added visibility which could influence the price of his services for training the horses of other owners).

There is, however, no direct and immediate link in the following cases:

• The costs (only) enable the operator of the racing stables to improve and develop the training methods, feed and care given to the horses and so the services supplied to other owners (indirect link only);

• The costs are only intended to promote the private interests of the racing stables.

The application of a reduced rate of VAT may be permissible in accordance with Art. 98 of the VAT Directive in conjunction with point 14 of Annex III to the Directive. This allows the mem-ber states to apply a reduced rate of VAT to the use of spor-ting facilities, and therefore to facilities for practicing equestrian sports. However, this does not apply to the use of facilities for the passive stay of horses in stables, their feeding or the care provided to them.

The CJEU also left it to the referring court to decide whether the service in question is a com-plex composite supply of service consisting of several elements. In this case these elements could be the training of the hor-ses, the use of sporting facilities and the stabling, feeding and general care of the horses. A reduced rate of VAT cannot be applied if the use of the sporting facilities and the training of the horses are two equal components of this complex supply of service. Nor can the reduced rate of VAT be applied if training of the horses is the main component of this service.

Please note: The CJEU did not accept the opinion of the advocate general of 14 June 2016, who had argued that the award of prizes gives rise to taxable transactions.

The German Federal Tax Court (BFH) also decided in a ruling of 2 July 2008, XI R 66/06, that keeping racehorses could be a business activity in certain circumstances. However, if the horses are being kept for reasons of prestige, any asso-ciated costs are ineligible for input tax deduction in accor-dance with Art. 15 (1a) of the German VAT Law (UStG) in conjunction with Art. 4 (5) sent. 1 no. 4 of the German Income Tax Law (EStG).

German legal practice relating to the treatment of prize money may therefore have to be revie-wed. In a currently pending appeal case the BFH will be called upon to decide under what conditions a participant in tournament poker and cash games qualifies as a business for the purposes of German VAT law. The Lower Tax Court of Münster had argued in the original case that prize money constituted business earnings (ruling of 15 July 2014, 15 K 798/11 U; BFH ref no.: XI R 37/14).

The Lower Tax Court of Münster had already ruled on prize money awarded by a munici-pality for a business start-up competition in its ruling of 12 June 2007, 15 K 6229/04 U. It took the view that the prize money could constitute a taxable consideration for the service supplied to the municipality as part of the competition. The Regional Tax Office (OFD) Münster dissented and instead held that the prizes represented a non-taxable subsidy (OFD Münster, Kurzinformation Umsatzsteuer (VAT summary no. 3/2008, 10 January 2008).

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© 2016 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The name KPMG and the logo are registered trademarks of KPMG International.

Reverse charge mechanism: Reasonable fines allowed CJEU, opinions of the Advocate General of 10 November 2016 - case C-564/15 – Farkas

If a recipient of a supply does not report the transactions for which he is liable to VAT due to reverse charge mechanism, a fine may be imposed against him. However, the trader is only obliged to accept a reasonable fine.

This conclusion was reached by the Advocate General in his opinions in a case referred by a Hungarian court.

The case Mr. Farkas purchased a mobile Hangar from an insolvent trader in a compulsory sale. The auction was conducted by the Hungarian tax authorities. The seller issued an invoice for the supply on 26 November 2012 indicating the VAT (converted approximately EUR 2,600). Mr. Farkas deducted the amount in the VAT return. However, the tax authorities informed him that the transaction was subject to the reverse charge mechanism and that the VAT was incorrectly stated in the invoice by the seller. Mr. Farkas as the recipient of the supply was liable to pay the VAT. Hence, the tax authorities demanded the payment of that amount and imposed a fine on Mr. Farkas amounting to 50 percent of the amount due (converted approximately EUR 1,300).

Opinion The way the case of Mr. Farkas was dealt with regarding the VAT was correct insofar if the mobile Hangar was a movable item. Pursuant to Art. 199 (1) (g) of the VAT Directive, only the supply of real property sold by the seller within the scope of a compulsory sale is subject to the

reverse charge mechanism. With regard to movable items, Hungary has no deviating exceptional authorization according to the Union law. As a result, Mr. Farkas was entitled to deduct the VAT invoiced to him as input tax without penalties.

On the other hand, if the mobile Hangar were real property, the supply would be subject to the reverse charge mechanism. Therefore, including the VAT into the invoice would be incorrect and Mr. Farkas would not be entitled to input tax deduction. In this context, the input tax deduction in the reverse charge mechanism needs to be differentiated. Since there was no indication to tax fraud or misuse, the tax authorities were not allowed to deny the right to input tax deduction. Even if he was entitled to input tax deduction accordingly, the fact that the reverse charge mechanism was not correctly applied would be punishable by a fine. However, the fine must be reasonable according to the circumstances of the individual case.

When assessing whether the fine is reasonable, the referring court needs to take into account that no fraudulent act was committed and that the payment of the reverse charge tax claimed by the tax authorities was not delayed in any way. In addition, the seller was responsible to issue an invoice complying with the reverse charge mechanism and the supply was carried out within the scope of a compulsory sale organized by the tax authorities. Taking into account these special circumstances, it is in dispute whether the fine amounting to 50 percent according to the standard legal rate was really set in accordance

with an actual individual assessment of the case.

Please note: The incorrect application of the VAT rules in the EU may be sanctioned by the national legislation by imposing a fine. The fact that this must be reasonable is a recurrent fact visible throughout the current CJEU case-law. The case-law on incorrect invoices received must particularly be pointed out (CJEU, ruling of 15 September 2016 - RS. C-518/14 – Senatex; see VAT Newsletter August/September 2016) and incorrect evidence for intra-Community supplies of goods (CJEU ruling of 20 October 2016 ‒ case C-24/15 ‒ Plöckl; see VAT Newsletter November 2016).

Legal rules may ‒ alone or combined ‒ form a basis for a fine. Accordingly, the Advocate General points out in the present case that according to one Hungarian rule, the fine should amount to 50 percent of the owed VAT amount as per standard rate and according to another rule a reduction of the non-setting is allowed in exceptional cases. Thus, the Hungarian authorities allow the penalty to be adjusted or reduced depending on the circumstances of the individual case.

The undifferentiated interest rule pursuant to § 233a of the German Tax Code (AO) are not least being revised since the CJEU ruling of 15 September 2016 ‒ case C-518/14 – Senatex. Only in connection with the remission option pursuant to § 277 AO, reasonable interest claims may result in individual cases. In practice, however, the tax authorities grant a remission of the interest only in individual cases.

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According to information of the German newspaper Handelsblatt, the CDU party has elaborated a new draft law on the change of § 233a AO (see edition No. 236 of 6 December 2016, p. 15). According to this new draft, the interest rate needs to be reduced from six to three percent. This is based on the very low market interest rates. Therefore, the question remains open whether the reduction is to apply for a limited time. Obviously, the change is to be implemented through the second law intended to relief the burden of bureaucracy particularly from medium-sized businesses (Bureaucracy Reduction Act), which as not yet been discussed in the German Parliament (Bundestag) (see last German Parliament’s Journal 18/9949).

IN BRIEF

19 percent VAT on lifestyle magazine Lower Tax Court of Munich, ruling of 31 August 2016, 3 K 3080/14, non-appealable

Magazines are not subject to the reduced VAT rate of 7 percent but to the standard VAT rate of 19 percent if they are primarily used for advertising purposes.

In its ruling, the Lower Tax Court of Munich pointed out that the spatial ratio between the adver-tising and other text was not to be taken into account, but the type and design, the content and the purpose of publication of the print media.

A lifestyle magazine, such as in the present case, is considered to be used primarily for adverti-sing purposes if a specific tourist region and its sights (such as excursion destinations, hostels, restaurants and other tourist

services) are to be extolled as a suitable travel destination worth seeing.

In the present case, the fact that individual so-called presentation adds are to give the impression that they are journalistic works does not speak against a full or primary advertising nature. According to the Lower Tax Court of Munich, a magazine containing smaller and more general articles about events, tips or recipes, without there being a commercial supplier behind it is also considered to be a travel advertisement.

It becomes clear in the present case that the purpose of publication is primarily to make advertisements, because the magazine does not contain any critical reports.

The advertising nature is also emphasized in the present case, because the magazine is mostly distributed for free through the advertising customers. The magazine is published primarily in the interest and at the cost of the advertisement customers showing the relation of the publishing house’s source of income. Hence, the sales from the advertisement business amounts to 95 percent of the total sales.

Determination of customs valuation for transfer pricing Lower Tax Court of Munich, ruling of 15 September 2016, 14 K 1974/15; ref. no. of the CJEU: C-529/16

The Lower Tax Court ofMunich has asked the CJEU questions on the customs valuation for transfer pricing of imported goods. They relate to the importance of adjustments made to the declared amount upon

expiration of the accounting period. In the present case, it is decisive how the pricing agreed upon expiration of the accounting period based on tax reasons is to be taken into account with regard to the customs valuation in a mutual agreement procedure.

The question arises whether an adjustment of the originally calculated customs amounts based on transfer pricing is to be made not only in the event of a subsequent claim but also if a credit is issued.

According to the Lower Tax Court of Munich, customs authorities are obliged to review the relevant declarations and have to take appropriate measures in order to calculate the relevant customs amount and reimburse the amount ex officio in the event of credits after a credit has become known at the end of the accounting period. This also applies to the subsequent declaration of a subsequent payment through the parties concerned.

Please note: The details of the transfer pricing between group companies was also considered to be important due to the initiative on the international combat against base erosion and profit shifting - BEPS. Learn more about the direct and indirect impact of the BEPS action plan on the deferred taxes in an article of KPMG International*.

* Please note that KPMG International does not provide services to clients.

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© 2016 KPMG AG Wirtschaftsprüfungsgesellschaft, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The name KPMG and the logo are registered trademarks of KPMG International.

OTHER

Electronic business transactions and online companies in the EU are to be enhanced Commission, press release of 1 December 2016

The EU Commission has presented a range of measures by which the VAT framework condition for the electronic business transactions within the EU is to be improved. In summary, the Commission proposes as follows:

• New regulations will be introduced that will enable online companies process all their VAT obligations within the EU (expansion of the mini-one-stop-shop - MOSS) in an easier way.

• In order to simplify the VAT rules for small online businesses and start-up online businesses, the VAT on cross-border sales amounting to up to EUR 10,000 are billed in the domestic country. In order to relief small and middle-sized companies, the procedure of cross-border sales of up to EUR 100,000 are simplified.

• VAT fraud that may lead to distortions on the market and unfair competition outside the EU will be fought.

• The Member States will be able to reduce their VAT rates of electronic publications such as ebooks and online magazines (see also the following article on the consultation of the Commission).

The press release also contains further details. The proposals of the regulation are to be presented to the European

Parliament for consultation and to the European Council for acceptance. For a proposal to be implemented, all Member States need to agree.

Wish for reduced VAT rates on ebooks & Co. Commission, Report of the Directorate General Taxes and Customs Union, October 2016

From 25 July 2016 to 19 September 2016 there was a public consultation of the Commission on reduced VAT rates on electronic publications.

The public consultation was aimed at gathering opinions of the economic market, public and representative organizations.

According to the present Union law, the Member States have the option to pay a reduced VAT rate on books, newspapers and publications (minimum 5 percent). Some Member States were allowed to apply a VAT rate below 5 percent (substantially reduced rate), including VAT exemptions with an entitlement to input tax deduction on the previous level (so-called zero-rate) on particular print material. On the other hand, the regular VAT rate is applied to digital publications supplied electronically.

The most important results of the – non-representative ‒ consultation are as follows:

• 94 percent of the interviewed persons agree that the Member States should have the opportunity to apply a reduced VAT rate to ebooks.

• 88 percent of the interviewed persons agree that the Member States should be granted to apply a reduced

VAT rate to e-newspapers and e-magazines.

• Several interviewed persons (45 percent) stated that the substantially reduced VAT rates and zero-ratings of printed publications should not be eliminated. A vast majority (90 percent) of these 45 percent said it would all Member States to be able to apply the substantially reduced VAT rates or zero-ratings for printed publications and e-publications.

The Commission has taken into account the results of the Commission into the proposals on the reform of the framework conditions of electronic business transactions within the EU (see article in this Newsletter.

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