By Francesca Amaddeo, Researcher, Tax Law Competence Centre (SUPSI), Manno, Switzerland
Advocate General Juliane Kokott has released her conclusions concerning a case before the European Court of Justice on the operation of the VAT exemption for cost-sharing groups when a third country is involved. The opinion, issued 23 April, relates to case C-77/19, Kaplan International.
Despite relevant case laws, in particular, Aviva, C-605/15, and DNB Banka, C-326/15, the application of the VAT exemption for cost-sharing groups has again been brought in front of the ECJ. The interpretation of the exemption for cost-sharing groups, art. 132, par. 1 lett. f) Directive 2006/112/EC, seems not to be so uniform among the Member States.
Kaplan International
Kaplan International Colleges UK Limited is a holding company of the so-called Kaplan group, made up of a series of branches located in the United Kingdom, which carries on educational services and activities.
The group finds students through services provided by a network of 500 recruitment agents active in 70 countries against a commission. These agents are supported with marketing materials, training as to the institutions and courses being marketed, admissions and compliance procedures, and so on, provided by different representative offices.
Until 2014, agents contracted directly and only with Kaplan international. The problem was that these transactions, since performed in the UK, were charged UK VAT. Applying the reverse charge mechanism, Kaplan International was liable for VAT, but, at the same time, as its educational activity was exempt from taxation, it was not able to deduct this burden.
Later on, in October 2014, Kaplan International established – and indirectly owned – Kaplan Services Hong Kong Limited. This latter entity took over the agents’ arrangements. As a consequence, on the one hand, VAT was no longer chargeable on Kaplan International, but, on the other one, Kaplan Services was located in an extra-EU jurisdiction, where VAT is not applicable. The huge tax saving is clear!
The UK fiscal administration established, through a notice of assessment, the VAT liability on Kaplan International, claiming that services received from Kaplan Services were not encompassed by the art. 132 VAT Directive exemption for cost-sharing groups.
Kaplan International appealed in front of the First-tier Tribunal in the UK, which referred to the ECJ for a preliminary ruling.
In brief, the UK court asked if the cost-sharing exemption applies to a group, which was also established in a non-European country.
The UK court also focuses on the condition that no “distortion of competition” may occur. Moreover, the ECJ is asked to clarify if the exemption applies even in the case in which the members of the group form a sole VAT group and if the representative of that group is not part of the cost-sharing group.
Advocate General’s opinion
The preliminary ruling encompasses eleven questions which can be grouped into three categories.
The first group consists of questions involving the understanding the territorial scope of the VAT exemption for cost-sharing groups.
Indeed, from a deep analysis of the legal framework, including the previous version and working papers, the Advocate General assumes that services provided by Kaplan Services all provided to all entities: indeed, from the literal interpretation, it seems clear that cross-border groups were not covered by the exemption of article 132 VAT Directive.
This reasoning seems to work also in light of article 11 VAT Directive content, which allows Member States to regard as a single taxable person “any person established in their territory”.
These provisions seem to share the same ratio: the limitation of their applicative range to the territory of one jurisdiction “ensures that one Member State does not encroach upon the tax jurisdiction of another Member State by allowing group taxation or the formation of an equivalent independent group, the conditions governing which are not open to ready scrutiny by that other Member State”.
However, it is worth noting that the main reason under this approach is to circumvent the exploitation of different tax rates (or regimes), which especially occurs when a third country is involved. Indeed, often, this latter country does not have/apply VAT.
So, the Advocate General remarks that the VAT Directive’s exemption for cost-sharing groups is not applicable when services are provided by a group in a third State.
If the ECJ would conclude differently, extending the exemption at issue to Kaplan Service, it will be necessary to address the second main question, which concerns the interpretation of the criterion of an absence of distortion of competition in the VAT Directive’s exemption for cost-sharing groups.
Here, the Advocate General highlights the main scope of the VAT Directive’s exemption for cost-sharing groups, which consists of offsetting the competitive disadvantage of smaller undertakings by comparison with larger competitors, Indeed, it will seem contradictory to have, as a consequence of the application of such provision, the rising (or the risk) of distortion of competition.
This is why, to Advocate Kokott, a restrictive interpretation is essential! She remembers that the so-called purchasing guarantee is a de facto condition to apply correctly the exemption at issue as cooperative action prevents distortion of competition.
Despite apparently the relationship between Kaplan International and Kaplan Service seems to fulfill this requirement since Kaplan Service provides services exclusively to the UK group, the Advocate General considers that elements of evaluation are missing.
Finally, the last category refers to the relationship between the exemption for a cost-sharing group in article 132, par. 1 lett. f) VAT Directive and group taxation ex article 11 of the same directive.
The Advocate General claims that, in answering to this last questions, it must not be forgotten that there is an agreement between the Commission and the UK that only services supplied by the cost-sharing group to its independent members are exempt from VAT, but this group must be kept separate from the VAT group established under article 11 VAT Directive.
The fact that some members of the cost-sharing group are also part of the VAT group in the UK does not preclude the application of article 132.
Indeed, article 11 must be considered as a lex specialis in relation to article 132 only where the cost-sharing group is made up of persons who are all part of a single VAT group.
However, the more extensive group taxation, ex article 11 VAT Directive, prevails: as a result, the exemption ex art. 132, par. 1, lett. f) VAT Directive does not, therefore, apply where all the members of the cost-sharing group are part of a single VAT group.
VAT Directive’s exemption for cost-sharing groups
After much analysis, Advocate General Kokott, consistent with her previous opinions, states that the exemption under article 132, par. 1, lett. f) VAT Directive shall not apply to cross-border groups when a third country is involved.
Moreover, as regard distortion of competition, she affirms that the interpretation of the exemption under exam does not cause distortion of competition “unless it is applied inappropriately”.
Competition could be distorted, for instance, that when the group supplies the same services to a significant extent for consideration to non-members and is, to that extent, operating in the market primarily as a competitor and less as a cooperative group; the group does not supply any services tailored to the specific needs of its members, but only passes on purchased services; and when the primary purpose of the group’s formation is simply to optimize the input VAT burden rather than to establish reciprocal cooperation with a view to avoiding a competitive disadvantage.
In the past, on the same topic, the ECJ overturned the outcome deriving from Advocate General remarks.
Francesca Amaddeo
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