The EU VAT Treatment of Vouchers in the Context of Promotional Activities

Preface / V
Abbreviations / XVII

CHAPTER 1
Introduction / 1
1.1 Vouchers, promotional activities and EU VAT / 2
1.2 Focus of the research (conceptual framework): the EU VAT treatment of vouchers, in the context of promotional activities / 4
1.3 Research questions / 5
1.4 Research framework and referencing system / 6
1.5 Relevance of the research / 7
1.6 Research method and structure / 9
1.7 Scope of the research / 9
1.8 Approach of the research / 10

CHAPTER 2
Research framework / 13
2.1 Positive EU law / 13
2.2 The current EU VAT system (positive law) / 16
2.2.1 The early beginnings of EU VAT / 16
2.2.2 A Common System of Value Added Tax / 18
2.2.3 The Own Resources Decision and the Sixth Directive / 20
2.2.4 The current EU VAT Directive / 21
2.3 The fundamental principles underlying the EU VAT system / 22
2.3.1 The principle of neutrality / 22
2.3.2 The principle of legal certainty / 23
2.4 The basic features and character of the EU VAT system / 24
2.4.1 VAT: a tax on consumption / 25
2.4.2 VAT: a tax on consumer expenditure / 26
2.4.3 VAT: a general tax on expenditure for private consumption / 28
2.4.4 VAT: a tax on expenditure for local private consumption / 30
2.5 The economic and commercial reality of a transaction / 31
2.6 The CJEU’s use of economic and/or commercial reality / 32
2.6.1 The principle of prohibition of abuse of law / 32
2.6.2 Composite supplies / 33
2.6.3 What is a ‘typical consumer’? / 34
2.6.4 Economic and commercial reality deviates from legal reality – substance over form? / 35
2.6.4.1 The CJEU’s economic and/or commercial reality / 37
2.6.4.2 Marks and Spencer: a UK case about VAT and economic reality / 37
2.6.5 The economic and commercial reality of a transaction as a reference point / 39
2.6.6 A concept developed by the CJEU as test for positive law? / 40
2.7 Conclusion / 41

CHAPTER 3
Transactions that are subject to VAT and economic activities / 43
3.1 Transactions subject to VAT / 45
3.2 A supply of goods or services / 46
3.2.1 A supply of goods / 46
3.2.2 A supply of services / 48
3.2.3 A supply or ‘part of the taxable sales’? / 49
3.3 Supply (of goods or services) made for consideration / 50
3.3.1 Legal relationship / 53
3.3.2 Legal relationship entailing reciprocal performance / 55
3.3.2.1 Legal relationship entailing reciprocal performance applied to composite supplies / 64
3.3.3 The remuneration has to constitute the value actually given in return for the supply / 65
3.4 The ‘direct link’-requirement as a prerequisite for a payment to be a ‘consideration’ from an EU VAT perspective / 69
3.5 An activity that is subject to VAT has to be performed by a taxable person acting as such / 72
3.5.1 Taxable person / 72
3.5.2 Acting ‘as such’ (as a taxable person) / 72
3.5.3 Economic activities / 73
3.6 The activity has to be performed within the territory of a Member State / 75
3.7 Other provisions in the EU VAT Directive affecting taxability / 76
3.8 Requirements for transactions to be subject to VAT derived from CJEU case law / 76
3.8.1 No consumption, no taxation / 77
3.8.2 A total legal prohibition on importation and marketing in the EU / 77
3.8.3 Transactions within the same legal entity / 78
3.8.4 Some specific contractually agreed shares / 78
3.9 Summary – transactions that are subject to VAT and economic activities / 79

CHAPTER 4
VAT treatment of composite supplies / 81
4.1 Main rule for composite supplies: all elements of a transaction should be considered separately / 81
4.1.1 Is the supply part of a multiple-element transaction? / 83
4.1.2 Accountancy rules and VAT / 84
4.1.2.1 A very brief introduction into accounting standards / 85
4.1.2.2 ‘Consideration’ (a VAT concept) and ‘revenue’ (as an accounting concept) / 85
4.1.2.3 Accounting rules for determining whether a supply is made for consideration / 86
4.1.2.4 Proposed joint IASB/FASB rules for accounting for free products / 88
4.2 Multiple-element transaction as a single, composite supply for VAT / 90
4.2.1 Different types of single, composite supplies / 90
4.2.1.1 Absorption / 91
4.2.1.2 Amalgamation / 93
4.2.2 The ‘concrete and specific’-test: more rules from the CJEU? / 95
4.3 Multiple-element supplies made by multiple suppliers / 95
4.4 Multiple-element supplies made consecutively? / 96
4.4.1 Absorption / 96
4.4.2 Amalgamation / 97
4.5 Is the consideration paid for a composite supply, paid for all elements? / 97
4.5.1 A single, composite supply where one or more elements are advertised as supplied ‘for free’ – economic and commercial angle / 98
4.5.2 Economic and commercial reality applied to other composite supplies where one or more elements are advertised as supplied ‘for free’ / 99
4.5.2.1 The legal agreement regarding specific elements to a multiple-element supply is generally leading / 99
4.5.2.2 Accounting rules as a reflection of ‘commercial and economic reality’ / 102
4.5.2.3 Proposed accounting rules / 103
4.5.2.4 Allocating consideration to separate performance obligation (Step 4) / 104
4.5.2.5 Accounting for free products under current FASB rules / 107
4.5.2.6 Economic and commercial reality: possible exceptions to the main rule that ‘free elements’ are actually free / 110
4.5.2.7 The VAT treatment composite supplies where the ‘free’ element has an absolute and relatively high value / 111
4.5.2.8 The VAT treatment of ‘combination deals’ / 113
4.5.2.9 The VAT treatment of transactions where the customer has to accept the ‘free’ element / 114
4.5.2.10 The VAT treatment of a supply where the free element is an explicit part of the negotiated deal. / 115
4.5.3 More EU rules on multiple-element transactions / 115
4.5.4 Summary: when is a ‘free element’ actually supplied for consideration / 117
4.6 How to allocate the total consideration to the different elements of a multiple-element transaction / 118
4.7 VAT deduction and the difference between ‘free elements’ and ‘paid for-elements’ / 119
4.8 Conclusion: the VAT treatment of composite supplies / 120

CHAPTER 5
Discounts and rebates / 121
5.1 Introduction / 121
5.2 Conditional and unconditional discounts and rebates / 122
5.3 Discounts and rebates versus free supplies / 123
5.3.1 The open market value – reassessing the agreed consideration / 124
5.3.2 Open market value: only for determining the taxable amount or more? / 125
5.4 The VAT consequences of discounts and rebates / 128
5.4.1 Discounts at the time of the supply / 129
5.4.2 Discounts in kind? / 129
5.4.3 Rebates (discounts granted after original payment was made) – ‘money off schemes’ and ‘cash back schemes’ / 129
5.4.4 Rebates granted by another person than the party making the (direct) supply: leapfrogging. / 130
5.4.5 Elida Gibbs / 133
5.4.5.1 The ‘leapfrog’ discount cases only apply to specific transaction chains / 136
5.4.5.2 Because of the ‘leapfrog’, the payments may be considered discounts or rebates as well as third-party payments / 138
5.4.6 Other rebates granted by another person than the party making the (direct) supply / 140
5.5 Analysis of the principles underlying the ‘leapfrog rebates’: are they really discounts/rebates? / 141
5.5.1 The CJEU entangled in a VAT web? / 145
5.6 Practical analysis of the rulings; practice and (perceived) problems / 147
5.6.1 Practical issues arising in a domestic chain of transactions / 149
5.6.2 The Dutch rules and solutions / 152
5.6.3 The UK rules and solutions / 152
5.6.4 Cross-border chain of transactions / 153
5.6.4.1 Cross-border chain of transactions under the proposed (temporary) rules for intra-EU cross-border trade / 156
5.6.5 Summary of all issues identified with regard to the CJEU’s VAT treatment of ‘leapfrog’ discounts and rebates / 157
5.7 The Commission’s original (or first) proposal for changes to the VAT Directive and why this proposal doesn’t solve all the issues / 158
5.8 An alternative solution: ‘joint payment, shared deduction’ / 164
5.8.1 ‘Joint payment, shared deduction’ also applicable to other rebates granted by another person than the party making the (direct) supply? / 173
5.9 Conclusion with regard to the VAT treatment of leapfrog cash back and money off schemes / 173
5.10 Discounts and rebates: summary / 174

CHAPTER 6
The VAT treatment of supplies for no consideration / 175
6.1 Introduction / 175
6.2 Introduction to the VAT treatment of ‘free’ supplies / 175
6.2.1 Free transactions and non-economic activities / 176
6.2.2 VAT consequences of non-economic activities / 177
6.2.3 Free supplies as promotional activities / 177
6.2.4 Gifts and VAT / 178
6.2.5 When is a supply made ‘free of charge’ or not made ‘for consideration’? / 178
6.3 VAT consequences of supplies not made for consideration / 180
6.3.1 VAT deduction: a fundamental principle underlying the system of VAT that, in principle, may not be limited / 181
6.3.2 Disallowing deduction / 182
6.3.2.1 No recovery of VAT on costs for non-economic activities / 183
6.3.2.2 No recovery of VAT on immovable property used for private consumption / 184
6.3.2.3 No recovery of VAT on costs that exceed what is objectively necessary to allow a business to carry out its taxed transactions / 185
6.3.2.4 No recovery of VAT on costs under the ‘stand still’ provision / 186
6.3.3 VAT due on transactions that are deemed to be made for consideration / 190
6.3.3.1 Taxation of the application and the use of capital assets / 190
6.3.3.2 For the private use of the taxable person or of his staff or, more generally, for purposes other than those of the business of the taxable person / 191
6.3.3.3 Disposal free of charge (of goods, not services) / 193
6.3.3.4 Taxation of the application and the use of capital assets (continued) / 195
6.3.3.5 Do the ‘private use allows full VAT deduction and subsequent taxation of that private use’-provisions also apply to non-capital goods? / 196
6.3.3.6 Taxation of the ‘private use’ of services. / 198
6.3.3.7 Do the ‘private use’ provisions also apply to bought-in (purchased) services? / 202
6.3.3.8 The recipient’s VAT status and his use of the free supply / 204
6.4 Exceptions to the main rule: consumption without adjustment(?) / 205
6.4.1 The element of private consumption can be so small, compared to the business reasons for making the free supply, that no adjustment needs to be made / 206
6.4.2 No taxation of the free supply of samples and of gifts of small value / 207
6.4.3 What is a ‘sample’ / 208
6.4.4 What is a ‘gift of small value’ / 209
6.4.5 VAT treatment of free services that are samples or of small value / 210
6.5 VAT treatment of taxed free supplies: the taxable amount / 210
6.5.1 Taxing the free application of goods / 211
6.5.2 Taxing free services / 214
6.6 Do ‘the other VAT rules’ apply to supplies that are deemed to be made for consideration? / 216
6.6.1 Place of supply / 216
6.6.2 VAT rates / 217
6.6.3 Exemptions / 217
6.6.3.1 Exemption without credit – the private application or use of business assets that are goods / 218
6.6.3.2 Exemption without credit – the free supply of services (other than the use of business assets) / 219
6.6.3.3 Exemption with credit – the private application or use of business assets that are goods / 219
6.6.3.4 Exemption with credit – the private use of services, not being the use of goods / 220
6.6.4 Liability rules / 220
6.6.5 Deduction of input VAT / 221
6.6.6 Other VAT rules / 222
6.7 Summary / 222

CHAPTER 7
Bartering / 225
7.1 Bartering as (part of) a promotional activity / 225
7.2 A brief introduction to the VAT issues surrounding bartering / 226
7.2.1 Why do people and businesses barter? / 227
7.2.1.1 Bartering in absence of money or because of different valuations of money as such / 227
7.2.1.2 Bartering because of (temporary) insufficient cash/cash flow / 229
7.2.1.3 Bartering because of economic benefit / 230
7.2.2 Emotional benefit as a reason for accepting certain conditions / 232
7.2.3 Summary: which reasons for bartering are relevant for this research, and why? / 233
7.3 Bartering or trading goods as a condition for a discount or other favourable terms? / 233
7.4 Bartering and VAT – conceptual difficulties / 234
7.4.1 Using a good or service for a taxable supply / 235
7.4.2 Using a good or service as payment/consideration for a taxable supply / 235
7.4.3 Can the supply of a good or service be a payment at the same time? / 236
7.4.4 The value of the consideration for a supply is the amount paid by the supplier for making that supply? / 238
7.5 Two (alternative) options for determining the taxable amount in barter transactions / 241
7.6 Deduction of VAT in barter transactions / 245
7.7 VAT and barters between a taxable person and a non-taxable person / 248
7.8 Barter transactions between related parties (emotional benefit) / 248
7.9 Are all ‘barter transactions’ involving a taxable person acting as such VAT taxable transactions? / 248
7.10 Bartering and promotional activities: can ‘customer loyalty’ or ‘user data’ be consideration for a transaction under the current EU VAT rules? / 250
7.10.1 Introduction / 250
7.10.2 Loyalty or customer data as consideration for supplies from an EU VAT perspective? / 252
7.11 Conclusion / 256

CHAPTER 8
Goods and services as prizes / 257
8.1 Deduction of VAT – general / 257
8.2 A direct and immediate link / 258
8.3 Direct and immediate link with a free transaction? / 260
8.4 The VAT treatment of the distribution of the ‘free lottery’ prizes / 262
8.5 Conclusion / 263

CHAPTER 9
Vouchers / 265
9.1 Introduction / 265
9.2 Vouchers and promotional activities / 265
9.3 Is the supply of a voucher the supply of a right or does it embody the right to a supply? / 268
9.3.1 The supply of a right as such and the supply of a right to a future supply / 269
9.3.2 The difference between a right as such and the right to a future supply / 269
9.3.3 Vouchers (except SPVs) embody the right to a future supply, not a right as such. / 274
9.4 Specific types of voucher transactions – what will be discussed in this Chapter / 276
9.5 The VAT treatment of vouches in the EU VAT Directive / 277
9.5.1 The definition of voucher in the EU VAT Directive / 277
9.5.2 The VAT treatment of voucher transactions involving voucher as defined in the EU VAT Directive / 279
9.5.2.1 The VAT treatment of voucher transactions involving SPVs / 280
9.5.2.2 What is an SPV? / 280
9.5.2.3 The VAT treatment of issuing and transferring SPVs for consideration / 280
9.5.2.4 The VAT treatment of redeeming SPVs that were issued for consideration / 284
9.5.2.5 The VAT treatment of issuing and transferring SPVs for no consideration / 285
9.5.2.6 The VAT treatment of redeeming SPVs that were issued for no consideration / 286
9.5.2.7 The appropriate EU VAT treatment of transactions involving SPVs (summary) / 287
9.5.2.8 The VAT treatment of voucher transactions involving MPVs / 287
9.5.2.9 What is an MPV? / 287
9.5.2.10 The VAT treatment of issuing and transferring MPVs / 287
9.5.2.11 The VAT treatment of redeeming MPVs / 288
9.5.2.12 The appropriate EU VAT treatment of transactions involving MPVs (summary) / 290
9.5.2.13 The appropriate EU VAT treatment of voucher transactions / 290
9.5.3 Is a definition of voucher in the EU VAT Directive necessary under appropriate law? / 290
9.6 The VAT treatment of vouches that are not vouchers under the definition in the EU VAT Directive / 291
9.6.1 Transport tickets, admission tickets to cinemas and museums, postage stamps or similar / 291
9.6.2 Discount vouchers / 292
9.6.3 Discount cards / 293
9.6.4 Vouchers-for-cash / 294
9.7 The issuing and transfer of vouchers should not be subject to VAT / 295
9.7.1 The supply of a voucher as such should not be considered a supply that is subject to VAT because transferring a voucher is neither the supply of a good nor a service / 296
9.7.2 The supply of a voucher should not be considered a supply that is subject to VAT because there is no consumption / 297
9.7.3 CJEU dissenting ruling: the issuing or supply of a voucher is a service that is subject to VAT / 299
9.7.4 Some practical reasons why the issuing of (free) vouchers in itself should not trigger VAT consequences / 301
9.7.4.1 Return goods / 301
9.7.4.2 The same voucher can be an SPV or an MPV / 302
9.7.5 VAT rate changes – planning / 304
9.8 Can transactions regarding vouchers be VAT exempt? / 304
9.8.1 The difference between vouchers and money and payment vehicles / 305
9.8.2 CJEU case law about vouchers and a VAT exemption / 307
9.8.3 What possible exemptions could apply? / 308
9.8.4 Exemption in the Proposal / 308
9.8.5 Are the exemptions that could apply, applicable? / 309
9.8.5.1 Arguments in favour of the application of a VAT exemption / 309
9.8.5.2 Arguments against the application of a VAT exemption / 311
9.8.6 E-money and m-payments / 313
9.8.7 Conclusion regarding the applicability of a VAT exemption / 315
9.9 Example case: the VAT treatment of a voucher (or: points) based loyalty scheme operated by a ‘loyalty business’ (e.g. Nectar points or Air Miles). / 315
9.10 Summary / 319

CHAPTER 10
Summary, conclusions and recommendations / 321
10.1 Purpose of the research and research questions / 321
10.2 Summary research framework / 322
10.3 Answers to the research questions / 322
10.3.1 How to determine whether a supply is made free of charge? / 322
10.3.2 How to determine whether a supply that is part of a composite supply (or: an element in a composite supply) that is made for consideration, is made free of charge? / 323
10.3.3 What should be the VAT treatment of discounts or rebates granted to other persons than the actual recipient of the original transaction? / 323
10.3.4 Which free supplies are and should be taxed and how can this be best achieved? / 324
10.3.5 What should be the taxable basis or taxable amount for free supplies? / 325
10.3.6 What should be the taxable amount or taxable basis for barter transactions? / 325
10.3.7 Can the VAT on costs incurred for performing promotional activities always be fully deducted? Should it always be deductible? / 326
10.3.8 How should transactions involving vouchers, in the context of promotional activities, be treated from an EU VAT perspective? / 327
10.4 In conclusion / 330

Nederlandse samenvatting / 331
Case Law Cited / 337
Books cited / 351
Articles cited / 353
Keyword register / 355