VAT litigation in the EU: the role of international agreements

As noted in our Tax investigations and disputes across borders guide, issues related to VAT are a common source of tax litigation in many European countries. Some of these court cases stem from the differences between EU VAT and value-added taxes imposed elsewhere in the world. Some businesses are now turning to international agreements in the course of resolving such litigation – and we discuss that trend in more detail in this blog post.

The potential for cross-border VAT litigation

More than 170 states worldwide have implemented some sort of value-added tax. Even though the labelling of such taxes (most commonly, either “VAT” (such as in the EU) or “GST” (such as in Australia, Canada and India)) and their exact functioning is not homogenous throughout the world, most of these taxes share one core principle: the one-off burden on final consumption.

When it comes to the cross-border trade in goods and services, however, this core principle is vulnerable to being harmed by the multiple impositions of VAT in different jurisdictions: while one country might levy VAT where the service supplier is resident, another country involved in the same transaction might levy VAT where the service is effectively used or enjoyed. In addition, differences in factual assessments might lead to multiple impositions of VAT on the same transaction. For instance, while one country might assume the existence of a fixed establishment for VAT purposes, another country also involved in the cross-border case might not.

Such multiple impositions of VAT harm the international trade in goods and services and ultimately burden businesses because in most cases it will not be possible to on-charge this double burden to the customer. In contrast to direct taxation, there are no cross-border dispute resolution mechanisms available to resolve international tax disputes in the area of VAT.

The relevance of international agreements in VAT litigation

In its infamous SK Telecom case, the CJEU had to address the imposition on telecommunication roaming services of both EU VAT and Korean VAT due to a misfit of the two VAT systems. According to the CJEU, EU Member States must not take into account the fact that a third country has already levied VAT on the transaction when levying EU VAT. However, an international agreement concluded with that third country “could provide otherwise”, meaning that an international agreement might oblige the EU Member State to abstain from levying VAT itself.

As a consequence, businesses entangled in a VAT dispute involving an EU Member State and a third country might choose to rely on international agreements to appeal multiple impositions of VAT. There are a number of international agreements, aside from double tax treaties, containing rules which may be relevant for such tax matters, including the General Agreement on Trade in Services or Free Trade Agreements.

The pivotal question of jurisdiction in the area of international agreements

However, before using international agreements as an argument in VAT litigation, businesses must be clear about which court such argument can be asserted in. If domestic courts have jurisdiction over the international agreement, the argument can be raised in the domestic appeal procedure; if the CJEU is competent to interpret the respective provision of the international agreement, the argument can only be raised in the context of a request for a preliminary ruling.

The CJEU only has jurisdiction to interpret EU law. Thus, the competence basis under which the respective international agreement was concluded is the starting point for answering the question of whether or not the CJEU is competent to interpret a provision contained within it. There are international agreements concluded by the EU without EU Member State participation, international agreements concluded by EU Member States without EU participation, and mixed agreements as a hybrid form. Determining the relevant competence basis can be a complex exercise which must be carried out separately for each provision of an international agreement. Further complexity arises in relation to mixed agreements, as CJEU case law on the treatment of mixed agreements is in flux and no definitive statements can yet be made here.

Outlook

Ever-increasing globalisation makes cross-border VAT disputes increasingly likely, and many businesses are affected by multiple countries claiming the right to impose VAT in respect of the same transaction. Due to the absence of cross-border dispute resolution mechanisms in the VAT area, businesses might choose to rely on international agreements in the course of VAT litigation. In doing so, businesses need to thoroughly assess which court has the necessary jurisdiction to decide on the question since this aspect significantly impacts the overall litigation strategy.

If you would like to discuss any of the points raised in the guide or this blog post in further detail, please contact our tax investigations and disputes team or your usual Freshfields contact.