In an article that was first published in Finance Dublin, Gavin O’Connor discusses the future of financial services in the aftermath of the Skandia America judgment. While the Court of Justice of the European Union’s decision is a hugely significant case, the impact on many financial services firms will most likely be limited. However, the judgment could mean that cross-border intra entity transactions which were previously disregarded may now be subject to VAT, and may necessitate system changes by companies, including aircraft lessors, to ensure transactions are correctly recorded.
Much has already been written about the recent judgment of the Court of Justice of the European Union (‘CJEU’) in the case of Skandia America Corporation USA, Sweden branch (C-7-13) with many commentators stating that the case could cost potentially billions of euros for financial services companies operating in Europe.
As always the truth is more complex and while there is no doubt that it is a hugely significant case, for many financial services companies the impact, if any, will be limited. For other companies who could potentially be significantly impacted by the judgment there are many steps they can take to mitigate potential negative impacts.
The purpose of this article is to summarise for a non-tax professional the decision of the CJEU and the practical steps companies can now take to address the potential implications.
Skandia America Corporation (‘Skandia’) was the global purchasing company responsible for procuring IT services for the wider Skandia group. It was established in the US and carried out its activities in Sweden through its Swedish branch. Skandia received externally provided IT services from US providers and recharged these to its Swedish branch. The branch used these services to make onward supplies of IT services, both inside and outside the Swedish VAT group.
Skandia contended that no VAT arose on the intra-entity supply of IT services from Skandia to its Swedish branch. In taking this view Skandia was relying on the 2006 decision of the CJEU in FCE Bank (C-210/04) where the Court held that transactions that take place within the same legal entity, for example between head office and a branch or between different branches of the same entity, do not give rise to supplies for VAT purposes.
In contrast, Sweden argued that VAT should be (reverse) charged on the supply of IT services from Skandia to its Swedish branch.
The Court confirmed that the FCE Bank judgment applies and therefore that services provided from a head office to a branch continue to be disregarded where the branch is registered for VAT in its own name and is not in a VAT group.
However, the CJEU held that where a branch joins a VAT group it is precluded from being identified as an individual taxable person. As a result, the supply from within that entity to the branch must, for VAT purposes, be treated as no longer supplied to the branch but to the independent VAT group of which the branch forms a part.
The CJEU stated that since ‘the services provided for consideration by a company such as [Skandia] to its branch must be deemed, solely from the point of view of VAT, to have been provided to the VAT group, and as that company and that branch cannot be considered to be a single taxable person, it must be concluded that the supply of such services constitutes a taxable transaction’ and that the reverse charge mechanism must be applied to that supply.
Effectively the decision has ruled that certain cross-border transactions between head-office and branches will now attract VAT. This has a real, above-the-line cost for FS businesses as typically not all VAT is recoverable. Accordingly, the case is expected to have a significant impact on banks, insurance and certain asset management companies operating in Ireland given their typical organisational structures.
In particular, the type of services which could be impacted would include the following:
In addition, while the potential impact for financial services companies that cannot recover VAT in full is clear, what is less appreciated is that the case could also have an impact on businesses that are engaged in fully VATable activities, for example leasing companies. Although companies in these sectors will typically be entitled to recover VAT in full on costs (and therefore the case will not result in an above the line cost), cross-border intra-entity transactions which were previously disregarded may now be subject to VAT. This may necessitate systems changes to ensure that the transactions are identified and recorded in VAT and VIES returns.
Although on an initial reading of the judgment the view of the CJEU seemed clear, now that the dust has settled and taxpayers are considering the impact on their specific situations considerable uncertainties remain.
In particular, the CJEU in Skandia (as in any other case) only addressed the specific fact pattern. Furthermore, the actual legal analysis and reasoning set out by the CJEU supporting the decision was brief. As a result, it is not entirely clear whether the Court would come to the same conclusion for other head office to branch transactions where the fact pattern is different to Skandia. These uncertainties are amplified by the differences in legislation and practice between EU Member States and the uncertainties as to how different Member States will implement the decision.
Some of the many open questions include the following:
In view of the uncertainties described above all potentially affected businesses will eagerly await the response of the Irish Revenue Commissioners’ and other EU authorities in order to clarify matters. However this does not mean that companies should wait to see how tax authorities implement the case. Instead, companies should now begin the process of identifying the potential impact and examining solutions.
The most important initial step that companies can and should do is to assess the potential impact on their organisation. This initial assessment would involve a high level review of all intra-company flows as follows:
While the manner in which each organisation will address the potential impacts is different (and will be partially determined by how each Member State enacts the decision), some of the concepts that companies are now examining include the following:
The Skandia case is undoubtedly one of the most significant VAT cases for many years for financial services organisations. Uncertainties remain, not least how the Irish Revenue Commissioners and other Member States will implement the decision. However, there are many practical steps companies can take now to mitigate the potential impact of the decision, even if the Irish Revenue were to take a broad interpretation of the case.