Comparative studies of national law in the EU harmonized VAT¹ - PDF

Nordic Tax J. 2016; 1:29 40 Article Open Access Eleonor Kristoffersson Comparative studies of national law in the EU harmonized VAT¹ DOI /ntaxj Received Nov 10, 2015; accepted Dec 17,

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Nordic Tax J. 2016; 1:29 40 Article Open Access Eleonor Kristoffersson Comparative studies of national law in the EU harmonized VAT¹ DOI /ntaxj Received Nov 10, 2015; accepted Dec 17, Introduction The aim of this article is to contribute to the theory and methodology of comparative value-added tax (VAT) research, especially when comparative studies are carried out in the EU harmonized field of VAT. There are few fields of law that are harmonized to such a great extent as VAT.² The VAT acts of the Member States have been subject to harmonization for a long time. The first VAT Directives are dated back to 1967.³ Soft (non-binding) law harmonization measures are also taken by the OECD.⁴ Furthermore, the VAT acts over the world are similar as such, since a VAT system, in order to be a VAT system, has to have some basic elements, such as right to deduction of input VAT and a general taxation of transactions. The VAT is a young tax that has developed rapidly the last 65 years. Now, it has spread to approximately 160 countries all over the world.⁵ This article deals with the comparative research method in the field of EU harmonized VAT. The findings in this article regarding the research method may also have Eleonor Kristoffersson: Professor Doctor, Örebro University, Sweden; 1 The writing of this article was financed by Vetenskapsrådet and Marianne och Marcus Wallenbergs Stiftelse. Thanks a lot for generous support! 2 The main harmonizing act is Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (the VAT Directive). 3 First Council Directive 67/227/EEC of 11 April 1967 on the harmonization of legislation of Member States concerning turnover taxes and Second Council Directive 67/228/EEC of 11 April 1967 on the harmonization of legislation of Member States concerning turnover taxes - Structure and procedures for application of the common system of value added tax. 4 See for example OECD international VAT/GST guidelines on place of supply of B2B Services and Intangibles (2014). 5 For a complete list, see e.g. Pages/gst_ci.aspx, Website access in January Cf. OECD Observer No 284, Q1 2011, VAT s next half century: Towards a single-rate. relevance for other EU harmonized fields of law. The research gap that this article contributes to, regards basic questions on comparative methodology: How should a researcher in VAT decide which jurisdictions to compare? Which differences and similarities could a researcher of national VAT law expect to find and what can be the reasons for such differences and similarities? Which are the typical problems that may arise? The general idea upon which this article is based is that legal concepts are differently understood in different legal systems. Some precision of the concepts is lost already in the translation of the harmonizing legal act, in this case, the VAT Directive. For example, supply of goods is called Lieferung, delivery, in the German version of the VAT Directive.⁶ But also when the translation is successful, the understanding of the concepts may differ in different legal and societal environments. This article does not deal with the comparative method when the EU VAT system is compared with, for example, the Australian, Canadian, South African, or New Zeeland system, but when harmonized laws are compared with each other at the national level. Comparing the EU VAT system with other non-harmonized national VAT systems can be feasible for a general study when the systems as such are in focus. When getting into details, however, it is more appropriate to compare, for example, Germany with New Zeeland, taking the EU VAT system as a starting point, but going down to the same level, namely to national law (other opinion, Rendahl (2008)). There are two reasons for this, both based on the different competences of the EU and the Member States in VAT issues; First, VAT is harmonized by directives, and second, most case law of the European Union Court of Justice (CJEU) is preliminary rulings. 1. When Member States implement directives, they have a certain margin of appreciation, since directives should be implemented in order to achieve 6 Article 14 of the VAT Directive E. Kristoffersson, published by De Gruyter Open. This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivs 3.0 License. 30 E. Kristoffersson their results.⁷ National VAT acts are hence in many cases more detailed than the directive. 2. Preliminary rulings concern interpretation of the treaties as well as validity and interpretation of acts of the EU institutions.⁸ The application of the law belongs to the competence of the national courts. Consequently, directives and case law of the CJEU isolated do not fully provide solutions of juridical problems. To get the whole picture, the implementation in national law as well as other national sources such as case law from the national courts have to be taken into consideration. The starting point of this article is comparative research method and its application on VAT research. After that, the question how to choose jurisdictions for the research is discussed. Thereafter, differences and similarities within the EU VAT system are discussed. The differences and similarities are divided into expected and unexpected differences and similarities. This categorization is to some extent rough, but the idea is to make a difference between those differences and similarities that have to do with harmonization or those that are not. The article ends with some concluding remarks where the research questions are answered. 2 Comparative research method and its application on VAT research 2.1 Legal families Comparative law is subject to an extensive legal theory. A traditional view is that a comparative study should be carried out between the parent jurisdictions of the legal families (Zweigert (1972)). In the Germanic legal family, Germany (and not Switzerland or Austria) is the parent jurisdiction. In the Roman legal family, French law (and not Spanish or Italian law) is the parent jurisdiction. In the Anglo-Saxon legal family, British law (and not Indian or Australian law) is the parent jurisdiction (Zweigert and Kötz (1998)). This idea of using legal families as a tool for comparative studies is based upon the assumption that the material of a comparison might be reduced by way of generalization (Rainer (2010)). Comparing all jurisdictions in the world would be impossible or at least very difficult. It would therefore simplify the working process of a comparative study if a few representative jurisdictions could be identified. The classification and division into legal families is challenging. An early classification was made by Esmain in He suggested a classification into Roman, Germanic, Anglo-Saxon, Slavic, and Islamic legal systems (Esmain (1900)). Only a few decades ago, comparatists, in general, had started to widen their perspective and include other non-european legal systems as a subject of independent study, not only for occasional extra-european excursions (Dölemeyer (2010)). Rainer argues for the existence of two legal traditions within the Western and European legal systems the Roman law tradition and the common law tradition (Esmain (1900)). This classification leaves room for a third category, mixed legal systems. Mixed legal systems are the ones that do not belong to the Roman or common law tradition, such as the law of Scotland. Also, the Nordic legal systems would be mixed legal systems. Göransson proposes that only at a very high level of generalization and regarding very basic rules, the presumption of similarities of legal systems within one and the same legal family is valid (Göransson (1994)). As soon as the law is studied more in detail, the similarities diminish. Furthermore, the deeper the law is studied, Göransson argues, the riskier it is to assume that similarities depend on the fact that legal systems belong to the same legal family. Similarities might as well have other reasons even though the jurisdictions belong to the same legal family. Knowledge about legal families and the main characteristics of different legal systems is helpful when jurisdictions are selected for comparative studies. In advanced comparative legal research where the law is studied in detail, randomly selecting parent jurisdictions for comparison because of expected similarities and that the parent jurisdictions should be representative is, however, risky. The reasons for this are that there is no given one and only classification in legal families or legal systems, there are no given parent jurisdictions, and the similarities found within legal families may as well depend on the fact that the two jurisdictions are members of the same legal families as on other reasons. In my opinion, legal family is a too rough tool to be used for the selection of jurisdictions in most comparative studies. 2.2 Different approaches to comparative law 7 Article 288 of the Treaty of the Functioning of the European Union (TFEU). 8 Article 267 TFEU. When a comparative study is carried out, it is often held that the functional approach should be applied (Zweigert Comparative studies of national law in the EU harmonized VAT 31 (1972); Gunnerstad and Ingvarsson (1997); Avi-Yonah et al. (2009)). This means that, in respect of deciding which questions to answer, the researcher should not focus on rules in a foreign legal system, but on the problems that the rules are intended to solve. For example, a transaction may be VAT-free for several reasons, it may be out of the scope of VAT, it may be exempt from VAT, or it may be supplied or acquired abroad. If a researcher of VAT would only study if the transaction was exempt from VAT, the researcher would not get the answer to the question whether the actual transaction was subject to VAT or not which would be interesting out of a comparative perspective. The research questions should be formulated in a way that they aim at catching the complexity of a legal system (Göransson (1994)). Comparing the VAT treatment of the insurance sector in several Member States is far more fruitful than comparing the exemption for insurance services. The functional approach is, however, not the only possible approach to comparative law. The economic approach goes further than the functional approach in the sense that it does not only deal with which functions laws and institutions fulfill, but also ask which laws and institutions that fulfill the functions in the most efficient way. When the economic approach is applied, benchmarks are often set in order to concretize economic efficiency. The economic approach tends to end up in identifying best practices or best solutions based on an economic analysis (Avi-Yonah et al. (2009)).⁹ The cultural approach is based on the idea, that law is part of a broader cultural phenomenon. In each culture, there are unique elements such as values, traditions, and beliefs. If the cultural approach is applied strictly, it is in conflict with the functional approach. Due to each legal system s uniqueness, there are few similarities in social problems and legal solutions (Avi-Yonah et al. (2009)). Consequently, under this view, identifying the same problem and searching for legal solutions thereof result in comparing the incomparable. In my opinion, the functional approach is relevant when identifying what to compare in foreign law, since it in the field of VAT, it is possible to identify similar transactions of goods or services and compare the VAT effects thereof. The strict cultural approach is characterized by a scent of nationalism, which rests on the idea that national boarders create different cultures. Within a country, there 9 As an example of a comparative study in tax law, applying the economic approach, see Hambre (2015). Tax Confidentiality. A Comparative Study and Impact Assessment of Global Interest. Örebro: Örebro Studies in Law 6. Örebro University. are many different cultures. This does not only apply to cultures in general, but also to legal cultures. Furthermore, as long as a national border is not closed, the cultures on both sides of the border tend to be similar. During the research and when the results are analyzed, however, elements of the cultural approach should be taken into consideration, since culture is closely linked to law. Depending on the aim of the study, an economic approach can be added. 2.3 Analyzing similarities and differences and using the result A comparative study cannot just aim at identifying similarities and differences (Cornell (2015)). Both similarities and differences have to be analyzed in order to understand the reasons behind them (Göransson (1994)). Such an analysis should not be carried out without understanding the societal and historical context of the provisions. In this step of the comparative study, it is often helpful if the quality of the study is assured by native lawyers. When the similarities and differences are explained, the last step in the comparative study is to use the result (Göransson (1994)). It could be used for suggesting changes of law, or to find the most appropriate legal solution, based on certain benchmarks of a particular problem. In a wider sense, it could be used for the widening of knowledge about the national legal system as well as for better understanding of foreign legal systems (Rainer (2010)). If the functional approach is applied strictly, the aim of the study should be to find the rules with the most appropriate function in relation to the problem (Gunnerstad and Ingvarsson (1997)). In harmonized fields of law, such as VAT law, the implementation and application of a directive in other Member States can offer guidance regarding both possible ways of interpreting the directive and how the directive could be implemented (Göransson (1994)). From a practical point of view, comparative studies are highly relevant in cross-border trade (Göransson (1994)). 2.4 Applying the comparative research method on EU VAT law In the field of comparative VAT law, little is written about theory and methodology. The most well-known text book in comparative tax law, in general, is Thourony, Comparative Tax Law Thuronyi (2003)). This book, however, fo- 32 E. Kristoffersson cuses much more on describing different tax systems of the world, than with methodological issues. In EU VAT law, there is little research done regarding how to carry out a comparative study at the national level. The standard work, Shenk/Oldman (2007, Value Added Tax A comparative approach) offers a comparative presentation, but it does not particularly deal with methodical issues. There are also conference volumes with a large quantity of comparative material on VAT, but where the comparative method is not dealt with (See?Lang and Lejune (2014)). The reason for the apparent lack of any research on the comparative method in VAT research is most likely that the VAT and GST (general sales tax) systems around the world are fairly similar. From a methodological point of view, it is a relatively simple task to identify the provisions regulating, for example, the right of deduction in two different VAT systems and compare them. Likewise, it is to find out whether internal transactions of goods and services are taxed when they are supplied cross-border from a head office to a branch. Thus, it is probably assumed that there are not any certain methodological issues that should be taken into consideration. However, in my opinion, this is a flawed view. As mentioned above, the EU VAT is harmonized by directives that have to be transformed into national law. As long as the result of the directive is achieved, the Member States are free to choose how to implement the directive. This means that the VAT acts of the different Member States differ to a fairly large extent from each other. When examining the history of the VAT acts in different EU Member States, one can often find that the Member States have maintained some of the legislation that they had before the common EU VAT entered into force. Interestingly, the structure of some VAT acts and some of the provisions in them can be traced back to the time before VAT was introduced. For example, there are provisions in the Swedish VAT act¹⁰ that stems from the omsen, which was the general sales tax that was applied before VAT (SW: momsen) was introduced in 1969 (See Forssén (2013)).¹¹ The general structure of the Austrian VAT act¹² can be traced to the German sales tax system introduced during the German occupation in World War II.¹³ 10 Mervärdesskattelagen (1994:200), the Swedish VAT Act (SVATA). 11 Eg Chap. 6 Sec. 2 SVATA. 12 Umsatzsteuergesetz, UStG 1994, the Austrian VAT Act (AVATA). 13 Reichsteuerblatt, RStBl 1938, 425 and Weitergeltungsgesetz vom , Steuergesetzblatt, StGBl The selection of countries for the comparison When making a comparative study in the field of EU VAT law, the starting point should be the common legal basis, which is binding EU law (directives, regulations, and decisions) and the interpretation thereof by the CJEU. Since the CJEU has developed its case law for many years, and the national courts of last instance are obliged to refer questions of interpretation to the CJEU,¹⁴ there are hundreds of VAT cases. To describe, analyze, and understand EU law is therefore an important and time-consuming piece of work. This might be one explanation for why some researchers choose to stay at the EU level and not go further to the national VAT law (see e.g. Rendahl (2008)). In the article Holding complexity: analysing the CJEU s VAT case law as a network, Knops and Schaper (2014) propose a new method for analyzing CJEU case law, by using data-driven modeling to build a case-to-case network. Their method is one way of dealing with the large number of cases of the CJEU. When EU VAT law has been analyzed, the next step is to select jurisdictions for the comparison. One of the most difficult parts of a comparative study is to get knowledge about foreign law (Göransson 1995). This is difficult because understanding the law requires not only knowledge about legal sources and the legal system, but also understanding about the society in which the law operates (Göransson 1995). For this reason, it is far easier to make a comparative study in a country where the researcher knows the language and has knowledge and experience of the legal system or where the researcher has established contacts than in any other country. Nevertheless, the selection of countries should be motivated by other than practical considerations. How the jurisdictions are selected should, in my opinion, depend on the aim with the study. Following issues could be addressed in relation with the aim of the study. Does the study aim at giving information to new Member States of how the VAT Directives and the case law of the CJEU are understood by the Member States that have been members of the EU for a longer time? For example, when Sweden, Finland, and Austria became members of the EU in 1995, it was fruitful to make a comparison with jurisdictions in Member States, which had been members of the EU since the beginning, and 14 Article 267 TFEU. Comparative studies of national law in the EU harmonized VAT 33 where there was a lot of national case law as well as legal literature on VAT (e.g. Alhager (2001)). The same applies today for new Member States, such as Rumania, Croatia, and Hungary. For new Member States, EU VAT law is law out of context (Watson (2008)). EU VAT law does not come from the inside country but from outside; from the EU. Therefore the history, culture, and society are not reflected in the law. This increases the risk of different understanding of EU harmonized law of the different Member States compared with national law of national courts. Does the study aim at examining how the EU
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