Brussels, 01/03/2013 (Agence Europe) - The VAT directive does not make it an obligation for member states to take into account the turnover of branches established in other member states or third countries when calculating the pro rata deduction for a company based on their territory, Advocate General Cruz Villalon states in conclusions on Thursday 28 February regarding a case (C-388/11) which opposes the French bank, Crédit Lyonnais (LCL), and the national tax administration.
The French Council of State, in its questions to the Court of Justice, wishes to know whether, under the sixth VAT directive (77/388/EEC), a company based in a member state with branches located abroad must, at the time of paying its tax obligations to the tax authorities of the member state where it is based - in so far as it conducts operations opening entitlement to deduction and operations that do not give entitlement - must take its total turnover into account (i.e. that of its home base and of its various branches - “global pro rata”), when calculating its pro rata deduction of VAT. Cruz Villalon supports his argument as follows. Court case law (ruling C-210/04 FCE Bank) rules out the possibility of deducting VAT on spending by the head office of a company established in a member state when that spending is used for operations carried out by its branches in other member states. Nonetheless, it does not answer the question as to whether the same company must take into account not only the legal entity's turnover where that entity is based but also that of its branches when calculating pro rata deduction under the sixth VAT directive. In this respect, the VAT directive aims to allow the entity liable which acquires goods and services for the exercise of taxed activity and exonerated activity to deduct, from all operations carried out, the proportionate share of VAT on the acquisition of goods or services that corresponds to their use in its taxed activities. Hence: - the pro rata deduction system cannot always give rise to a perfectly exact correspondence between the proportion of VAT that can be recovered on spending upstream and the effective use of such spending on downstream operations; - the VAT directive does not explicitly provide for application of the “global pro rata” - consequently, it is up to the national courts and authorities to determine the concrete arrangements for exercising the right of deduction of those who make the acquisition in a member state of goods or services used for operations carried out downstream by branches established in other member states.
Indeed, as Cruz Villalon notes, according to the Court's case-law, the right of deduction must correspond as far as possible to the VAT paid upstream on the acquisition of goods or services used for non-exonerated operations. However, that requirement does not make it an obligation for member states to systematically take into account total turnover when calculating the pro rata deduction of the company concerned. The total figure is that of the corporate seat and that of all the company's branches established in other member states. Furthermore, with regard to VAT, a company with branches is not in a similar situation to that of a company with subsidiaries (the latter having their own legal nature, unlike branches). As the Court has pointed out, independent persons (such as subsidiaries) albeit closely linked (on the financial and economic levels in particular) may be considered as a single liable entity solely when they are established on the territory of one and the same member state.
Finally, the advocate general adds, companies are free to choose organisational structures and transactional arrangements that they consider the most appropriate for their economic activities and for limiting their tax burden, which encompasses the organisation and the breakdown of spending of the group (by opting for the creation of subsidiaries, for example).
Consequently, the advocate general proposes that the sixth VAT directive should be interpreted as not compelling member states to provide for the turnover of their branches in other member states or third countries to be taken into account when calculating the pro rata deduction of companies established on their territory. (FG/transl.jl)