EU VAT: What is it and why does it matter for EU ship supply?
Vice Chairman of OCEAN and Board member responsible for VAT, Mr. D. Cupido, shares his insights into the importance of VAT for ship supply
What is Value Added Tax?
Overall Value Added Tax, or VAT, in the European Union is a general, broadly based consumption tax assessed on the value added to goods and services. It applies more or less to all goods and services that are bought and sold for use or consumption in the European Union.
Value Added Tax, a tax on the use and consumption of goods in the European Union, is one of the main sources of income for the Member States. The system, in all its variety, is set up in such a way that ultimately the end-user / consumer of goods or services on ‘European (=EU) soil' pays a certain percentage on the price paid. The standard rate varies in 2021 from 17 per cent (Luxemburg) to 27 per cent (Hungary) and for specific types of goods and services reduced rates are applicable.
Thus, goods which are sold for export or services which are sold to customers abroad are normally not subject to VAT.
Conversely, imports are taxed to keep the system fair for EU producers so that they can compete on equal terms on the European market with suppliers situated outside the Union.
More VAT features a ship supplier needs to know about
Value-added tax is
- a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services, including ship supply. There are sales thresholds before VAT kicks in.
- a consumption tax because it is borne ultimately by the final consumer, usually the customer of the shipsupplier.
- charged as a percentage of the price, which means that the actual tax burden is visible at each stage in the production and distribution chain.
- collected fractionally, via a system of partial payments whereby taxable persons (i.e., VAT-registered businesses) deduct from the VAT they have collected the amount of tax they have paid to other taxable persons on purchases for their business activities. This mechanism ensures that the tax is neutral regardless of how many transactions are involved.· paid to the revenue authorities by the seller of the goods, who is the "taxable person", but it is actually paid by the buyer to the seller as part of the price. It is thus an indirect tax.
VAT in the EU
At the time when the European Community was created, the original six EU countries, including my native Netherlands, were using different forms of indirect taxation, most of which were cascade taxes. These were multi-stage taxes which were each levied on the actual value of output at each stage of the productive process, making it impossible to determine the real amount of tax actually included in the final price of a particular product. As a consequence, there was always a risk that EU countries would deliberately or accidentally subsidise their exports by overestimating the taxes refundable on exportation.
It was evident that if there was ever going to be an efficient, single market in Europe, a neutral and transparent turnover tax system was required which ensured tax neutrality and allowed the exact amount of tax to be rebated at the point of export. But - VAT allows for the certainty that exports there are completely and transparently tax-free. So, if ship supply is an export, then no VAT would be charged.
VAT rates in the EU
EU law only requires that the standard VAT rate must be at least 15% and the reduced rate at least 5%.
Actual rates applied to vary between EU countries and between certain types of products. In addition, certain EU countries have retained other rates for specific products.
The most reliable source of information on current VAT rates for a specified product in a particular EU country is that country's VAT authority. An overview of the different rates applied in all EU countries is available.
Standard VAT rate
This is the rate that EU countries have to apply to all non-exempt goods and services (Article 96 VAT Directive). It must be no less than 15%, but there is no maximum (Article 97 VAT Directive).
Reduced VAT rates
EU countries have also the option to apply one or two reduced rates (Article 98(1) VAT Directive which:
may be applied to goods or services listed in Annex III of the VAT Directive but not to electronically supplied services (Article 98(2) VAT Directive)
must be no less than 5% (Article 99 VAT Directive)
Exceptions to the rules – "special rates" of VAT
"Special rates" refers to the multiple exceptions to the basic rules. This enables them to keep "special rates" - reduced rates under 5% (including zero rates) and reduced rates for goods and services other than those listed in the directive (Articles 102-128 VAT Directive).
A complex system
The enormous variety of goods and services and the complexity of the market and the processes therein, in combination with the concept of the Common Market in the EU and the ambition to reduce red tape, has made the concept of VAT sensitive to fraud. It is estimated that about € 150 billion is lost in VAT fraud per annum, the last years (the ‘VAT Gap').
Simplification: Work in Progress
Already in 2010, a Green Paper was presented by the European Commission: ‘On the future of VAT; Towards a simpler, more robust and efficient VAT system'. Since then, a lot of measures have already been taken to simplify the system, taking into account the mentioned complexity, but we are not yet there.
A special position
European ship supply, as always, holds a very specific position, operating on the border of a Common Market, in a market environment, which is known for its international, hence complicated, character. For supplies to merchant vessels rules have always been relatively simple. Through customs documents, a supplier could prove that goods actually left the Union and the application of 0 per cent VAT was confirmed. This has all changed: one has to be able to prove that a ship is solely used for commercial purposes, and sails the high seas for at least 70% of its time. And then you have a large variety of floating and sailing units, from cargo vessels, via cruise ships and ferries, (super-)yachts, offshore installations, work ships, barges, fishing boats of all sizes and the like.
Whether or not VAT is to be applied for deliveries ship suppliers do, is relevant against the background of the type of trade we are in. Vessels sailing around the world have a choice where to buy their goods and then, certainly in these days of budget control and cost optimisation, a 10 to 15 per cent price difference, due to the levying VAT could be distorting competition. For vessels trading in European waters, the competition element might be less important, but only if there is a level playing field.
No harmonisation of VAT procedures across the EU
EU countries implement common rules set in VAT Directive in their national legislation. The practical application and the administrative practices of each EU country therefore vary.
We, in the OCEAN Board, are, therefore, more and more confronted with questions regarding the interpretation of EU Directives on VAT in national legislation. Considering that VAT is not (yet) harmonised in the European Union, it is difficult for us to have an idea of how the rules in this respect are applied. While the OCEAN Board would like to support national VAT legislation conversations, the options to discuss VAT at the European level remain limited as long as taxation is set at the national level.
It is more than ever important to have a national conversation about VAT with the authorities/lawmakers.
When thinking about it or not VAT applies for ship supply, depending on national legislation, one may have to consider and discuss with the national authorities the impact of the following:
OCEAN's position on VAT
- Types of vessels supplied: cargo vessels, cruise vessels, ferries, fishing boats, yachts, superyachts, work ships, barges, offshore installations, etc.
- Types of clients: ship owners, management firms, catering companies, etc.
- Types of suppliers (from your national perspective): national supplier, EU-supplier, non-EU-supplier.
- Types of goods supplied: stores, provisions, veterinary goods, free-floating goods, custom goods, etc.
- Types of services: port services, services carried out during the next trip, transport services, etc.
- Is the next destination (EU or third country) relevant?
OCEAN points out that tax and duty-free ship supply are fundamental for European Ship Suppliers and must be maintained.
What European Ship Suppliers need is direct recognition in EU law of our exemption to pay VAT and excise duties.
In international shipping, the principle of tax and duty-free use of goods and services is of fundamental significance. A ship may be supplied at every port she is calling and therefore competition between Ship Suppliers depends on the cost of goods, transport conditions and services in different ports. Freedom of taxes is one of the most important conditions to avoid distortions between different ports and different countries.
Freedom of duty has an important effect on supply costs. In countries where indirect taxation is in force, freedom of duties leads to lower prices than in those countries where direct taxation is in force. However, countries, where low prices are available, may not always be the most suitable, due to circumstances or lack of services for satisfactory trouble-free ship supplying. Nevertheless, ship supplying is an international business in which competition is worldwide and influences supply conditions in every port. It is therefore important that customs, fiscal and market legislation in the EU and each Member State should only be framed after due consideration of this element of competition.
The VAT regulation which concerns Ship Supply and its related exemptions are described in Directive 2006/112/EC which entered in force 1st Jan 2007 ( Publ. L347 Vol 49 of 11 Dec 2006 ), in particular, Title 9 Chapter 1 and Chapter 7 Art 148.
We welcome any questions, comments and input.