The hidden VAT – Why Europe escapes from a benefit

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By Dr. Giovanni Bianchi, COMMA 10

In Europe, the desire to compensate for VAT exemptions is growing, as evidenced by the court cases C-216/97 Gregg; C-384/98 D/W; C-498/03 Kingscrest; C-613/2010 Debiasi, by the use of legislation in force (e.g. VAT grouping and exemption for cost-sharing associations) and by proposed legislation (postal sector COM (2003) 234 def; insurance and financial service COM (2007) 746 e COM (2007) 747 def.).

Exemption without deduction of VAT paid on the purchase of goods and services was introduced in the VAT Directive "to reduce the cost of certain activities which are in the public interest". This concerns not only healthcare, education, university, culture and non-profit organisations but also banks, the financial and insurance sectors and real estate.

Given its social aim and public impact, this was made mandatory for all EU countries in the belief that it could give consumers a greater benefit than the application of the lower reduced rate.

Due to technological innovation in many sectors (e.g. healthcare) the exemption has often lost its purpose: it is no longer a benefit since hidden VAT (i.e. VAT that cannot be deducted), is higher than the global VAT charged to consumers. It therefore becomes an obstacle to new management models as it entails the outsourcing of "no core" services, the lack of ability to form different business structures, real estate and technological investments etc.

These are the conclusions of a recent study conducted by Comma 10, which estimated the incidence of hidden VAT in the Italian healthcare industry through a model that can also be useful for assessing the impact of hidden VAT in other countries.

Through the cooperation of other GGI members, significant differences between the laws of different countries in terms of tax exemptions and reduced rates have also been highlighted.

The high cost of irrecoverable VAT and the strong differences which exist in VAT rates and exempted activities in European countries also implies the need for appropriate cross-border advice for clients working in "out of scope" or "VAT-exempt" areas.

 Bianchi GiovanniDr. Giovanni Bianchi
COMMA 10 – Commercialisti & Avvocati, Milan, Italy
T: +39 02 481 92 58
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Dr. Giovanni Bianchi is a chartered accountant, tax and corporate advisor, registered auditor and a technical advisor for the Italian Court. He has more than 30 years of experience in accounting, consultancy and auditing for several companies and non-profit organisations. His domestic and international experience has enabled him to publish studies and technical articles, and he has worked with regional authorities, national ministries and European commission on a range of different subjects, including relationships between public and private companies (PPPs).

Comma 10's most fundamental task is to facilitate professional collaboration between chartered accountants and lawyers, with the aim of providing integrated services to individuals, private and public companies as well as non-profit organisations.

published: July 2013

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