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CJEU decision on transactions between branches and overseas head offices
The Court of Justice of the European Union (“CJEU”) has handed down its decision in the case of Skandia America Corporation USA (“SAC”), holding that supplies of services from an overseas head office (“HO”) to a branch in a VAT group in a Member State should be subject to VAT and accounted for under the reverse charge mechanism by the VAT group.
SAC is a US entity and, in 2007 and 2008, was the global purchasing company for IT services for the Skandia group. SAC carried out its activities in Sweden through its Swedish branch, which took the role of processing the externally-purchased IT services that had been supplied to it by SAC’s HO and then supplying these to various entities in the wider Skandia corporate group. Supplies from the SAC HO to the Swedish branch, and from the branch to other entities within the Skandia group, were made at a mark-up of 5%, with costs allocated between the SAC HO and the Swedish branch through the issue of internal invoices.
The Swedish branch of Skandia was also a member of a VAT group in Sweden.
Taking the view that transactions from the SAC HO to the Swedish branch constituted taxable supplies, the Swedish tax authority sought to levy VAT on these supplies. This decision was challenged by Skandia, with the Swedish court choosing to refer some of the issues arising to the CJEU.
In a brief and fairly clear decision, the CJEU confirmed that, in situations where a branch of an overseas entity is part of a VAT group, any supplies of services made by an overseas head office in a non-EU country to this branch are considered to be made to the VAT group as a whole and hence subject to VAT. It is then the responsibility of the VAT group to account for VAT on these supplies under the reverse charge mechanism.
In our view the decision of the Court is very difficult to understand as the decision is not consistent with case law or indeed the EU VAT Directive. In fact in its judgment the Court itself concluded that there was no supply of services between the branch and its head office which could be subject to VAT. In the next paragraph of its judgment it then simply stated that there was a supply of services which must be taxed. In this regard EU VAT law provides that certain “non-supplies”, such as movement of own goods between Member States, can be treated as supplies for VAT purposes and taxed. It would require a similar provision that makes transactions between branch and head office to be supplies for VAT purposes for the Court to rationally reach the judgment that it has. In the absence of such legislation it is arguably not within the Court’s remit to make a finding that there is any supply which could be subject to VAT.
Regrettably as the CJEU is the highest Court its judgments cannot be appealed and the decision of the Court has to be applied.
Currently, Revenue accept that where a branch in Ireland that is a member of an Irish VAT group receives services from a head office established outside Ireland the services are disregarded for VAT purposes. This also applies where the head office is located in Ireland and the branch is outside Ireland.
The decision of the CJEU therefore may have ramifications for all businesses that have overseas head offices (or branches) and branches (or head offices) in Ireland that are members of a VAT group in Ireland and which receive services from the overseas head office (branch). There is likely to be a particularly significant impact in the Financial Services sector, where arrangements involving branches and VAT groups are commonplace.
We expect that any changes to the current position will only be on a prospective basis and that there will be a transitional period to allow for consultation with practitioners and taxpayers in respect of any changes to law or practice.
Immediate next steps
Businesses which may be affected by this decision should determine the potential financial impact it could have on their organisation and consider any means of restructuring their activities or procurement processes with a view to mitigating the additional VAT costs that could arise.