CJEU – Recent Developments in Value Added Tax 2020

S. 761. The VAT paradox

The VAT, the dominant consumption tax across the globe, has evolved significantly since its adoption more than half a century ago. The original version, now known as the “traditional” VAT, was a complex, distortionary creature that inherited from its predecessor turnover taxes features which were quite incompatible with a benchmark VAT. These include multiple rates, a substantial range of exempt supplies, and narrow definitions of supply and enterprises subject to the tax. A combination of entrenched interests and, more importantly, the unanimity rule blocking significant overhauls of the tax, has left the traditional VAT largely intact in the EU. Outside the bloc, however, jurisdictions have moved to a modern VAT with a single positive rate, few exempt supplies, a broad definition of supply, and a wide concept of enterprises subject to the tax.

Although the traditional and modern VATs have parted ways in many respects, one feature of the traditional VAT was initially carried over to the modern VAT, namely the characterization of at least some types of financial supplies as exempt supplies. In a VAT, intended to act as a tax on final consumption, exempt supplies re...