Contribution to Liber Amicorum for Sven-Olof Lodin

This is the final manuscript contributed to the editor. Minor amendments may have been done in the printed version.

Who is a taxable person to VAT?

1 Introduction

1. Taxes are levied on income, consumption or other re-sources that create ability to pay tax. However, taxes are by definition paid by persons. For an income tax it is obvious that when income is the basis for taxation it must be the per-son in control of the income that should pay the tax.1

When consumption forms the basis for taxation the taxpayer could either be a consumer or persons supplying him with goods and services for consumption. Sven-Olof Lodin is prob-ably the scholar that has made the most extensive contribu-tion to the analysis of practical problems and in proposing so-lutions for a consumption tax where the consumer is the tax-payer.2 His analysis brought much new insight and demon-strated that practical methods exist for such taxation. Never-theless, the traditional system for taxation of consumption prevails, and will probably continue to do so in the foresee-able future. This article deals with the existing general consumption taxes and their rules to determine which persons should pay such tax. The European system of Value Added Tax is the con-sumption tax system with the widest jurisdiction in the world. It is therefore natural to use the terminology minted in the EEC VAT Directives and when rules will be discussed the ex-amples used will be limited to the articles of the Directives and the case law from the European Court of Justice (ECJ).

2. Persons supplying goods or services purchased by con-sumers should pay VAT. The taxpayers are thus the suppliers and not the consumers. Although the consumers are sup-

1 In modern tax systems the waste amount of tax is paid by other persons in the form of different withholding taxes, but on behalf of the formal taxpayer.2 Progressive Expenditure Tax – An Alternative?, 1978.

posed to bear the tax finally, it is nevertheless the producers/distributors that are the actual payers of VAT. As implied above it is not only the final distributor who acts as a taxpayer, but all persons participating in the production/distribution process. This makes necessary a re-ciprocal system where, until the final stage VAT, paid on sales at one stage should be deductible at the next stage. The fact that a person participating in this chain is a taxable person or not could create effects that are special to the VAT system. The next section of this article deals with the structure of the VAT system and the effects of it. These are questions which are of general interest for tax systems of the VAT type.3

Special attention will be paid to the effects that deviate from what would be income tax effects in a similar situation. In the third section the rules of the EEC Directives which are the foundation of the European VAT-laws are analyzed. Practical problems that must be solved by the rules of delimi-tation are also discussed.

2 Effects of treating a person as a taxable or non-taxable person

1. In every VAT system the category of persons who should pay tax are defined in some way. These persons should charge VAT on supplies of goods and services (output VAT) and are entitled to deduct VAT that has been charged on their purchases (input VAT). These persons are called taxable persons in the EEC Directive and will so be referred to as such here as well. As a rule all producers and distributors are taxable persons and under normal circumstances their taxable activities will result in a net payment of VAT. In some activities deductible input VAT exceeds regularly or occasionally the VAT charged on sales. This will result in refunds. The right to a refund is a necessary component of the system in order to uphold the reciprocity. It should be noted that with very few exceptions the right to refund does not exist in income tax systems.4

3 Such taxes exist in all member states of the European Union and in most other developed countries such as Canada, China, Korea, New Zealand. Australia has recently introduced a General Sales Tax of the VAT-type. USA is still the most prominent exception.4 The author acknowledges that he is not sure whether such a right exists in some income tax systems.

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2. In order to make the tax as general as possible and to make the reciprocity of the VAT system function as well as possible, the category of taxable persons should be wide. Ulti-mately, that would mean that only persons acting in their ca-pacity as consumers should be excluded. However, in prac-tice a number of persons acting as producers or distributors are excluded as well. The effects of this exclusion from the VAT system are a bit special and differ from the effects of ex-emption arising in the income tax system. If a person is a non-taxable person the primary effect will be that no VAT will be paid on the value added produced by him. Whether this will be the final effect or not depends, however, on the character of the purchaser. If the purchaser is a con-sumer the final effect will be that this value will escape VAT, but if the purchaser is a taxable person, it will not. For a taxable person this will be the effect since there is no input VAT for him to deduct, but when he later sells the prod-uct VAT will be charged on the full price. Thus, the value pro-duced by a non-taxable person does not escape VAT, although the tax will not be paid by that person but by the taxable per-son at the next stage of the production/distribution. This ef-fect will be referred to below as the catching effect. It should be noted that this effect does not normally arise in the income tax system. This is because normally the right to deduct the costs of purchases exists irrespective of the tax status of the seller.

3. The catching effect described above may be considered desirable or undesirable depending on the situation in which it occurs. Usually, the effect is intended and it is then desir-able. For practical reasons not all persons taking part in the pro-duction and distribution of goods and services are treated as taxable persons. Normally under VAT laws persons such as employees, lenders, shareholders and similar are not treated as taxable persons. This delimitation may be discussed, and that will be done to some extent later. When employees are not treated as taxable persons the VAT system must function in the way described above in para-graph 2. This function means that the value added produced by them will be taxed when their employers charge VAT on the sales of goods and services produced by them. The advan-tages of the system clearly outweigh the disadvantages, since millions of employees can be kept outside the administrative burden of the VAT system. The disadvantage is only that they

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are not allowed to deduct VAT on the purchases used in their employment; see further below paragraph 4. However, such purchases are probably normally of limited value. Taxation of the value added produced by capital employed functions in a similar way. The yield on capital – loans or eq-uity – will be taxed as part of the valued added in the busi-ness carried on by the taxable person. This as way of a taxa-tion could also be deemed desirable. Charging VAT on finan-cial services has so far been considered too complicated. Treating the owner of a business – the shareholders or indi-viduals carrying out business - as separate taxable persons would be even more complicated and unjustifiable. Again the disadvantage of such an approach is that the shareholder, lender etc. cannot deduct the VAT connected with the fund-ing. The VAT amount is probably not of considerable value, however.

4. In the situations above the catching effect is considered desirable since the administrative advantages vastly out-weigh the disadvantages of lost deductions. However, in many other situations the loss of deductions is deemed to be a considerable and serious problem. When the negative as-pects of the effect are emphasized the effect is called the cu-mulative effect. The negative result of the cumulative effect is that the total amount of VAT levied on a product will exceed the intended amount of VAT on the product:

A producer purchases rawmaterial for 100 including 20 of VAT. He is not a taxable person. After his work he sells the product for a price equal to his cost and a profit of 30, that is for 130, to a dis-tributor. The distributor sells the product for 200, including 40 of VAT, to a consumer. The total correct amount of VAT levied on this product should be 40. Whereas 60 of VAT are actually paid.

This effect is caused by the fact that a non-taxable person oc-cupies a place in the production/distribution line located be-tween two taxable persons, which interrupts the reciprocity of VAT deductions. A cumulative effect is undesirable in a number of ways: If the extra amount of VAT will result in an increase of the consumer prices, the consumers will have to carry the bur-den. There is no reason for heavier taxation on this type of consumption than on other types of consumption.

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If the producer carries the extra VAT it could create a dis-tortion of competition, since his costs will e rise by the amount of his input VAT. If a product is exported or sold in competition with imported products, a cumulative effect may cause a competitive disad-vantage in cases where cumulative effects affect products from other countries to a lesser degree. Cumulative effects are taken seriously. However, sometimes the size of the effect does not justify undertaking measures to eliminate the effect. In my opinion this is for instance the case in the situations described in the previous paragraph. But in most other situations the effect is serious enough to motivate measures in order to eliminate the effect.

5. Discussed above are situations in which a non-taxable per-son sells his products to a taxable person. If a non-taxable person acts as a seller to a consumer the VAT effects will dif-fer from the effects described above. In this situation VAT has been levied in the preceding stages of the production chain, but it will not be levied on the value added at the last stage, either by the non taxable person or by any other person. The total amount of VAT levied on this product will therefor be certainly smaller it would have been, had VAT been levied on the consumer price. This effect would also arise in an income tax system if the seller was exempt from income tax. However, the scope of the effect would differ very much between the two taxes. The construction of the VAT normally means that it is not only the value added produced by the non taxable person that will es-cape VAT, but also the value added produced by non-taxable person’s employees, lenders and other suppliers of his pro-duction, who are not taxable themselves. An exemption from income tax will only include the income of the non taxable person, but not of his employees etc., since they are normally all taxable persons themselves. This effect should be observed for instance when consider-ing exemptions from VAT for non-profit-making organizations. Such organizations is sometimes competeing with other per-sons and extensive exemption from VAT might constitute a far more important disadvantage to their competitors than exemption from income tax.

6. To summarize what has been said above it can be stated that the effects described and discussed above provice argu-ments for a wide scope of taxation and therefore for a broad definition of a "taxable person". It is especially avoding the

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cumulative effects of the VAT-system that makes it important to have a wide scope of taxation. Further, exemption from taxation of persons selling to consumers may create a distor-tion of competition, which is aggravated by the fact that the value added subject to exemption includes also the value added by their employees, etc. However, for practical reasons, it is reasonable not to treat employees as taxable persons. In most cases such an exemp-tion does not create any of the undesirable effects just men-tioned, since it is rare that purchases of employees for their employment amount to any considerable amount.5

3 Defining taxable persons in VAT-laws

The previous section dealt mainly with problems caused by choosing either a narrow or a wide definition of “taxable per-son”. The conclusion was that in general a wide definition should be applied in order to avoid the cumulative effect. However, it was also emphasized that for practical reasons a number of categories should be excluded from the concept of a taxable person. In this section the definition of the concept of a taxable per-son will be dealt with. The necessary limitations on the scope of the concept of a taxable person and the construction of rules governing it are discussed with the objective to make the discussion interesting in a general international context. However, in order to provide the discussion with a more prac-tical basis the presentation of rules will be based on the EEC Sixth Directive 77/3886 (hence the Sixth Directive) and case law of ECJ.7

3.1 General

5 This problem may have been aggrevated, however, in recent years with an in-crease in computer use and distance work.6 This directive has been amended a number of times by other directives. The reference here will only be made to the Sixth Directive.7 The purpose is not primarily to analyze the interpretation and application of the directive and the cases. The analyzes will not therefore be carried out in any greater detail. Problems of more special character will neither be dealt with.

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1. The Sixth Directive contains in Article 4 (1) a general defi-nition of a taxable person:

"Taxable person" shall mean any person who independently carries out in any place any economic activity specified in paragraph 2, whatever the purpose or results of that activity.

In the previous sections reasons for a wide scope of taxation were explained. The concept of "taxable person" in Article 4 is widely interpreted and the ECJ has stated that "Article 4 of the Sixth Directive confers a very wide scope on value added tax, comprising all stages of production, distribution and the provision of services".8

The concept of taxable persons should basically include all persons selling goods and services. Nevertheless, as shown in the previous section, there are reasons to exclude some cate-gories of persons even though they do sell goods or services.

2. First of all consumers should be excluded in order to deny them deduction for VAT on all purchases for consumption. Whenever the primary and dominant purpose for a purchase is consumption, there are reasons not to treat this as a tax-able activity. There are reasons not only to exclude purchases but also sales of used goods because they would be hard to control and costly to administer. Further, in these cases there are usually no value added.9

The concept of economic activity could be deemed to ex-clude consumer activities, at least when the explanations in the following paragraphs are considered. The concept ”eco-nomic activity” could be interpreted to include a requirement that it does not include activities carried out on an occasional basis.10 That excludes most sales of used goods by con-sumers. However, consumers could often supply services on a con-tinuing basis although the value of the service is limited. An example is given in the ECJ case C-230/94 (Enkler):

Mrs Enkler bought 1984 a motor caravan for DEM 46 249 plus VAT of DEM 6 474. During three years allegedly the caravan was used for her private use 79 days, hired to her husband 40 days and to third parties 13 days. The court held that hiring out of tangible property was an eco-nomic ‘activity’, within the meaning of Article 4(2) if it was done for the purpose of obtaining income therefrom on a continuing basis; para. 22. However, the court made no judgment whether

8 van Tiem C-186/89. The statement was made with reference to the previous cases C-235/85 and C-348/87, and has been frequently repeated in later cases such as C-80/95 and C-60/90.9 The exclusion cause no special problems, except that sales of used goods from a consumer to a taxable person need special treatment.10 Article 4(3) e contrario and C-230/94 para. 20.

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that was fulfilled in this case, but discussed some criteria to be used for such a judgment. My impression is that the court at least did not find it impossi-ble than Mrs Enkler could be deemed to be a taxable person.

A conclusion of the Enkler-case is that the threshold for taxa-bility probably is fairly low concerning services carried out on a continuing basis. In my opinion there are good practical reasons to exclude this type of activities from taxation. The reasons are the same as stated above for sales of used goods by consumers. The taxation of service-activities are also hard to control and costly to administer. On the other hand there is probably more value added in a service - like renting out an asset - than in the sale of used goods.11 The conclusion is that also in this case the practical problems normally outweigh the rea-sons to tax the transactions. It would therefore be desirable if a higher threshold could be applied to these cases. That would require an amendment of the Directive.

3. The reason for exclusion from taxation in the case dis-cussed above – sale of used goods and hiring out - are practi-cal problems with taxation and the limited amount of value added. As discussed in section 2 there are also exclusions that involve persons adding a considerable value to the pro-duction/distribution of taxable products. The value added by such persons as employees, lenders etc. will, as was de-scribed in section 2, anyhow normally be taxed.

In the Sixth Directive is the exclusion achieved by treating financial services as exempt services according to Article 13 (B)(d). Employees are excluded in Article 4(1) by the state-ment that an economic activity should be carried out indepen-dently. The concept independently is explained in Article 4(4) as excluding "employed and other persons from the tax in so far as they are bound to an employer by a contract of employ-ment or by any other legal ties creating the relationship of employer and employee as regards working conditions, remu-neration and the employer's liability."

4. In general, apart from the exclusions mentioned above, the taxation should be wide, for reasons discussed in section 2. As mentioned in para. 1 above the concept of "taxable per-son" in Article 4 is also wide which has been stressed in case law.

11 This could be the case when a considerable capital is invested in the asset, since no deductible input VAT is attached to the capital cost.

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This rule is based among others on the basic VAT principle that all input VAT paid in the course of the production and distribution of taxable goods or services should be de-ductible. In Rompelman C-268/83 ECJ this was expressed by stating that "… the deduction system is meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities."12

What is here stated is the intention to avoid cumulative ef-fects. The intention of a wide scope of taxation is of impor-tance when determining the delimitation between taxable persons and non-taxable persons. For persons eventually car-rying out economic activities it is also of great importance to be treated as taxable persons as early as possible. The case law of the ECJ give evidence that this is a very important question and it should be dealt with in the next subsection.

3.2 The start of an economic activity

1. It is normally very important for a person to be treated as a taxable person as soon as possible. There are normally no mechanism in VAT-laws through which a deduction can be made retroactively if a taxable status is established later, and it is thus important to be allowed to deduct input VAT as soon as possible.13

That this is an essential part of the VAT system has been stated several times by the ECJ. It was first stated in the case Rompelman, which was quoted above in section 3.1.

In Rompelman, C-268/83, the problem considered was if and when an economic activity consisting in letting of immov-able property commenced. The ECJ made a principal state-ment concerning the start of an economic activity:

"As regards the question of the time when the exploitation of im-movable property commences, it must first be pointed out that the economic activities referred to in Article 4 (1) may consist in several consecutive transactions, as is indeed suggested by the wording of Article 4 (2) which refers to 'all activities of produc-ers, traders and persons supplying services'. The preparatory acts, such as the acquisition of assets and therefore the pur-chase of immovable property, which form part of those transac-

12 Para. 19.13 See for instance C-97/90, Lennartz, where the ECJ states that the adjustment rules in Article 20 (2) are only applicable for capital goods acquired by a person in his capacity as a taxable person.

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tions must themselves be treated as constituting economic activ-ity."14

The opinion of the ECJ was accordingly that all preparatory acts should be considered to be parts of the economic activ-ity.

2. The reasons for such an immediate recognition of prepara-tory acts as part of the economic activity was then stated by the ECJ in para. 23:

"…the principle that VAT should be neutral as regards the tax burden on a business requires that the first investment expendi-ture incurred for the purposes of and with the view to commenc-ing a business must be regarded as an economic activity. It would be contrary to that principle if such an activity did not commence until the property was actually exploited, that is to say until it began to yield taxable income. Any other interpreta-tion of Article 4 of the Sixth directive would burden the trader with the cost of VAT in the course of his economic activity with-out allowing him to deduct it in accordance with Article 17 and would create an arbitrary distinction between investment expen-diture incurred before actual exploitation of immovable property and expenditure incurred during exploitation. Even in cases in which the input tax paid on preparatory transactions is refunded after the commencement on actual exploitation of immovable property, a financial charge will encumber the property during the period, which may sometimes be considerable, between the first investment expenditure and the commencement of exploita-tion."

A further variant of these arguments for a neutral treatment is added in INZO C-110/94 (see below para. 4), in a similar situation:

"Any other interpretation of the directive would, moreover, be contrary to the principle that VAT should be neutral as regards the tax burden on a business. It would be liable to create, as re-gards the tax treatment of the same investment activities, unjus-tified differences between businesses already carrying out tax-able transactions and other businesses seeking by investment to commence activities which will in future be a source of taxable transactions. Likewise, arbitrary differences would be estab-lished between the latter businesses, in that final acceptance of the deductions would depend on whether or not the investment resulted in taxable transactions."15

The ECJ has so clearly and fully stated the reasons for an early recognition of preparatory acts as parts of an economic activity that little there is to add.14 Para. 22.15 Para. 22

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3. Accordingly preparatory acts should be treated as an eco-nomic activity as soon as the intent of the acts could be estab-lished with reasonable certainty. The main problem is to establish whether an activity may re-sult in consumption or not in future. This is primarily a ques-tion of evidence, and was discussed in both Rompelman and Enkler (see sec. 3.1 para. 2 above). The court stated there that the tax authorities could require "the declared intention to be supported by objective evidence". This could be a con-siderable problem in a case like Enkler where the activity – renting out a caravan – involve an asset that normally is used for private activities.16 However, in most cases it is fairly obvi-ous that a private activity could not be carried out, for in-stance when machinery is bought. A mistaken classification could in some cases be corrected in the future. If an economic activity has not been recognized as such from the beginning it is normally not possible to grant the deduction a later period. However, the procedural rules in force in a country may for a considerable time permit correction of the initial period. On the other hand an activity for which a deduction has been granted may not turn out to be or may not continue to be an economic activity. If the as-sets are transferred to private use most VAT laws probably contain rules that make it possible to charge VAT for assets transferred to private use, as is stated in Article 5 (4) and 6 (2) in the Sixth Directive. In theory this enables the tax au-thorities to neutralize the tax deduction if the assets could be considered to end up in a private activity.

4. An economic activity may ceases to exist, without a trans-fer to a private activity. For instance it may be considered economically unsustainable. Such a situation was considered by the ECJ in INZO C-110/94. In this case a company was put into liquidation before it had entered into any sales transactions. The question was if the company nevertheless was a taxable person already at the ini-tial investment phase. The court held in accordance with Rompelman, "that even the first investment expenditure incurred for the purposes of a business may be regarded as an economic activity"17 and that the deduction of VAT could not be "retained, even if it was subsequently decided … not to move to the operational

16 In Rompelman a private activity seems unlikely as the property let was “showrooms”.17 Para. 17.

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phase but to put the company into liquidation, with the result that the economic activity envisaged did not give rise to taxed transactions".18

An important argument for this decision is the principle statement of the ECJ that "it is contrary to the principle of le-gal certainty for the rights and obligations of taxable persons to depend on facts, circumstances or events which occurred after the tax authority made a finding in respect of those rights and obligations".19

It should be noted that the wording in para. 18 make it a bit unclear whether the unretained deduction was conditional of the fact that the tax authority in the beginning had accepted that the company had the status of a taxable person. How-ever, as the ECJ put forward strong principal arguments for deductibility in this situation,20 it seems unlikely that the de-duction should be granted only in such a case. Finally, as VAT is not meant to be a tax burden for enter-prises, but for consumers, there is nothing principally wrong with the deduction of VAT in this situation.

3.3 Pure capital investments

1. Financial services are excluded form VAT. Nevertheless, in some situations a deduction may be granted for input VAT in a capital investment activity. It will not be discussed here what constitutes those situations.21

Of interest for this article is that in a number of cases the ECJ has held that an activity consisting merely of holding bonds or shares is not an economic activity. The reasons of this opinion could be of general interest for the question of delimitation of the concept of taxable person.

2. The ECJ has considered that investment activities that are pure capital investments are no economic activities. The question is what set these activities apart from economic ac-tivities?

18 Para. 20. 19 Para. 21.20 See above para. 2.21 In the cases below reference was given to the possibility to deduct input VAT under Article 17(3)(c) of the Directive where their customers are established outside the Community. In other cases financial services are exempt from VAT and the connected input VAT is not deductible

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The case C-60/90 concerns Polysar a holding company that solely held shares in subsidiary companies. The court held that the mere acquisition and holding of shares in a company is not to be regarded as an economic activity and that Polysar therefore was not a taxable person.22 The reason for this was that "the mere acquisition of financial holdings in other un-dertakings does not amount to the exploitation of property for the purpose of obtaining income therefrom on a continu-ing basis because any dividend yielded by that holding is merely the result of ownership of the property."23

In the next case C-155/94 the Wellcome Trust Ltd did pur-chase and sell shares and other securities as a trustee in the course of the management of the assets of a charitable trust. In this case the arguments were developed as the ECJ took into account the possibility to "distinguishing between the ac-tivities of a private investor, which fall outside the scope of the Directive, and those of an investor whose transactions constitute an economic activity."24 The court further stated: " To treat the Trust's activities as an economic activity within the meaning of the Directive and accordingly allow input VAT to be deducted would place an investor such as the Trust at an advantage vis-a-vis other private investors, who could not deduct input VAT…".25

Finally, in the case C-80/95 Harnas &Helm CV acquired ownership in and the holding of bonds. In the decision no new reasons were brought forward. The primary argument for not to consider the holding of bonds to be an economic ac-tivity was stated as follows:

"The income from the bonds derives from the mere fact of hold-ing them, which entitles the holder to payments of interest. Such interest cannot, therefore, be regarded as a return on an economic activity or transaction carried out by the bondholder, since it derives from the mere ownership of the bonds."26

3. I find no principle reasons not to allow deduction of VAT connected to the financing of taxable activities. The financial costs are part of the input into the activity of producing or distributing goods and services chargeable to VAT. The de-22 Para. 13.23 In the next para. it was stated that "it is otherwise where the holding is ac-companied by direct or indirect involvement in the management of the compa-nies in which the holding has been acquired, without prejudice to the rights held by the holding company as shareholder". The court may have meant that in such a case it was not merely a pure capital investment and that the additional element of activity conferred it a character of economic activity. 24 Para. 37.25 Para. 39.26 Para 18.

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duction system should in principle relieve the production of such goods and service entirely of input VAT. This is valid not only for VAT paid by the persons directly involved in produc-tion or distribution, but also those that are financing these ac-tivities as share- or bondholders. If a deduction is not granted it will create a cumulative effect. The practical importance of this effect is probably limited concerning a private investor but could be significant for investments through a profes-sional intermediary.

When the holding of shares or bonds is exempt from VAT, as it is under the Sixth Directive Article 13 (B) (d) there could be no deduction for input VAT. However, if input VAT is con-nected to a transaction outside the Community a deduction could be granted for a taxable person.27

In the ECJ cases mentioned above such a deduction would have been granted if the companies would have been deemed to be taxable persons. The ECJ did not treat the companies as taxable persons. The reason for this is probably that it would put them in a better situation than an individual private in-vestor. However, it is probable that a holding company has costs of sort and amount (even relative to the invested amount) that normally an individual investor does not have. For reasons stated above it is in principle desirable to treat even a private investor as a taxable person concerning his in-vestment activities. However, this is not a practicable solu-tion, but that fact is not a reason to deny professional in-vestors such as holding companies the treatment as taxable persons for such investments.

3.4 Non-profit making organizations etc.

1. Certain organizations may act as producers and distribu-tors of products, but not with the normal intentions of a pro-ducer/distributor to make profit and add value to the product. For instance, a charitable organization distributing meals etc. to needy will normally do that free. For practical reasons the taxable chain may be deemed to end already before such an organization. That is, the organizations should not be treated as a taxable person. However, in the Sixth Directive such a construction is not used. In Article 4 (1) it is stated that "taxable person" is a per-son who carries out an economic activity "whatever the pur-27 Article 17 (3) (c).

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pose or results of that activity". This must mean that it is not necessary that the activity is carried out in order to raise an income for the person. Thus, also activities carried out by non-profit making organizations could justify treatment as taxable persons. However, most non-profit making organizations are ex-empted from VAT. In the Sixth Directive this is achieved by rules in Article 13 (A). about "exemptions for certain activities in the public interest".

2. The exemptions have the same effect as not treating the organizations as taxable persons. The effect is that the value added in the stage carried out by the organizations escape VAT.28 When the beneficiaries of the activities are consumers, which is the rule, this means a definite loss of tax and could cause a distortion of competition.29 However, the exemptions have motives that rank higher than the reasons to strictly abide to the principles of a VAT-system.

On the other hand there are situations where a treatment as taxable person would benefit a non-profit making organiza-tion. As an example let us consider an activity that is not ex-empted under Article 13, such as the production of a scien-tific journal by a private university. The activity is carried out without the intention of gaining a profit and may even as a rule result in losses. For income tax purposes the activity would probably not be considered to be a taxable business in most jurisdictions, because of the lack of business purpose evidenced by the losses. However, for VAT-purposes this is very likely considered an economic activity.

There are two main reasons why a treatment as a taxable person is in accordance with the principles of the VAT. First, employees or other dependent persons may add a consider-able value to the production, although the organization per se has not contributed to the value added. If VAT is not levied on

28 The potential taxation could vary in magnitude depending on the degree of value added in the organization and whether the product supplied is deemed goods or services. For an example let us consider the charitable organization supplying meals for needy. Employees prepare the meals. According to Article 6 (2) this should be considered as a supply of a service. Article 11(A)(c) states that the taxable amount would be the cost to the taxable person of providing the service. If the organization was not exempt a considerable extra burden therefore would have been put on the charity.29 Some of the activities mentioned in Article 13 (A) are therefore exempt under the condition that the exemption is not likely to produce distortion of competi-tion.

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this value added it might produce a distortion of competition for commercial producers.30

The second reason is to avoid cumulative effects. If some purchasers of the journal are taxable persons it could be im-portant that the organization could deduct input VAT and charge VAT on the sale. This situation may not be so common for non-profit making organizations in general. In some case, as the one discussed here, it could be usual that a consider-able amount of subscribers are taxable persons, public au-thorities who are granted special VAT-compensation or resi-dents of other states which should be relieved of the VAT of the producing state.

3. To summarize it could be concluded that there are situa-tions where a non-profit making organization should not be taxed and some where a treatment as a taxable person is mo-tivated. The rules in the Sixth Directive in this respect do probably mainly result in desirable effects. In theory it could be discussed whether the rules in Article 4 should not, as some of the rules in Article 13, contain a refer-ence to the distortion of competition. There may exist activi-ties that are not exempt according to Article 13 and where a treatment as a taxable person could give undesirable results. Such would be the case when, contrary to the journal de-scribed above, the beneficiaries of the activities of a non-profit making organization are consumers. A net repayment of input VAT to the organization could mean a subsidy of con-sumption and a distortion of competition. However, normally would such a result not be achievable owing to the rules in Article 6 and 11 that prevent that the taxable amount will be lower than at least cost price.

4 Concluding remarks

The question who should be taxed are in some respects far more complicated in a VAT-system than in an income tax sys-tem. Some problems of delimitation are common for the two tax systems, such as the international scope of the taxes and the exemption of certain organizations such as charities. They do, however, differ in the respect that the concept of taxable person does contain almost all persons regarding the income 30 As mentioned above, in the exemption rules in Article 13 (A) it is a frequent requisite that the competition should not be distorted by the exemption.

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tax but is far more restricted regarding the VAT. In general the concept of taxable person as defined in the EEC Sixth Directive is functional and does only give raise to some minor problems. The exclusion of employees has a sound practical reason. However, an exclusion may increase the number of cases where the exact delimitation is ques-tioned, but in practice this question seems not to cause much litigation. Normally in such a case it does not matter much whether a person is deemed an employee or a taxable person, since due to the catching effect the result will be the same. The exclusion of consumers is of great practical value. Those cases that could cause delimitation problems do, however, not contain huge amounts. Nevertheless, for practical rea-sons there is a need for more explicit and probably standard-ized rules of delimitation.

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