Boston University School of Law

Use and Enjoyment of Intangible Services:
The Czech Republic's VAT Derogation

Richard Thompson Ainsworth

53 Tax Notes International 1077 (March 23, 2009)
Boston University School of Law Working Paper 09-07


            On January 1, 2009 a minor change in the Czech Republic VAT became effective.  A use and enjoyment standard was added to modify the sourcing of certain service transactions.  Traditional proxy-based rules, derived from Articles 43 and 56(1) of the Recast VAT Directive (RVD), are set aside by this modification when the customer receiving the services has a permanent establishment (PE) in the Czech Republic.  The modification is authorized by RVD 58. 

This change is a limited adoption of RVD 58(b), and functions like a full force of attraction principle in direct taxation.  If caught by these rules, transactions that would have been sourced outside the EU (and not subject to Czech VAT) will be sourced within the Czech Republic (and attract the Czech VAT).  In most cases a reverse charge will apply.  However, this modification can be a trap for the unwary. 

After the adoption of the Czech rules the best automated VAT compliance systems were reconfigured.  Programming changes were instituted in advance to be effective on January 1, 2009.  Sometime in December 2008 the system would have queried the VAT compliance staff about the presence of a PE in the Czech Republic.  If that answer was affirmative, then whenever a service listed under RVD 56(1) was purchased anywhere in the company after January 1, 2009 a dialogue box would ask if this service was to be used and enjoyed in the Czech Republic.  If that answer was affirmative, then the system would expect to find either Czech VAT on the seller’s invoice, or it would institute a reverse charge of the Czech VAT. 

Without this level of automation (where every RVD 56(1) service is measured for Czech use and enjoyment) it is doubtful that correct determinations would be made in all cases.  Errors would be all the more likely if the services were being purchased from a jurisdiction that imposed VAT based on where the seller is established (a jurisdiction that had for example adopted a rule like RVD 43), or where these service are taxed based on a “place of performance” standard (regardless of where the seller’s place of establishment is located).  Admittedly, this would yield a double-VAT result, but it may be the correct result.  The double-VAT, of course, can be prevented (or planned around) but this is much easier done through automation than it is through manual processes.

This paper sets out the Czech Republic rules, and contrasts them with rules that achieve a similar result under the UK VAT.  In doing this the facts of the following case are considered in detail:  Zurich Insurance Company v. HMRC (LON/02/1080) (June 30, 2005); reversed [2006] EWHC 593 (Ch); [2006] STC 1694 (Mar. 23, 2006); affirming the reversal [2007] EWCA Civ 218; [2007] STC 1756 (Mar. 15, 2007). 

The paper concludes that legislators considering the problem of sourcing rules for intangible services might be well advised to factor into their analysis how this change would impact automated VAT compliance. 

Keywords: Intangible services, VAT, Place of supply rules, Czech Republic, United Kingdom, Berkholz, RVD 43, RVD 56(1), RVD 58

JEL Classifications: H00, H20, H70, K34, O23, O33


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Richard Thompson Ainsworth Contact Information
LL.M. Tax Program
Boston University School of Law
765 Commonwealth Ave
Boston, MA 02215

Phone: (781) 773-1052

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