EU takes action against Malta, Greece and Cyprus on VAT

[Deleted User YDKXO]

http://www.ybw.com/news-from-yachting-boating-world/european-commission-announces-action-on-vat-evasion-in-the-yachting-sector-66270

I'm not sure how many new boat buyers took advantage of these leasing schemes in order to reduce their VAT liability but it certainly seemed to be a little cottage industry in Malta at least. Does the panel think that this will affect new boat sales in the Med and are there other types of VAT mitigation schemes out there which the EU can't touch?

 

[petem]

Will it be applied retrospectively?

 

[PowerYachtBlog]

If our system is cottage industry then excuse the pun, everything is including the loved (corrupted to the bone) banks who have such a system.

The difference between our system and that of the banks are the following:

1. You are the owner of the boat during the lease, in the bank system the bank owns the boat. If the bank goes down the asset is of the bank who is leasing it to you.
The Maltese system works that a company an accounting firm will make you is leasing the boat to you, which you can buy after an X-amount of years you decide.
This gives a security to the owner.

2. The percentages in our system are similar- near identical to that of the European banks which offer this system (Italy, France, Belgium, Dutch etc etc)

3. The Maltese system also required (at a certain time this was removed, but many firms still suggested a visit when paying total of your Vat bill) that you come over to Malta to clear your Vat.
On the other hand the system of the other EU countries never required this and in order to give you Vat discount assumed that you used 50% of your boat outside EU waters.
I would like a GPS system to proved how many actual leased yachts did this especially motor boats.

Just to be clear this is not about Maltese Vat not valid, this is about the Lease system, used to get discount on Vat.

 

[MalcM]

Google tells me there’s ~3,000 yachts registered in Malta.

If only 500 of those took advantage of the scheme that’s a hefty chunk of change.

 

[jfm]

@Deleted User - thanks, interesting. I cant find the EC's actual letter online, only the press release, so it's hard to analyse precisely.
@PYB, you are right with point #1, but it's a red herring: the boater's personal credit risk is an entirely separate point from the VAT. Ref #2 yes the % are indeed similar, but the Dutch lease scheme isn't comparable- it is different from the others (and is legally very weak indeed, imho) Ref #3 the requirement to visit Malta is also a side show/red herring in this EC attack in the sense it provides no defence against what the EC is accusing Malta of. Furthermore, you definitely don't want a GPS system!
@MalcB, remember you do not need Malta flag to get the VAT benefits. Maltese advisers often suggest you do and sell a package deal including flagging and VAT in the bundle, but you don't need it. Plenty of UK flagged yachts are in Malta leasing, for example.

In general this is an interesting case. You can see the logic in what EC say and they definitely have a point. They have also been very precise in correctly spotting the difference between Greece on the one hand and Malta/Cyprus on the other and in making slightly separate complaints. They ain't stupid.

But EC are wide open to criticism in almost saying categorically that this has become apparent from Paradise papers, which of course renders EC really quite incompetent because these VAT structures have been widely used and all over the internet for years, and France/Italy, not even mentioned by the EC have been offering these structures with similar percentages for about 20 years, a very long time before Cypress and Malta who are just "me too" copy artistes. The points at issue, namely (a) estimated usage outside EU based on a look-up table not reality and (b) small end-of-lease purchase price, have been an integral part of the Fr/It structures for all that time, and the EC either knew or should have known that, so there is a strong legal argument that EC have by their inactions acquiesced in the VAT analysis applied here, giving citizens a legitimate expectation that the structures are accepted, and so the EC are estopped from challenging. Maybe that is why EC is running the story that they only just became aware thru paradise papers, but if they are relying on that then they should fail.

In addition, I struggle to see that the EC is correct in saying look up tables are wrong. They write: "current EU VAT rules allow Member States not to tax the supply of a service where the effective use and enjoyment of the product is outside the EU, they do not allow for a general flat-rate reduction without proof of the place of actual use". In my opinion the rules do not need to "allow" for it, so EC's point here is baseless. The EC then go on to say "Malta, Cyprus and Greece have established guidelines according to which the larger the boat is, the less the lease is estimated to take place in EU waters, a rule which greatly reduces the applicable VAT rate". Well, there is lot wrong with the EU's statement there. It reduces the base not the rate and their statement says nothing to support the contention that the base is wrong, and there is plenty of logic in making an estimate that bigger boats travel further. So I think when you look hard the EU's position is fairly weak.

As for retrospection (@petem), the EC press release does not use their normal language where they wish to make clear there is no retrospection, so they might want to keep it slightly up their sleeve, but I very much doubt there could be retrospection on any sound legal basis. Malta itself would not have to collect back taxes - the only small risk I see would be another country where an ex-Malta boat now resides wanting to charge import VAT and that would be a matter for local law not EC. I said "sound legal basis" above with good reason - some countries employ machine-gun toting tax collectors who can be aggressive and don't care enough about legal basis where there is a sniff of tax to be collected. I'd rather an ex-Malta boat were in UK than Spain, for example. But taking everything into account I strongly doubt there will be retrospection at all and it would be good if internet forums didn't over speculate negatively, because like everything else with boat VAT internet forum talk can be more important than the facts when it comes to spooking buyers in the used boat market.

An additional point is that EC arguably need to find a market distortion to win. They do indeed claim "This issue can generate major distortions of competition ". Arguably "Can" isn't good enough - it needs a "does". But there isn't any distortion is there? You can buy your Malta leased boat in any EU country and use it in any EU country, so where is the distortion? Sure, Malta collects the VAT not another country but that per se isn't a distortion. Luxembourg gets sales of transportable goods (private jets) due its 17% VAT rate compared with 25% in other EU countries and that is allowed.

This will be interesting and I rate the EU's position here as much weaker than in their other yacht VAT challenges, especially the recent French commercial boat scheme, which the EU won technically, but it hasn't changed much in practice so you could argue that the French won in reality. Of course, there was a distortion in that case because you had to buy your boat in France.

Overall I'd back (marginally...) Malta et al to win this on points, provided they get a team to argue it well because the arguments are in part subtle and woolly.

 

[Zing]

That reads like just another EU attack on competition between member states. This is contrary to federalist dream of the EU superstate with central Brussels control ensuring a good solid heavy tax burden on everything to fund their projects. They really don’t like low tax and hate competition between EU countries with different VAT and corporate tax rates, so when they see a dramatic difference such as here where the Malta VAT rate on superyachts is a small fraction of what it is in the other major countries then they throw their dummy out of the pram and have a hissy fit.

I’ll bet it won’t be long before Ireland faces a real broadside attack for their aggressively competitive corp tax rates. All the more likely when the UK is out of it and the gap between them and the rest is even bigger.

I think the solution may be to put your boat into charter. Do it right and the vat rate is zero.

 

[jfm]

...where the Malta VAT rate on superyachts is a small fraction of what it is in the other major countries...

Actually superyachts can generally be run VAT free because they are so long legged, but it takes a little effort. However, the low effective VAT rate in Malta has incentivised lots of owners pay the VAT rather than go to that effort, especially as some of that VAT cost is recovered as residual value. It's worth going to some effort to avoid lawfully 20% VAT but less so @6%. So the superyacht VAT collected by Malta is additional tax take, not tax avoidance.

I think the solution may be to put your boat into charter. Do it right and the vat rate is zero.

Quite a simplistic comment but let's not go there!

 

[Zing]

Actually superyachts can generally be run VAT free because they are so long legged, but it takes a little effort. However, the low effective VAT rate in Malta has incentivised lots of owners pay the VAT rather than go to that effort, especially as some of that VAT cost is recovered as residual value. It's worth going to some effort to avoid lawfully 20% VAT but less so @6%. So the superyacht VAT collected by Malta is additional tax take, not tax avoidance.

I’ll buy that viewpoint. Somehow I doubt the EU will ever view it that way.

Quite a simplistic comment but let's not go there!

Quite right. Heads and parapets...

 

[jfm]

I’ll buy that viewpoint. Somehow I doubt the EU will ever view it that way.

Quite right. Heads and parapets...

:encouragement:

 

[MapisM]

Actually superyachts can generally be run VAT free because they are so long legged

Yeah, right.
I'm well aware that you don't need to learn it from myself, but if you don't mind me trying to throw into the debate a momentary glimpse of reason, the true and very simple reason why big pleasure boats can be (and indeed often are) run VAT free is that the world we live in is sick.
Let me try to build a scientific (sort of) demonstration of this theorem.

The DP I just purchased was originally sold to her first owner through the IT leasing scheme.
My old lady before her was sold with the plain vanilla 20% VAT on top, as well as all my previous boats before her.
Therefore, the IT government always cashed in some of my hard earned money upon each of my purchases - albeit indirectly, when buying second hand, but you know that this ain't relevant in this context.

My compatriot FB ran VAT free his Royal Denship - and it's easy to guess that he did the same with several other boats.

I have no children, while FB has two children, both entitled to free sanitary assistance, school system, etc.

Therefore, my humble boat purchases (as well as the costs of running them) contributed to a social system which FB and his family can exploit even more than myself, while his ships didn't.

Bottom line, we live in a sick world - Q.E.D.

Oh, and if the above can happen legally (mind, the chap in this example has been naive enough to not do it legally, but let's forget that), well, isn't that an even more established evidence that the world is sick...? :ambivalence:

 

[oldgit]

A mystery explained
One could dare to suggest that this thread is a prime example of why the voters of the United States voted for Mr Donald John Trump as the 45th President and gave Mr Nigel Paul Farage the time of day.
As with a few other recent developments, the more something enjoyed only by the few emerges blinking into the light of day , the less palatable by the the great unwashed it becomes ,however legal ?
Please do not shoot the messenger

 

[jfm]

Yeah, right.
I'm well aware that you don't need to learn it from myself, but if you don't mind me trying to throw into the debate a momentary glimpse of reason, the true and very simple reason why big pleasure boats can be (and indeed often are) run VAT free is that the world we live in is sick.
Let me try to build a scientific (sort of) demonstration of this theorem.

The DP I just purchased was originally sold to her first owner through the IT leasing scheme.
My old lady before her was sold with the plain vanilla 20% VAT on top, as well as all my previous boats before her.
Therefore, the IT government always cashed in some of my hard earned money upon each of my purchases - albeit indirectly, when buying second hand, but you know that this ain't relevant in this context.

My compatriot FB ran VAT free his Royal Denship - and it's easy to guess that he did the same with several other boats.

I have no children, while FB has two children, both entitled to free sanitary assistance, school system, etc.

Therefore, my humble boat purchases (as well as the costs of running them) contributed to a social system which FB and his family can exploit even more than myself, while his ships didn't.

Bottom line, we live in a sick world - Q.E.D.

Oh, and if the above can happen legally (mind, the chap in this example has been naive enough to not do it legally, but let's forget that), well, isn't that an even more established evidence that the world is sick...? :ambivalence:

MapisM, I definitely don't want to develop this into a big argument but there is something I don't understand in your logic. I'm posting this to understand, not argue. Suppose another compatriot (not FB in particular, just a general person) worked v hard and earned so much that he paid €1m income tax pa for 25 years working life, whereas Joe Average pays €1m in total for his 25 yrs working, Neither avoids any tax - they just pay the 40% or whatever on their income/salary/bonus/whatever. Then the compatriot buys a boat and doesn't pay €1 VAT because of leasing etc. So he has paid only €25m tax, not €26m, say. Joe Average has paid €1m, so the richer guy has paid more towards schools etc. Even if the richer guy has say 2x more children than Joe Average, is it still sick? I guess the logic I'm asking you about is whether it is sick because FB has (say) contributed less €€€ than you, or because he has in effect paid a lower % rate than you.

 

[BruceK]

The answer to that depends where in the political spectrum you sit. A no win argument / debate.

 

[Deleted User YDKXO]

Yeah, right.
I'm well aware that you don't need to learn it from myself, but if you don't mind me trying to throw into the debate a momentary glimpse of reason, the true and very simple reason why big pleasure boats can be (and indeed often are) run VAT free is that the world we live in is sick.
Let me try to build a scientific (sort of) demonstration of this theorem.:

You should also remember that FB buying that new big pleasure boat is generating jobs and prosperity for the employees and owners of the boat manufacturer building his boat. It is also very likely that the only way that FB could afford to buy his new boat is to work his bollox off running his own business which also generates jobs and prosperity for his employees not to mention a whole myriad of other taxes which the govt takes from him. I'm with jfm on this. Before you criticise anyone for avoiding VAT on a boat purchase you should take account of all the other taxes that person has generated for his country, not to mention, as I say, the jobs and prosperity that his boat buying process generates

 

[pan]

I have no idea whether these EU proposals are 'currently' legal or not, but I am sure that ultimately the EU will harmonise all Tax rates & rules across the bloc, that, along with all the dictats they issue, is their 'raison d’être'.....

If this sudden realisation came from Panama papers, then the thousands of officials employed by the EU are more 'stupid' than we imagine, these loopholes have been known about for years! I am not sure the 'world is 'sick', more like the morons who control our lives.

 

[jfm]

...ultimately the EU will harmonise all Tax rates & rules across the bloc...

IIRC the EU started in 1958 - 60 years. Wanna place a bet on that harmonisation happening in, say, the next 60 years???

 

[jfm]

If this sudden realisation came from Panama papers, then the thousands of officials employed by the EU are more 'stupid' than we imagine, these loopholes have been known about for years!

Yes indeed - the "we learnt this form paradise papers" admission by the EC is quite amazing.

I realise the word "loophole" is vague, but the yacht lease schemes in Fr IT Malta Cyprus are specifically enacted chapters of their tax law passed by their elected parliaments by due process. The laws describe over several pages precisely how the structure works and how the lease of the boat is treated as X% subject to VAT and Y% exempt, and the laws contain look up tables where you read off X and Y depending on LOA of the boat and whether it is a sailboat or a mobo. I don't really think you can call that a loophole.

I may not agree with everything parliaments decide but I defend their right to decide it. It would be sick if we didn't have elected parliaments and rule of law.

(BTW I don't have a particular axe to grind - I have never used any of these leases myself. I have helped friends do it though.)

 

[pan]

"It would be sick if we didn't have elected parliaments and rule of law."

Hmmmm.. but isn't that exactly what they are trying to subvert, those countries have made their own tax rules, now the EU wants to change them because they have a 'tax advantage' over other EU bloc countries! Ok perhaps it's a 'legal loophole', but also like IOM having tax advantageous rules on private aircraft etc, it's a way for some people to reduce their tax liabilities (by the way I don't have any problem with people/organisations running their tax affairs efficiently within the rules set by parliaments) however I do question the right of the EU to change individual states own tax arrangements.

I agree the EU won't harmonise entirely within the next 50yrs, but they will keep chipping away... and I will bet that Corporate taxation is harmonised within the next 10 yrs, because individual states are worried they will lose businesses to others with 'advantageous' taxation.

Apologies for the thread drift....

 

[sorabain]

I have no idea whether these EU proposals are 'currently' legal or not, but I am sure that ultimately the EU will harmonise all Tax rates & rules across the bloc, that, along with all the dictats they issue, is their 'raison d’être'.....

If this sudden realisation came from Panama papers, then the thousands of officials employed by the EU are more 'stupid' than we imagine, these loopholes have been known about for years! I am not sure the 'world is 'sick', more like the morons who control our lives.

It's all politics, they're signalling that they're acting on something that the media have scared the public with. There are no doubt millions of problems, but have certain "flavours of the month" based on what's in the media

 

[jfm]

Hmmmm.. but isn't that exactly what they are trying to subvert, those countries have made their own tax rules, now the EU wants to change them because they have a 'tax advantage' over other EU bloc countries! ... however I do question the right of the EU to change individual states own tax arrangements.

Yep.

You could of course say that Malta is subverting the common rules of tax meant to apply consistently across EU. That is perhaps loopholing but if so then it is loopholing by the Maltese state, not by any citizen.

Thing is, where do we draw the line on consistency? Lux VAT rate is 17%, many are 20%, and many are 25%. That competitive action (loopholing?) is same as Malta's/IT's/Fr's/Cyprus's competitive grab of yacht VAT isn't it? Other taxes are also a competition ground eg UK/Ireland corporate tax.

As a matter of intrinsic fairness to promote efficiency in governments, you can argue that counties should be allowed to compete with each other by lowering taxes to attract activity. If not, you have a cartel don't you?