2.3.1 The principle of neutrality

Neutrality is one of the most important, leading principles in value added tax. From the preamble to the First Directive, it is clear that the EU’s common system of value added taxation aims to achieve, amongst other things, the highest form of neutrality. This neutrality is not defined anywhere in the VAT directive. A specific type of neutrality, neutrality in competition, is mentioned in the First Directive. It is described as meaning that within each country similar goods bear the same tax burden, whatever the length of the production and distribution chain, and that in international trade the amount of the tax burden borne by goods is known so that an exact equalisation of that amount may be ensured.1 The CJEU describes fiscal neutrality as the principle under which economic operators carrying out the same transactions may not be treated differently in relation to the levying of VAT.2 This means that there are two aspects to the concept of ‘neutrality’.

First, the neutrality principle entails that VAT should be exactly proportional to the price of the goods and services.3 This aspect is therefore sometimes referred to as the principle of ‘system neutrality’, because it is closely related to the purpose and the design of the EU VAT system.4 System neutrality also means that VAT should not cascade (no VAT on VAT) throughout the supply chain and that double taxation or non-taxation must not occur. After all, if VAT cascades in the supply chain, or if double or non-taxation occurs, VAT will no longer be exactly proportional to the prices and likely have an effect on business decisions.5

Secondly, the neutrality principle in VAT reflects the (general) principle of equal treatment.6 It forms a special manifestation of an overall EU law principle.7 It is applicable in respect of similar services and goods which are (thus) in competition with each other.8 According to settled CJEU case-law, the principle of fiscal neutrality precludes treating similar goods and supplies of services, which are thus in competition with each other, differently for VAT purposes.9

Even though the CJEU considers the principle of neutrality as a ‘fundamental principle of the common system of VAT established by the relevant Union legislation’,10 it is not a rule of primary law.11 It is merely a principle of interpretation, to be applied concurrently with other principles of interpretation.

Neutrality, as a fundamental principle underlying the EU VAT system, is a relevant test for determining whether positive (written) law is in line with appropriate or desired law.