6.5.1 Taxing the free application of goods

As mentioned above, for the taxation of the application by a taxable person of goods forming part of his business assets for his private use or for that of his staff, or their disposal free of charge or, more generally, their application for purposes other than those of his business, the taxable amount shall be the purchase price of the goods or of similar goods or, in the absence of a purchase price, the cost price, determined at the time when the application takes place.1

The purchase price of the goods is, in my view, a clear concept. However, the taxable amount shall be the purchase price determined at the time when the application takes place. This could be interpreted as the ‘current cost’ or ‘current value’ of the goods. According to the OECD, ‘current cost accounting’ is a valuation method whereby assets and goods used in production are valued at their actual or estimated current market pricesat the time the production takes place (emphasis by me, JB) (it is sometimes described as ‘replacement cost accounting’).2 This would mean that if goods have increased in value after their purchase, their actual ‘purchase price the time when the application takes place’ would be higher than the original cost price. However, in my view, this interpretation of the concept ‘determined at the time when the application takes place’ is not in line with the rationale behind the relevant provision. Under that rationale, which aims to ensure equal treatment as between a taxable person who applies goods or services for his own private use or for that of his staff and a final consumer who acquires goods or services of the same type,3 only the deduction of the VAT incurred on the actual cost of the goods should be adjusted, insofar as these goods are applied for consumptive purposes. Under the current EU VAT rules, this adjustment is made by taxing the application, but the same aim could have been attained by means of adjustments to deduction already made.4 The latter ‘adjustment’ is made by ‘undoing’ the initial deduction by repaying (part of) it.5 Taxing goods when they are applied for private consumption only achieves the same effect as undoing the original deduction by repaying (all or part of) it when the taxable amount for the adjustment is (based on) the original cost price of the goods. I find support for this view in the CJEU’s Oudeland case,6 where the CJEU holds that the value of a good or service “(…) may be included in the taxable amount of a supply, within the meaning of Article 5(7)(a) of the Sixth Directive (Article 16 of the EU VAT Directive, JB), where the taxable person has already paid VAT on that value and on that cost, but also deducted the VAT immediately and in full”. This implies an adjustment of the VAT that was originally deducted, not an adjustment to avoid distortion of competition by levying VAT on a more market value adjusted cost.

Goods can be (and are) used for business purposes before being applied by the taxable person for his private use or for that of his staff, or their disposal free of charge or, more generally, their application for purposes other than those of his business. If the business activities do not limit the deductibility of the VAT incurred on the cost of these goods, part of the VAT was rightly deducted because of the use for taxed business purposes. This means that if the goods are applied for consumption purposes after being used for business purposes, not all of the initial VAT deduction should be adjusted, which means that the residual value of the goods should be used as taxable amount.7 This is, in my view, what is meant by ‘the purchase price determined at the time when the application takes place’.

The European VAT Directive does not provide the guidance necessary for defining uniformly and precisely the rules for establishing the ‘purchase price of the goods or similar goods, determined at the time of the supply’ or the ‘the cost price, determined at the time of the supply’, and neither does any other binding European legislation (e.g. the Implementing Directive). This means that the European Member States have a certain margin of discretion as regards those rules, provided that they do not fail to have regard to the aims and role of the provision at issue within the scheme of the EU VAT Directive.8 The purpose of the provision under which the application of business assets is deemed to be a taxable supply insofar as VAT has been deducted on the goods or the component parts thereof, is to prevent non-taxation of private consumption (application) of goods where VAT has been deducted that can be attributed to that private consumption, as I explained above. This is achieved by creating a correspondence between the deduction of input VAT and the charging of output VAT.9 As regards the determination of the taxable amount, the CJEU has indicated that only expenses that relate to the goods themselves, such as the writing-off of depreciation, may be taken into account.10

Under the current EU VAT case law, VAT deducted on the purchase of services (used for the goods that are applied for consumptive purposes) and on goods that are not considered ‘component parts’ of the applied goods, should not be adjusted by including the residual value of those goods and services to the taxable amount for the taxable application of the good, but by making an adjustment of the deducted VAT through the ‘normal’ adjustment system.11 In my view, the relevant provisions for determining the taxable amount provide sufficient room for including (some of) those costs in the taxable amount. In my view, the addition of the phrase “determined at the time when the application (…) takes place” to “the purchase price of the goods or of similar goods (…)” implies that the value at the time of the application may have increased because of (some of) the purchased services that have not been fully consumed at the time of the application. The value of these services should, in my view, be included in the ‘residual value’ of the goods that are applied for private consumption purposes, as should the cost of the goods that are not considered ‘component parts’. Besides the fact that this is, in my view, correct from a theoretical point of view, this method (i.e. including the value of relevant goods and services in the taxable amount for the adjustment instead of making a separate adjustment – based on a different adjustment method – for these costs) is also easier to apply by taxpayers who, under the current case law, have to apply two different adjustment methods to the application of a single good.12

In my view, the above does not apply to all services performed with regard to the goods forming business assets that are applied for private consumptive purposes. Only the value of services that have given rise to a lasting increase in the value of the good and which have not been entirely consumed at the time of the allocation should be included in the taxable amount.13 The same applies to component parts and other goods added to the good that is applied for private purposes. Under CJEU case law, ‘component parts’ are goods that have definitively lost their physical and economic distinctiveness as a result of being incorporated in the relevant good(s) that are applied (or used) for private consumption.14

For calculating the ‘residual value’ based on the writing-off of depreciation, Member States are allowed to force taxpayers to apply a depreciation period that is the same as the period used for the ‘capital goods adjustment scheme’.15 The advantage of using the same periods for these calculations would be that this would make it possible to avoid as far as possible, in the interest of equality between taxable persons and final consumer, cases of untaxed end use where the assets are transferred free of VAT by taxable persons.16

In my view, the taxable amount should only include ‘direct costs’ and not overhead cost components such as ‘use of office space’, depreciation costs of business assets used for making the goods etc. Even though the relevant provision states that the taxable amount should be ‘the cost price’, ‘general costs’ should in my view not be included, if only because this would make an exact calculation of the taxable amount virtually impossible. Also, from a more principled view, including general costs would diverge too far form an adjustment principle whose aim could also be achieved by the (general) VAT adjustment mechanism.