VAT: Inadequate taxation of turnovers from commercial activities of public-sector entities

The inadequate subjection to VAT of turnovers originating from commercial activities of public-sector entities puts private competitors at a disadvantage and infringes EU law. The Bundesrechnungshof has submitted proposals for corrective action.

In many areas, no VAT is assessed on commercial operations of public-sector entities even where they offer services in competition with private businesses. This distorts competition to the detriment of private service providers and is not in keeping with European law. This is why the Bundesrechnungshof demanded in a report presented on 2 November 2004, a fundamental review of the application of VAT to commercial operations of the public sector and adapt German tax law to the requirements laid down in EU law.

Where public sector engages in commercial operations, it enters into competition with the private sector. In this case, the principle of the ‘level playing field’ requires that the public sector should not be given any tax privileges over private-sector competitors. The principle of equitable conditions of competition is laid down in Community law with respect to VAT. National tax law must comply with these requirements of EU law.

The Bundesrechnungshof found that the applicable legal provisions resulted in an unjustified exemption from VAT of many commercial operations performed public-sector entities. If e.g. a local authority provides waste water treatment services to a neighbouring local authority free of charge, this is considered as non-taxable provision of assistance. Similar practices of VAT assessment were applied to community area computer centres, chambers of industry and commerce, chambers of crafts and trades, statistical offices and contract research performed by state universities.

Any tax exemption of commercial operations in a competitive market is not compatible with current EU law. Therefore, the Bundesrechnungshof presented a report to the two Houses of the German Parliament on 2 November 2004, in which it made suggestions for corrective action to ensure compliance with EU law. Moreover, a speedy adaptation to the relevant provisions of EU law is imperative to avoid infringement proceedings against Germany before the European Court of Justice that would involve a considerable financial risk for Germany.

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