The EFTA Surveillance Authority Decision of 3 may 2007 - the Norwegian Act on compensation for value added tax (VAT)

Reference is made to the Authority’s decision of 3 May 2007 concerning the Norwegian VAT Compensation Act. Reference is also made to the meeting in Brussels on 4 June 2007 between the Ministry of Finance, the Ministry of Government Administration and Reform and representatives of the Authority.

According to the decision the Norwegian authorities shall inform the Authority within two months of its notification of the measures taken to comply with it. In this letter the Ministry of Finance submits its response to the decision.

The letter is divided into two parts. In part one we give an account of the Ministry’s understanding of the decision. In part two we inform the Authority of the measures that the Norwegian Authorities will take to comply with the decision.

  1. The scope of the decision
According to Article 1 of the decision the state aid granted in connection with the VAT Compensation Act implemented by the Norwegian authorities is not compatible with the functioning of the EEA agreement.

The Ministry finds that the scope of the decision is relatively limited compared to the wide ranges of activities regulated by the VAT Compensation scheme. The decision does not prohibit the VAT Compensation scheme as a whole. On the contrary, the scheme as such must be deemed compatible with the functioning of the EEA Agreement. Provided that the VAT Compensation scheme is amended as concerns certain situations (see part two below), the scheme may therefore be maintained.
 
This understanding of the decision is based on the wording of the decision viewed against the administrative procedure, including the complaint that initialized the case. As referred to in the decision, the case was initialized by a complaint to the Authority in 2003 alleging that particular municipal schools, which provide specialised services to the off-shore sector in competition with the complainant, receive state aid through the application of input tax compensation as provided for in Article 3 of the VAT Compensation Act. When assessing whether the VAT Compensation Act fulfils the criteria under Article 61 (1) of the EEA Agreement the Authority several times emphasizes that far from all compensation granted under the VAT Compensation scheme amounts to state aid. The Authority holds, for instance, that the question as to whether a measure constitutes state aid only arises in so far as the public body exercises an economic activity.

This understanding of the decision was confirmed during the meeting with the representatives of the Authority on 4 June 2007. The scope of the decision was on the agenda. As we understood the representatives of the Authority, the decision is aimed at the refund for input tax to municipalities which carry out economic activities in competition with private undertakings in areas exempted from VAT. The VAT Compensation scheme has created a distortion of competition between public authorities carrying out economic activities and private undertakings carrying out the same economic activities in sectors exempted from the application of VAT. As we understood the representatives of the Authority, it is therefore only in order to counteract this distortion of competition that the VAT Compensation Act has to be amended.  
        
2. The measures of the Norwegian Authorities 
According to Article 2 of the decision Norway shall amend the VAT Compensation Act with immediate effect in order to exclude the granting of state aid. According to Article 3 the Norwegian authorities shall also take all necessary measures to recover from any beneficiary the aid referred to in Article 1 of the decision.

As regards the amending of the VAT compensation Act in order to exclude the granting of aid, we would like to inform the Authority that the Ministry is investigating the possibilities of introducing a limitation to the VAT Compensation Act. As we informed the representatives of the Authority on 4 June 2007, we consider to introduce a provision which precludes public entities from compensation of input VAT when they carry out economic activities in competition with private undertakings in areas exempted from the application of VAT. As indicated above, the Authority has called attention to the distortion of competition between public authorities carrying out economic activities and private undertakings carrying out the same economic activities in sectors exempted from VAT. The Ministry will therefore carefully evaluate how a limitation can be framed to effectively counteract this distortion of competition. In order to ensure a satisfactory measure, we have also started a process in cooperation with the Ministry of Local Government and Regional Development in order to identify the sectors in which the VAT Compensation scheme might cause distortion of competition between public and private undertakings carrying out economic activities.

The Ministry of Finance’s ambition is to propose a limitation as mentioned above to the Parliament in October 2007 (as a part of the state budget for 2008), so that the limitation can come into force on 1 January 2008.     

As regards the recovery of state aid unlawfully granted, the Norwegian Authorities will make a claim against the schools which provide specialized services to the off-shore sector in competition with the complainant. Additionally, the Ministry of Local Government and Regional Development are, in cooperation with The Norwegian Association of Local and Regional Authorities, currently investigating other possible recipients of aid which may be subject to recovery.

If the Authority is in need of more information on these matters, please do not hesitate to contact us.
 
Yours sincerely,

Tor Lande
Deputy Director General

Elisabeth Berge
Legal Adviser