Reasoned opinion on the Norwegian VAT representative scheme

Reference is made to previous correspondence, most recently the EFTA Surveillance Authority's (“the Authority”) reasoned opinion dated 19 September 2012, and the Authority's letter of 6 November 2012 (case No 65608). 

1.       Introduction

1.1.    A brief summary of the reasoned opinion
The Authority points out that it is settled case-law that all measures that prohibit or are liable to impede or render less attractive the exercise of the fundamental freedoms must be regarded as constituting restrictions to those freedoms. Thus, although taxation falls within the EEA States' competence, that competence must be exercised consistently with EEA law.

The Authority also points out that the Court of Justice of the European Union has stated that it is a restriction on the fundamental freedoms to require a non established tax payer to appoint a representative that is jointly liable for the payment of tax. Even though the Authority recognizes that Norway has a legitimate interest in ensuring the payment of VAT by non-established tax payers that provide services or sell goods in Norway, the Authority is of the opinion that Norway goes beyond what can be considered necessary to fight tax evasion. Norway could apply other, less restrictive measures to achieve that objective.

Further on, the Authority draws the attention to the agreements Norway has concluded with 14 EEA States that provide for the mutual assistance in the collection of VAT and administrative assistance in the exchange of information concerning VAT. In the view of the Authority those agreements entail provisions for mechanisms for the exchange of information and assistance in recovery of VAT sufficient for the purposes of checking and reviewing the necessary information and ensuring cross border recovery of VAT.

The Authority consequently concludes that by requiring companies established in other EEA States to appoint a tax representative that is jointly liable for the payment of VAT in Norway for imported goods and services, when there exists an international instrument between Norway and the relevant EEA States providing for mutual administrative assistance in the exchange of information and the recovery of VAT, Norway has failed to fulfill its obligation arising from Articles 11 and 36 of the Agreement on the European Economic Area.

Norway is required to take the measures necessary to comply with the reasoned opinion within two months following notification thereof. A deadline extension is granted until 15 January 2013. 

1.2.     A summary of the Norwegian Government's position
VAT is one of the main sources of income in the Norwegian State budget. It is therefore of great importance to have effective legal instruments to ensure that VAT is paid in accordance with national rules and regulations.  

The Norwegian Government recognizes that the current VAT representative scheme in some aspect may seem cumbersome and outdated. In light of this, the Norwegian Government suggests a two-step approach consisting of immediate solutions and a long term development of a modern VAT system for non-established businesses operating in Norway.

As an immediate solution, the Ministry of Finance will suggest a removal of the joint and several liability for the VAT representatives which represent non-established businesses domiciled in EEA States with which Norway has concluded mutual and administrative assistance agreements. The Ministry will also suggest a removal of the requirement for the sales documents to be sent through the representative for all non-established businesses. The Ministry intends to have the proposals implementing the immediate solutions ready as soon as possible, and at the latest for the next Revised National Budget process, i.e. spring 2013.

Furthermore, the Ministry will intensify the current revision of the Norwegian VAT Act concerning registration for VAT purposes for non-established businesses, with a view to create a better and a more simple system.

2.         Legal background

2.1.      Norwegian legislation applicable

2.1.1.  VAT representative scheme
Norway applies a VAT system in many ways similar to EU's VAT system as it is laid down in Directive 2006/112/EC. However, secondary legislation in EU in this area is not a part of the EEA Agreement. Thus, Norway is a “third country” in relation to this legislation. According to the Norwegian VAT Act No. 58 of 19 June 2009 (“the VAT Act”), VAT is levied on all domestic supplies of goods and services, imports and deemed supply, unless expressly exempted.

All taxable persons, either domiciled in Norway or domiciled abroad, engaged in business activities in Norway and whose annual turnover from domestic supplies of taxable goods and services exceeds NOK 50 000 during a 12 month period, are obligated to register for VAT in Norway, see VAT Act Section 2-1 paragraph 1.

A non-established taxable person engaged in business activities in Norway and whose turnover from domestic supplies of taxable goods and services exceeds NOK 50 000 over a 12 month period, must register for VAT through a representative. By such registration, the foreign non-established business basically has the same rights and obligations as established taxable persons have.

Registration through a VAT representative imposes requirements on both the non-established taxable person and on the VAT representative. The foreign business and the representative are jointly and severally liable for the payment of VAT (although VAT debt initially will be collected from the foreign business). Further, the sales documents (invoices) for goods and services supplied by the non-established taxable person in Norway ought to be submitted through the representative. The VAT representative and the non-established taxable person also have regulations to adhere to regarding bookkeeping.

2.1.2.   Arrangements for mutual administrative assistance in tax matters
Norway has concluded agreements concerning mutual and administrative assistance in the exchange of information and on recovery of VAT with 15 other EEA States[1]. It is therefore not correct as informed in our previous correspondence that the number is 16.

The agreements are based on either the Council of Europe/OECD`s Convention on Mutual Administrative Assistance in Tax Matters or on the OECD Model Tax convention on Income and Capital. The conventions provide for a wide range of tools for cross-border tax co-operation including exchange of information, multilateral simultaneous tax examinations, service of documents, and cross-border assistance in tax collection.

Norway has also concluded a multilateral agreement, the Nordic Mutual Assistance Convention on mutual administrative assistance in tax matters, with Sweden, Denmark[2], Finland and Iceland. The Nordic Mutual Assistance Agreement has rules and procedures with regards to the service of documents, the supply of information in tax matters such as the exchange of information, spontaneously or upon request, the collection of tax and the recovery of tax.

The majority of the rules and procedures laid down by the Convention on Mutual Administrative Assistance seem similar to the rules and procedures laid down by the Nordic Mutual Assistance Agreement, i.e. provisions on information exchange (on request and without prior request), simultaneous tax examinations, assistance in recovery of tax claims, service of documents and secrecy. Certain provisions in the Convention on Mutual Administrative Assistance though, might seem to provide for a wider co-operation than the similar provisions in the Nordic Mutual Assistance Agreement, and vice versa. 

2.2.        Relevant EU law

2.2.1.    EU's VAT Directive
Directive 2006/112/EC on the common system of value added tax (“VAT Directive”) is not EEA relevant, and has not been incorporated into the EEA Agreement. In respect of this legislation Norway is regarded as a “third country”. Because Norway applies a VAT system in many ways similar to EU`s VAT system as it is laid down in Directive 2006/112/EC, the VAT Directive is however interesting to examine and to compare with the VAT system in Norway.

According to Art. 204 of the VAT Directive, the appointment of a tax representative is not a requirement, but an option for taxable persons not established in the Member State in which the VAT is due. However, if the Member State in which the VAT is due has no legal instruments relating to mutual assistance as provided for in Directive 76/308/EC and Regulation (EC) No 1798/2003, an obligation to appoint a tax representative that is liable for the payment of VAT may be imposed on the taxable person.

The newly adopted Directive 2010/24/EU on mutual assistance for the recovery of claims relating to taxes (entered into force as of 1 January 2013) and Regulation (EU) No 904/2010 on administrative cooperation and combating fraud in the field of value added tax (entered into force as of 1 January 2012) repeal Directive 76/308/EC and Regulation (EC) No 1798/2003, respectively.

Below we will focus on Directive 2010/24/EU and Regulation (EU) No 904/2010 

2.2.2.    The EU arrangements for mutual and administrative assistance in tax matters between Member States
Directive 2010/24/EU and Regulation (EU) No 904/2010 modernize and extend the rules and procedures for recovery of VAT in Member States, and the cooperation and exchange of information between tax administrations within the EU (e.g. rules to combat VAT fraud and to protect VAT revenue).

Regulation (EU) No 904/2010 lays down rules and procedures that enable the competent authorities of Member States to cooperate and to exchange with each other any information that may help to effect a correct assessment of VAT, monitor the correct application of VAT, particularly on intra-Community transactions, and combat VAT fraud. Further, according to the Regulation the competent authorities are to assist in the protection of VAT revenue in all Member States.

Directive 2010/24/EU concerns mutual assistance for the recovery of claims relating to taxes, duties and other measures. The Directive lays down rules and procedures for mutual assistance between Member States for the recovery of each other`s claims and those of the EU with respect to certain taxes and other measures. Further, in order to cope with the increase in assistance requests and to deliver results that are more efficient and effective, the scope of mutual assistance for recovery of claims is extended by the Directive. The Directive also lays down a general obligation to communicate requests and documents in a digital form and via an electronic network. Further, the Commission Regulation (EU) No 1189/2011 lays down additional and detailed implementing rules in relation to certain provisions of Directive 2010/24/EU, and is directly applicable in all Member States.

3.      The legal framework within the EU and the legal framework available to the Norwegian authorities regarding information exchange and VAT recovery

3.1.   Introduction
During the package meeting in Oslo the Authority´s representatives explained that it would be helpful if Norway could explain how the Norwegian framework for administrative assistance in the exchange of information and recovery of VAT differs from the legal framework within the European Union. Thus, the Norwegian Government has in chapters 3.2 and 3.3 listed in more detail the most important legal mechanisms laid down by the legal framework within the EU which are not available to the Norwegian authorities in the agreements that Norway has concluded with certain EEA States. 

3.2.   Exchange of information
Below we have listed the most important legal mechanisms laid down by Regulation (EU) No 904/2010 which are not available to the Norwegian authorities in relation to EEA States with which an agreement on information exchange has been concluded: 

-         The rules and procedures laid down by the Regulation are all based on operational communication by electronic means, see e.g. Chapters I, III, IV, V, IX, XI, XII and XV.  

-         The Regulation has fixed time limits for providing information; see e.g. Chapter 2, Articles 10-12 where time limits such as “maximum period of one month” and “no later than three months” are used. 

-         The Regulation has rules and procedures on how the competent authority receiving the information requested is to provide feedback as soon as possible to the authority it may concern, see Chapter IV.

-         In Chapter V of the Regulation there are rules and procedures on the storage and exchange of specific information. The Chapter contains i.e. rules on how the information should be stored in an electronic system and available for at least five years and how the information should be kept up to date so that it is accurate and complete. Every Member State must grant the competent authority of any other Member State automated access to this information.

-         In Chapter X of the Regulation there are rules and procedures regarding the EUROFISC network. Through the network national officials can detect and combat new cases of cross-border VAT fraud. 

-          Chapter XIII of the Regulation concerns the bond that exists between the different Member States and the Commission when it comes to evaluating and improving the arrangements for administrative cooperation provided for in the Regulation.  The Commission has an independent role in collecting and communicating any information which may enable the Member States to combat fraud in the field of VAT as soon as it obtains such information.

-         Chapter XIV of the Regulation lays down rules and procedures on how the competent authorities in a Member State can provide information obtained in accordance with this Regulation to a third country provided that certain conditions are met. 

3.3.      Recovery of VAT
Below we have listed the most important legal mechanisms laid down by Directive 2010/24/EU (cf. Regulation (EU) No 1189/2011) which are not available to the Norwegian authorities in relation to EEA States with which an agreement on recovery of VAT has been concluded: 

-         The rules and procedures in the Directive are, as in Regulation (EU) No 904/2010, based on operational communication by electronic means, i.e. the CCN/CSI network. Further, the Directive lays down a general obligation to communicate requests and documents in a digital form and via an electronic network, and with precise rules on the use of languagesfor requests and documents.

-         According to Chapter I, Art. 4 of the Directive, each Member State shall designate a central liaison office which shall have principal responsibility for contacts with other Member States in the field of mutual assistance covered by the Directive. The central liaison office may also be designated as responsible for contacts with the Commission. Further, the Directive states that every communication shall be sent by or with the agreement of the central liaison office to ensure effectiveness of communication.

-         In Chapter III, Articles 8 and 9 of the Directive there are rules and procedures on assistance for the notification of documents to the addressee, and the means for that notification.

-         Rules and procedures in Chapter IV, Articles 14, 16, 17 and 19 of the Directive respectively concerning disputes, request for precautionary measures, rules governing the request for precautionary measures and questions on limitation.

-         Chapter VI, Art. 27 of the Directive lays down rules and procedures for the Member States to report to the Commission annually, i.e. of the number of requests for recovery and the amounts recovered. The Commission has an independent role in evaluating the provisions under the Directive, as to improve the functioning of the Directive.

 4.     The Norwegian Government`s assessment

4.1.   Fundamental reasons for having a scheme which in a sufficient way ensures the payment of VAT by non-established businesses  
In the reasoned opinion, the Authority recognizes that Norway has a legitimate interest in ensuring the payment of VAT by non-established businesses. The Norwegian Government shares this assessment; VAT is one of the Norwegian State`s main sources of income, representing about ¼ of the central government’s tax revenue. Thus, the collection of VAT is a very important part of the Norwegian tax system.

For businesses operating in Norway without being established here, there are challenges regarding control, penalties and collection of VAT. As the Norwegian authorities have limited jurisdiction over non-established businesses operating in Norway, it is important to have effective legal instruments to ensure that VAT is paid in accordance with the national rules and regulations.

Further, various types of VAT fraud, e.g. missing trader fraud, are particularly damaging to public finances, and constitute a big problem for the authorities.[3] Combating different types of VAT fraud, without creating unnecessary administrative burdens for legitimate trade and businesses, is an important task for the Norwegian authorities. As shown above, combating VAT fraud is also emphasized throughout the entire European Union; The newly adopted Directive 2010/24/EU and Regulation (EU) No 904/2010 are sought out to modernize, and extend, the rules and procedures for recovery and information exchange regarding VAT.

In our view it is also important to take into consideration that EU has a common, highly harmonized, system of value added tax without any internal borders between the 27 Member States. Further, as demonstrated above, EU has a modern and sophisticated system based on automatic information exchange and effective rules for recovery of VAT and other taxes between Member States. These rules are adopted unanimously by EU countries and apply either directly (regulations) or by implementation (directives) in all Member States. This allows the EU to have fewer safeguards at national level. In respect of this legislation Norway is regarded as a “third country”.

Additionally, the presentation above shows that Norway has not concluded comprehensive mutual assistance agreements comparable to the legal framework existing within the EU. For instance, the tax amount registered requested based on the agreements Norway has concluded with certain EEA States in 2010 was approximately NOK 148 518 887, and in 2011 it was approximately NOK 176 195 539. The amount recovered in relation to the outstanding amount was approximately 10 percent in 2010, and approximately 8 percent in 2011.[4] These circumstances illustrate the need to retain the obligatory requirement of a VAT representative for the time being.

In this context we would also like to point out that, according to our information, EU countries such as Bulgaria, Estonia, Greece, Cyprus, Lithuania and Romania all require a VAT representative for businesses domiciled in a third country (i.e. Norway). Moreover, in addition to registering through a VAT representative, Luxembourg, for instance, also requires a bank guarantee from the non-established taxable person domiciled in a third country. Additionally, Bulgaria and Cyprus are examples of EU countries where the non-established taxable person must acquire either a bank guarantee or joint and several liability with the VAT representative.

In light of the above, the Norwegian Government is therefore of the opinion that it is justified to have a scheme which in a sufficient way ensures the payment of VAT by non-established taxable persons. 

4.2.    The need for a modernization of the current VAT representative scheme
Before 1 May 1977, foreign non-established businesses were not allowed registration for VAT purposes in Norway. This led to unfortunate effects such as instances of double-taxation and competitive disadvantages for Norwegian businesses who were under the obligation to calculate and pay VAT on their sale of (equivalent) goods and services. The current VAT representative scheme therefore came into force on 1 May 1977, allowing Norwegian authorities to secure oversight, compliance and payment of VAT, whilst also allowing the non-established businesses to register for VAT purposes in Norway.

The Norwegian Government recognize that the current VAT representative scheme with, inter alia, its obligation to submit all sales documents (invoices) for sales of goods and services through the VAT representative, might seem cumbersome and outdated.

In light of the above, and as also stated in our previous correspondence, the rules regarding VAT representatives are currently under revision by the Norwegian Tax Authorities. The working group that has been evaluating the current VAT representative scheme has presented the Ministry of Finance with an extensive (non-official) internal report which requires further work, and has the potential of constituting significant changes to the Norwegian VAT Act.

Based on our need to have effective legal instruments to ensure that VAT is paid in accordance with the national rules and regulations, and in light of the current evaluation process of the VAT representative scheme, as well as this reasoned opinion, the Norwegian Government suggests a two-step approach consisting of immediate solutions and a long term development of a modern VAT system for non-established businesses operating in Norway. 

4.3.     A two-step approach for modernizing the current VAT representative scheme and the time frame for the implementation of the new policies

4.3.1.  Immediate solutions
According to the VAT Act Section 11-1 paragraph 3, the non-established business and the representative are jointly and severally liable for the payment of VAT, although the VAT debt initially will be collected from the non-established business. As mentioned above, this requirement has been regarded as important to the Norwegian authorities due to considerable challenges regarding control, penalties and collection of VAT from non-established businesses. Thus, the requirement has a preventive role, serving as a safeguard for the authorities.

Nevertheless, taking into consideration the reasoned opinion in the case, and the fact that the requirement of joint and several liability seems to constitute a burden and a cost for the non-established businesses, the Norwegian Government has decided to remove this requirement for all non-established businesses domiciled in an EEA State with which Norway has concluded an agreement providing for mutual administrative assistance in the exchange of information and the recovery of VAT.

Further, according to Regulation No 1540 of 15 December 2009 on value added tax (Forskrift-2009-15-12-1540 om merverdiavgift), Section 2-1-1 paragraph 1 the sales documents (invoices) for goods and services supplied by a non-established taxable person in Norway shall be submitted through the VAT representative. The representative ought to enter his own name and address on the sales document, the non-established taxable person`s organization number followed by the letters “MVA”, and the amount of VAT (output tax) for the payment. Even though the tax authorities are authorized to waive the requirement in the first paragraph in case of “special circumstances”, the exemptions have, according to administrative practices, been reserved for the cases where it is not practical to send sales documentation through the representative, e.g. foreign passenger transport.

As also stated above, the Norwegian Government's view is that the requirement to submit the sales documents for goods and services through the VAT representative seems outdated.The requirement has also a specific cost side for the non-established businesses as the representative often is paid on an hourly basis for stamping of invoices etc. On these grounds, the Norwegian Government has decided to remove this requirement as well, for all non-established businesses.

The timeframe for both of the solutions presented above is to have a proposal ready as soon as possible. According to the Norwegian regulations regarding Norwegian legislative process amendments, a matter needs to be sent on a public hearing for a period of at least six weeks. Consequently, the Norwegian Government intends to have the proposals implementing the immediate solutions put before the Parliament at the latest for the forthcoming Revised National Budget process, i.e. spring 2013. 

4.3.2.  The long term development of a modern VAT system for non-established businesses operating in Norway
As there are challenges regarding control, penalties and collection of VAT for non-established businesses, as well as general challenges regarding various types of VAT fraud and avoidance, the Norwegian authorities want to make sure that the new long term solution for non-established businesses constitutes a well founded alternative for both the authorities, and the non-established taxable persons.

As explained before, a revision of the current VAT representative scheme entails further work and will constitute significant changes to the Norwegian VAT Act. As Norwegian authorities wish to ensure the effectiveness of fiscal supervision and the compliance and recovery of VAT claims, as well as to implement an easy and modern system for registration for VAT purposes for non-established business, we will need some time to assess the legal and technical aspects. At this time, it is regrettably, difficult to indicate a specific time frame for the completion of this revision. Nevertheless, we would like to emphasize that we have taken into account the Authority`s reasoned opinion, and that we will intensify and prioritize the work regarding a complete revision of the current VAT representative scheme. As a part of this prioritization, the Ministry of Finance will as soon as possible, and at the latest for the forthcoming Revised National Budget process (i.e. spring 2013), inform the Norwegian Parliament on the further progress of this revision.

 5.      Conclusion
The Norwegian Government recognises the need to implement changes to the current VAT representative scheme. Accordingly, we suggest a two-step approach consisting of immediate solutions and a long term development of a modern VAT system for non-established businesses operating in Norway.  

As an immediate solution, the Ministry of Finance will suggest a removal of joint and several liability for the VAT representatives representing non-established businesses domiciled in States with which Norway has concluded mutual and administrative assistance agreements. Secondly, the Ministry of Finance will suggest a removal of the requirement for the sales documents to be sent through the representative for all non-established businesses. The Ministry of Finance intends to have the proposals implementing the immediate solutions ready as soon as possible, and at the latest for the next Revised National Budget process, i.e. spring 2013.

Furthermore, the Ministry of Finance will intensify the current extensive revision of the Norwegian VAT Act concerning registration for VAT purposes for non-established businesses.

We will keep the Authority informed on the processes outlined above. If you have any questions, please do not hesitate to contact us.  

Yours sincerely,

Tor Lande
Deputy Director General

                                                                              Biljana Nedimovic
                                                                              Higher Executive Officer