Artificial exporting is an export of a yacht which immediately or shortly thereafter is re-imported, or need not have been exported at all because its true nationality and identity was disguised, as was its true ownership – that is an EU ultimate beneficial owner owning a yacht through an offshore company.
The EU VAT Directive that replaced the Sixth VAT Directive restated and consolidated EU VAT law from 1 January 2007, and gave us a single reference point for EU VAT law. Although the Directive accepts that each State will apply its own rates for VAT, the expectation amongst some practitioners was that the application of VAT would become be fairly uniform throughout the Union.
Unfortunately, we are still subject to the vagaries of local interpretation and inconsistent application of the rules. Also, for a long time, some players have confused ‘getting away with it’, with being legal. Just because you have not been caught does not make it legal! Chartering under the Temporary Import Regime used to be uncomfortably common. It was always illegal, but no one ever bothered to clamp down on it.
Until now, those of us who advise in this industry, have focused on the VAT from the owner’s perspective, and how it was applicable on the ownership, use and acquisition of yachts. The various high-profile cases that peppered 2010 dealt with tax that may have been due from the owners of the yacht. Up until then, yacht builders in Europe have not been the target of too much enquiry, but I believe this is about to change. Thought needs to be given as to whether it is still appropriate to rely on contractual terms that obligate delivery offshore or export by the buyer, thus avoiding VAT on delivery.
Tax avoidance is not illegal, but as Her Majesty’s Revenue and Customs state on their website:
Tax avoidance ….can give a business an unfair tax advantage over others, and puts at risk tax simplification measures. We have to take action to counter this and will continue to do so. That action includes the use of litigation, or the introduction of new legislation.
Similarly, in December last year, the EU Taxation Commissioner, Algirdas Šemeta launched a wide public consultation on the future of VAT in the EU, with one of the aims being to strengthen the VAT system to stop fraud and avoidance. In 2009, the EU published a study that estimated €106.7 billion was lost in VAT fraud, insolvencies and legal avoidance (DG Taxation and Customs Union, Report 21 September 2009, Study to quantify and analyse the VAT gap in the EU-25 Member States, Reckon LLP). Tax avoidance is on the agenda.
The 2006 European Court of Justice (ECJ) ‘Halifax Case’ became legendary in tax circles. It was the law that reinforced the concept of abusive practices in the context of VAT. It means that no person has the right to avoid VAT by setting up a commercial structure where the essential aim is to obtain a tax advantage, contrary to the intention of the law. The ECJ declared that:
…In that case, where an abusive practice has been found to exist, the transactions involved must be redefined so as to reestablish the situation that would have prevailed in the absence of the transactions constituting that abusive practice.
Yacht builders and suppliers gain significant cashflow advantages and possibly other tax advantages by exporting their products. Where a yacht is genuinely for export, the yacht builder and any suppliers to the yacht builder are not required to charge VAT, and indeed are not required to pay VAT on any supplies to that yacht. This is the case, even for EU ultimate beneficial owners who actually export the yacht from EU and keep the yacht outside the EU. Unfortunately, we have no guidelines on how long is long enough, but my guess is it’s probably months rather than days, or weeks.
However, it is not uncommon for an EU yacht-builder to expressly put a clause in a yacht-building contract which obligates an owner on delivery to remove the yacht from the EU within a short specified time period, normally within 60 to 90 days.
Alternatively, there are clauses that expressly state that the yacht will be delivered outside the EU.
EU yacht builders are well aware of their legal obligation to collect VAT on the sale of goods supplied in their home-country – which are to stay in their home country. They are also very clear on their obligations to manage the VAT process to make sure VAT is paid (if due), or accounted for somewhere else in the EU if it is not paid in their home jurisdiction. There is a well-worn bureaucratic VAT paper trail that follows the sale of a yacht in the EU for which tax is due and payable. The responsibility to manage that properly falls squarely on the shoulders of the yacht builder. There is a risk to the yacht builder that if it is not done properly, they will pick up the bill for the VAT.
The solution to all these headaches has, hitherto, been to attempt to transfer the ‘problem’ to the buyer, by either giving him the yacht outside the EU or contractually forcing him to export the yacht, and if the buyer brings the yacht back into the EU, then the buyer has to deal with the VAT consequences. The yacht builders, in their defence, try to protect themselves by marrying the clause to export the yacht with a contractual obligation on the buyer to pay any tax due if the yacht is not exported. However, the issue here is not the tax that might be due if the yacht is not exported, it is rather, are the builders or suppliers to the builder entitled to declare in the first instance that the yacht is for export simply by relying on certain contractual terms?
Obviously if, when the yacht is later imported, the buyer satisfies the VAT liability due on importation, it can be argued that no tax has been avoided. However, if the buyer does not satisfy the liability then the relevant customs authority should be expected to be aggrieved. Whatever happens – some tax has been avoided. The yacht builder and its suppliers paid no tax during the building of the yacht, even though they may legitimately claim that tax back, it still has to be paid before it can be claimed. It is worth noting that in some jurisdictions, VAT is suspended during the build phase and the build only has to account for VAT on delivery. Of course, if the yacht builder says the yacht is exported, then no tax is paid.
There is a view that (except where the yacht genuinely is permanently exported), if the ultimate beneficial owner of the yacht is an EU resident, or if the yacht is to be immediately or shortly after delivery brought back into the EU for commercial use, the yacht should not have been declared as being for export by the builder. Some yacht builders do not seek to prove that the ultimate beneficial owner of the yacht does not have a domicile or habitual place of residence within the EU. They assume that because the legal owner is from an offshore jurisdiction, for example Liberia, Marshall Islands or Panama, the yacht can be described as being for export. However, if prior to delivery the non-EU company has established a VAT home, in for example, the Isle of Man, or if the controlling mind of the non-EU company is an EU tax resident, the non-EU company ceases to be non-EU for tax purposes.
This is not always understood. Yet the customs authorities will assume that yacht builder will precisely know, or ought to know who the ultimate beneficial owner is. As a builder you should be cautious of perpetuating a myth of export where the reality is somewhat different. Unwittingly, a builder could fall foul not only of VAT law, but also of anti-money laundering legislation. The yacht-building world is not immune from the various iterations of the proceeds of crime/anti-money laundering legislation in force across Europe. As a builder, can you veryify that the source of the beneficial owner’s wealth is legitimate? The EU customs authorities will further assume that the yacht builder will have a very good idea where the ultimate beneficial owner habitually lives.
If the ultimate beneficial owner is an EU resident, or if the yacht is to be used commercially within the EU, the correct tax route on delivery – if in a different EU jurisdiction from where the yacht is built – would be to effect an intra-community transfer. An owner, if properly advised and if legitimately entitled, can still take the yacht without paying the VAT to the yacht builder, via such intracommunity transfer. Such owners should not be contractually obligated to take delivery offshore then ‘import’ into the EU, making the relevant declarations on importation.
But if there is a genuine foreign owner who is not going to commercially use the yacht in the EU, the yacht builder can quite legitimately turn around to his own customs authorities and say that the yacht has been exported and claim whatever tax advantages that flow from that export. However, if the true final destination is not outside the EU, a taxable supply at the standard rate may have been made. Should the builder be responsible for collecting that tax or giving effect to the collection of that tax elsewhere? The answer is ‘yes’. If they don’t, there may be a loss of revenue for the customs’ authority.
Fabricating an artificial tax reality may no longer work in VAT matters. A good recent example of this was in the recent ECJ case (18 November 2010) involving a Swedish taxpayer who delayed taking his yacht to Sweden from the UK and tried to pay tax in the UK (X and Skatteverket). The court decided that the true final destination – determined in that case by where the taxpayer was habitually resident and where consumption actually takes place – is what triggers tax, not an artificial construct designed to reduce a tax bill. Reality bites. The court said:
The application of a time period within which the transport of the goods to the purchaser must be commenced or completed would give purchasers the option of choosing the Member State where the acquisition of a new means of transport would be taxed according to the most favourable rates and terms Such an opportunity would jeopardise the achievement of the objective of the transitional VAT arrangements applicable to intra-Community trade in that it would deprive those Member States where the actual final consumption takes place of the tax revenue, which is rightfully theirs. Leaving such a choice to purchasers would also run counter to the objective of preventing distortions of competition between Member States in trade involving new means of transport.
Further, the court said:
If X’s interpretation, to the effect that there is a strict time period during which the transport of the goods in question must be commenced, were to be upheld, it would suffice for X to delay the transport of the goods concerned to the Member State of destination in order to mask the intra-Community nature of the transaction or alter the allocation of authority to tax so that a Member State other than the Member State of destination had the authority to tax the transaction. In either case, the Kingdom of Sweden would be deprived of its tax revenue.
The point of referring to this case in this article is that it reinforces the principle that if you, as a taxpayer, are doing something primarily to avoid a tax liability, well, it may be re-characterised so that you are put in the position you would have been if you hadn’t done it.
In normal circumstances, if you or I were buying a television at Selfridges for export, we would have to prove that we were non-EU residents, that we intended to leave the EU with the goods by the last day of the third month following purchase of the television; and having left the EU remain outside the EU with the television for a minimum of 12 months. If the television was re-imported within 12 months of its export from the EU, duty and tax free allowances would not apply to the television as you will have to pay import duties, including VAT that would be due.
Where there is an EU tax resident ultimate beneficial owner, or where the yacht is going to commercially operated in the EU and the buyer does not satisfy the VAT due on importation, or potentially claims commercial status, which is later declined, a customs authority may seek to ignore the export of the yacht for VAT purposes so that the builder is obligated to charge VAT, as would have been the case with a supply in the jurisdiction in which the yacht is built. In such circumstances any declaration that the yacht is for export may be seen as abusive, if it was intended to create a situation where the builder does not charge VAT and the buyer selects where he wants account for it on importation.
- Do we have a situation where owners and shipyards are making potentially tax abusive declarations?
- As to the true ultimate destination of the yachts?
- As to the true ownership and use of the yachts?
- As to the purchase and the supply of goods to the yachts?
The owner who may quite innocently participate in an ‘artificial export’, having originally been entitled to a tax-free status because of planned commercial activity, may find that taxfree status barred to them if they have not taken delivery of the yacht in the correct fashion and made the correct tax declaration. If the export should not have been made in the first place and the correct route to a legitimate tax status was an intra-community transfer allied with the correct tax declarations by the shipyard, an owner may find himself with a tax headache. The shipyard may also find themselves with uncomfortable questions to answer.
It is a fundamental principle of VAT law that the supplier is not only responsible for collecting VAT, but also for ensuring that the correct rate is applied. That responsibility cannot be abdicated by a contractual term. The shipyards must conduct reasonable due diligence to check if a yacht is genuinely for export, that the ultimate beneficial owner is not EU tax resident and that the yacht is not for commercial use in the EU.
Shipyards should be prepared to prove to the tax authorities that such due diligence has been undertaken. If the yacht is genuinely for export then a true export declaration can be made. If the yacht is for immediate or near immediate commercial use in the EU or if the ultimate beneficial owner is EU tax resident then a different route should be taken.
The atmosphere is changing on what is acceptable practice. We all have to recognise that some people believe that it is unacceptable for a yacht to be built in the EU and its services consumed in the EU and no VAT is paid. What owners and yacht builders tell the tax authorities and what we do legally should be in harmony with the prevailing mood of VAT enforcement. Result? Happiness.