How to calculate a VAT pro rata ? Worldwide prorate or country per country calculation ?

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Companies with establishments abroad are confronted with questions regarding VAT recovery. In recent cases the ECJ already provided some guidance on how VAT should be recovered: through the VAT return or through a request for refund. Now the question lays before the Court how the pro rata of a mixed VAT payer with establishments abroad should be calculated, especially when the head office incurs costs that are also for the benefit of the activities of the branches abroad (ECJ case nr. C-388/11 Crédit Lyonnais). The opinion of Advocate General Cruz Villalón was released on 28 February 2013.

In Belgium, the turnover realized by foreign branches is basically not taken into account for the calculation of the pro rata. An exception applies when costs in relation to the transactions of foreign branches are directly borne by the Belgian (head) office.

The question is whether this rule can be maintained after the Court’s decision in the Crédit Lyonnais case. Based on the opinion of the Advocate General (AG), such seems to be the case.

The questions raised by the French Conseil d’Etat concern whether and how foreign turnover may be taken into account for the calculation of a pro rata of a French company with branches abroad. Paraphrased, the questions are whether :

  1. The entire “EU” turnover of the company should be taken into account for the recovery position of the head office and each of the branches ;
  2. The same solution applies to branches outside the EU, taking into account that banking and financial transactions to a recipient outside the EU give right to deduct VAT ;
  3. The answer to the first questions may vary from Member State to Member State, taking into account the options that the latter have with respect to setting up business sectors ;
  4. If the answer to one of the two first questions is positive
    a. Should the “worldwide pro rata” should apply restrictively to expenses incurred by the head office to its branches ?
    b. Should the foreign turnover be taken into account in accordance with the rules of the countries of establishment of the head office and of the branch ?

The AG commences by stating that the FCE Bank case of that was sentenced on 23 March 2006 does not provide any answer in the case at hand. For the AG the territorial principles governing VAT prevail. A company having its head office and branches in a single Member State is not subject to the same regime as a company with branches in other Member States.

The common system of VAT established by the Directive remains strongly characterized by domestic territorial sovereignty. The harmonization achieved by the Directive is only partial. There is different legal regimes of VAT in each Member State.

Since the VAT Directive does not provide any specific rules in this respect, it is in first instance to the Member States to establish the concrete modalities of the right to deduct VAT. Member States are, according to the AG, not obliged to include the company’s entire EU or non-EU turnover in the pro rata.

Before jumping into conclusions, one should wait for the ECJ to pronounce itself. It is likely that the court will follow the conclusions of the Advocate General, meaning that this case might not be as pioneering as it could be...