Extended warranties attract particular VAT considerations and were the subject of a case brought before the European Court of Justice by the Portuguese tax authorities.
Rádio Popular (the “Taxpayer”), a company specialising in the sale of household electrical and technological equipment, offered extended warranty through a partnership with an insurance company in addition to its main activity. The contract for the extended warranty was ultimately concluded between the insurance company and the buyer.
Rádio Popular received commissions directly from the insurer, and the issue, in this case, was whether such commissions fell within the scope of the financial services VAT exemption, such that they were to be excluded from the Taxpayer’s partial exemption pro-rata calculation as ‘incidental transactions’.
Indeed, Rádio Popular whilst not charging VAT on the commissions it derived from the supply of extended warranties, considered them ‘incidental transactions’ and continued to claim a full input tax deduction for all its activities.
What does the VAT Directive say in this respect?
In terms of Directive 2006/112/EC (“the VAT Directive”), the following items are excluded from the calculation of the pro rata calculation:
a
b
c
Following a VAT audit, the Portuguese tax authorities argued that the supplies related to the additional warranties cannot be considered as financial transactions. Consequently, these transactions should not be excluded from the calculation of the pro rata deduction and the Portuguese tax authorities raised a VAT assessment to recover the excessive amount of input tax claimed by the Taxpayer.
The Taxpayer contested those assessments as unlawful and contended that the intermediary role should be considered an ancillary financial transaction, and therefore, excluded from the pro rata calculation. It also argued for a wide understanding of what qualifies as financial transactions to maintain VAT neutrality and non-distortion of competition.
The case was referred to the Court of Justice of the European Union (CJEU), to establish whether the supply by an intermediary of extended warranties on household electrical appliances and other computer and telecommunications equipment can be considered a financial transaction. Furthermore, if they are, whether these should be excluded from the calculation of the deductible proportion for tax purposes, based on the principles of neutrality and non-distortion of competition.
The CJEU ruled in favour of the Portuguese tax authority, emphasising that the VAT Directive excludes from the pro rata calculation, incidental transactions consisting of credit and banking services and the management of special investment funds - but does not so exclude incidental transactions consisting of insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents. The court made a clear distinction between insurance transactions and financial transactions, stating that they should not be treated similarly since the VAT Directive clearly distinguishes between the two.
Therefore, the court concluded that a transaction categorised as an insurance transaction cannot be considered a financial transaction within the definition for the input tax partial attribution calculation, even if such a transaction is considered incidental.
As a result, the value of the supply of extended warranties by an intermediary primarily engaged in the sale of goods cannot be excluded from the denominator when calculating the input tax pro rata recovery ratio. Consequently, this is likely to result in a lower amount of deductible input tax.
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