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Energy Community SecretariatEnergy Community Secretariat

Obstacles to cross border trade

Mumovic Milka

Value added taxes and public procurement

in energy trading


Meeting of the Central and South-Eastern European

Connectivity (CESEC) High Level Group in Sofia on

29 June 2018

Conclusions

[11]. Asks the European Commission and the

Energy Community Secretariat to investigate

bottlenecks in market reform and integration in the

CESEC region related to non-matching VAT and

public procurement regimes, and to propose

solutions to the next High-Level Group meeting

2

CESEC initiative

CESEC 24 October 2014


February 2017: Study on extending the Energy

Community Treaty to include the rules on public

procurement

Link: https://www.energy-

community.org/documents/studies.html#wpqyyz-

accordion

3CESEC 24 October 2014

Work undertaken so far

https://www.energy-community.org/documents/studies.html#wpqyyz-accordion


Public Procurement:

In EnC most of the energy companies are state owned and subject (or should be subject) to public

procurement rules.

Rules are to a certain extent harmonized

Their implementation is not.

- Different interpretations

- Different procedural rules

- Market competition assessments

Concentration limits customer’s access to competitive offers, exempting public entities from

implementing public procurement for energy purchases.

Saving potential – min. 20 mil EUR annually If all contracting entities currently belonging to “small customers” would purchase electricity in public

procurement procedure, only 1 EUR/MWh lower offer would bring 20 mil. EUR annual savings. This is

without counting for consequential effects of steering the interests for new entries, aggregated purchases

via centralized electricity procurements, intensification of customers’ activity

4

Public procurement rules: obstacles or tools for

market integration


Energy Community SecretariatEnergy Community Secretariat 5

Status of implementation in CP Albania

Bosnia and

Herzegovin

a

GeorgiaFYR

MacedoniaKosovo* Moldova Montenegro Serbia Ukraine

General principles (transparency, equal treatment, free competition and

non-discrimination)

Definition of contracting authority and contracting entity

Do public procurement rules apply to contracting entities & entities

operating on the basis of special or exclusive rights?

Do contracting authorities apply public procurement rules to purchase

electricity or gas for their own consumption

The thresholds

Exclusion when a contracting entity is active in the energy sector

(supply and production) exposed to competition

Exclusion of the service contracts awarded on the basis of an exclusive

right

Exclusion of contracts between contracting authorities or entities and

their affiliated entities?

Do public procurement rules apply to the granting of the support

scheme for renewable energy

Are public procurement rules applied by TSOs when procuring for

providing balancing and ancillary services ?

Do public procurement rules apply to construction of new production

facilities?

Do public procurement rules apply to construction of interconnections or

extension of the grid?

What types of procurement procedures are available and what are the

prescribed time limits?

What techniques and instruments are available

What are the applicable award criteria? Is it possible to reject a

participant for abnormally low tenders?

What are the grounds for modification of a PP agreement?

What are the available remedies?

Preferential treatment of domestic economic operators

Promotion of environmental and other criteria

Electronic self-declarations for bidders (ESPD)

Purchase of electricity from power exchanges or other organised

market



Works best when the five market forces are kept in balance

How market powers work in energy markets?

Does competition exist?

The How:Remove Obstacles to the sale on equal terms and without discrimination or disadvantages

Competitive offers from state owned power producers and their participation in cross border competition brings price convergence.Competition brings efficiency and contributes to security of supply in the long run.Efficiency and market prices contributes to profitability of state owned companies, including inputs to state budgets.

Create appropriate and efficient mechanisms for regulation, control and transparency so as to avoid any abuse of a dominant position, in particular to the detriment of consumers, and any predatory behavior.

CESEC 24 October 2014 6


The implementation plan

1. Formal commitment of the Contracting Parties to introduce in the national

legislation and implement public procurement rules relevant for the opening

and cross border integration of electricity and natural gas market;

2. Establishment of an expert group / network of procurement authorities, lead by

an expert from the Commission, to monitor and guide practical implementation

and to ensure adequate level of consistency and harmonization in the Energy

Community;

3. Implementation: monitoring and reporting of the compliance with the

harmonized public procurement rules, of interpretations and instructions, of

granted exclusions and dispute cases;

4. The Secretariat shall facilitate the work of the Network of Procurement

Authorities, provide logistic and administrative support in accordance with the

work plan.



- Harmonize market design and licensing regime -

mutual recognition (Art 34 of EnC Treaty)

- Remove barriers to trade

- Ensure access to supplier regardless of the CP

where the supplier is registered (Art 3.4 of

Directive 2009/72)

- Preconditions

- compliance with market and balancing

rules

- In EnC – compatibility with fiscal rules

(primarily VAT)

8

Steps

Entry barriers

Licensing rules

Customers rights

When Directives on internal market are implemented, market is considered open -

Harmonized implementation of public procurement rules may help to get out of the vicious circle.



Supply by non resident supplier – status in EnC

CP

Taxation rules Wholesale supply (trade) Retail supply

B2B B2C

License

required

Domestic seat

required

License

required

Domestic seat

required

Albania RCM FR

BiH FR FR

Georgia PE PE

Kosovo* RCM FR No

FYR Macedonia RCM PE

Moldova PE PE

Montenegro FR FRNo No

Serbia RCM FR No

Ukraine PE PE

9

RCM REVERSE CHARGE MECHANISM PE PERMANENT ESTABLISHMENT REQUIRED

FR FISCAL REPRESENTATIVE NPE PERMANENT ESTABLSHMENT NOT REQUIRED



Different VAT regimes are creating obstacles for trade in energy in the EnC countries.

- supply of goods

- Domestic supplies, Cross border supplies

- Organized market

- supply of services

- Access to network, Use of network

- Other services

Different tax obligations may lead to different playing field for market participants.

Non-harmonized rules lead to double taxation or non taxation

Distorting competition

Hinder competition and new entries (Suppliers will not enter a market where competition have a hidden

advantage

Lost public revenue from tax fraud scheme (VAT lost due to tax fraud may amount to 40 mil. EUR p.a.)

(Assuming the value of transaction in wholesale electricity market of minimum 10 bill. EUR, and assuming the share of

VAT fraud at the same level of 0,04% total transaction as in EU MSs)

Tax evasions and fraud undermine market confidence.

10

VAT issue



August 2017: Study on examining the implementation

of EU acquis on Value Added Tax in the Energy

Community legal order

Link: https://www.energy-

community.org/documents/studies.html#gtbgeq-

accordion

11CESEC 24 October 2014

Work performed

https://www.energy-community.org/documents/studies.html#gtbgeq-accordion


Where are the differences?


Taxable person

Place of taxable transaction

Person liable to pay tax

Place of Supply of services

Place of Supply of goods

Reverse charges


Status of harmonization with EU VAT regime

VAT Directive -

subject matter Application Article

Alb

an

ia

B&

H

Mo

nte

ne

gro

Ge

org

ia

Ko

so

vo

FY

R o

f

Ma

ced

on

ia

Mo

ldo

va

Se

rbia

Uk

rain

e

TAXABLE PERSON general (Art. 9) ////// //////

GOVERNMENTAL BODIES

general (Art.13) ////// ////// ////// ////// //////

PLACE OF SUPPLY OF GOODS

NG and electricity (Art. 38, 39) ////// //////

PLACE OF SUPPLY OF SERVICES

general, and access to network

(Art. 44, 45, 59/1/h)

//////

EXEMPTIONS ON IMPORTATION

NG and electricity (Art. 143) //////

EXEMPTIONS ON EXPORTATION

general (Art. 146) ////// ////// ////// //////

PERSON LIABLE FOR PAYMENT OF VAT

general (Art.192a )

reverse charging -general

(Art.194 ) cross-border reverse charging [NG and electricity]

(Art.195 )

domestic reverse charging [NG and electricity, certificates] and reporting

(Art.199a)

//////

tax representative (Art.204)



Minimum requirements for harmonization

Uniform treatment of electricity and natural gas as goods in the VAT legislation (tangible asset);

The place of supply of goods is the place where the customer is located (in the case of gas

through the natural gas distribution system, or of electricity).

Definition of the place of supply of natural gas through the distribution system, or of electricity, to a taxable dealer

(business to business [B2B] transaction), as the place where that taxable dealer has established his business, or has a

fixed establishment for which the goods are supplied, or, in the absence of such a place of business or fixed

establishment, the place where he has his permanent address or usually resides;

Definition that the supply of electricity at the final stage from traders and distributors to the final consumers should be

taxed at the place where the customer actually uses and consumes the goods (business to customer [B2C] transaction);

Definition of place of supply of services to taxable person as a place where taxable person has

established his business, or has a fixed establishment for which the services are supplied, or, in the

absence of such a place of business or fixed establishment, the place where he has his permanent

address or usually resides

The place of supply of services to a non-taxable person shall be the place where the supplier has established his business.



Recognizing the subject of a taxable dealer in the VAT Law provisions on supply of gas

and electricity;

VAT exemption on exportation of electricity (natural gas) through a system or any network

connected to such a system (or fed in from a vessel transporting gas into a natural

gas system or from any upstream pipeline network) with the right to VAT deduction.

VAT exemption on the importation of electricity (natural gas) through a system or any network

connected to such a system (or fed in from a vessel transporting gas into a natural gas system

or any upstream pipeline network);

VAT shall be refunded to taxable persons who are not established within the territory of

the CP.

The VAT law shall define requirements for VAT refund, the institute of the Fiscal

Representative or direct Tax Registration.

15

Minimum requirements for harmonization


Energy Community SecretariatEnergy Community Secretariat 16CESEC 24 October 2014

Scenarios for VAT chargeability

on transactions between persons from Bulgaria and FYR Macedonia

Case 1: Double taxation

Company A from FYR of Macedonia sells a service to Company B from Bulgaria (B2B)

- Non-taxation

Supply of

services

- B2B

Place of supply

(FYR of Macedonia

VAT Law):

Place of supply

(Bulgarian VAT

Act)

VAT paid by

(FYR of

Macedonia VAT

Law):

VAT paid by

(Bulgarian VAT

Act):

VAT will be paid

in both countries

FYR of Macedonia Bulgaria Supplier

(MK)

Customer

(BG)

VAT will be paid in both countries - it is negative for companies, distorting competition

Customer Company (B) from Bulgaria

Supplier Company (A) from FYR of Macedonia




Case 2: No taxation

Company A from Bulgaria sells a service to Company B from FYR of Macedonia (B2B)

Supply of

services

- B2B

Place of supply

(Bulgarian VAT Act): Place of supply (FYR

of Macedonia VAT

Law):

VAT paid by

(Bulgarian VAT Act):

VAT paid by

(FYR of

Macedonia VAT

Law):

VAT will not

be paid in

any country

FYR of Macedonia Bulgaria Customer

(MK)

Supplier

(BG)

VAT will not be paid in any country – distorting competition, is negative for budget in both

countries, higher risks of task fraud.

Supplier Company (A) Bulgaria

Customer Company (B) from FYR of Macedonia




Case 3: Double taxation

Company A from FYR of Macedonia sells a service (provision of access to network) to

customer B from Bulgaria (B2C)

- Non-taxation

Supply of

services

-B2C

(provision

of access)

Place of supply (FYR

of Macedonia VAT

Law):

Place of supply

(Bulgarian VAT Act) VAT paid by

(FYR of

Macedonia VAT

Law):

VAT paid by


VAT will

be paid

in both

countries

FYR of Macedonia Bulgaria Supplier

(MK)

Supplier

-tax representative

Or

Customer

-non-taxable legal person

VAT will be paid in both countries - it is negative for companies, distorting competition

Supplier Company (A) FYR of Macedonia

Customer (non-taxable legal person) Bulgaria




Case 4: Non taxation

Company A from Bulgaria sells a service (provision of access to network) to customer B

from FYR of Macedonia (B2C)

Supply of

services

- B2C

(provision of

access)

Place of supply

(Bulgarian VAT

Act):

Place of supply

(FYR of

Macedonia VAT

Law):

VAT paid by


VAT paid by

(FYR of

Macedonia VAT

Law):

VAT will not

be paid in any

countries

FYR of Macedonia Bulgaria Customer

(MK)

Supplier

(BG)

VAT will not be paid in both countries - distorting competition, is negative for budget in both

countries, higher risks of task fraud

Customer (B) from FYR of Macedonia

Supplier Company (A) from Bulgaria




Case 5: Different VAT treatment of players in the same market

Example 5.1 - Company A from FYR of Macedonia sells electricity to Company B from

Bulgaria

Supply of

electricity


of Macedonia VAT

Law):

Place of supply

(Bulgarian VAT Act)

VAT paid by (FYR of

Macedonia VAT Law)

VAT paid by

(Bulgarian VAT Act)

VAT will be

paid by

Bulgarian

customer

FYR of Macedonia

-export

Bulgaria

- Reverse charge

Supplier

Export - exempt

Customer

- import exempt

- apply RC

Supplier from FYR of Macedonia must prove export with custom declaration.

Bulgarian customer will not pay on import, he will apply RC and he will have right of

deduction but not have additional cost

Supplier Company (A) FYR of Macedonia

Customer Company (B) Bulgaria




Example 5.2 - Company A from Bulgaria sells electricity to Company B from FYR of Macedonia

Customer from FYR of Macedonia must pay VAT on import, but he will have right of deduction.

Customer from FYR of Macedonia will have additional costs to finance the transaction (VAT

until deduction) for purchases from Bulgaria. This is distorting competition because of additional

costs borne by this customer.

Supply of

electricity

Place of supply



of Macedonia VAT

Law):

VAT paid by

(Bulgarian VAT Act)

VAT paid by (FYR of

Macedonia VAT

Law):

VAT will be

paid in FYR

of

Macedonia

on import

FYR of Macedonia FYR of Macedonia Suppler

- export exempt

Customer

- VAT on import

Supplier Company (A) Bulgaria

Customer Company (B) FYR of Macedonia


Implementation plan

1. Preparation of amendments of VAT legislation and its adoption

2. Implementation, harmonization and coordination

3. Monitoring and consulting (VAT expert group)

Coordination of the efforts among Contacting parties is the key priority in order to avoid double-

taxation or non-taxation in the Contacting parties. In the coordination activities the Commission

support is of key importance.

Transactions for electricity between entities from different Contacting Parties and between Contracting

Parties and EU Member States that have predominantly different taxation system can lead to negative

effects such as distortion of competition and negative implications on the Contracting Party/EU

Member States budgets resulting from tax evasion or tax fraud.



www.energy-community.org

Questions


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