State aid compatibility of VAT refunds to local authorities

EFTA Surveillance Authority decision (19 pages, PDF) finding arrangements to refund input VAT to Norwegian local authorities to be an incompatible State aid under the EEA Agreement's equivalent of Article 87.

The incompatibility arises from the discriminatory treatment of input VAT incurred by local authorities and by competing providers of VAT exempt services, for example in the education sector. The investigation was triggered by a complaint (in 2003) from an independent school competing with municipal schools in providing “specialised services to the offshore sector”. Whilst the Authority could not identify any other example of an effect on trade, it took the view that the case law only requires it to show that the measure is liable to affect trade within the EEA, and not to determine its actual effect.

There is no criticism of arrangements for refunding input VAT on outsourcing of Government functions. But the Authority found that this purpose could not justify the breadth and the potential distortionary effects of the Norwegian refund scheme.

Comment: A similar criticism might apply to Section 33 of the UK Value Added Tax Act 1994, depending on how the restriction of VAT refunds to supplies which are “not for the purpose of any business carried on by the body” is interpreted and implemented in practice. Franck

For further information or advice please contact Franck Latrémolière.

Filed under State aid, VAT.

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