Chaos and confusion over payment of VAT on LNG into EU
Differing approaches towards the payment of VAT on LNG imports in different parts of Europe are putting some countries at a disadvantage as they try to build import facilities.
At the moment, confusion reigns. Britain’s approach has been to follow the letter of the law, despite the potential for more murky interpretations, while France has decided to charge no VAT at all. In other countries policy varies according to how the meaning of ‘distribution’ is interpreted.
The European Commission’s (EC’s) VAT committee met last week to try and clear up the legislative confusion on the issue, but, unsurprisingly, progress is slow. However, a source at the EC told HLM: “A large majority of the delegations consider, as the Commission does, that importation of liquefied gas by gas tankers is not VAT exempt.” However, imports by transmission pipeline look set to escape the tax: “All the delegations and the Commission think that gas imported through pipelines of the “transmission system” should be exempt of VAT on importation.” The EC concluded: “The way to reach this objective is still under examination.”
The decision to charge VAT, even at the reduced rate of 5% rather than the usual 17.5%, can have serious cash flow implications despite the system by which VAT is claimed back and repaid a month later. If Centrica pays about $100 million for a cargo of LNG at Grain, it will take a cash flow hit of $5 million, a substantial amount for a company that already has a lot of exposure to wholesale price fluctuations.
A Centrica spokesman told HLM: “Anything which adds extra costs into sourcing more supplies for the UK should be looked at very carefully. As the biggest wholesale buyer of gas in the UK we’ve got some concerns about adding additional costs to what is already very highly priced wholesale gas in the market.” He went on to warn of a potential disincentive to would-be importers as companies like Centrica attempt to attract more gas in an increasingly competitive global market. “The UK’s now in a net importer position and that’s only going to go one way,” he added.
So for now the UK is right to be charging VAT on LNG imports, in terms of following the letter of the law. But taking the moral high ground does not alter the negative impact on British companies as they try to reposition the country’s gas sector to reach its potential as a hub, where gas coming in via ship and by pipelines can be easily, and cheaply, traded on into Europe.
British companies are at a particular disadvantage given that gas that can go through a variety of other routes; LNG could also go to France, Spain or Belgium. The Belgians are of the view that import VAT should be charged but have yet to rule. Meanwhile the UK is less attractive to would be importers because non resident companies must submit to the administration of registering and filing tax returns in order to get their VAT money back.
How it works in practice
VAT rules come under European legislation. According to the European Community Directive 2003/92/EC from 2003, “importation of gas through the natural gas distribution system” is VAT exempt. But where that left LNG imports by tanker was not at all clear. A new directive was issued on 1st January 2005 in an attempt to tidy up the confusion. It decreed that, from a VAT perspective, gas imports were regarded as a ‘good’, so companies trading gas throughout Europe had to register for VAT in every country in which they sold gas, resulting in multiple VAT registrations and very complicated compliance issues.
“We get a reduced rate on gas imports because we applied for a derogation when we originally joined the EU VAT system in the early 1990s,” a spokesman at the UK Treasury told HLM. “What matters is the state the gas is in when it goes to the consumer. Imports don’t have VAT on them; they attract it when they’re traded on.” He added that as far as he knew there was no specific policy on the issue.
Kendra Hann, tax partner at Deloitte, explained how the current system is structured.
“As a result of significant lobbying by the industry the VAT rules were changed from 1st January 2005 to effectively treat gas and electricity as a supply of services. What that meant was that you ignored where the gas was physically located and looked at the location of your counter party.
“So if it was Centrica selling to BP, because both are in the UK you’d always charge UK VAT regardless of whether the gas is in Poland, Belgium or wherever. And if you were Centrica selling to a French trader then you would not charge UK VAT and the French recipient would apply what we call a reverse charge; a self accounting charge that is not actually a cash payment but an accounting entry in the books. Again, that didn’t matter if the gas was in the UK or wherever. It was a simplification regime and only available for wholesale supplies of gas or electricity.”
The biggest problem with the directive was its use of terminology referring to gas in the distribution network, not the transmission network. So 25 different member states could each take a view on what that meant. The UK has decided that imports do not fall within the distribution network because they take place before the gas goes into that network. As a result, that is a taxable event in its own right and import VAT is due.
Because LNG is subject to further processing before it enters the gas network an import VAT charge is due at the time the cargo arrives. The importers have to pay the import VAT and then seek to recover it a month later.
“There’s a lot of lobbying going on in the UK at the moment to get that simplified,” Hann says. “The UK so far has said it can’t change it because the EU Directive is quite clear in talking about the gas distribution network. Other countries have been more flexible. For example the French have allowed LNG imports not to be subject to import VAT.”
What that means is that it would be much cheaper to import LNG import LNG into France rather than the UK because there would be far less of the bureaucracy involved with claiming back the VAT.
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