Norway: Value Added Taxation in Norway

Norway introduced a value added tax in 1970. Until the introduction of a general VAT on services in 2001, however, only minor changes were made to Norway's VAT system, which is based on the Second EC Directive.

Norway's VAT has been a local system for the past 30 years after Norway chose not to join the European Community in 1972. The local doctrine has been to keep VAT simple; thus, several proposals to introduce differentiation in the VAT rates were rejected. A proposal for a general VAT on services was rejected in 1990, as the then 20% VAT was found to be too burdensome on passenger transport and accommodation services. In contrast to Sweden, no proposals for EU harmonization were released prior to the EU referendum in October 1994. There were very few significant developments in the 1990s, apart from the adoption in 1996 of a VAT refund arrangement similar to that in the Thirteenth Directive and the adoption in 1997 of a second-hand goods scheme similar to the Fifth Directive.

Until recently, VAT was levied on all goods and certain services. The general VAT on services suddenly appeared as a part of the budget for 2001. Reference was then made to the hearings held in 1990.¹ After amending the budget proposal for a reduced rate on passenger transport and accommodation services by providing for exemptions without credit for this "travel sector" and several other areas, the Parliament adopted the new legislation and it became effective on 1 July 2001.

This single effort to modernize Norway's VAT system was half-hearted. Inconsistency, uncertainty and unpredictability now dominate the VAT system more than ever.

This article describes the VAT system in Norway and compares it with the EU VAT system. Because of the similarity of the tax mechanism with the EU system, this article focuses on the special features of Norway's system, at the sacrifice of separate discussions on the taxable amount, chargeability, and the deduction of input VAT.

As in other countries, the VAT in Norway is determined by the existing legal culture and "the mechanical application of VAT legislation by the tax administration, which is based on a legal concept directed at strict legal positivism".²

The main source of the VAT system in Norway is the VAT Act of 19 June 1969 (VAT Act), whose format follows that of the Second Directive. The VAT Act has 20 chapters and 76 (+ 17) articles. Chapter 1 contains the "introductory provisions", which deal with matters such as the tax mechanism, the definition of goods and services, input and output VAT, and the scope of the exemptions (without credit). Chapter 2 has the provisions relating to the tax authorities, their obligation to maintain confidentiality, and their duty to keep records for ten years. Chapter 3 addresses issues such as the liability to pay VAT and who is a taxable entrepreneur. Chapter 4 defines the types of supplies of goods and services that are subject to VAT or exempt with credit. Chapter 5 deals with the taxable amount and Chapter 6 with the deduction of input VAT and VAT refunds. Chapters 7 to 20, except Chapter 15 (Imports), deal with registration, reporting and payment, controls, complaints, etc.

The VAT Act is only the basic source. In addition, there are 122 (-- 23) regulations, a very large number of administrative decisions, decrees, and some guidelines. Unlike other VAT systems, the special Investment Tax Act has been linked to the VAT Act, creating complexity, cumulating effects and compliance work. As to the provisions from the original EC Directive and the original proposition (Ot prp No. 17, 1968-69), it appears that these sources were soon forgotten. In 1985, the High Court of Justice rediscovered the provisions from the proposition in the most important VAT judgement Sira-Kvinadommen (Rt. 1985 at 93), settling the principles of the input VAT deduction in Norway.

Since 1970, the Directorate of Taxes has established a strong tradition of both published and unofficial decisions as the bases for interpretations. VAT has been applied by the authorities leaning rather casuistically toward decisions on which new casuistry has repeatedly been based. This has undoubtedly developed a legal culture of its own. For VAT practitioners in Norway, it has always been of the greatest importance to have in-depth knowledge of the relevant decisions. During the "VAT reform 2001", namely, when the Ministry of Finance issued guiding interpretations on the financial services exemption, there was a breakthrough regarding the principles of the EU VAT system. Suddenly, the judgements of the European Court of Justice in Sparekassernes Datacenter (C-2/95) and Card Protection Plan (C-349/96) were adopted. As a result of this recent upgrading to a scope similar to the Sixth Directive and a new era of harmonization efforts, many new problems of interpretation have arisen. Consequently, the Ministry of Finance has, more often than ever, been forced to use a kind of derogation clause (Art. 70 of the VAT Act), despite the intention of the VAT reform 2001 to do away with this "off the record" source.

According to the Second Directive:

On each transaction, the VAT calculated on the price of goods or service is accordingly chargeable after deducting the amount of VAT borne by the various cost components. The VAT in Norway is levied at all stages in the production and distribution chain and is paid to the state on the basis of the value added at each stage; hence, the tax mechanism follows the universal VAT pattern. A local phenomenon, however, is a certain 7% investment tax which (until October 2002) is normally calculated when VAT is deducted on permanent business equipment. This accompanying excise tax effectively limits the deduction and creates a disturbing cascading effect.

The collection of VAT is through a system of registration of (a) all entrepreneurs supplying taxable goods or services and (b) those subject only to reverse-charge liability. VAT is reported and paid one month and ten days after the end of each two-month period.

Consequently, the basic tax mechanism is the universal value added principle, although the Ministry of Finance often characterizes the zero rate with credit as an indirect subsidy and thus maintains the fiction of a positive VAT liability as a must for VAT-registered businesses. If an entrepreneur becomes pre-registered but fails to reach the turnover threshold of NOK 30,000, he is assessed for the VAT deducted plus interest charged at the rate 18% per year and a (normally) 30% penalty. The INZO judgement (C-110/94) of the European Court of Justice and similar cases are not yet applicable.

The VAT Act does not define the territorial scope of VAT, but Art. 1 states that VAT applies on the sale of goods and services at all stages in the production and distribution chain and at importation. Presumably, the relevant sales are supplies for consideration effected within Norwegian territory. The importation of goods is taxable, and exports abroad and to Svalbard and Jan Mayen are exempt with credit. This territorial scope is determined by administrative decisions.³ Some inconsistency has developed over the years, especially with regard to intangible supplies to the areas around the North Sea and other seas (oil and gas fields) outside Norwegian territorial waters. According to the VAT authorities, for example, telecommunications services and staff by domestic service providers supplied on the Norwegian continental shelf are subject to VAT.

The term "goods" is defined as all tangible assets, including real property and land. According to the definition, "goods" also includes electricity, piped water, gas, heating and cooling. The term "services" includes anything that does not constitute goods. A problem finally resolved by the VAT reform 2001 was that, before the introduction of a general VAT on services, tailor-made software and the like were regarded as services outside the scope of VAT, while digital goods and standard software were taxable goods. At the 1998 OECD Conference in Ottawa, the OECD Member countries decided to characterize digital goods supplied via a line, the Internet, etc., as services. To comply with this principle, which was internationally agreed upon, it was necessary for Norway to make such services taxable.

Art. 3 defines the term "turnover" as: (1) the delivery of goods for consideration, including deliveries of goods in connection with services, (2) the rendering of services for consideration, and (3) the exchange of goods or services. An anomaly worth mentioning is that the decision of the Borgarting Lagmannsrett of 7 April 1997 was based on a decree of the Directorate of Taxes stating that the meaning of "turnover" in Art. 3 differs from the meaning of "turnover" in the pro rata regulation, Reg. 18. Until recently, this decision limited the input VAT deduction in connection with subsidized passenger transport services. Now, by a decision of the tax authorities (Oslo county tax office, 7 February 2002), the pro rata VAT deduction is extended to subsidized research services. In comparison, the Sixth Directive states that:

• the supply of goods or services for consideration is subject to VAT (Art. 2);
• the taxable amount is everything which constitutes the consideration, including subsidies directly linked to the price (Art. 11); and
• the calculation of the deductible proportion is made using a fraction whose numerator is the total amount of "turnover" attributable to taxable transactions and whose denominator is this amount plus the "turnover" attributable to transactions not attributable to taxable transactions (Art. 19).

The Directive (Art. 19) does not define the term "turnover", which is probably because the Directive describes an indirect tax on consumption, while Norway's system seems to be describe a turnover tax in the sense of "taxation of turnover". The use of the term "turnover" is undoubtedly consistent throughout the Directive.

In contrast to Reg. 18 in Norway, Art. 19 offers a much more detailed pro rata calculation in which "estimated use" is the standard method. For subsidies, Art. 19 alternatively offers the option to "include in the denominator the amount of subsidies, other than those specified in Article 11(A)(1)(a)". Other than mentioning that such subsidies are not included by most Member States, this clearly shows, according to this author, that the Sixth Directive is more sophisticated than the Norwegian solutions.

Norway's VAT system lacks a common approach to transactions having a mixed nature, i.e. partly goods and partly service or partly exempt and partly taxable. Norway could turn to the UK legislation to find a similar pattern in the UK characterization of "composite" versus "multiple" supplies. In the United Kingdom, a composite supply is where the goods and services supplied together make up a single indivisible supply, whereas a multiple supply is where several separate supplies of goods and/or services are sold at a single inclusive price.

Before the VAT reform, the tendency regarding "mixed supplies" was simply to consider the tax-free part of the supply as an expense for the vendor which was required by the sale. Extending the scope of VAT to services in general, however, has led to a more objective and neutral approach.

As regards the territory of Norway, the exemptions without input tax credit are found in Arts. 5, 5(a) and 5(b) of the VAT Act. Art. 5 contains the original exemptions, and Art. 5(a) the specified exclusions from the exemption for immovable property. The exemptions for certain activities in the public interest are found in Art. 5(b), together with most of the "new" exemptions.

The exemptions for health care services (e.g. hospital and medical care) and social services (i.e. services linked to welfare and social security services) do not diverge much from the equivalent exemptions in the Sixth Directive (Arts. 13 A and B). The term "health care services" refers to the definition of the term in the health care services and social security legislation. In addition, as in Denmark, the term includes acupuncture and homeopathy. Other alternative medical treatment is exempt under the condition that it is provided by authorized health personnel. Thus, alternative treatment such as aromatherapy is exempt when provided by anyone belonging to the group specified, e.g. an authorized ambulance chauffeur. As before the reform, however, the care of animals is subject to VAT. Social services include both public and private activity in the field of child care (e.g. kindergartens). For the definition of "social services", the VAT Act refers to the social services legislation and includes services in child and juvenile institutions.

Due to the hearings held in 1990, all activities involving instruction are exempt, not only education, vocational training and tutorial services. This was due to the difficulties in trying to define "competence developing" training, which was then proposed to be exempt. The current exemptions include business-to-business instruction services, and this leads to distortions and to problems of distinguishing between such services and consulting services, etc. An initiative to propose voluntary registration arrangements for business-to-business instruction services has not yet been given the political support necessary to engage the law-making machinery.

Outsourcing is encouraged by a special exemption for the hiring out of staff in the health care, social care and education sectors.

The exemption for the cultural sector is probably much broader than in the European Union, despite the fact that the VAT Act mentions only a few such services. The legal provision mentions admission fees to opera, ballet, cinema and circus performances as well as to exhibitions in galleries and museums. The exemption also applies to admission fees to concerts and sporting events, amusement parks and "adventure centres". Discos and ballroom dancing, however, are taxable. The wide scope of the term "culture" has led to numerous derogations, i.e. exclusions from the scope, based on Art. 70 of the VAT Act.

An exemption for sporting activities was passed in the Parliament in the spring of 2001, thanks to the focus on sexual discrimination, to lobbyists from the aerobic studios and to the preventive effect of sports on health. In any event, this exemption makes it unnecessary to distinguish between swimming pools that could be regarded as "adventure centres" and normal swimming pools that were about to become taxable. Unlike in the EU Member States, this exemption does not depend on whether the sporting activity is run commercially. The outer limit of the exemption may be illustrated by the fact that go-cart activities are exempt, but paintball activities are taxable. Pool games in bars are also taxable.

Regarding the exemption for banking and financial services, a serious attempt has been made to ensure harmonization with the neighbouring countries. The Ministry of Finance's guidelines state that the exemption should be interpreted in accordance with the legislation in Denmark and Sweden. The exemption covers the following services: insurance and insurance procurement services; financial services (except financial leasing) and services connected to deposits and loans; payment order services; services connected to trading in securities and brokerage services connected thereto; financial instruments and brokerage services connected thereto; and management of securities funds.

Since Norway is part of the European Economic Area, the legislation in fields such as finance is continuously being developed in accordance with European legislation. As a paradox, however, there is no automatic developing process regarding VAT because taxation is outside the scope of the EEA Treaty. The need for a level playing field for financial services led to a breakthrough for international VAT solutions in Norway. In its guideline of 15 June 2001, the Ministry of Finance adopted the judgements (of the European Court of Justice) in Sparekassernes Datacenter and Card Protection Plan as part of Norway's VAT system. The Card Protection Plan judgement is mentioned both for its definition of "composite supply" and for stating that what in fact is insurance is covered by the exemption, instead of identifying an exclusive group of businesses for the purpose of defining "insurance". In draft legislation that was not adopted, insurance was defined by reference to the domestic provisions for conventional insurance businesses.

The breakthrough relating to significant judgements and the new relevance of solutions in neighbouring countries mark a new era, and they have been followed by several decrees referring to "corresponding liability", e.g. for loss adjustments, as in the neighbouring countries. There are, however, currently no provisions which entitle Norwegian suppliers of financial services to recover the VAT incurred on supplies made to customers outside the VAT territory, as in the European VAT legislation. The playing field is still not level.

The exemptions for immovable property in principle apply to the leasing or letting of immovable property. The letting of parking facilities is taxable. The leasing of permanently installed equipment and machinery is not mentioned as taxable, but it was in the legal provisions before the reform. There are no comments in the proposition regarding the VAT liability of such leasing. Consistent with the main purpose of the VAT reform, however, one must consider it as taxable. The letting of dining premises in connection with catering was taxable before the VAT reform and continues to be taxable -- a rare provision for preventing VAT avoidance.

The letting of space for advertising continues to be taxable, as before the reform, while the leasing of safe deposit boxes was previously outside the scope of VAT as an activity in the banking sector.

The letting of harbours for (pleasure) boats is mentioned in particular as taxable, but the Parliament has instructed the government to discontinue the taxation of such facilities as from 2003. The letting of harbours for vessels more than 15 metres in length for commercial, industrial or fishing activities and for rescue or marine vessels is exempt but, in the near future, such letting will probably be included in the scope of VAT together with the letting of airports. There is a huge area for which the VAT reform made a temporary exemption under the heading "services in connection with public authority". The letting of roads, bridges or tunnels for road transport and the letting of track installations for rail transport are other examples of services that are exempt under the "public authority" heading.

Although optional registration (for taxation) is available for the letting of immovable property used in a taxable activity (see Reg. 117), there are no similar provisions regarding "the supply before the first occupation of buildings and the land on which they stand" and regarding "the supply of building land" (see Arts. 4(3)(a) and (b) of the Sixth Directive).

A very significant divergence from other VAT systems is the exemption for accommodation services. A budget agreement between the governing (Labour) party and the opposition in November 2000 led to the narrowing of the scope of the exemption for "the travel industry" (i.e. accommodation services, travel bureaus and passenger transport services). The exemption for accommodation services is not expressly stated, but is regarded as being included in the general exemption for the letting of immovable property or rights. The reason for this is that the following provisions were deleted from the original proposal (Ot prp No. 2, 2000-01): the letting of rooms in a hotel or similar business, the letting of camping sites, the letting for business purposes of cottages, holiday flats and other leisure property.

The amendments exempting passenger transport services are found in Art. 5(b) Nos. 9 and 10. The latter lists "the procurement of passenger transport and the letting of rooms in hotels, etc." as exempt. It will be interesting to see what the process of harmonizing the VAT schemes for travel agencies and tour operators in the European Union leads to. In Denmark, the proposal (KOM (2002) 64) is said to surely finalize the keeping of passenger transport outside of VAT. The place of supply rules in the Travel Bureau Directive will probably lead to taxation in European Union of supplies from branches in Norway and to the introduction of an equivalent margin scheme for travel bureaus in Norway. There are reasons to believe that a low rate of 5% to 6% will, sooner or later, force its way for accommodation and passenger transport services in Norway.

The only public broadcasting company (NRK) financed by a certain fee from Norwegians owning a television or radio is currently exempt with respect to its broadcasting activity because the fee was considered as consideration for its broadcasting services -- by reference to a similar situation in Denmark. Since NRK's competitors, the commercial television and radio companies, have a right to deduct input VAT and since the actual broadcasting of NRK's programmes is outsourced to a telecommunications company that invoiced NRK with VAT, the Parliament has now politically agreed that NRK's input VAT will be compensated, following a similar arrangement for the BBC in the United Kingdom.

As to non-profit organizations and associations, certain exempt services are covered by the membership fee, provided the fee covers goods and services in line with the aims of the organization or association. For charities, there are broader exemptions. Such charities, however, are temporarily given monetary compensation for the extra burden of input VAT due to the introduction of a general VAT on services. It is expected that, in the future, rules similar to the rules for charities in the neighbouring countries will be adopted.

The list of exemptions now seems to be extended twice a year, despite the intentions of the VAT reform 2001. The current exemption for services consisting of performing arts and the procurement of an artiste's performance became effective on 1 January 2002. Included in the exemption are services that are an integral and necessary part of the performance. The proposal mentions the services of light and sound technicians and the building of a stage for certain concerts or performances. One would think that this refers to the scenery or the stage "belonging" to a certain play, etc., not just "any" construction of a concert stage. A distinction in this respect will certainly be disputed.

A problem for Norwegian VAT legislators is that rate differentiation is deemed to be equivalent to zero-rating, which, as mentioned, is regarded by the Ministry of Finance as an indirect subsidy. Thus, the list of exempt services is steadily growing and includes several small changes, such as services regarding security alarms for the elderly and for patients and information services regarding the timetables for scheduled passenger transport.

A peculiar anomaly in the list of exclusions from the scope of the exemptions is the diehard liability in Art. 5(b)(3) on "any service" if a telephone operator is either the seller or intermediary who collects the consideration for the service". This liability was introduced before digital telephone systems made it possible to diversify "value added services" from taxable telecommunications services, and this provision was continued without comment in the VAT reform 2001. This provision currently distorts competition for mobile phone operators in their development of value added services. Mysteriously, it did not represent a problem for providers of information services regarding the timetables for scheduled passenger transport. This was because their service is free to the public seeking information, but financed by the two owners of the service provider, NSB (Norwegian rail) and Oslo Sporveier (trams). Notwithstanding this, "information" was defined as a taxable service and found worthy an amendment to the VAT Act. As shown here, the VAT system in Norway is still dominated by casuistry.

Another sign of this legal culture is the newly published digital VAT handbook of the Directorate of Taxes. The handbook presents administrative decisions from the 1970s and 1980s as the legal sources for the provisions changed in 2001. Suddenly, old decisions are invoked, which creates more inconsistency.

The term "taxable person" does not exist in Norway's VAT legislation. The conditions for VAT liability for those defined as "næringsdrivende", i.e. tradesman/enterprise, however, are more or less the same. VAT liability applies to individuals and legal persons who maintain a continuous independent activity with the aim of making a profit and within the scope of VAT. National and local governments and institutions owned or exploited by state or local governments are liable to VAT as if they were entrepreneurs while delivering goods or performing services (Art. 11 of the VAT Act). According to Art. 11(2), if such entities carry on their activities mainly to satisfy their own needs, they are liable to VAT only on goods delivered to and services performed for third parties. This limitation does not apply if the government entity or activity is organized in the form of a joint-stock or limited liability company or as a state enterprise.

Enterprises operated jointly by several persons (joint ownership or other forms of joint enterprise) are regarded as one enterprise for purposes of paying VAT, unless otherwise provided by the tax authorities.

Group registration is, according to the Act, available for "collaborating" companies, provided the entities involved maintain more than 85% ownership of the companies within the VAT group. Group registration of companies having subsidiaries abroad and vice versa is currently under discussion, one concern being possible VAT avoidance by not applying the reverse-charge system. Anti-avoidance provisions similar to those in the United Kingdom may be introduced.

VAT liability applies to: the supply of taxable goods or services within Norway on a commercial basis, the self-supply of such by an entrepreneur within the scope of his business, the importation of goods by any person, and the acquisition of taxable services from abroad by a reverse-charge mechanism.

Self-supply is a taxable activity for all entities registered for the supply of goods or services according to Art. 14 of the VAT Act, but there is an exception for national and local governments and for institutions owned or exploited by state or local governments if such entities carry on their activities mainly to satisfy their own needs. Apart from this, the self-supply of construction or refurbishing services with respect to immovable property for sale or letting is subject to a certain liability according to Art. 10(4).

The self-supply rules in Norway were initially not amended in connection with the introduction of a general VAT on services. In principle, VAT on self-supply should apply to services in exactly the same way as to goods. Since 1 July 2001, however, the Ministry of Finance has issued decrees exempting certain self-supplies, as this principle is found too difficult to apply in many cases. One example of a self-supply situation is the legal department of a bank performing services on an external assignment. Apparently, the Ministry of Finance has not yet limited the self-supply consequences to situations where input VAT was deducted. The VAT authorities have given the following examples of self-supply situations. The Directorate of Taxes has said that a lawyer who begins work for a client before the application for free legal aid has been decided on has provided a free gift, triggering self-supply VAT on the value of the work; it is later decided that the client is not eligible for free legal aid. (The lawyer will probably not get paid in such cases.) According to a letter of 29 May 2002 to the Norwegian Bar Association, the Tax Directorate has also stated that lawyers must consider applying self-supply VAT if the fees are down to cost price. This author believes the explanation for this approach may be the "turnover tax" view mentioned earlier (see 6.).

According to Art. 14(1) of the VAT Act, self-supply VAT is payable when goods or services are withdrawn from the taxable business for private use or for any other use outside the scope of VAT. According to Art. 14(2), certain uses trigger VAT unless the deduction of input VAT was blocked under Art. 22. In the author's opinion, the same precondition applies to the situation of withdrawals (see Art. 14(1)). If a bank, without the right or possibility to deduct input VAT, renders some legal services externally, VAT applies on the external services; this author, however, cannot see that this triggers output VAT on all legal services used in-house, a position taken by the Ministry of Finance from which it has found it necessary to grant a certain exemption based on Art. 70.

The kinds of use that attract self-supply VAT are, according to Art. 14(2), "when the purpose of the acquisition (being the sole purpose) will lead to input VAT blocking according to Art. 22". The following are examples of uses that attract self-supply VAT: (a) the provision of meals for staff and (b) the use of goods or services from the business as payment in kind or for maintaining and covering the operating costs of immovable property destined for residential housing, recreation or any other welfare purpose. Excluded from this category is the maintenance of business canteens, but this has led to inconsistent interpretations on blocking input tax or triggering self-supply VAT with respect to the operating costs allocated to a business canteen. In addition to appropriations for representation and gifts, the VAT Act, unlike other VAT laws, prescribes self-supply VAT or input VAT blocking for goods and services distributed for promotional purposes (value exceeding NOK 50). For both gifts and promotion, it should be crucial whether any element of generosity is involved, as in the VAT systems of other countries.

All cost allocations to means of transport used for passenger transport purposes and to registered vehicles regarded as passenger vehicles under Reg. 49 either trigger self-supply VAT or block the deduction of input VAT. This applies to all taxable persons except leasing and rental businesses. In other words, Norway maintains a very strict attitude to input VAT deductions, diverging more and more from Denmark and Sweden also in this field, which again reflects a very broad application of self-supply VAT.

Judging from the previous examples, there are few leading principles as to when self-supply applies. The VAT amount to be assessed, however, is "the normal taxable value", which is very difficult to determine objectively. Both determining the cost of the service at the time of use and including a "normal margin" make it difficult to comply with Norway's VAT legislation. Dr Ben Terra has written an article on the Norwegian tendency to regard the taxable amount as being objective rather than subjective.⁴ As this is really a problem in the construction industry when developing immovable property for sale, a proposed solution, which suffers from the lack of initiative from the VAT authorities, is to enact provisions similar to the voluntary registration for the supply (letting) of business premises; these provisions would apply to the supply before the first occupation of buildings and the land on which they stand and the supply of land that has not been built on other than building land. This could lead to a more level playing field in the construction sector as there seem to be as many different self-supply schemes as there are construction firms. In the author's view, if self-supply situations were more consistently limited to cases where input VAT was deducted, the function of self-supply will be more to correct input VAT and less to be an instrument of taxation. The taxable amount for services would then probably evolve into being the cost price, as in the European Union.

Arts. 16 and 17 of the VAT Act list transactions and services that are exempt with credit (for input VAT). These articles comprise both the export provisions, i.e. the local place of supply rules, and the various zero-rating schemes. Arts. 16 and 17 are equivalent to Arts. 15 and 16 of the Sixth Directive.

The discussion below focuses on the Norwegian rules equivalent to the place of supply rules in the Sixth Directive. They are the general "export provisions" for goods and services in Art. 16(1) and Regs. 24 and 35 and in the rather exceptional provision, Art. 16(12).

Art. 16(12) grants an exemption for services performed in Norway on foreign accounts "to the extent the Ministry of Finance decides". Pursuant to Art. 16(12), advertisement services on foreign accounts are not subject to output VAT under Reg. 50, provided the foreign customer's business is within the scope of Norwegian VAT and the service is intended for use within the business. For this purpose, relevant advertising services include the renting of stands at fairs and exhibitions. Since the 1970s, this exemption has provided consistency with the EC place of supply rules as regards advertising services. Warranty services on foreign accounts are also exempt from VAT pursuant to Art. 16(12).

According to Art. 16(1), the supply of goods and services outside Norway is VAT free. Art. 16(1) also refers to Reg. 24 regarding the supply of goods and services "for use abroad", which uses the destination principle for various supplies. Although the term "place of supply" is not explicitly found in the legal text, it is apparently decisive for the supply of goods to destinations outside Norway; for goods, this is evident if they have passed through customs when being transported out of Norway.

For services, the starting point is where the service is physically performed, accompanied by a variation based on the Second Directive of the "use and enjoyment" provision for the granting of an exemption with credit. The local version of "the effective use and enjoyment" provision is the very demanding requirement that the services be "entirely intended for use abroad" if the recipient is domiciled abroad, etc.

Instead of deciding whether the use and enjoyment was in Norway or abroad, the original Norwegian provisions impose VAT on all services if there is any domestic use. Consequently, the dominant principle in practice was probably the origin principle, which is the starting point (see Art. 9(1) of the Sixth Directive). The discussion on fixed telecommunications circuits in connection with the 1994 Olympic Games in Lillehammer may illustrate how an element of domestic use creates difficulties. The problem in this case was that the customers, US television companies, used the lines for two-way communications and thus created an element of domestic use. For temporary circuits, however, the VAT authorities finally accepted that VAT should not be levied. The newly published VAT handbook, however, has made public several decisions showing the inconsistency of the authorities' practice in this matter. In a decision dated 24 April 1990, the Directorate of Taxes accepted that VAT should not be levied on engineering work on a foreign account by a Norwegian joint venture, although the services were performed in connection with construction work on an industrial site in Norway.

The VAT reform 2001 finally introduced a reverse-charge liability on businesses, the state and the communities on the acquisition of "services capable of supply from a remote location", provided they are taxable when supplied domestically (see Reg. 121). With the intention of harmonizing the export and import situations, the Ministry of Finance used the new reverse-charge provisions in a corresponding regime (based on the destination principle) equivalent to Art. 9(2)(e) of the Sixth Directive. VAT is not payable on the supply of certain intangible services characterized as "capable of being supplied from a remote location" if the recipient is resident abroad or in Svalbard or Jan Mayen or is a public authority abroad or in Svalbard or Jan Mayen. According to the new rules, the category of service and the recipient will be decisive. The Ministry of Finance, however, has warned that these provisions may be subject to an overall evaluation, but an exemption is granted if there is a corresponding liability for the recipient. As neither Svalbard nor Jan Mayen has a VAT, this warning may be just a paper tiger.

The proposal (Ot prp No. 2, 2000-01) and the official comments on Reg. 121 state that services in the category "services capable of supply from a remote location" are meant to be equivalent to the intangible services listed in the Sixth Directive, Art. 9(2)(e). According to the proposal, all services capable of being supplied electronically are included. Consulting services, legal services, marketing services, information services, electronic data processing services and telecommunications services are governed by Reg. 121. In a later decree, the Directorate of Taxes confirmed that the hiring out of staff is also included. Further, it is deemed that the sale and exploitation of patents, licences, production methods, etc., are included. On the other hand, the Ministry of Finance has stated that the leasing of goods is not included; this is not consistent with Art. 9(2)(e) of the Sixth Directive as regards goods other than means of transport.

The term "services capable of supply from a remote location" originated from an OECD report. At the OECD conference in 1998, the OECD countries agreed to characterize "digital goods supplied via a line" as services, which is probably part of the reason for the government's introduction of the VAT reform 2001.

Until 1 July 2001, the VAT liability on standard software depended on whether it could be regarded as "goods" for VAT purposes. The supply of tailor-made software regarded as services was not subject to VAT. In other words, Norway was not capable of complying with the OECD agreement without amending its VAT system. With the VAT reform 2001, Norway took a step towards consistency with the OECD principles. There is, however, a long way to go before businesses are given "security and certainty as to their obligations" (for the background to the EU proposal, see KOM (2000) 349 Brussels, 7 June 2000).

There are currently expectations with respect to a memorandum from the Directorate of Taxes regarding the place of supply of legal services as to how Norway's VAT legislation will deal with the EU place of supply rules. According to signals from the VAT authorities, they will demand a test for "services capable of being supplied from a remote location", i.e. before an exemption is granted, it must be shown that the services are actually both supplied from a distance and not geographically linked to the place where the service is performed.

From the commentary on Reg. 121, it appears that the Ministry of Finance will proceed with promulgating the regulations on private consumers' acquisition of services from abroad, based on the international developments. Following the EU Council's adoption on 7 May 2002 of the rules for applying VAT to electronically delivered services, it is expected that the Norwegian VAT authorities will propose similar rules sooner or later.

For all services other than "services capable of supply from a remote location", there are additional provisions for zero-rating. In order to be zero-rated, supplies must either be performed abroad or be performed in Norway on foreign accounts (buyers resident abroad), but in either case, the services must be intended "totally for use abroad" (Reg. 24 § 8). There are many mismatches between the Norwegian rules and the EU place of supply rules. A classic example is the VAT liability in both Norway and locally within the European Union on a Norwegian architect's design of an embassy, on assignment for the Norwegian authorities, to be built in an EU Member State.

Norway claims to maintain a single rate of VAT. The standard rate of VAT is 24%. The list of zero-rated goods and services, however, includes newspapers, books and periodicals, electricity to households in northern Norway, second-hand cars (previously registered in Norway), ferry services, services concerning public roads and railways for passenger transport, and electric cars. Until now, the zero rate for electric cars is the only recent addition to the list.

Several recent letters of the Ministry of Finance characterized zero-rating as an indirect subsidy and, on this basis, a proposal to make a study on the zero-rating of the supply of medicine was rejected. Instead, considering the loss of revenue, several services, such as passenger transport by aircraft and the services of driving schools, have been excluded from the scope of VAT and are now "exemptions within the territory of the country" despite the intention of the VAT reform. Upcoming developments are certain compensating schemes for charities and municipalities. The list in Annex H to the Sixth Directive may be used prospectively for attempts to include passenger transport, accommodations, admission to some cultural events and facilities and the receipt of broadcasting services and for equality between journals and newspapers, as seen in Sweden. The VAT reform 2001 reduced the rate on foodstuffs to 12%. This actually broke the fiction that goods or services are either subject to the 24% rate or are outside the scope of VAT.

All foreign entrepreneurs making taxable supplies in Norway are obliged to register through a fiscal representative in Norway if they do not have a permanent establishment in Norway. The VAT representative and foreign enterprise are jointly and severally liable for calculating and paying VAT, and the representative must keep a separate account for the foreign enterprise's business in Norway. A particularly conservative rule requires that the sales documents concerning the relevant sales of goods and services of the foreign entrepreneur be sent via the representative. The representative must, on every invoice, add his name and address and the foreign entrepreneur's VAT number. In addition, only the representative is entitled to add the VAT amount to each invoice. Norway has entered into mutual agreements regarding the collection of VAT debts with the EU Member States, Iceland and the United States, and the EU Member States have correspondingly dropped the VAT representation arrangement within this group of countries. Thus, it is probably only a matter of time before Norway proposes similar changes, or it must eventually introduce a new arrangement enforced under the EEA Treaty.

Since 1996, foreign businesses without supplies subject to VAT in Norway have been entitled to a refund of VAT paid on goods and services bought in Norway. This scheme, equivalent to the Thirteenth Directive, offers a refund to foreign entrepreneurs, provided their business would have been subject to registration in accordance with the VAT Act if the business were carried out in Norway and if, in that case, the VAT paid would have been deductible. Consequently, the right to a refund does not apply to purchases or expenses relating to meals and entertainment and passenger cars (including rental cars); this reflects the strict input VAT deduction in Norway.

Norway's VAT legislation has been a revenue machine for more than 30 years. The lack of neutrality, however, has increased steadily as new services emerged in the 1980s and 1990s without being included. It finally became evident that a tax reform was needed if Norway was to comply with the OECD guidelines on electronic commerce. The result of the VAT reform, which apparently ended when it became effective on 1 July 2001, is disappointing, and a work programme like the one launched by the EU Commission in 1996 can only be hoped for. The VAT system and other tax harmonization efforts were not included in the EEA Treaty that Norway entered into in 1994. It is therefore a paradox that the current VAT developments are driven by the harmonization process in areas such as financial services and international trade regulation.

The purpose of this article has been to provide a broad outline of Norway's VAT legislation, focusing on aspects of international interest, such as divergences in the place of supply of services and the general lack of neutrality. It is obvious that Norway still has much catching up to do in the field of VAT -- and this is obvious without a comparative study of the Sixth Directive and Sweden's or Denmark's VAT legislation, on the one hand, and Norway's VAT legislation, on the other hand.

Norway's VAT legislation is still under the influence of the single stage turnover tax which it replaced in 1970. The policies regarding certain aspects of VAT all indicate a culture of taxing entrepreneurs rather than taxing consumption -- i.e. the policies regarding which services should be included, how the taxable amount is to be determined based on what the sales price should have been, and how zero-rating with credit is not neutrality but an indirect subsidy. It seems to be an underlying condition for an input VAT deduction that the business make revenues for the state. Entrepreneurs that do not satisfy the threshold requirement for registration, i.e. a turnover of NOK 30,000, within a certain period of time are assessed for the input VAT deducted plus interest at the rate of 18% per year and a 30% penalty.

Norway would reach a landmark if it implemented "irreversibility" for the intended trader in accordance with the INZO case (C-110/94) and similar judgements of the European Court of Justice. It is time that Norway's VAT system became more neutral as regards the tax burden on businesses. Being a burden to competitiveness actually obstructs the fiscal intention of VAT. Internationally, VAT systems must urge neutrality and simplification of compliance.

The future will show how the different VAT/GST systems of more than 100 countries worldwide will meet the challenges of borderless trade.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.