Flashback on ECJ cases C-172/96 (First National Bank of Chicago) – VAT on Foreign Exchange Transactions Explained

On July 14, 1998, the ECJ issued its decision in the case C-172/96 (First National Bank of Chicago).

Context: Sixth VAT Directive — Scope — Foreign exchange transactions

Summary

The case involves the First National Bank of Chicago and the UK Commissioners of Customs regarding VAT on foreign exchange transactions.
The Court ruled that foreign exchange transactions are classified as supplies of services under the Sixth VAT Directive.
Consideration for these transactions exists despite no fees being charged, as the Bank earns through the spread between bid and offer prices.
The taxable amount for VAT purposes is determined by the net result of the Bank’s transactions over a specified period.
The ruling clarifies the legal framework for assessing VAT obligations on financial service transactions within the EU.

Article in the EU VAT Directive

Article 2 of the Sixth Directive provides as follows:

‘The following shall be subject to value added tax:

1. the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such;
2. the importation of goods.

Article 5(1) defines the supply of goods in these terms:

1. ”Supply of goods” shall mean the transfer of the right to dispose of tangible property as owner.‘

The supply of services is defined in Article 6(1) as follows:

1. ”Supply of services” shall mean any transaction which does not constitute a supply of goods within the meaning of Article 5.‘

Article 11A(1)(a) of the Sixth VAT Directive (Article 73 of the EU VAT Directive 2006/112/EC)

The taxable amount shall be:

(a) in respect of supplies of goods and services other than those referred to in (b), (c) and (d) below, everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies‘.

Article 13B(d)(4) of the Sixth VAT Directive (Article 135(1)(e) of the EU VAT Directive 2006/112/EC)

Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any possible evasion, avoidance or abuse:

(d) the following transactions:

4. transactions, including negotiation, concerning currency, bank notes and coins used as legal tender, with the exception of collectors’ items; ”collectors’ items” shall be taken to mean gold, silver or other metal coins or bank notes which are not normally used as legal tender or coins of numismatic interest.

Article 13C(b), however, makes it possible for Member States to allow their taxpayers a right of option for taxation in respect of the transactions covered by, inter alia, Article 13B(d).

Article 17(3)(c) of the Sixth Directive (Article 169 and 170 of the EU VAT Directive 2006/112/EC).

3. Member States shall also grant to every taxable person the right to a deduction or refund of the value added tax referred to in paragraph 2 in so far as the goods and services are used for the purposes of:

(c) any of the transactions exempted under Article 13B(a) and (d), paragraphs 1 to 5, when the customer is established outside the Community or when these transactions are directly linked with goods intended to be exported to a country outside the Community.‘

Facts

The First National Bank of Chicago is VAT-registered in the UK and engages in various banking activities, including foreign exchange trading as a market maker.
The Bank quotes bid and offer prices for currency transactions, with the difference (spread) between these prices being its profit margin.
Foreign exchange transactions are categorized as either ‘spot’ (immediate exchange) or ‘forward’ (future exchange), with no physical currency delivered; rather, account access in the respective currency is provided.
The Bank does not charge transaction fees or commissions, relying on the spread for profits, and has a partial VAT exemption while retaining the right to deduct input tax for certain international transactions.
After calculating its input tax credit for specific foreign exchange transactions, the Bank faced a reduction in this credit from the Commissioners, prompting an appeal regarding the classification of these transactions for VAT purposes.

Questions

On the proper interpretation of Council Directive 77/388 of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover tax (the Sixth VAT Directive)

and in relation to transactions of foreign exchange as defined by the British Bankers’ Association (as set out at paragraph 1 of the Findings of Fact)

1. Do such foreign exchange transactions constitute the supply of goods or services effected for consideration?

2. If there has been a supply of goods or services effected for consideration, what is the nature of the consideration in relation to such transaction?‘

The definition referred to in the question reads as follows:

Foreign exchange transactions are ‘transactions between parties for the purchase by one party of an agreed amount in one currency against the sale by it to the other of an agreed amount in another currency, both such amounts being deliverable on the same value date, and in respect of which transactions the parties have agreed (whether orally, electronically or in writing) the currencies involved, the amounts of such currencies to be purchased and sold, which party will purchase which currency and the value date‘.

AG Opinion

(1) In relation to foreign exchange transactions as defined by the British Bankers’ Association, the Bank effects a service for consideration within the meaning
of the Sixth Directive where that service is not paid for by a charge but by the spread between the bid and offer rates.
(2) The consideration for the service is what the Bank receives by way of spread between the bid and offer rates.

Decision

1. Transactions between parties for the purchase by one party of an agreed amount in one currency against the sale by it to the other party of an agreed amount in another currency, both such amounts being deliverable on the same value date, and in respect of which transactions the parties have agreed (whether orally, electronically or in writing) the currencies involved, the amounts of such currencies to be purchased and sold, which party will purchase which currency and the value date, constitute supplies of services effected for consideration within the meaning of Article 2(1) of the Sixth Council Directive (77/388/EEC) of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment.

2. Article 11A(1)(a) of the Sixth Directive must be construed as meaning that, in foreign exchange transactions in which no fees or commission are calculated with regard to certain specific transactions, the taxable amount is the net result of the transactions of the supplier of the services over a given period of time.

Source

CURIA

Other ECJ Cases referred to in the Decision

Case C-16/93 Tolsma v Inspecteur der Omzetbelasting – This case is referenced to clarify the requirements for a supply of services to be considered as being made “for consideration” under VAT law.
Case C-38/93 Glawe v Finanzamt Hamburg-Barmbek-Uhlenhorst – This case is cited regarding the determination of what constitutes the consideration received for services supplied, particularly concerning foreign exchange transactions.
Case C-281/91 Muys’ en De Winter’s Bouw- en Aannemingsbedrijf v Staatssecretaris van Financiën – This case is referenced in relation to how the taxable amount can be defined based on future factors.
Case C-288/94 Argos Distributors v Commissioners of Customs and Excise – This case is cited to support the notion that the exact amount of consideration does not need to be known at the time of the transaction for VAT purposes.

Reference to the case in the other EU MS