Exemptions (zero-rate) related to international transport – Drilling rigs – vessels used for navigation on the high seas - ECJ ruling of 20 June 2019
In May 2008 the Romanian Company Grup Servicii Petroliere SA (hereinafter called “GSP”) sold three offshore jackup drilling rigs, operating in the Black Sea to certain Maltese purchasers for the purpose of carrying out drilling activities for a total consideration of US $96 million. On the occasion of that sale, GSP issued invoices, applying the VAT exemption scheme provided for by the national legislation (Article 143(1)(h) of the Tax Code) transposing Article 148(c) of the VAT Directive in respect of the supply of these platforms. After the sale, GSP continued to operate these platforms in the Black Sea pursuant to the terms of a bare boat charter.
Jackup rigs or self-elevating units are mobile platforms which consist of a buoyant hull which has been fitted with several movable legs. The existence of the hull enables the drilling unit and all attached machinery to be transported to the proposed drilling site with its legs up and the hull floating on the water. When the rig arrives at the location, the legs are then extended (‘jacked’) into the water. The legs thus anchor the rig on to the seabed and the hull platform is then elevated well above the surface of the sea. When the rig is in this extended (or ‘jacked-up’) position it forms a static platform. It is not until the legs are withdrawn at the end of the drilling operation that the hull can float again. It should be further mentioned that the rigs at issue are not self-propelled, but maneuvered by towing. They can also be maneuvered by their engines to deal with ocean currents and sea drift and they support a crew as well as maintaining a log book.
During 2016, following the adoption of a tax inspection report, the Romanian tax administration issued a VAT adjustment notice against GSP for a total amount of €25 million plus penalties.
Arguments raised before the ECJ
a) Arguments raised by GSP: Against the VAT adjustment notice issued by the Romanian Tax Authorities, GSP submitted a complaint on the grounds that the supply of the three offshore jackup drilling rigs fell under the provisions of Article 148(c) of the VAT Directive. This was due to the fact that for the application of the VAT exemption the only prerequisite is that the vessels at stake are used for navigating on the high seas for the purpose of commercial and/or industrial activities, whereas their simultaneous navigation on the high seas during the actual drilling activities at sea should not be a prerequisite.
b) Arguments raised by the Romanian Tax Authorities: The Romanian tax administration argued that, although the drilling rigs could be considered as vessels within the meaning of the national legislation and are suitable for unlimited use at sea, nevertheless they do not navigate during drilling activity but are rather in a parked position. On the contrary, for the supply of drilling rigs to fall within the VAT exemption, it is necessary to establish that the rigs in question are navigating effectively and predominantly on the high seas. It was therefore observed that the actual and preponderant use of the offshore jackup drilling rigs occurred when they were in a parked position for the purpose of drilling activity and not when they navigated, which was only an activity subsidiary to drilling.
Questions referred to the ECJ
1) Must Article 148 of the VAT Directive be interpreted in such a way so that offshore jackup drilling rigs are covered by the term “vessels” within the meaning of that provision of EU law and thus falling under the VAT exemption?
2) If the answer to the first question is in the affirmative, must Article 148(c) of the VAT Directive, in conjunction with Article 148(a) of that directive, be interpreted as meaning that an essential condition for applying the VAT exemption to an offshore jackup drilling rig, which has navigated into international waters, is that it must in fact be in a state of movement while it is being used (for commercial/industrial activities), floating or moving at sea from place to place, for a longer period than the period during which it is stationary or immobile, as a result of carrying out drilling activities at sea?
Article 148 (a) and (c) of the Council Directive 2006/112 / EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that the expression vessels used for navigation in high seas does not cover the supply of floating structures, such as self-extinguishing underwater drilling rigs of the type at issue in the main proceedings, which are predominantly used at a fixed location for the exploitation of hydrocarbon marine deposits.
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