Which Business Model Will Enable A Circular Economy?

Ushering in a truly circular economy, i.e. one that runs on products, components, and materials that are reused instead of discarded, requires more than the will to change one's behaviour. It takes real updates to how we approach the taxation of services and materials. Our last article looked at how stakeholders would feel the different VAT impacts of the resell model, one concrete circular business model. We would like this time to examine another circular business model, the product-as-a-service (PaaS) model. We'll look at the fiscal implications (both in terms of VAT and direct tax) for service provider, customer, and State.

What is the product-as-a-service model?

Do we actually need to own the products we use? That is the question that drives the performance economy. First studied by Walter Stahel in the late 1980s,1 the "functional service economy" (also called performance economy or service economy) introduced new business models where a company sells performance instead of goods—like mobility instead of cars. Today this is called the pay-per-use, subscription, or product-as-a-service model. It ranges from pay-per-week handbag usage, to pay-per-cycle washing machine usage, to pay-per-lux light usage. The objective is to maximise the value extracted from material resources, and to decouple economic growth from resource consumption. As such, it is one of the main schools of thought feeding into the concept of a circular economy. According to Jeannot Schroeder, managing director of +ImpaKT and contributor to this article, "this business approach is a real game changer for a more circular approach as all the of the environmental consequences stay with the producer."

Do PaaS models affect tax expenses?

While there are many arguments in favour of PaaS models, e.g. customer loyalty or cash flow predictability, the fiscal implications have not yet been fully studied. To study the tax impacts of such a business model, we might take the example of light-as-a-service.2 In this business model, a company (provider) sells the service light to another business (customer) instead of selling lighting as an asset. For this example, let's say the service is sold for a fee of €50 per year (excl. VAT), instead of as an asset sold for a one-shot price of €1,000. (It must be noted that this is a simplified example in which only the provision of the lighting is considered, and not the possible repair services or other related transactions).

Let us start by...