Improve Cash Flow by Streamlining VAT Compliance: New Sovos Smart Brief
The high complexity of tax systems, particularly VAT, can pose a heavy burden on multinational organisations.
These companies are often challenged with managing VAT across different jurisdictions, legal entities, business models, technologies, and supply chains.
As a result, businesses unwittingly expose themselves to significant risks, potential reputational damage, as well as financial losses due to unexpected tax assessments and penalties.
VAT Compliance Updates: February 2016
Austria: Authorization to Continue Limiting the Deductibility of Certain Purchases On December 10, 2015, the European Council authorized Austria to continue to derogate from Articles 168 and 168a of the
EU VAT Directive.
The measure allows Austria to exclude from input VAT deductions VAT collected on goods and services which are used for more than 90% non-business purposes.
If the measure had not been adopted, the derogation was scheduled to expire on December 31, 2015.
As it stands, the Council decision extends the derogation measure until December 31, 2018.
Belgium: Reduced Rate to Goods and Services Related to Schools
As of January 1, 2016, the supply of goods and services related to school buildings in Belgium will be taxed at a reduced rate of 6%, pursuant to the Royal Decree of December 14, 2015. A ‘school
building’ can include buildings for primary and secondary education, higher university education, special education, and adult education, even if offered part-time. Goods and services subject to the reduced rate include deliveries intended for education, work on real property, and the
leasing of real property.
Croatia: Flea Market Exchanges Exempt from VAT
On December 28, 2015, the Croatian tax authority (Porezna Uprava) published a circular discussing the application of VAT on the exchanges of personal belongings at a flea market. The tax authority reiterated that
VAT is levied on the supply of goods and provision of services in Croatia for a fee by a taxable person acting as such, as well as the acquisition and import of goods within the European Union. A taxable person is defined as any person who independently carries our economic activity whatever
the purpose or result of the activity.
Economic activity is considered to be the exploitation of tangible or intangible property for the purpose of permanent realization of revenues.
Special rules, however, apply to small taxpayers.
A “small taxpayer” is defined as a legal entity based or permanently established in Croatia and whose supply of goods is less than 230,000.00 HRK in a given year. A “small taxpayer” is exempt from VAT on supplies of goods or services, but cannot deduct input VAT.
After considering the purpose and application of VAT, the tax authority concluded that the exchange of used personal belongings in a public flea market is not the type of commercial activity intended to fall under the
purview of the national VAT Act, and is therefore exempt.
Cyprus: Special Rates for Leasing of Boats:
The Ministry of Finance of Cyprus issued Circular 198 which serves to update the special scheme which applies to the leases of motor and sailing boats.
The Circular provides that the 19% standard VAT rate will apply only to a percentage of the lease payment depending on the size and type of the boat.
Essentially, for each boat size, there are pre-set percentages of usage designed to represent the percentage of time the boat is likely to be used within the EU. By way of example, motor boats measuring more than 65 meters, are considered to be used only 10% of the time within EU waters.
Accordingly, Cyprus VAT will apply only to 10% of the lease payment, resulting in an effective rate of 1.9%.
The application of the scheme is not automatic because a number of conditions must be met by the lessor and the lessee.
Czech Republic: Proposed Pilot Program on Expanding Reverse Charge
At the behest of the Minister of Finance, the EU Council for Economic and Financial Affairs debated the expanded use of the reverse charge mechanism during their January
15, 2016 meeting.
The Minister of Finance suggested that the Czech Republic be used as a pilot country to apply the reverse charge mechanism at its discretion on any B2B domestic transaction without limitation.
Through the pilot program, the Czech Republic would be able to apply the mechanism to different goods rapidly and autonomously in areas where they found serious VAT fraud.
Full details of the proposed pilot program and a possible recommendation by the European Commission will be available in March 2016.
Finland: Increase in VAT Registration and Liability Thresholds Enacted
The threshold amount above which is a business is obligated to register for VAT in Finland has been increased to EUR 10,000 from 2016.
In 2015, the threshold amount was EUR 8,500. Additionally, the small business threshold above which a business no longer qualifies for possible relief from VAT collection obligations has been increased to EUR 30,000. The previous threshold amount was EUR 22,500.
France: Distance Sales Threshold Decreased
Under the Finance Act for 2016, the distance selling threshold in France has been decreased from EUR 100,000 to EUR 35,000 effective January 1, 2016.
Accordingly, French VAT will be due if in a calendar year, the total amount of supplies of goods by an EU supplier from another EU Member state to non-taxable persons in France exceeds EUR 35,000.
Germany: Authorization to Continue Limiting the Deductibility of Certain Purchases
As was the case for Austria as noted above, on December 10, 2015, the EU issued Council Implementing Decision (EU) 2015/2428, authorizing Germany to completely exclude a right of deduction
for VAT borne on goods and services that are used for non-business purposes more than 90% of the time. This Decision represents a derogation from Articles 168 and 168a of Council Directive 2006/112/EC. Germany had previously been granted a derogation from these Articles that expired on
December 31, 2015; the new derogation runs until December 31, 2018.
Greece: Application of VAT on Crowdfunding Activities
The Tax Administration of Greece clarified that funds provided by contributors to crowdfunding initiatives made over the internet, where the contributors or investors receive goods or services in exchange for their
contribution, are considered taxable transactions and as such subject to VAT.
According to the tax authorities, such provision of goods or services is considered a sale and as such is subject to VAT based on the total amount of the contribution.
Any fees imposed for participating in the initiative, are not deducted from the taxable amount.
Ireland: 2015 Finance Act Published
Ireland’s 2015 Finance Act, which was passed on December 21, 2015, has now been published by the Office of the Revenue Commissioners. The law introduces several amendments to Ireland’s Consolidated VAT
Act. Most significantly, the reverse charge mechanism will now be applied to the supply of gas or electricity by a taxable person in Ireland to a taxable dealer in Ireland. The supply of a gas or an electricity certificate to a taxable person in Ireland will also be subject to a
Additional changes include an updated definition of exempted education activities, an explicit exclusion of new means of transport from the margin scheme for taxable dealers, and an exemption for betting and betting
exchange services provided to customers located outside of Ireland.
Italy: Increased VAT Rates Deferred
The 2016 budget law of Italy (Legge di Stabilita) deferred until 2017 and 2018 the planned automatic increases to VAT rates that were originally scheduled to take effect on January 1, 2016 and on January 1, 2017.
Essentially, the Italian Government opted to maintain, for calendar year 2016, the standard rate of 22%.
The law now provides for an increase in the standard rate to 24% in 2017 and a further increase to 25% in 2018.
The automatic application of VAT increases was part of a compromise agreement between the Italian Government and the European Commission reached in 2014.
Other VAT related changes in the budget include a deferral (until 2017), a change making certain transactions currently taxed at 10%, subject to tax at 13%, and the application of a 5% rate on certain medical and food items.
Latvia: Derogation Permitted Relating to the Deductibility of Certain Passenger Vehicles
On December 10, 2015, an implementing decision was published by the EU authorizing Latvia to introduce a special measure to derogate from Article 26(1)(a) and Articles 168 and 168(a) of the EU VAT Directive.
The derogation allows Latvia to restrict the right to deduct VAT in relation to expenditures on certain passenger cars, not wholly used for business purposes, to 50%.
Article 26(1) (a) states that the use of business assets for private purposes or more generally for purposes other than those of the business is considered a supply of services subject to VAT. Article 168
establishes situations in which VAT may be deducted.
Latvia does not consider the private use of a business car as a service for valuable consideration if the right to deduct VAT on the car is limited.
This decision only applies to smaller passenger vehicles, and cannot have more than eight seats in addition to the driver’s seat. The decision is effective from January 1, 2016 and expires on December 31, 2018.
Lithuania: Derogation Permitted to Apply Reverse Charge on Additional Transactions
On December 10, 2015, an implementing decision was published by the EU authorizing Lithuania to derogate from Article 193 of the EU VAT Directive. Article 193 stands for the general proposition that the supplier
must collect VAT from the purchaser unless otherwise indicated in Articles 194 through 199 and Article 202.
The derogation allows Lithuania to apply the reverse charge on transactions involving the following:
- Supplies of goods and services by a taxable person involved in insolvency or judicial reorganization proceedings;
- Supplies of wood.
Netherlands: New EU Council President Announces VAT Agenda
The Netherlands assumed the Presidency of the Council of the European Union on January 1, 2016, and will hold the position until June 30. Creating a more efficient and effective VAT regime has been cited as a key
priority, and an action plan is scheduled for publication in the first half of 2016. A proposal on VAT rates and e-commerce is also expected in 2016, with the goal of combating fraud in the digital marketplace.
Portugal: Reduced Rate for Restaurant Services in July 2016:
The Portuguese Government has announced its intention of reducing the VAT applicable to restaurant services. The applicable tax rate will be reduced from 23% to 13% no later than July of this year unless the
European Commission objects.
The Prime Minister has committed to this rate reduction to the Association of Hotels and Restaurants and has included the measure in their 2016 budget.
Further, the majority of the Portuguese Congress has agreed to the new rate.
Nonetheless the proposal is still pending official enactment.
Sweden: Deduction for Intra-Group Supplies of Services Abolished
On December 9, 2015, the Swedish Parliament adopted Government Bill 2015/16:19, “Some Issues in the Field of Indirect Taxes,” which came into effect on January 1, 2016. The Bill amended Sweden’s
VAT Act by eliminating the so-called ‘gating rule,’ which had allowed a deduction for intra-group supplies of services even when the individual service provider had no stand-alone right to deduct. The Swedish Ministry of Finance projects that abolishing this rule will result in
an increase in tax revenues of SEK 54,000,000 for 2016.
VAT MOSS – Simplifications for Businesses Trading Below VAT Registration Threshold
On January 8, 2016, HMRC released Revenue and Customs Brief 4 (2016): VAT MOSS - Simplifications for businesses trading below the VAT registration threshold, which outlines the simplifications available to businesses
trading below the UK's VAT registration threshold (currently GBP 82,000) that make cross border supplies of digital services to consumers in other EU Member States.
Of note, the HMRC is providing additional flexibility and is now allowing businesses below the UK VAT registration threshold to exercise their best judgment in obtaining information as to where their customers are
This means businesses can rely on any single piece of information, such as the address provided by the customer, to determine where their customer is located.
Reverse Charge for Electronic Communications Services
On January 15, 2016, HMRC published Revenue and Customs Brief 1 (2016): VAT- domestic reverse charge for businesses wholesaling telecommunications services, which provides guidance on the operation of a new domestic
reverse charge for wholesale supplies of telecommunications services.
Under the law, a reverse charge will take effect from February 1, 2016, and will apply to the wholesale buying and selling of telecommunications services in the UK, subject to certain exceptions.
The reverse charge will cover telecommunications services which enable:
- speech communication instantly, or with only a negligible delay between the transmission and the receipt of signal; and
- the transmission of writing, images and sounds or information of any nature when provided in connection with services described above.
A non-exhaustive list of examples of services covered by the reverse charge includes:
- wholesale switched voice services, including switched voice over Internet protocol (VOIP) services;
- wholesale short messaging service (SMS) and multimedia messaging service (MMS) services (for example, push messages);
- wholesale "Over The Top" telecommunications messages;
- SMS hubbing; and
- SMS and voice aggregator services.
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