Upcoming event: “VAT Compliance in a Digital Age"
Please join us on the 3rd of November, 2016 at the Sofitel Legend the Grand Amsterdam for the third in our series exploring digital compliance.
This event will focus on the theme of Standard Audit Files for Tax (SAF-T), and help you gain in-depth understanding of the latest developments in the field of e-audits as well as how to solve the resulting complexities of VAT.
Guest speakers include Daniel Kroesen, Partner Indirect Tax at Ernst & Young.
Complimentary drinks and canape networking session will follow the presentations as well as an in-depth question and answer opportunity.
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VAT Gap Estimated at Nearly 160 Billion Euros
The European Commission has released a study estimating that the difference between expected VAT revenue and collected VAT revenue in 2014 (the “VAT gap”) amounted to 159.5 billion Euros across the EU.
The study, published on September 6, 2016, breaks down the uncollected revenue in each of the 28 EU Member States, showing a gap ranging from 37.9% in Romania to 1.2% in Sweden.
Overall, there was only a 1.5% EU-wide improvement in collection rates from the previous year.
Cross-border VAT fraud was identified as a significant contributor to the VAT gap, accounting for roughly 50 billion Euros in lost revenue per year.
The Commission has already put forth an “Action Plan on VAT” intended to improve VAT collection and reduce fraud, and is now calling on Member States to have an in-depth discussion of the plan in 2017.
Right to Deduction for Non-Economic Use of Goods
On September 15, 2016, the Court of Justice of the European Union (CJEU) ruled on the scope of a derogation allowing Germany to deny a deduction of input VAT on goods and services when more than 90% of expenditures thereof are for non-business purposes.
The case of Landkreis Potsdam-Mittelmark (C-400/15) involved a municipal authority that acquired machinery, commercial vehicles and equipment for its public function of providing road construction and maintenance.
The authority also used these goods, however, to provide third-parties with tree-felling, mowing, sweeping and winter services, to an extent of 2.65% of its expenditures.
The authority then sought to deduct 2.65% of the total input VAT on the machinery, vehicles, and equipment.
The German tax authorities denied the deduction based on the above “90% non-business purpose” derogation from Council Directive 2006/112/EC (the “EU VAT Directive”).
The Court held that Germany could not deny the deduction based on the derogation.
The term “non-business purpose” could not be interpreted to include non-economic activities performed by a local authority as part of its public function; such activities are not used for “non-business purposes” but instead fall outside the scope of VAT.
Therefore, the authority will now be entitled to its deduction absent other contrary provisions of German law.
VAT Invoicing Requirements
The CJEU has recently issued opinions in two cases involving denials of VAT deductions due to invoicing errors: Senatex GMBH v.
Finanzamt Hannover-Nord (C-518/14) (“Senatex”), and Barlis 06 – Investimentos Imobiliarios e Turisticos SA v.
Autoridade Tributaria e Aduaneira (C-516/14) (“Barlis 06”), both decided on September 15, 2016.
In both cases, the Court limited the right of tax authorities to deny VAT deductions based on these errors.
In Senatex, the German tax authorities denied a taxpayer’s deduction claim based on missing VAT numbers from its invoices – the numbers were subsequently added, years after the supply had been made.
In Barlis 06, the taxpayer presented invoices for transactions described only as “legal services rendered… until the present date,” which the Portuguese tax authorities deemed insufficient evidence for granting a deduction.
The taxpayer in Barlis 06 submitted annexes giving a fuller view of the legal services involved, but the tax authorities ruled that these annexes could not be considered “invoices” for purposes of granting an exemption.
The CJEU fell on the side of the taxpayers in both cases, holding in Senatex that the German authorities could not deny the deduction solely because the invoices were corrected after-the-fact, and holding in Barlis 06 that the Portuguese authorities could not deny the deduction when there were other means available to verify the scope of the transactions, i.e., the annexes submitted by the
The common thread was a reluctance to abrogate the right to a deduction based only on formal, technical invoicing errors.
Bulgaria: Parliament Votes to Scrap VAT on Donated Food
On September 7, 2016, the Bulgarian Parliament approved a VAT-free regime on donations of food.
Under the regime, VAT will not be levied on food products donated within 30 days of their date of expiration.
The amendment, if approved further, will only be in force when the value of foods given out does not exceed 0.5% of the respective donating entity.
Additionally, the donations must be made to registered charitable non-profit food banks, and the food must be used for charitable purposes only.
Reverse Charge Mechanism Extended to Telecommunications
On August 31, 2016, the Czech government approved a proposal by the Ministry of Finance to apply a reverse charge to domestic sales of certain telecommunication services, effective October 1, 2016.
Member States are permitted to apply a reverse charge on such services for a minimum period of two years, under Article 199a of Council Directive 2006/112/EC (the “EU VAT Directive”).
The Ministry of Finance is now discussing a comprehensive amendment to national VAT law which would extend the reverse charge to other classes of goods and services listed in Articles 199 and 199a of the EU VAT Directive; these amendments would tentatively become effective on January 1, 2017.
Ministry of Finance, Social Democrats Propose Competing VAT Cuts
According to recent reports, Finance Minister Andrej Babiš is planning to submit a plan to reduce VAT on draught beer in the Czech Republic from 21% to 15%, in order to offset costs stemming from an electronic cash-register system adopted in April of 2016.
The Czech Social Democrats have already announced that their opposition to the plan, stating that they would prefer lowering VAT on all basic foodstuffs from 15% to 10% after the next election cycle.
Various regional and Senate elections in the country are scheduled for October of 2016.
Estonia: Extension of Domestic Reverse Charge to Supplies of Certain Metals
The Estonian Government has approved and sent a draft law to Parliament that extends the domestic reverse charge mechanism to the metal industry sector.
The affected metal products are mainly used for construction services and in the engineering industry, and include items such as water and gas pipes and leaf metal, both in the form of scrolls and sheets.
The reverse charge mechanism is effective January 1, 2017.
France: New Rules for Self-Assessment of Import VAT
The French Parliament has recently issued a private bill, entitled “law on the blue economy,” that relaxes the current requirements for self-assessment of import VAT on a VAT Return.
Under Article 1695 of the French Tax Code, as amended, companies with “PDU certification” may opt for self-assessment of VAT on imports, which provides cash flow advantages.
However, obtaining PDU certification has proven to be time-consuming, requiring three months of customs audits.
Accordingly, the “law on the blue economy” removes the certification requirement for European operators.
The French Customs Authorities have released a memo stating that practical application of this measure will be deferred until October 1, 2016.
Germany: Online Dating Platforms are “Electronically Supplied Services”
The German Federal Fiscal Court recently upheld a decision subjecting a United States operator of online dating platforms to German VAT.
The operator maintained several platforms, each of which included a searchable database of user profiles, online news magazines, chat rooms, complaint hotlines, and assistance for invasion of privacy and/or abuse.
The German tax office claimed that these were electronically supplied services to private consumers, taxable in Germany pursuant to § 3a(5) of the German VAT Act.
The operator, by contrast, claimed that the services involved more than “minimal human intervention” and were thus taxable in the United States.
The Federal Fiscal Court held that provision of access to the user database was the “dominant service” of the platform, and that the other services involved were either elements of this dominant service (access to profiles in database, search function), or ancillary to it (online magazine, chat rooms).
The Court further held that the data collected for the database fell within the scope of the dominant service, even if such data was collected manually via user input.
This decision, if it stands, will require the U.S.
operator to register and collect VAT in Germany, and may have implications for other providers of mixed human/electronic services.
Clarification on VAT Exemptions for International Airlines
International airlines that have a permanent establishment in Greece, used to provide both domestic and international air transportation, will be entitled to the exemptions provided in Art.
27 of the VAT law if they get more than 50% of their revenues related to air transportation from international flights.
Accordingly, purchases of supplies needed for the provision of the aircraft, as well the import of other goods or services used or required in the regular course of air transportation, will be considered free of VAT.
Circular 1130/2016, issued by the Ministry of Finance of Greece, clarifies that those exemptions are to be extended to foreign airlines that operate domestic flights and have a permanent establishment in Greece.
Compensation of Customs Debts with VAT Refunds
On September 20, 2016, the Ministry of Finance of Greece issued Circular 1124/2016, which allows taxpayers to apply VAT refunds due from the tax administration to debts originating in customs.
Taxpayers interested in making use of their VAT refund to pay customs debts should make the request in writing to the tax administration, which in return will issue a confirmation allowing them to use the refunds due to offset the customs liabilities on products imported into Greece.
This decision is based on the provisions of the law 3943/2013.
Tax Office Prepares for Electronic Reporting of Invoices
The Hungarian National Tax Office (NAV) has declared that it is preparing for the introduction of mandatory electronic invoices starting in July of 2017, according to a report in the newspaper Magyar Idők.
According to NAV, electronic invoices will be required for transactions with a tax content of greater than 100,000 forints.
This provision is intended to prevent VAT fraud within the country.
Hungary derives much of its revenue from VAT, and has the highest standard VAT rate (27%) in the European Union.
Economy Minister Mihaly Varga has recently declared that the government has no room in its budget to reduce the standard rate.
National Tax Office Clarifies Reduced Rate on Housing Sales
Hungary’s National Tax Office (NAV) has published guidance on the application of a 5% reduced VAT rate to sales of new single and multi-unit residential homes.
Under § 86 of the Hungarian VAT Act, as amended, sales of new homes are subject to the 5% rate when used for residential purposes, and when the total useful floor area is not more than 300 square meters for single-unit dwellings, or 150 square meters for multi-unit dwellings.
The NAV publication clarifies which parts of a home are factored into this calculation of “useful floor area”: Unfinished attics are not part of the area to be considered, but built-in lofts, basements, terraces and balconies generally are.
In addition, NAV has reminded taxpayers that garages do not qualify as residential dwellings for purposes of the reduced VAT rate, and that sales of newly-built garages are therefore taxed at the standard 27% rate.
Italy: Electronic Transmission of VAT data
The Italian government has issued a new Ministerial Decree intended to regulate the electronic transmission of VAT data.
According to the new regulations, and beginning in January of 2017, taxpayers will have the option to transmit electronically all of the data contained in the invoices they have issued and received.
This system is supposed to give the Italian tax administration the option to remotely audit the taxpayer, and provide electronic notifications of any inconsistency that it may find once the information is crosschecked in its own electronic database.
The use of this system does not limit the power of the tax administration to use other standard means of auditing; however, it does give the taxpayer some advantages, such as getting higher priority on refunds, a waiver on reporting transactions with the Republic of San Marino, and a reduced statute of limitations of one year in the case of tax assessments directly related to data that was
Finally, once a taxpayer opts for this electronic transmission of data, the subscription will last for 5 years, and may be automatically renewed.
Some restrictions apply.
Lithuania: Obligatory Electronic Return Submission, effective October 1, 2016
Effective October 1, 2016, all tax returns submitted by taxable legal persons must be submitted via the Electronic Declaration System (“EDS”).
Exceptions are provided for certain taxable persons for whom electronic filing would cause disproportionate difficulty.
The measure is intended to cut down on paper and administrative costs, and facilitate the processing of returns.
Netherlands: Tax Plan for 2017 Released
On September 20, 2016, the Dutch government released Tax Plan 2017, a component of the 2017 national budget.
Tax Plan 2017 includes the following proposed amendments to the VAT Act: the definition of “building land,” which is subject to VAT, will be expanded to comply with case law from the Court of Justice of the European Union (CJEU); the refund scheme for bad debts will be simplified, as previously reported; and the exemption for water sport organizations will be amended to comply with
the CJEU’s decision in the 2015 case Commission v.
No Reduction in VAT Rate for 2017
In a recent interview, Finance Minister Pawel Szalamacha stated that Poland’s value added tax rates will not be reduced in 2017.
Poland raised its standard VAT rate from 22% to 23% in 2011, and periodic attempts have been made to return to the 22% rate.
However, the country is currently on course to exceed the EU’s fiscal deficit limit of 3% of GDP in 2017, and the government plans to raise necessary revenues through increased VAT collection and a crackdown on VAT avoidance measures.
This effectively takes VAT reduction off the table.
Should Poland exceed the EU fiscal deficit limit, it will be at risk of losing billions of euros in development funds.
Sweden: 2017 Budget Includes Several VAT Amendments
The Swedish government presented its 2017 Budget to Parliament on September 20, 2016.
Included in the budget are three amendments to VAT law: first, the deductibility of input VAT on entertainment expenses related to meals will be limited to a maximum of SEK 300 per person, per event; second, taxable persons with a turnover of SEK 30,000 or less in the current year and in the two previous years will not be required to register for VAT, though they may still opt to register; and
finally, the VAT rate on repairs to bikes, clothing, and shoes will be reduced from 25% to 12%, as part of a broader initiative to reduce consumption of goods for purposes of environmental protection.
VAT on Pension Fund Management Costs
HM Revenue and Customs (HMRC) has published a policy paper on its treatment of VAT on pension fund management costs following a 2012 decision of the Court of Justice of the European Union (CJEU).
In Fiscale Eenheid PPG Holdings BV cs te Hoogezand, the CJEU held that a Dutch company purchasing third-party services for management of its pension fund was entitled to deduct the VAT incurred.
This decision conflicted with HMRC’s then-policy of differentiating between day-to-day administration of pension schemes and investment management activities.
In response, HMRC resolved to change its position, and provided a transitional period during which companies could opt to use the “old” scheme before new rules were published.
HMRC’s latest guidance indicates that the new rules are still not ready, and that the transitional period will be extended until December 31, 2017.
VAT on Dwellings
HMRC has published a brief on the applicable VAT rate for dwellings formed by more than one building.
Under UK law, construction of new houses and flats – “dwellings” – is zero-rated, and conversion of premises into a dwelling is subject to a reduced VAT rate of 5%.
HMRC now accepts that these rules apply to dwellings formed by multiple buildings, so long as the buildings are designed jointly to be a single dwelling, and certain other conditions are met.
This interpretation brings the HMRC position in line with a pair of recent First Tier Tribunal cases on construction VAT costs.
COUNTRIES OUTSIDE THE EUROPEAN UNION
Norway: Regulations to Clarify the Concept of Food Products
The Norwegian tax administration has issued a new regulation intended to clarify which goods qualify as “food” for the purpose of Norwegian VAT law.
FOR-2016-08-31-1026, issued on August 31, 2016, states that the main criteria for determining which goods qualify for the exemptions provided to basic food products are contained in the guidelines established in Regulation no.
1620 of 22 December 2008.
That regulation, in turn, defines “foodstuffs” to mean “any substance or product, whether processed, partially processed or unprocessed, intended to be, or reasonably expected to be ingested by humans.” This includes beverages, chewing gum, and certain types of water.