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Managed Services for VAT Compliance

Many multinational companies find VAT compliance challenging, especially when trading cross-border. With the increase in real-time reporting across Europe and differing VAT registration and reporting requirements, VAT compliance now requires significant resources and specialist knowledge to ensure compliance and avoid costly penalties. As your business expands, so do your VAT obligations. This is why many organisations, turn to managed service providers to ease the burden of VAT compliance, audits and fiscal representation. This e-book discusses the many elements of VAT compliance including:

• VAT registration
• Fiscal representation
• How to determine VAT obligations
• Filing VAT returns
• Preparing for an audit
• Managing VAT changes
• VAT compliance advice from JD Sports’ Indirect Tax Manager

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How JD Sports manage VAT compliance with Sovos’ Managed Services

John Dowd, Indirect Tax Manager at sport-fashion retailer JD Sports discusses how he managed cross-border VAT compliance with the help of Sovos’ managed services

“For us at JD Sports and me personally I’m looking for a partnership, something long term, as it takes time and costs money to change advisors. I’m looking for a long-term relationship over a number of years with a VAT service provider.

“I want my advisor to have specialist knowledge, for us that’s retail and cross-border supply chains, overseas tax authorities, and I want to see new talent joining the team. I prefer a single point of contact to make it easier to move things along and of course, competitive pricing, and Sovos ticked all of these boxes for us.”

John Dowd, Indirect Tax Manager at JD Sports

The many elements of VAT compliance

VAT compliance has many elements, beginning with an understanding of place of supply rules to determine where VAT registration is required. Fiscal representation might be required to register in EU Member States.

Once VAT registration is underway, the next step is to determine EU VAT obligations by mapping the supply chain for the country of registration. There are also additional requirements to consider including exemptions, recovering VAT, Intrastat and varying continuous transaction controls (CTCs) mandates.

Submitting VAT returns to ensure compliance is a never-ending process. Each country has its own VAT return regulations and additional declaration requirements.

The VAT compliance cycle also includes preparation for VAT audits. Tax authorities can carry out audits for a variety of reasons so it’s important businesses prepare for audits and ensure they are able to manage the process successfully.

How Sovos VAT Managed Services can help with VAT compliance

Sovos’ end-to-end, technology-enabled VAT Managed Services can ease your compliance workload and mitigate risk where-ever you operate today, while ensuring you’re ready to handle the VAT requirements in the markets you intend to dominate tomorrow.

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The EU-UK Trade and Cooperation Agreement (TCA) provides for tariff-free trade between the United Kingdom (UK) and the European Union (EU) but does not work in the same way as when the UK was part of the EU.

Before Brexit, if the goods were in free circulation within the EU, they could be moved cross-border without incurring any additional customs duty. Therefore, the origin of the goods was not relevant for this intra-EU movement. If the goods originated from outside the EU, customs duty would have been paid as required when they first entered into free circulation but was not payable again.

This difference creates issues for UK businesses where they import finished goods into the UK first before being sold to the EU. As the goods are not being processed in the UK, they cannot be of UK origin and will be subject to double duty unless specific duty mitigations measures are taken.

The same tariff-free trade between the EU and the UK can be achieved under the TCA, but it depends on meeting the detailed rules within the agreement. The key is in the origin of the goods and whether they qualify under the terms of the TCA. This ensures that only eligible goods are tariff-free and removes the risk of goods entering from outside the Free Trade Area without paying customs duty.

The requirement for goods to be of relevant origin to benefit from zero tariffs on imports under the TCA has been in place since 1 January 2021.

Claiming and evidencing relief

If goods meet the appropriate rules of origin, preference can be claimed on the customs declaration when they are imported. Thus, the claim is made by the importer of the goods. However, it is not as simple as completing the appropriate box on the declaration; there is a requirement for the proper evidence to be held.

To claim tariff preference, the importer needs to have one of the following proofs of origin:

• A statement on origin – this must be made out by the exporter to confirm the product originates in the UK or EU; or
• Importer’s knowledge – this option allows the importer to claim tariff preference based on their knowledge of where the goods they’re importing originate.

If they are relying on a statement of origin, the exporter will have to prove that the goods are of appropriate origin to qualify.

End of easement

In 2021, there was a light touch approach towards holding evidence when the customs declaration was made. The TCA allowed for a declaration to be made and the evidence to be obtained later to reduce the burden on business.  There is still a requirement to provide the appropriate evidence on request, so businesses must ensure that it will be available if necessary.

There may be checks that the goods are of appropriate origin to be free of duty under the TCA.  With effect from 1 January 2022, there is a need to have the appropriate evidence that the goods meet the origin requirements when the declaration is lodged. Therefore, businesses will need to ensure that the appropriate documents are immediately available should they be requested.

Post import claims for relief

Businesses should note that it is not obligatory to claim preference at the time of entry of the goods as claims can be made up to three years later, as long as there is valid proof of origin. It is beneficial to claim preference at the earliest possible time to benefit cash flow and provide certainty of the cost of the goods.

Therefore, businesses will need to ensure that they determine origin of goods correctly and have the appropriate evidence to support the goods being tariff-free.

It’s important to remember that the rules for trade between Northern Ireland and the EU are different because of the Northern Ireland Protocol.

Meet the Expert is our series of blogs where we share more about the team behind our innovative software and managed services.As a global organisation with indirect tax experts across all regions, our dedicated team is often the first to know about new regulatory changes and the latest developments on tax regimes worldwide to support you in your tax compliance.

We spoke to Khaled Cherif, senior client representative here at Sovos to discover more about Insurance Premium Tax (IPT) and, in particular, the complexities of France and the French overseas territories.

Can you tell me about your role and what it involves?

I joined Sovos as part of the IPT team in June 2017. My role is senior client representative and I mostly work with our French and Italian clients, which is around 54 organisations.

I am the first point of contact so my role along with the rest of the team is to provide clients with all the assistance that they require, including helping them with filing their liabilities and ensuring they are compliant with the relevant regulations.

Can you explain IPT in France and what is particularly complex about the country’s IPT regulation and requirements?

IPT in France is quite complex as there are many parafiscal charges that can apply to insurance premiums. There are also multiple IPT rates depending on the type of risk being covered. This can range from 7% IPT rate to as high as 30%. As well as the different IPT rates there are also 10 parafiscal charges that could be due on insurance premiums and again all with varying rates.

There are also French overseas territories to be considered. There are two groups of French overseas territories, the Départements and Régions d’Outre-Mer (DROMs), and Collectivités d’Outre-Mer (COMs).

What top tips do you have for insurers that have IPT obligations in France and other EU countries?

It’s important to understand the differences in IPT requirements with the French overseas territories.

DROMs (French Guyana, Guadeloupe, Martinique, Mayotte, and Reunion) are treated the same as mainland France for premium tax purposes. Premiums covering risks located in these territories should be declared in the same way, except for Guyana and Mayotte where the IPT rates applicable are reduced by half.

For COMs the local tax authority for the territory can levy taxes on insurance premiums. Most have set up their own IPT regimes, often requiring insurers to appoint a fiscal representative. In some COMs territories the tax ID issued for Mainland France can be used.

As many French and international organisations have subsidiaries in overseas French territories it’s important to understand how the different IPT rates and filings affect compliance. Not being based in the territory where IPT needs to be filed can make things complicated, so working with local partners or representatives can ease the burden.

How can Sovos help insurers?

Sovos has a team with global IPT expertise, meaning we can help organisations understand their IPT requirements wherever they operate, including in France and the French Overseas Territories.

Sovos has in-depth knowledge of local requirements, laws and regulations as well as local partners and representatives to assist with IPT requirements.

We recently launched the 13^th Edition of our annual Trends report, the industry’s most comprehensive study of global VAT mandates and compliance controls. Trends provides a comprehensive look at the world’s regulatory landscape highlighting how governments across the world are enacting complex new policies and controls to close tax gaps and collect the revenue owed. These policies and protocols impact all companies in the countries where they trade no matter where they are headquartered.

This year’s report looks at how large-scale investments in digitization technology in recent years have enabled tax authorities in much of the world to enforce real-time data analysis and always-on enforcement. Driven by new technology and capabilities, governments are now into every aspect of business operations and are ever-present in company data.

Businesses are increasingly having to send what amounts to all their live sales and supply chain data as well as all the content from their accounting systems to tax administrations. This access to finance ledgers creates unprecedented opportunities for tax administrations to triangulate a company’s transaction source data with their accounting treatment and the actual movement of goods and money flows.

The European VAT landscape

After years of Latin America leading with innovation in these legislative areas, Europe is starting to accelerate the digitization of tax reporting. Our Trends report highlights the key developments and regulations that will continue to make an impact in 2022, including:

• VAT reporting processes become digital and more frequent – Existing VAT reporting is becoming more granular and more frequent in many EU Member States, with the majority quickly evolving towards real-time controls with or without electronic invoice mandates.
  • Italy has mandatory e-invoicing via a data exchange platform previously introduced for public procurement messaging.
  • Since 2017 in Spain, all companies must report inbound and outbound invoices within four days.
  • In Hungary, suppliers have had to report their sales invoices in real-time since 2018.

• Public procurement standards will play a major role in the design of various continuous transaction control (CTC) models – Frameworks such as PEPPOL are increasingly adopted by public administrations as large buyers of goods and services – the standards and platforms used for these transactions will increasingly be repurposed for electronic invoicing as a key enabler of VAT digitization.
• “Own the Transaction” CTC model becomes more popular – More tax administrations aim not only to receive reporting data from business transactions but use legislation to become the invoice exchange platform themselves.
  This trend is gaining traction after Turkey and Italy introduced it as core concepts in their CTC legislation, while countries like France and Poland are introducing similar models.

• SAF-T is here to stay – The OECD’s Standard Audit File for Tax (SAF-T) will remain an inspiration for European tax administrations not only to enforce VAT via real-time or near-real-time controls, but to obtain copies of taxpayers’ entire accounting books on their own systems for broader tax controls and audit support as well.

• EU E-commerce VAT package and digital services – Changes introduced in July 2021 to the One Stop Shop (OSS) and the launch of an Import One Stop Shop (IOSS) concept have drastically changed requirements for all e-commerce vendors and marketplaces selling low-value goods or digital services to European consumers.

According to Christiaan van der Valk, lead author of Trends, governments already have all the evidence and capabilities they need to drive aggressive programs toward real-time oversight and enforcement. These programs exist in most of South and Central America and are rapidly spreading across countries in Europe such as France, Germany and Belgium as well as Asia and parts of Africa. Governments are moving quickly to enforce these standards and failure to comply can lead to business disruptions and even stoppages.

This new level of imposed transparency is forcing businesses to adapt how they track and implement e-invoicing and data mandate changes all over the world. To remain compliant, companies need a continuous and systematic approach to requirement monitoring.

Trends is the most comprehensive report of its kind. It provides an objective view of the VAT landscape with unbiased analysis from our team of tax and regulatory experts.  The pace of change for tax and regulation continues to accelerate and this report will help you prepare.

Identifying the Location of Risk in the case of health insurance can be a tricky subject, but it’s also crucial to get it right. A failure to do so could lead to under-declared tax liabilities in a particular territory and the potential for penalties to be applied once these deficits are identified and belatedly settled. We examine the situation from a European perspective.

Legal background

The starting point in this area is the Solvency II Directive (Directive 138/2009/EC). Notably, Article 13(13) outlines the different categories of insurance risks that are used to determine risk locations. As health insurance doesn’t fall within the specific provisions for property, vehicles and travel risks, it is dealt with by the catch-all provision in Article 13(13)(d).

This Article refers to the ‘habitual residence of the policyholder’ or, where the policyholder is a legal person, ‘that policyholder’s establishment to which the contract relates’. We will consider these scenarios separately, given the distinction between individuals and legal persons.

Where the policyholder is an individual

For natural persons, the situation is generally straightforward. Based on the above, the key factor is the habitual residence of the policyholder. The permanent home of the policyholder tends to be relatively easy to confirm.

More challenging cases can arise where someone moves from one risk location to another. For example, when an individual purchases insurance in a particular country, having lived there for a significant period before moving to another country soon afterwards, the Location of Risk will be the original country. As EU legislation does not go into detail on the point, examples of no apparent habitual residence will be dealt with on a case-by-case basis.

Where the policyholder is a legal person

In this scenario, we have to consider the ‘policyholder’s establishment to which the contract relates’ in the first instance. The establishment is treated quite broadly, as evidenced by the European Court of Justice case of Kvaerner plc v Staatssecretaris van Financiën (C-191/99), which pre-dates Solvency II.

Notwithstanding the above, the habitual residence of the insured should be used to identify the risk location even where the policyholder is a legal person in certain circumstances. This will occur when the insured is independently a party to an insurance contract, giving them a right to make a claim themselves rather than through the corporate policyholder.

This logic can also potentially be extended to dependents of the insured person added to the policy and who can also separately claim under the contract. They will also create a risk location, although this will often be in the same country as the insured person. Ultimately, the compliant approach will be dictated by the overall set-up of the policy.

If any insurers writing business in Europe have any questions on the location of risk rules, whether concerning health insurance or any other insurance, then Sovos is best placed to provide advice to ensure taxes are being correctly declared.

On 30 January 2022, the Zakat, Tax and Customs Authority (ZATCA) published an announcement on its official web page concerning penalties for violations of VAT rules, and it is currently only available in Arabic. As part of the announcement, the previous fines have been amended, ushering in a more cooperative and educational approach for penalizing taxpayers for their non-compliance with VAT rules than previously.

What’s the new approach?

If ZATCA officials detect a violation during a field visit, the taxpayer will first be given a warning about the violation without any penalty. The ZATCA aims to raise awareness instead of penalizing taxpayers for their first violation. Taxpayers will be granted three months to comply and make necessary changes in their processes.

If non-compliance continues after the first inspection, the taxpayer will be fined 1.000 Riyals, roughly 267 USD. The penalty charge will gradually increase if the taxpayer fails to comply with the rules and doesn’t make necessary changes within three months after the notice.

The fine for each additional repetition time will be as follows: 5.000 Riyals for the third time, 10.000 Riyals for the fourth time and 40.000 Riyals for the fifth time. If the same violation is repeated 12 months after its discovery, it is considered a new violation, and the process will begin with a warning without a fine.

What are the violations of e-invoicing?

According to the announcement, the violations of e-invoicing rules will be penalized per the new procedure described above. The instances that require a notice/fine are slightly different than the initial violations described previously and highlighted as follows:

• Not issuing and storing invoices electronically
• Not including a QR code
• Non-compliance with keeping electronic invoices and electronic notes in the form stipulated
• Not notifying the authority of any malfunction that hinders the issuance of electronic invoices
• Deleting or modifying electronic invoices after their issuance
• Including any of the prohibited functions in the e-invoicing solutions
• Violation of any other provision of electronic invoicing.

What´s next?

The ZATCA states that the new approach ensures proportionality between the violation and the penalty imposed on taxpayers while giving taxpayers a chance to comply within a specific time frame. Considering that the introduction of both VAT and mandatory e-invoicing is fairly recent in the country, there are certain aspects that are unclear for taxpayers. This approach will educate businesses and is expected to be welcomed by stakeholders.

Towards the end of 2021, the tax authority in Turkey published a draft communique that expands the scope of e-documents in Turkey. After minor revisions, the draft communique was enacted and published in the Official Gazette on 22 January 2022.

Let’s take a closer look at the changes in the scope of Turkish e-documents.

Scope of e-fatura expanded

• The gross sales revenue threshold will decreased reduce. The threshold limit has been lowered from TRY 5 million to TRY 4 million and above for the 2021 financial period. A lower threshold of TRY 3 million and above will apply for 2022 and subsequent fiscal periods.
• The use of the e-fatura is now mandatory for taxpayers in the e-commerce sector when exceeding a certain threshold. The communique introduced a gross sales revenue threshold of TRY 1 million and above for 2020 and 2021 financial periods; and TRY 500.000 for 2022 and all subsequent fiscal periods.
• Taxpayers who run a business in the real estate and/or motor vehicle sector by carrying out construction, manufacturing, purchase, sale, and rental transactions, as well as taxpayers who act as intermediaries in these transactions must use the e-fatura application if their gross sales revenue exceeds TRY 1 million and above for 2020 and 2021 financial periods; and TRY 500.000 for 2022 and all subsequent fiscal periods.
• Taxpayers who provide accommodation services by obtaining investment and/or operation certificates from the Ministry of Culture and Tourism and Municipalities must use the e-fatura application.

Taxpayers meeting these thresholds and criteria must start using the e-fatura application from the start of the year’s seventh month following the relevant accounting period.

In terms of accommodation service providers, if they provide services as of the publication date of this communique, they must start using the e-fatura application from 1 July 2022.

For any business activities that start after the publication date of the communique e-fatura must be used from the beginning of the fourth month following the month in which their business activities began.

E-arsiv invoice scope expanded

Taxpayers not in scope of e-arşiv invoices have been obliged to issue e-arşiv invoices if the total amount of the invoices to be issued exceeds TRY 30.000 including taxes (in terms of invoices issued to non-registered taxpayers, the total amount including taxes exceeds TRY 5.000) from 1 January 2020.

With the amended communique, the Turkish Revenue Administration (TRA) lowered the total amount of the invoice threshold to TRY 5.000, and thus more taxpayers will be required to use the e-arsiv application. The new e-arsiv invoice threshold applies from 1 March 2022.

E-delivery note scope expanded

Another change introduced by the communique was the expansion of the scope of e-delivery notes. The gross sales turnover threshold for mandatory e-delivery notes has been revised to TRY 10 million, effective from the 2021 accounting period. In addition, taxpayers who manufacture, import or export iron and steel (GTIP 72) and iron or steel goods (GTIP 73) are required to use the e-delivery note application. E-fatura application registration is not applicable to those taxpayers.

The Tax Bureaus of Shanghai, Guangdong Province and Inner Mongolia Autonomous Region have all issued announcements stating they intend to carry out a new pilot program for selected taxpayers based in some areas of the provinces. The pilot program will involve adopting a new e-invoice type, known as a fully digitized e-invoice.

Introduction of a new e-invoice type

Many regions in China are currently part of a pilot program that enables newly registered taxpayers operating in China to voluntarily issue VAT special electronic invoices to claim input VAT, mostly for B2B purposes.

The new fully digitized e-invoice is a simplified and upgraded version of current electronic invoices in China. The issuance and characteristics of the fully digitized invoice are different from other e-invoices previously used in the country.

Characteristics of the fully digitized e-invoice

• The fully digitized invoice is supervised by the local Taxation Bureaus as part of the pilot program
• The legal effect and basic purpose are the same as those of existing paper invoices
• Fully digitized invoices can be delivered in the form of data messages, which eliminates specific format requirements such as PDF or OFD
• The basic content includes dynamic QR code, invoice number, invoice date, buyer information, seller information, quantity, unit price, amount, tax rate, tax amount, total, total price, and tax
• After the pilot program taxpayer has passed a “real-name verification” they can immediately use the electronic invoice service platform to issue invoices without the need to use special equipment for tax control (e.g., UKey device)
• Pilot taxpayers can automatically deliver fully digitized invoices through the tax digital account of the electronic invoice service platform and can also deliver fully electronic invoices themselves via email or other means

Verification of fully digitized e-invoices

Relying on the national unified electronic invoice service platform, tax authorities will provide selected taxpayers for this pilot program with services such as issuance, delivery, and inspection of fully digitized e-invoices 24 hours a day. Taxpayers will be able to verify the information of all electronic invoices through the electronic invoice service platform or the national VAT invoice inspection platform.

What’s next for e-invoicing in China?

This new pilot program has been effective in Shanghai, Guangzhou, Foshan, Guangdong-Macao Intensive Cooperation Zone, and Hohhot since 1 December 2021. Despite the lack of an official timeline for implementation, it’s expected that the scope of this pilot program will be extended in 2022 to cover new taxpayers and regions in China, paving the way for nationwide adoption of the fully digitized e-invoice.

As a result of the 2020 Finance Law implementation, which transfers the management and collection of import VAT from customs to the Public Finances Directorate General (DGFIP), France has implemented mandatory reporting of import VAT in the VAT return instead of having the option to pay through customs as is typically the process. This change came into effect on 1 January 2022, with additional VAT reporting changes in France, including the Declaration of Exchange Goods (DEB) split where the Intrastat dispatch and EC sales list are now separate reports.

This new import procedure is mandatory for all taxpayers identified for VAT purposes in France. Registered taxpayers may no longer opt to pay import VAT to customs and must report all import VAT via the VAT return. This is a departure from the prior process, where taxpayers needed to receive prior authorisation to implement a reverse charge mechanism to pay import VAT through the VAT return. Now, this process is automatic and mandatory, and no authorisation is required.

Consequently, taxpayers with import transactions into France must now register for VAT purposes with the French tax authorities. Additionally, the French intra-community VAT number of the person liable for payment of import VAT must be listed on all customs declarations.

Changes to the VAT return

Changes to the French VAT return include (see Figure 1):

• New fields to report import VAT and petroleum products
• New numbering system for most of the return
• Pre-filled information on imports – lists the amount of import VAT collected from customs items previously declared to the Directorate-General of Customs and Indirect Taxes (DGDDI). Taxpayers will have the ability to edit the pre-filled import amounts before submission
• Pre-filled information will be populated from the 14th of the month following the due date
• VAT returns containing import VAT will be due the 24th day of the month following the filing period

Figure 1: Draft extract of 2022 FR VAT Return

Impact on Taxpayers

From 31 December 2021, “foreign traders” who imported goods and then made local sales under the domestic reverse charge are now required to register as a result of the import portion of the transaction and will still apply the reverse charge to their sales. This will now require a new VAT declaration to be submitted.

Additionally, until 31 December 2021, a foreign company that imported goods into France and made local sales under the reverse charge had to recover the import VAT paid under the Refund Directive (EU companies) or the 13^th Directive (non-EU companies). For Refund Directive claims, there would have been a cash advantage for France because either companies did not submit claims (small value) or because claims were rejected for non-compliance. For claims under the 13^th Directive and the two previous considerations, there was also the issue of “reciprocity” which prevented claims from some counties such as the US, for example. Under the new regime, all import VAT is reclaimed, leading to a potential budget shortfall.

With the most significant VAT gap in the EU (34.9% in 2019), Romania has been moving towards introducing a continuous transaction control (CTC) regime to improve and strengthen VAT collection while combating tax evasion.

The main features of this new e-invoicing system, e-Factura, have been described in an earlier blog post. Today, we’ll take a closer look at the roll-out for B2B transactions and the definition of high-fiscal risk products, as well as the new e-transport system that was introduced through the Government Emergency Ordinance (GEO) no. 130/2021, published in the Official Gazette on 18 December.

For more information about e-invoicing in Romania in general refer to this overview or VAT Compliance in Romania.

What are high fiscal risk products?

According to GEO no. 120/2021 (the legislative act introducing the legal framework of e-Factura), the supplier and the recipient must both be registered with the e-Factura system. The recently published GEO no. 130/2021 establishes an exception for high fiscal risk products and ensures that taxpayers will use the e-Factura system regardless of whether the recipients are registered.

In line with the GEO no. 130/2021, the National Agency for Fiscal Administration has issued an order to clarify which products are considered high fiscal risk products.

The five product categories are as follows:

• Vegetables, fruits, roots and edible tubers, other edible plants
• Alcoholic beverages
• New constructions
• Mineral products (natural mineral water, sand and gravel)
• Clothing and footwear

High fiscal risk products are defined based on the nature of the products, marketing method, traceability of potential tax evasion and degree of taxation in those sectors. Detailed explanations, as well as product codes, can be found in the Annex of GEO no. 130/2021.

The enforcement timeline of this requirement means that businesses that supply these types of products must be ready to comply with the new Romanian e-Factura system as follows:

• From 1 April to 30 June 2022:  It will be voluntary to submit invoices in the Romanian e-Factura system
• From 1 July:  It will be mandatory to submit invoices in the Romanian e-Factura system

Looking ahead: introduction of an e-transport system in Romania

Another reform that shows the intention of the Romanian authorities to combat tax fraud and evasion is the introduction of an e-transport system.

Taxpayers will be required to declare the movement of goods from one location to another in advance. Once declared, the system will issue a unique number written on the transport documents. Authorities will then verify the declaration on the transport routes.

Moreover, it is stated in the justification letter that the e-transport system will interconnect with the Ministry of Finance’s current systems, Romanian e-invoice, and traffic control, much like similar initiatives in other countries, such as India, Turkey and Brazil.

The introduction of the e-transport system is still pending as the Ministry of Finance has not yet issued the order regarding the application procedure of the system. According to GEO 130/2021, the Ministry of Finance had 30 days to do so after GEO 130/2021 was published in the Official Gazette. However, the deadline expired on the 17 January, and no announcement has been made yet. Therefore, the details of the system are still unknown.

A new year has arrived, marking an excellent opportunity to continue our blog series addressing Insurance Premium Tax (IPT) compliance in different countries.

You can read other blogs in this series by visiting our Denmark, Finland, and the UK entries or by downloading Sovos’ Guide on IPT Compliance. Written by our team of IPT and regulatory specialists, this guide is packed full of insight to navigate the ever-changing regulatory landscape.

How does IPT operate in Slovakia?

To start, IPT in Slovakia became effective on 1 January 2019, with the default IPT tax rate of 8%.

There are three tax points for IPT in Slovakia:

1. Booked date – when the premium receivable is booked into the system
2. Cash received date – when the premium payment is received
3. Payment due date – when the premium is due to be paid

Insurers are not required to separately notify or request permission to use one tax point over another but an insurer must notify on the quarterly tax return which tax point they’re using. It’s important to note the choice of tax point must be used for eight consecutive calendar quarters.

Interestingly, Slovakia’s approach to tax points provides flexibility for insurers when choosing to pay tax, giving the option to pay upfront or spread out IPT payments in instalments across multiple returns.

Slovakian IPT is due on a calendar quarterly basis (e.g. January to March return declared in April). This is the same for the payment due at the end of the month. It’s worth noting that all returns are filed electronically so there are no paper returns.

An issuance of a premium is treated according to the relevant class of business and is placed in the corresponding section on the return. A renewal would be treated in the same manner.

For treatment of mid-term adjustments, in the case whereby a premium or part thereof, is increased, reduced or cancelled, there is a separate box on the return used for submission (Box 19). This is unusual in comparison to other countries, predominantly because an increase in premium results in a different treatment.

What happens with the treatment of error corrections?

A correction error can be categorised in two ways.

Mistakes can happen and typos can occur in the supply chain. Maybe there was a multi global risk covering multiple countries and apportionment was incorrectly allocated in the first instance.

In the case of a correction of an error a supplementary declaration must be submitted for the appropriate period affected.

For example, if in the first quarter EUR 1,000 was declared for a particular risk based on apportionment produced. Later down the line in Q3, on further review it should have been EUR 1,200. In this case, the additional EUR 200 cannot be submitted on the Q3 declaration. An amended return would need to be considered for Q1 and submitted separately – this is true for both increases and decreases.

Overall, negatives are allowed and the Slovakian tax authority should refund the money back to the insurer. Therefore, the credit cannot be carried over to the next reporting period. There are no limits regarding how much the insurer can regularise but a degree of caution is advised.

Whilst there’s no official guidance, it would be wise to keep any documentation as evidence if a large amount needs to be reclaimed.

Historicals need to be submitted as a supplementary return (i.e. outside the current return). The Slovakian tax authority can impose penalties between EUR 30.00 and EUR 32,000.00.

The Northern Ireland Protocol regarding goods moving from Great Britain to Northern Ireland continues to cause problems, leading to calls to suspend it via Article 16. But at the same time, some NI politicians are looking to capitalise on the possibility of inward investment by companies that can benefit from being in both the UK and the Single Market at the same time. This will be an interesting circle to square.

For goods moving from Great Britain to the EU, it has been necessary to review supply chains and VAT compliance, especially where the GB supplier is required to import the goods. Here we have the issue of theory clashing with reality, requiring plans to be revised.

Many UK suppliers selling goods into the EU decided that a good approach would be to obtain a VAT number in the Netherlands and then import the goods under an Article 23 licence to defer the import VAT to the VAT return – a straight-forward scheme to set up and manage. However, under the Union Customs Code, anyone who imports goods into the EU is required either to be established in the EU or to appoint an “indirect customs agent” who is established in the EU. 

Upon accepting such an appointment, the EU entity becomes jointly liable with the importer for the VAT and duty that is due. Not surprisingly, it is difficult to find businesses that will offer such a service. In 2020, the body representing freight forwarders in Germany suggested that no such appointments should be accepted because of the financial risk. For many UK businesses, the only solution has been to establish a company in the EU, often the Netherlands, to import in their name.

Brexit also caused issues for GB businesses that supply equipment required to be installed in factories or other premises – such as parts of manufacturing production lines.

Within the Single Market there is a simplification for such supplies. The vendor can move the goods to another Member State to install them with the customer accounting for the acquisition tax due on the goods. This is because there is no need for the supplier to have a local VAT number in the Member State where the goods are installed.

Following Brexit, suppliers shipping goods from Great Britain to the EU for installation are no longer able to use this simplification. Instead, the GB supplier must now import the goods into the EU and then make a sale. If the goods are imported and installed in a Member State where the extended reverse charge applies to the sale, there will be a cash flow issue regarding the paid import VAT. Claims need to be made under the 13^th Directive and, if the Member State concerned applies the concept of “reciprocity”, then the claim may be denied. 

“Reciprocity” allows a Member State to refuse VAT refunds to taxpayers from third countries which do not allow VAT refunds to taxpayers of the Member State. The Member State normally publishes a list of third countries that can submit claims where reciprocity is invoked.

Pre Brexit, there was no need for the UK to be on such a list, so this now represents a real risk. Some Member States, including Spain, added the UK to their list immediately following Brexit. If these subtle complexities are not considered before a transaction is agreed the cashflow consequences could be severe – so planning is essential.

Businesses also have to ensure that they are prepared for changes which came into effect on 1 January 2022.

Under the EU-UK Trade and Cooperation Agreement, goods exported from Great Britain to the EU with a UK origin are free of import duty. In some situations, exporters require information from their suppliers about the origin of the goods they are supplying.

Until 31 December 2021, an exporter of goods from Great Britain to the EU did not need to hold a supplier’s declaration when making a statement on origin to be used by the customer to claim the zero-duty rate on imports into the EU. It is enough that the exporter is confident that the origin rules are met and make every effort to get supplier declarations retrospectively.

Suppose a UK exporter finds that a supplier statement is not available retrospectively. In that case, they must inform the EU customer who will have to consider the impact on the imports they have made.

If an exporter cannot comply with an official request for verification of the origin of the goods being the UK, the EU customer will be liable to pay the full duty rate retrospectively.

From 1 January 2022, an exporter must hold a supplier’s declaration, when required, when making the statement on origin declaration to the customer or the full rate of Customs Duty is payable. This significant change to the rules will impact all businesses exporting to the EU, including e-commerce retailers selling goods above EUR150.    

In a blog post earlier this year, we wrote about how several Eastern European countries have started implementing continuous transaction controls (CTC) to combat tax fraud and reduce the VAT gap. However, it’s been an eventful year with many new developments in the region, so let’s take a closer look at some of the changes on the horizon.

Latvia

Latvia has recently revealed its new CTC regime plans. The Latvian government approved a report prepared by the Ministry of Finance to implement an electronic invoicing system in the country. The concept described in the report envisages the introduction of electronic invoicing as mandatory for B2B and B2G transactions from 2025 under the PEPPOL framework. The details about the system, including the legislation and technical documentation, are expected in due course.

Serbia

Serbia is another country moving rapidly towards a CTC framework, and apparently, various stakeholders find this movement rather quick. The Ministry of Finance recently announced that upon the request for a transition period to adapt to the new system of e-invoices, they have decided to postpone the date for entry into force of CTC clearance for B2G transactions until the end of April 2022. It must be noted that there has been no delay concerning B2B transactions.

According to the revised calendar:

• From 1 May 2022: B2G e-invoicing through a CTC portal will become mandatory
• From 1 July 2022: All taxpayers will be obliged to receive and store e-invoices
• From 1 January 2023: All taxpayers will be obliged to issue B2B e-invoices through the CTC system.

Slovenia

Slovenia is also looking to introduce CTCs. In June 2021, the Ministry of Finance submitted a draft law to the Slovenian parliament, aimed at introducing mandatory B2B e-invoicing in the country. According to the draft regulation, all business entities would be obliged to exchange e-invoices exclusively in their mutual transactions (B2B). In the case of B2C transactions, consumers could opt to receive their invoices in electronic or paper form. However, the Ministry of Finance withdrew the draft law due to disagreement with various stakeholders but intends to review it by simplifying the process and reducing the administrative burden on businesses.

Discussions around the introduction of CTCs in the country continue among various stakeholders, e.g., the local Chamber of Commerce. However, seeing as national elections are expected in Slovenia in April 2022, the CTC reform is not expected to gain much traction until summer 2022 at the earliest.

Slovakia

Earlier this year, we reported that the Slovakian Ministry of Finance had prepared draft legislation to introduce a CTC scheme. The aim was to lower Slovakia’s VAT gap to the EU average and obtain real-time information about underlying business transactions. Public consultation for the draft law was completed in March 2021. However, no roll-out timeline was published at the time.

Over the past months, the Slovakian government has launched the CTC system and published new documentation. The CTC system is called Electronic Invoice Information Systems (IS EFA, Informačný systém elektronickej fakturácie) and is a unified process of electronic circulation of invoices and sending structured data from invoices to the financial administration. The timeline for the gradual roll-out of entry into force looks as follows:

• Phase 1: From January 2022, CTC e-invoicing will be introduced for B2G, G2G, and G2B transactions; and
• Phase 2: From January 2023, CTC e-invoicing will be introduced for B2B, B2C, and G2C transactions.

Poland

There have been serious developments regarding Poland’s CTC framework and system, the Krajowy System e-Faktur (KSeF). The CTC legislation was finally adopted and published in the Official Gazette on 18 November 2021. Starting from January 2022, KSeF goes live as a voluntary system, meaning there is no obligation to use this e-invoicing system in B2B transactions. It is expected that the system will be mandatory in 2023, but no date has been set yet for the mandate.

For more information see this overview about e-invoicing in Poland or VAT Compliance in Poland.

Romania

With the largest VAT gap in the EU (34.9% in 2019), Romania has also been moving towards introducing a CTC regime to streamline the collection of taxes to improve and strengthen VAT collection while combating tax evasion. In October 2021, Government Emergency Ordinance (GEO) no. 120/2021 introduced the legal framework for implementing e-Factura, regulating the structure of the Romanian e-invoice process and creating the framework for basic technical specifications of the CTC e-invoicing system. While the Romanian e-Factura went live as a voluntary system on 6 November 2021, no timeline has yet been published for a mandate. Suppliers in both B2B and B2G transactions may opt to use this new e-invoicing system and issue their e-invoices in the Romanian structured format through the new system.

For more information see this overview about e-invoicing in Romania or VAT Compliance in Romania.

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The EU e-commerce VAT package was introduced in July 2021. The new schemes, One Stop Shop (OSS) and Import One Stop Shop (IOSS) bring significant changes to VAT treatment and reporting mechanisms for sales to private individuals in the EU.

In the last of our series of FAQ blogs, we answer some of the more common questions asked on the IOSS.

In previous pieces, we’ve looked at understanding marketplace liability, understanding OSS and understanding IOSS and imports

Q: What is IOSS VAT?

IOSS VAT is the VAT collected at the time when the supply takes place and subsequently remitted to the tax authority in the Member State of Identification (MSI).

Under the old rules, when goods imported from third countries were sold to private individuals, the normal steps would require the supplier to account for import VAT, then account for the VAT on the subsequent supply (the sale to the private individual) then deduct the import VAT.

Instead, with IOSS, the VAT on the import is exempt and only the VAT on the subsequent supply is to be collected and remitted to the tax authority.

Q: What is IOSS?

IOSS is short for Import One Stop Shop. This is a special scheme that simplifies the registration obligations for taxpayers who carry out distance sales of goods imported from third countries to private individuals in the EU.

Similar to the OSS, the IOSS scheme allows taxpayers to register in a single EU Member State where they account for VAT that was actually due in other Member States.

Here’s an example. A business registered for IOSS in the Netherlands, can account for its sales to German, French, Italian, Polish etc. customers in its Dutch IOSS return thus avoiding the requirement to register in multiple jurisdictions.

Other advantages of using the schemes are:

• Making use of the exemption from import VAT.
• No customs duties are due at importation.

The scheme, however, is restricted to consignments of up to €150. Additionally, signing up for the scheme requires careful analysis of the taxpayer’s profile, the way the supply chain is structured and other factors. All of these would affect the business’ eligibility for the scheme, and the requirements to appoint a special type of representative for the purposes of the scheme that is required in certain cases.

If such representative is required, they will be jointly and severally liable with the taxpayer’s IOSS obligations. It’s also important to note that such representative must be established in the EU.

Q: What is an IOSS number?

An IOSS number is the specific identification for the IOSS scheme that is designated by the MSI (the country where the taxpayer is eligible or decides to register for the scheme) to the taxpayers that have decided to make use of this mechanism.

Although IOSS identification is a type of VAT identification it’s not an actual resident VAT registration in the MSI.

Instead, it’s an IOSS number specifically for the purposes of the scheme. In this sense only the eligible type of supplies can be accounted for using the IOSS number and the IOSS registration. In case the taxpayer will carry out other type of supplies which require a regular VAT registration the latter should be obtained for the purposes of being compliant.

Q: How much does IOSS cost?

The cost of IOSS compliance can vary depending on multiple factors. This would be ultimately affected by:

• The scope and the quality of the service offered by different providers. For example, a low-cost provider would have the best price, but it will not offer the full scope of compliance service in terms of detailed data checks, instant client communication, providing compliance or ad hoc advisory services. On the other hand, mid-market providers would be best suited to provide a balanced price that would have the added value of more coherent, consistent and higher quality service.
• The requirement to appoint an IOSS representative that is established in the EU. For example, should a taxpayer need to appoint such representative, the cost would be higher as the latter would be jointly and severally liable regarding the taxpayer’s IOSS obligations.

Q: Who needs an IOSS number?

An IOSS number is required for any taxpayer that wants to make use of the IOSS special scheme. This mechanism isn’t mandatory hence there’s no obligation to apply for an IOSS number.

However, it is advisable that any taxpayer that carries out supplies eligible to be reported using IOSS should consider this option as it has some considerable advantages. Of course, the consideration should also include the numerous requirements and conditions that must be met if a person opts to use the IOSS scheme.

Q: What’s the difference between IOSS and OSS?

Both are special schemes used to simplify the registration obligations for taxpayers involved in B2C supplies. They provide an option to account for VAT, that is due in multiple EU VAT jurisdictions, using a single registration and only one IOSS or OSS return.

The difference between both schemes is the different types of supplies that can be accounted for. More precisely:

• IOSS can only be used to account for B2C distance sale of goods imported from third countries, whereby the eligible supplies are restricted to a single consignment value of up to 150 EUR.
• OSS can be used to account for B2C intra-Community distance sale of goods irrespective of the consignment value.

Considering the above, the main difference is that with IOSS the goods are located in a third country (outside the EU customs territory) at the time of the sale, whereas with OSS the goods are located within the EU’s territory.

Q: Do I need to register for IOSS?

No, IOSS is currently an optional scheme for taxpayers. If not used, the taxpayer’s supplies are subject to the normal rules and depending on the way the supply is structured normal VAT registration/s may be required instead.

Q: What is IOSS tax ID?

IOSS tax ID is the special IOSS VAT number assigned to a taxpayer that has chosen to opt in for the IOSS scheme. It‘s not a regular VAT number that is assigned in the course of a normal VAT registration but is instead used to identify a taxpayer specifically for the purposes of the scheme.

Also, in more practical terms, the IOSS number must be indicated in a specific way on each shipment/supply in order to identify it as eligible under the IOSS as this would allow for:

• 1Quicker customs procedures
• Exemption of the import VAT
• No customs duties will be charged
• The VAT on the supply to be accounted for under the monthly IOSS VAT return of the taxpayer