TaxTech –April 21st, 2020
The COVID-19 pandemic is still holding the world in its grip. VATBox’s Partner PwC created a designated page with an overview of the country by country measurements; the information can be found HERE.
An interesting article on the way how countries are approaching the virus from a VAT point of view can be found HERE.
It is also good to start looking forward again. The world may be in an economic shock right now, but while executives are dealing with the immediate impact of the crisis, they still need to consider when and how the economy is likely to recover so that their organisations can be ready to rebound.
An article on this can be found HERE.
VAT on unpaid or cancelled supplies – a global overview
Many companies around the world are starting to feel the economic impact of the COVID-19 pandemic. Unfortunately, this also means that some customers are cancelling or not paying for ordered supplies. That is, of course, not good news for the companies that have already performed the supply or have already have incurred costs for the anticipated supply. Especially when VAT is due and invoiced on the supply, the supplier will still need to remit the VAT charged to the tax authorities, but will not receive the payment from the customer.
KPMG prepared an overview of the rules regarding the indirect tax treatment of cancellations, ‘no shows’ and bad debts in various countries, providing insight to how businesses can realise VAT cash flow opportunities, avoid VAT leakages, etc.
The overview can be found HERE.
VATBox – When Time, Optimisation and Savings Come Together – On-demand webinar
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Customs duties waived and VAT rates temporarily reduced as part of COVID-19 measures
Several European countries have temporarily reduced their VAT rates for specific supplies of goods or services. This mainly concerns the supplies of medical equipment, such as face masks and protective clothing.
An overview of the VAT rate reductions can be found HERE.
Besides the VAT rules, the customs requirements have also been ‘relaxed’. The European Commission ordered a relief from customs duties and import VAT for goods needed to combat the effects of the COVID-19 outbreak. The EU countries are free to individually determine the scope of these goods and the quantities that can be imported duty-free.
For an update on the most important details regarding the preferential treatment of goods, temporary storage, the transport procedure and simplified customs declarations, we advise to read this interesting article HERE.
Germany: Court decides about the outsourcing of the preparation of VAT returns
Finding your way through the complex VAT rules isn’t easy. Many companies ask for assistance with the classification and the set-up of their transactions in their ERP-system for AR invoicing, AP invoice processing and the preparation of VAT returns and other related filings.
Asking for assistance in this complex area and time consuming process is not a problem, but one still needs to ensure it follows all formal requirements when outsourcing such tasks. In Germany, a company and its accountant found this out the hard way. The accountant collected information from the company and compiled and submitted the monthly VAT return for the company. However, it appeared that the accountant did not the Power of Attorney to do so.
According to the German Court, an unauthorised advisor (such as the accountant in this case since they didn’t hold the required PoA), is only allowed to perform ‘mechanical operations in the maintenance of books and records; to book ongoing business transactions; to make ongoing payslips and to prepare income tax declarations.’ Due to the complexity of the VAT law, this exception does not apply to the preparation of VAT returns.
A summary of the case (in German) can be found HERE.
Germany: description of the provided service on the invoice
All VAT invoices must comply with the VAT invoicing requirements. One of the items that most countries require is a ‘clear description of the goods or services’. It can be challenging for companies to comply with the rules, as what may be ‘clear’ for the supplier, is not necessarily ‘clear’ to the recipient, or to the tax officer.
In a recent case in Germany, the Court dealt with this issue. The supplier was a construction company, which provided “dry construction work”. This was also mentioned on the invoice, but the German Tax Authorities denied the deduction of input VAT with the recipient because this description was not fully clear, in other words, there was no project name, date or location mentioned regarding where the services were performed.
In this specific case, the German Court ruled that the description of the service on the invoice was sufficient because the specific details of the place of performance were available and could be verified by the Tax Authorities. This is an interesting case which once more proves that German authorities are very stringent and apply a formalistic approach, although the European Court set a clear red line to follow when it comes to the right of VAT recovery in conjunction with formal and material requirements. The Barlis case (C-516/14) being of quite some relevance here as well.
A summary of the case (in German) can be found HERE.
Czech Republic and France: VAT rate questions
In the Czech Republic, the reduced VAT rate of 10% will apply to more products. The Czech Republic has three VAT rates, the standard rate of 21%, the first reduced rate of 15% and a second reduced rate of 10%. After May 1st 2020, supplies of drinking water and draining of sewage water, catering services, cleaning, care for older adults and kids and others will be subject to 10% VAT rate.
Interestingly, draught beer, if consumed in a restaurant, will also be subject to the 10% rate. If the same beer is sold in a shop, the standard rate of 21% applies.
More information on the change in the Czech Republic can be found HERE.
In France, the reduced VAT rate applies to the supply of food. A restaurant applied the reduced VAT rate to its activities and had done so for many years. The French Tax Authorities did not agree with this and raised an assessment with the restaurant.
The French Court decided that the restaurant could not rely on ‘good faith’, as it was sufficiently clear that the reduced VAT rate did not apply to the activities of the restaurant.
The conclusion is that a company must always check what VAT rate applies to its activities. That can be difficult if the VAT rate varies on the use or location of where the good or service is used.
A summary of the French case (in French) can be found HERE.
United Kingdom: Free zones
The UK authorities have issued a consultation about creating up to 10 freeports in locations across the UK. The consultation was started as part of the UK government’s plans to boost economic activity across the UK, ensuring that towns, cities and regions across the country can begin to benefit from the opportunities of leaving the EU.
The freeports would have different customs rules than the rest of the country. Furthermore, they should act as national hubs for global trade and investment across the UK, promote regeneration and job creation and create hotbeds for innovation.
More information on the consultation and the plans of the UK can be found HERE.
United States: Vouchers subject to sales tax?
It has taken the European Union quite some years to develop new rules concerning the VAT treatment of vouchers. A recent case before the New York Tax Appeals Tribunal dealt with the question of how vouchers must be treated from a US sales tax point of view.
The case concerns Apple Inc., which sold computers to consumers, whereby these consumers also received a free gift card as part of a sales promotion. The gift card could be used in the (online) Apple Store, whereby the consumer received a discount. The question was whether Apple could reduce the sales tax base for the value of free gift cards.
The Tax Authorities argued that when a customer purchases the qualifying product at full price; sales tax should be charged on the full price of the qualifying item.
The US court decided that Apple could not sufficiently demonstrate that the gift card was purchased as part of the transaction and that the amount should be excluded from the tax base.
More information on this case can be found HERE.
Uruguay: VAT reduced rates for certain payments made by electronic means
On March 11th 2020, the Executive branch issued Decree No. 97/020, which included a decrease of the VAT rate from 9% to 4% on the following services:
- gastronomic services (provided in restaurants, bars, etc.);
- catering services;
- services for parties and events;
- leases of vehicles without a driver; and
- mediation services of real estate lease for tourism purposes.
The new rate only applies when the payment is made through credit or debit cards, or other electronic payment methods, which is an interesting way of pushing businesses toward more readily trackable electronic payments
In addition, the Decree establishes that in cases of payment of the minimum VAT (which applies to taxpayers whose annual income does not exceed 305,000 indexed units), the reduction in the VAT rate is 4.1% of the total amount of the operation (previously it was 7.38%).
Finally, the Decree repeals article 2 of Decree No. 203/014, which established an additional reduction of the VAT rate of two percentage points for the sale of goods and services when the total amount of the sale or service supply is equal to or less than 4,000 indexed units and is paid through credit or debit cards, or other electronic payment methods.
The Decree will enter into force on May 1st 2020 and can be found (in Spanish) HERE.
Japan: Consumption tax evasion by eating in a restaurant or take-out
In many countries, there is a difference between the VAT rate that is applied to buying of food in a shop or being served in a restaurant or through ‘catering services’. The first is often subject to a reduced VAT rate and the latter (restaurant and catering services) often to the standard VAT rate.
In Japan this difference also exists. The standard (CT) rate is 10%, but the rate for takeaway food has been reduced to 8%. This resulted in consumers avoiding the higher consumer tax rate by ordering takeaway food more often, which was actually the intention of the Japanese government. The reduced rate for takeaway food was introduced to meet changing customers’ lifestyles and the growing demand for takeaway.
The problem, however, was that customers did in fact not takeaway their order, but they consumed it at the place where they bought it. Although suppliers cannot avoid that their customers are lying about where they consume their order, the social controls in Japan work well, and in fact, businesses who are not charging the correct rate are ‘reported’ on social media. An interesting example of emerging ‘social tax audits’?
An article on this can be found HERE.
UAE: Insight to the VAT penalty regime
As in basically all countries, authorities in the UAE require businesses operating in its country to comply fully with tax regulations. Businesses that are struggling in matters related to VAT compliance are to seek the help of regulated tax agents in the UAE to sort out all tax-related issues. If a business is not complying with the VAT rules, the FTA, the country’s tax authority, can impose penalties. So far nothing new.
Tax authorities also have to obey the rules, however a nice nuance is that it cannot levy penalties if the company is trying to comply, but gets contradicting information from the authorities. This was decided in a recent court case.
In this case, the company submitted voluntary disclosures concerning certain services, but was unsure which services were taxable and so it didn’t charge VAT on its invoices. An earlier request about this topic was rejected but later reconsidered. The Court, therefore, decided that the Tax Authorities should not levy penalties in this case.
More information on the penalty regime in the UAE can be found HERE.
More information about the specific case can be found HERE.
See you in two weeks!
On behalf of the
VATBox Tax Knowledge team