New VAT Regulation as of January 2010
New VAT Regulation as of January 2010
The primary aim of the amendments is to simplify the application of VAT on services provided across the EU Member States. In accordance with the EU VAT Package, the amendment of the VAT Act will introduce the obligation to report the provision of the services to a recipient in other EU Member State, similarly as is currently required for intra-Community supplies of goods (i.e. EC Sales List). The EU VAT package and respectively the VAT Act amendment also introduces electronic submission of applications for refunds of VAT paid in other EU Member States. This amendment of the VAT Act will bring about a revolution for businesses supplying and receiving services cross-border. They may have to reconfigure their accounting systems to ensure the services are correctly taxed and recorded for VAT.
Place of supply of services from 2010
Until 1 January 2010, the place of supply of services is where the service provider is established for VAT purposes; according to the ‘basic rule’ (specific rules exist for certain services). With effect from 1 January 2010, this ‘basic rule’ will change: for services provided to businesses (B2B services) the new ‘basic rule’ is that these services are deemed to be supplied where the recipient of the services is established (reverse charge mechanism).
The service provider will not charge VAT but the recipients of these services will have to account themselves for the VAT payable on these services in their local VAT returns under the reverse charge mechanism. This VAT is deductible in the same VAT return according to the normal rules. As a result of this new ‘basic rule’ for cross-border B2B-services, in many cases VAT will no longer have to be charged (and reclaimed).
The changes to the rules that determine the place of supply of services to non-business customers (B2C services) are less far-reaching.
With effect from 1 January 2010, businesses that supply ‘basic rule’ services to businesses in other EU countries will have to periodically report these services by submitting a listing electronically to the tax authorities. These services must be broken down by value per VAT number for each service recipient. Services that are exempt in the recipient’s country should not be included in the listing.
The listing should be submitted monthly to the tax authority, but all businesses may opt to submit quarterly listings. This choice should be communicated to the tax authority in a timely manner.
Refund of foreign (EU) VAT
With effect from 1 January 2010 it will be easier for EU established businesses to reclaim foreign (EU) VAT. The new procedure is also applicable to foreign (EU) tax paid in 2009. Where previously businesses had to send a number of documents and all original invoices by mail to each individual foreign tax authority, EU established businesses can, from 2010, apply for a refund of foreign (EU) VAT with the national tax authority via the internet. The tax authority will assess the refund applications and forward them to the relevant foreign tax authorities.
From 1 January 2010, the costs on which VAT is reclaimed will have to be classified according to ten categories (nine specific categories and a general category). In addition, the applicants must include details of their deductible VAT method of calculation (if applicable) in the country of establishment. In addition, the foreign tax authorities will be required to process requests within a certain time. If they exceed the specified time (different time limits will apply in different circumstances), they will have to pay interest to the applicants.
Tax point – when is VAT due?
An additional rule will be introduced into the VAT legislation regarding the time at which VAT should be accounted for, i.e. the tax point. Where the service recipient is required to account for VAT under the reverse charge mechanism (as explained above), the tax point will be the moment when the service is provided.
In most cases, recipients of these services will not know (or will have no way of knowing) at what moment the services are provided or the value. They will usually rely on the invoices issued by the service providers. If they receive these invoices after the moment at which the VAT was due according to the new rule, strictly, they will be late in accounting for this VAT.
This new rule will have the most significant impact for businesses that cannot fully deduct input VAT, as these businesses will actually have to pay (part of) the VAT due on these services. Businesses with a right to fully recover input VAT can normally fully deduct the VAT accounted for on these services in the same VAT return.
In addition, where these services are supplied cross-border within the EU, there is a chance that mismatches will occur between the VAT accounted for in the VAT returns of the recipients and the services reported in the listings submitted by the service providers. This could result in enquiries from the tax authorities.
Important: what to do now?
There is a lot that needs to be done:
- Both for determining the place of supply of services as well as for completing the new listing, businesses will have to establish whether their (EU) clients are VAT taxable businesses. For this purpose, clients will have to provide businesses with their VAT identification numbers and these numbers should be checked by the service providers with the tax authority. When a customer provides a business with its VAT identification number, and the business has checked this VAT number with the tax authority, the business may assume that it will provide its services to a VAT taxable business.
- Businesses will have to adjust their ERP systems to accommodate the new rules. This applies not only to the place of supply, but also, for example, when invoices include a reference to specific sections of the relevant legislation. ERP systems should also allow compilation and easy access to all data relevant for completing the new listings.
- The procedures for reclaiming foreign (EU) VAT will have to be adjusted.
- Everyone in your business that is involved in processing and raising invoices, and the completion and filing of VAT returns and listings, should be familiar with the new rules in time to implement new procedures and be fully compliant.
Head of the Legal Department of West Union Cyprus