The criteria for non-application of VAT on services for foreign taxpayers…
…and an appeal addressed to the tax administration for a practical clarification on the necessary documentation
Based on the new Law on VAT (Law no. 92/2014, dated 24.07.2014, article 24.1), drafted in line with the European Directive on VAT (Directive 2006/112/EC), since January 2015 and onwards, services rendered from Albanian taxpayers to foreign taxpayers (non-resident in Albania), are ‘out of the scope of VAT’ in Albania (with certain exceptions). This means that these services are not subject to VAT on sale.
What changes does the new Law bring compared to the previous one?
The most significant change brought by this Law in relation to services to non-resident taxpayers is that, now, it is allowed to credit VAT on purchases of goods and services that have contributed to the performance of these services (with certain limitations). This is applicable to the extent that these services are not exempt ‘by their nature’, i.e. are such that, if they were rendered to Albanian taxpayers, they would similarly give the right to credit of input VAT on the respective purchases.
Based on the previous Law on VAT (Law no. 7928, dated 27.04.1995, article 25/9), the Albanian supplier did not have the right to credit VAT on purchases directly related with the services rendered to non-resident taxpayers.
What are the effects brought by the change of this rule to the Albanian taxpayers?
The previous Law caused distortion of competition for those services that, if performed for the benefit of Albanian taxpayers, did give the right to full credit of input VAT of the related purchases (i.e. for those services that were not exempt ‘by their nature’). Whereas now, with the new Law, doing business with Albanian taxpayers compared to foreign taxpayers is finally equal as regards the effects in VAT.
The financial impact of this change has been positive and immediate, by decreasing significantly the VAT payments of companies offering services to foreign ones and the cost of the VAT that they have borne as their own expense. For instance, a financial and legal consulting company that provides 40% of its monthly consulting services to foreign companies, until December 2014 could credit only 60% of VAT on its purchases (by bearing the rest of 40% as its own cost). Whereas, since January 2015, this company can deduct the entire 100% of VAT on its purchases (bearing zero VAT cost).
Which are the criteria to fulfil in order to benefit from this non-application of VAT?
The criteria are determined by the Instruction on VAT (Instruction no. 6, dated 30.01.2015, article 21.2). More precisely, the Albanian taxpayer should ensure the following documentation:
- Certification from tax authorities of the country of the beneficiary of the service, clearly stating that the taxable person is registered for VAT and its VAT identification number is active;
- The service agreement with full identification data of the foreign client;
- Full identification data of the client included in the sale fiscal invoice issued (name, VAT identification number, address of seat etc.);
- In the invoice there should be given also full description of the service performed, by making reference to the article of the Law that governs the treatment of such service;
- Payment documents (extracts) of bank accounts, nominally identifying the payer.
The verification of the status of the beneficiary of the service as active taxpayer in its country and its identification takes now special importance. Therefore, below I am focusing on the difficulties and practical solutions to the fulfillment of this condition.
How can we be assured on the identification and status of the non-resident taxable person before accepting to carry out the service without charging VAT?
Before carrying out a service for a non-resident taxpayer, we should ask for its VAT identification number (which may or may not be the same as its general business identification number/s).
For a client resident in a country of the European Union, the quickest way to verify whether the VAT identification number we have been communicated is active and valid or not, is offered by the official website of the European Commission. The VIES system (VAT Information Exchange System) integrated in this website (http://ec.europa.eu/taxation_customs/vies/) is connected in real-time with the VAT databases of all member countries (in total 28), through which it checks the validity of a VAT identification number each time we request it. A VAT identification number in a member country starts with the 2-letters code of the country (e.g. iT-Italy, EL-Greece, DE-Germany, AT-Austria, NL-Netherlands, GB-Great Britain etc.) and continues with 2-12 numeric characters (for some countries it may contain letters also). If the number is active, the VIES system turns the message “Yes, valid VAT number”, the full name of the taxpayer and the address of its legal seat. The system does not enable the vice-versa, i.e. it is not possible to search for the VAT identification number of a taxpayer by giving its name and address.
The option for a similar verification is provided also in the websites of the tax administrations of all member countries. Based on the European Council Regulation on administrative cooperation and combat of fraud on the field of VAT (no. 904/2010, dated 7.10.2010, article 31), each member state has the obligation to provide confirmation by electronic means of the VAT identification number it has issued to a taxpayer, as well as other identifying data related to that number (in accordance with the respective national data protection rules).
The majority of other countries also offer the possibility to verify a certain taxpayer’s identification number in their official tax websites. For instance, even the Kosovo Tax Administration offers this option in its website, through the menu “Electronic services/Search taxpayer” (http://apps.atk-ks.org/BizPasiveApp/VatRegist/SearchVat).
We can run these searches up-front and print their results to keep them in our foreign client’s file.
But is this information sufficient? What document will be considered to satisfy the criteria “certification on VAT number and active status from tax authorities of the country of the beneficiary of services…”?
We should consider that taxpayers of different countries will react differently to our request for such a certification. For instance, for a taxpayer registered for VAT in the United Kingdom (member country of the European Union), it is quite easy to print anytime and without any costs from its online account of the tax administration portal (https://online.hmrc.gov.uk/vat/trader/) a VAT certificate that contains the VAT identification number, full name, address of the legal seat and the date of issuance of the certificate. It is not signed and stamped by the British tax authorities (HM Revenue & Customs), but its electronic print-out is exactly made available solely and exclusively by the British tax administration. This form of certificate is widely used by British taxpayers in their cross-border transactions. Any additional data or security element needed (as signature, stamp, apostile), could be made available by the British authorities only upon payment.
Whereas, for a taxpayer in Norway (not a member country of the European Union), it is common practice to request and receive free of charge VAT certificates (in paper form, sent by courier) signed and stamped by Norwegian tax authorities (Skatteetaten).
In the context of the process of harmonization with the European legislation, we should keep in mind the solution provided for this ‘documentation criteria’ by the European Council Regulation on implementing measures for the Directive 2006/112/EC on VAT (no. 282/2011, dated 15.03.2011, article 18). More precisely, a taxpayer of a member country should ensure the following to not apply VAT on the services it provides to a non-resident taxable person:
- If the client is a taxable person in a country member of the European Union, the supplier should obtain validation/confirmation of the VAT identification number communicated by the client (and of the associated name and address) through the official website of the respective tax administration and/or through the VIES system.
- If the client is established in a country not member of the European Union, the supplier should:
- obtain from its client a certificate issued by the client’s competent tax authorities as confirmation that the client is engaged in economic activities (i.e. is a taxable person) in its country;
- or, in the lack of such certificate, obtain from the client the VAT number or similar identification numbers attributed by its residence country, and carry out a reasonable level of verification of the authenticity and accuracy of the information provided by the customer, by normal commercial security measures such as those relating to identity or payment checks.
In these circumstances, my questions are:
- Shall the Albanian tax authorities accept the certification only in paper form, signed and stamped from the tax authorities of the other countries?
- If yes, when should it be dated, i.e. how long/how many months/years before or after the provision of the service?
- What if the service is recurring and periodic? Shall it be acceptable to present one certificate only, or should it be renewed from time to time? If yes, how often, once in 6 months, once a year?
- Should the certification be legalized in the competent institutions of the other country (apostile stamp) before sending to our address?
- Should it be translated in Albanian and notarized?
- Can the residence certificates be accepted as equivalent to the VAT certificates, given that they also provide assurance of the status of being ‘a registered taxpayer’ (although they are required and issued for purposes of elimination of double taxation on income)?
It is evident that there is the need for a public clarification or a Technical Decision from the General Tax Directorate in relation to this documentation condition. Such a Decision should be oriented towards the most efficient, effective and least expensive solutions for the Albanian taxpayer and its foreign client, taking into account the specifics of other countries’ tax administration practices and the extensive usage of electronic means in nowadays.