Proposal for the technical implementation of the definitive VAT system – what’s new?
On 25 May 2018 the European Commission published its proposal on the technical implementation of the definitive VAT system. This proposal is a follow up on the proposals of 4 October 2017 that set out the ‘cornerstones’ of the definitive VAT system.
5 June 2018
After a brief summary of the 2017 proposals we will discuss in this perspective the new elements that have been added to the proposed definitive VAT system. For a brief overview of the proposed amendments to the VAT Directive we refer to our Indirect Tax Alert of 29 May 2018.
Towards a definitive VAT system
The definitive VAT system for cross-border supplies of goods in B2B-transactions proposed by the European Commission in October 2017 comprises the following elements:
- The introduction of the concept of intra-Union supply for cross-border supplies within the EU in B2B-situations. The abolition of the concepts of intra-Community supply and intra-Community acquisition. The intra-Union supply is subject to VAT in the Member State of destination.
- The extension of the MOSS system, which will become an OSS-system, to allow taxable persons to report VAT on intra-Union supplies due in other Member States in their own Member State.
- The introduction of the concept of a Certified Taxable Person (CTP). This implies being a reliable taxable person. The VAT on Intra-Union supplies provided to these taxable persons is reverse charged in case the supplier is not established in the Member State where VAT is due.
Prior to the implementation of the definitive VAT system, the European Commission also proposed four quick fixes (for call-off stock, for chain transactions, for the proof of intra-Community transport and to make the possession of a VAT identification number of the customer and a correctly filed Sales Listing mandatory requirements for application of the exemption for intra-Community supplies). The first three of these quick fixes also require a CTP status of the supplier and/or its customer for their application.
The new concept of the intra-Union supply plays an important role in the definitive VAT system. In order to qualify as an intra-Union supply, a supply must be carried out for a taxable person or non-taxable legal person and the goods must be transported or dispatched from one Member State to the other by or on behalf of the supplier or customer. The concept therefore applies to ‘pick-up’ transactions as well.
- The following supplies do not qualify as intra-Union supplies:
Installation supplies. These supplies are subject to VAT in the Member State where the installation takes place, as is the case under current legislation.
- Supplies that are exempt under art. 148 or 151 VAT Directive, for example supplies to NATO or supply of fuel for seagoing vessels.
- Supplies by a farmer that is subject to the flat-rate scheme for farmers.
In case goods are imported in a Member State and the supplier is the person liable for the payment of VAT or a subsequent supply involves the transport or dispatch of the goods that ends in another Member State the goods shall be considered to be transported or dispatched from the Member State of importation. As a consequence, this will also be an intra-Union supply.
Works of art and other goods that fall within the scope of the scheme for second-hand goods are intra-Union supplies but will be subject to VAT in the Member State where the transport of the goods starts or where the good is located at the moment of the supply.
Deemed intra-Union supply
Under the proposed art. 17 an intra-Union supply must also be reported when a taxable persons transfers goods forming part of its business assets to another Member State. This deemed intra-Union supply is subject to VAT in the Member State the goods are transferred to. VAT needs to be paid on the purchase price of the good or of similar goods or, in case of the absence of a purchase price, on the cost price of the good, determined at the time the transfer takes place. In case the transfer of the goods takes place in relation to an intra-Union supply to a customer, the deemed intra-Union supply does not need to be reported. There are also some other exceptions in which case a deemed intra-Union supply does not need to be reported.
We assume the provision safeguards the principle that taxation should take place in the Member State of destination, though effectively taxation does not take place when the taxable person has a full right to deduct VAT. It does cause an administrative burden for taxable persons, which in our opinion can be avoided in situations where the taxable person has a full right to deduct the VAT on the intra-Union supply.
One Stop Shop
As described above under the definitive VAT system the One Stop Shop will be extended to cover B2B supplies of goods. Taxable persons not established in the EU can only use the OSS in case they appoint a representative established in the EU. Distance selling (see below) within the EU can then also be reported in the OSS.
Under the OSS system VAT returns must be filed per calendar quarter. If the annual EU turnover of a taxable person exceeds a threshold of 2,500,000 euro monthly VAT returns need to be filed. Only supplies of goods and services made within the EU are taken into account to determine whether the threshold has been exceeded.
VAT on intra-Union supplies can be deducted if and in so far the customer performs activities that give rise to a right to deduct VAT. The OSS system can also be used to make deductions of VAT. If the taxable person is in a credit position the excess will be carried forward to the following tax period. A refund of the excess can however be obtained if the taxable person is in a credit position during two consecutive calendar quarters or in case of monthly VAT returns during three consecutive calendar months. VAT cannot be deducted in OSS in case a taxable person does not make any supplies of goods covered by OSS in the Member State it seeks for a deduction of VAT and has not done so in the three preceding calendar quarters or in case of monthly VAT returns eleven preceding calendar months. It must then apply for the refund under the procedure of Directive 2008/9/EC (taxable persons established within the EU) or the 13th Directive (taxable persons established outside the EU).
Records must be kept of transactions reported under OSS for ten years. The OSS system is optional for taxable persons. They can also choose to register for VAT in each Member State they need to report taxable supplies.
Certified Taxable Person
As explained before, the concept of the CTP plays an important role both in the quick fixes as well as in the definitive VAT system. It becomes clear from the proposal on the technical implementation of the definitive VAT system that the CTP status can be obtained if the taxable person is involved in one of the following transactions:
- Intra-Union supplies (B2B).
- The supply of gas, electricity, heat or cooling to either a taxable dealer or another customer (B2B and B2C).
Other criteria set for obtaining the CTP status (we refer to our perspective on CTP of 20 October 2017) have not been changed or further explained in the proposed Directive. Noteworthy is that the CTP status is still not open to taxable persons established outside the EU, not even when they appoint a representative or intermediary in the EU.
VAT is due on all intra-Union supplies at the date of issuing of the invoice or at the moment the issue should have been invoiced. The invoice must be issued ultimately the 15th of the month following the month the supply was completed. Continuous intra-Union supplies, such as supplies through pipelines of natural oils, will be regarded as being completed each calendar month until the supply comes to an end. Member States do not have the power to derogate from the tax point rules in case of intra-Union supplies.
Reverse charge rule
As described above, if the customer of an intra-Union supply is a CTP the VAT on the intra-Union supply is reverse charged if the supplier is not established in the Member State where the intra-Union supply is subject to VAT. The same principle applies in case of local supplies. Local supplies of goods are also reverse charged to a CTP customer in case the supplier is not established in the Member State where the supply takes place. Member States do not have the option to implement a reverse charge rule for local supplies, also in case the customer is not a CTP, but is established in its territory while the supplier is not. The optional reverse charge rule of art. 194 VAT Directive will be limited to services that do not fall within the scope of the main B2B place of supply rule for services.
Recapitulative statements and invoicing obligations
There is no obligation to report intra-Union supplies in the recapitulative statements in the definitive VAT system. The recapitulative statements will be used for services that fall within the scope of the main place of supply rule for B2B-services only.
There is an obligation to issue invoices for intra-Union supplies. The rules on simplified invoicing do not apply for intra-Union supplies.
As of 1 January 2021 the rules for distance selling will change (we refer to our Indirect Tax Alert of 6 December 2017). In the proposed definitive VAT system some amendments will be made to the concept of distance selling. This is due to the fact that within the proposed system the concept of the intra-Union supply applies for supplies to non-taxable legal persons as well. In the current system non-taxable legal persons are only required to report intra-Community acquisitions when they acquire goods from other Member States for more than 10,000 euros. If they do not exceed this threshold in a year and have not crossed it in the preceding year they will be regarded as consumers and the distance selling rules apply. In the definitive VAT system the rules for B2B intra-Union supplies apply regardless of the amount of purchases made by these non-taxable legal persons from suppliers in other EU countries.
This proposed change combined with the implementation of the adopted e-commerce Directive will have the consequence that taxable persons that supply goods to non-taxable legal persons under the distance selling regime may need to make changes in their systems twice in a short amount of time. Nevertheless we feel that the impact will be limited due to the fact that only legal persons that do not qualify as taxable persons at all fall within the scope of the distance selling rules and changes will only need to be made if they purchase goods in other Member States.
Responsibility of platforms
Under the e-commerce Directive that must be implemented by Member States in 2021 platforms will become responsible in certain cases for the VAT due on distance sales (we refer to our perspective on taxation of platforms of 11 January 2018). One of these cases is the situation of distance selling within the EU by a supplier that is established outside the EU through a platform. This provision is extended in the proposed Directive for the technical implementation of the definitive VAT system to cover also B2B-supplies by taxable persons established outside the EU.
Quick fixes after implementation of the definitive VAT System
Some of the quick fixed are still of importance after implementation of the definitive VAT system. Once the definitive VAT system has been implemented taxable persons can still use the call-off-stock arrangements under similar conditions applicable under the proposed quick fix for the current system (we refer to our perspective on call-off stock of 2 November 2017). This means that under the definitive VAT system the supplier does not need to report a deemed intra-Union supply in case of a transfer of the stock to another Member State. An intra-Union supply takes place at the moment the customer takes goods from the stock. Because the customer is a CTP (otherwise the quick fix does not apply) he will be responsible for reporting this VAT unless the supplier is established in the Member State where the stock is located.
Under the definitive system it is still important to ascribe the transport to one of the transactions in case of chain transactions (ABC-transactions). The transaction the transport can be ascribed to qualifies as the intra-Union supply. Under the quick fix proposed by the European Commission the transport can be ascribed to the A-B transaction if B communicates to A the name of the Member State the goods are transported to, B is identified for VAT purposes in another Member State than where the transport of the goods begins and both A and B are CTPs. If B does not communicate the Member State of destination to A or is identified for VAT purposes in the Member State of departure, the transport is ascribed to the B-C supply. Under the definitive VAT system this rule is continued under the same conditions that apply under the quick fix (for more extensive reading on this matter we refer to our perspective on chain transactions of 3 November 2017).
Derogations and optional provisions
To make the definitive VAT system simpler to apply for taxable persons derogations and options provided by the VAT Directive making the VAT treatment of movable property different per Member State, will be abolished as much as possible. This means, for example, that the option for Member States to tax the supply of dental prostheses will be abolished.
Definitive VAT system for services
In the proposed art. 402 VAT Directive the current system for taxation of cross border services is named transitional. It will be replaced by a system of taxation in the Member State of destination, liability of the supplier and a single registration scheme for the declaration, payment and deduction of VAT. This provision lays down the objective of the Commission to extent the concept of the definitive VAT regime for goods to services.
Date of entering into force
The 4 October 2017 proposals envisaged an implementation of the quick fixes as of 1 January 2019 and an implementation of the definitive VAT system as of 1 January 2022. The latter date has been postponed in the May 2018 proposal to 1 July 2022. There is no change in the date the quick fixes must be implemented by Member States in the May 2018 proposal. We do however have some serious doubts whether Member States will agree on these quick fixes in time to let the changes take effect as of 1 January 2019. We will of course keep you updated if anything changes.