Changes and amendments to the Law on Value Added Tax
The Government of the Republic of Serbia has drafted a Proposal of the law on changes and amendments to the Law on value added tax, which was adopted by the National Assembly of the Republic of Serbia on a special session, held on September 28th, 2015. Most of the changes will be applicable as of October 15th, 2015.
The main reasons listed for the changes and amendments to the Law on value added tax (hereinafter: the Law) are further harmonization with EU regulations, creating more favorable business environment, preventing possible abuses, as well as ensuring the improvement of the Tax Authority’s VAT audits, and the key changes are:
- The introduction of the obligation (possibility) for foreign entities performing the supply of goods and services on the territory of the Republic of Serbia to register for VAT by nominating a tax representative;
- New rules for the application of the reverse charge mechanism on the supply of goods and services in the construction industry;
- The introduction of the reverse charge mechanism for: the supply of electricity and natural gas intended for further sales, the supply of mortgaged immoveables/pledged items during mortgage/pledge contract realization, as well as on the supply of goods and services in enforcement proceedings;
- Different rules and clarifications related to the place and time of supply for specific goods and services, primarily for the supply of electricity, natural gas and heating/cooling power;
- Different rules for triggering the tax liability;
- Changes related to the transfer of assets or a part of assets that is outside of scope of VAT, in accordance with Article 6 of the Law;
- The introduction of new rules and the clarification of the provisions related to the right to claim input VAT; and
- The introduction of new rules and the clarification related to the subsequent change of the VAT base, as well as to the correction of input VAT.
The text below contains a detailed overview of the selected changes and amendments, which we deemed as the most significant for business activities of commercial entities in the Republic of Serbia.
In accordance with the amended Article 8 of the Law, a VAT payer is a person, including a person without a seat or place of residence in the Republic of Serbia (a foreign entity), which independently performs the supply of goods and services, as part of its business activity. Accordingly, foreign entities are granted the right to register for VAT in the Republic of Serbia for the first time, without first establishing i.e. a branch, which would constitute a separate VAT payer.
We would like to point out that if a foreign entity has a permanent establishment (i.e. a branch) in the Republic of Serbia, the foreign entity will be a VAT payer for supplies not performed by its permanent establishment.
The introduction of a new Article 10a into the Law further states that a foreign entity performing the supply of goods and services in the Republic of Serbia is obligated to nominate a tax representative. Exceptionally, a foreign entity does not have this obligation if it only performs the supply of e-services, or the supply of bus passenger transport services that are partially carried out on the territory of the Republic of Serbia.
A foreign entity may nominate only one tax representative, a physical person, including an entrepreneur, or a legal person, with a place of residence or seat in the Republic of Serbia, which is a registered VAT payer for at least 12 months before the request is submitted. This person may not have any outstanding or unpaid fiscal liabilities stemming from its business activities as determined by the Tax Authority and the Tax Authority has to, based on a submitted request, approve this person as a tax representative.
We would like to point out that a foreign entity’s tax representative cannot be that foreign entity’s permanent establishment in the Republic of Serbia.
A tax representative performs all tasks related to the foreign entity’s rights and obligations as a VAT payer, in the name and on the behalf of the foreign entity, as provided by the law (the submission of the recordkeeping tax return, VAT calculation, issuing invoices, submission of tax returns, making VAT payments etc.).
Finally, we would like to point out that a foreign entity’s tax representative is jointly liable for all of the foreign entity’s liabilities as a VAT payer, especially for VAT, fine and interest payments related to VAT liabilities.
However, if a foreign entity does not nominate a tax representative in the Republic of Serbia, no immediate sanction has yet been prescribed, and the obligation to calculate VAT will fall on the recipient of the goods and services using reverse charge, as it was until now.
It should be noted that an additional significant change which relates to a situation in which a foreign entity performs the supply in the Republic of Serbia to a person which is not registered for VAT, while the fee for such a supply is charged, in the name and on the behalf of the foreign entity, by a VAT payer. Namely, the tax debtor (i.e. a person obligated to calculate VAT) for such a supply is the VAT payer which collects this fee.
Application of the reverse charge mechanism
Supply of goods and services in the construction industry
In accordance with the changes and amendments to Article 10 para 2 of the Law, the recipient of goods and services in the construction industry, a VAT payer, is the tax debtor for the supply performed by another VAT payer.
In other words, the Law does not reference the Law on planning and construction any longer, i.e. the person performing the supply and the recipient of goods and services need not be classified as an investor and main contractor, as per the mentioned law, in order for reverse charge to be applied.
The aforementioned change should, on the one hand, simplify the application of VAT provisions, since the previous solution has caused practical uncertainties and has led to different interpretations of the conditions for applying reverse charge. On the other hand, this should lead to a wider application of reverse charge, which should further ease the fiscal burden on business activities in field at hand.
A bylaw will further regulate the aforementioned matter, i.e. what constitutes a supply of goods and services in the field of construction, after which the application the described provisions should be significantly more consistent and transparent.
Supply of electricity and natural gas
The addition of item 4) to Article 10 para 2 of the Law prescribes that a VAT payer – recipient of electricity and natural gas supplied via a transmission, transport and distribution network will be a tax debtor, if the goods in question are purchased for further sale and if the supply of electricity and natural gas has been performed by another VAT payer.
In accordance with the aforementioned change, a VAT exemption has been prescribed for the import of goods delivered via a transmission, transport and distribution network, i.e. for electricity, natural gas and heating/cooling energy.
The change in question should lead to more simplified trading in the aforementioned goods, since the transferor (or the Customs authority) will not be obligated to calculate and pay output VAT, while the recipient will be able to report both input and output VAT in the same tax period.
In that regard, we would like to point out that the rules for the supply performed towards end users, both legal and physical persons, remain unchanged, i.e. in the case of a supply of electricity and natural gas meant for final consumption, the obligation to compute VAT falls on the person making the supply.
The supply of mortgaged immoveables, pledged items and goods and services in enforcement proceedings
The amendments to Article 10 para 2 of the Law state that the recipient of goods and services, a VAT payer, will be a tax debtor for the supply performed by another VAT payer, in the case of: 1) the supply of a mortgaged immoveable when mortgage is realized, 2) the supply of pledged items when a pledge contract is realized and 3) the supply of goods and services in enforcement proceedings.
The tax debtor will in this case be able to claim input VAT, under the condition that output VAT has been computed and that the received goods and services are used to perform the supply of goods and services as prescribed by Article 28 para 1 of the Law. In other words, the tax debtor need not possess an invoice issued in accordance with Article 42 of the Law in order to claim input VAT.
Place and time of supply and the triggering of the tax liability
Place of supply
Amendments to Article 11 of the Law state that the place of supply will be the place where the recipient of electricity, natural gas and heating/cooling energy delivered via a transmission, transport and distribution network is located, if these goods were acquired for further sale.
On the other hand, the place of supply will remain the place where the water, electricity, natural gas and heating/cooling energy is received, when the goods in question are purchased for final consumption.
Further, changes to Article 12 specify that data processing and data provision services include the supply of information on business practices and experience, so that such a supply should be taxable in relation to the place of the service recipient.
Additionally, it is prescribed and specified that taxation in relation to the place of the recipient applies not only to services involving the granting of access to natural gas and electricity transfer networks, but also to: services involving the granting of access to heating/cooling networks; the transport and distribution via such networks; as well as to other services directly related to such services, including the granting of access to an organized electricity market.
Time of supply
The changes and amendments to Article 14 of the Law specify that the supply of goods occurs on the day of transfer of rights on electricity, natural gas and heating/cooling energy, supplied via a transmission, transport and distribution network.
Alternatively, when the supply of goods in question is performed for the purposes of final consumption, it is considered that the supply occurred on the day the reading of the water, electricity, natural gas and heating/cooling energy is performed for consumption calculation purposes, which was the regime up until now.
The triggering of the tax liability
The amendments to Article 16 of the Law prescribe that, for the transfer and granting the use of intellectual property rights, the date of invoice issuance is of relevance for the triggering of the tax liability.
Accordingly, the tax liability will, for the aforementioned supply, arise on the date of supply, the date of advance payment, or on the date of invoice issuance, if the invoice is issued before the supply or the advance payment takes place.
We would like to point out the deletion of the provision, added in 2012, which states that the tax liability for the supply taxable in the Republic of Serbia, performed by a foreign entity, is triggered on the date of supply. In other words, reverse charge should apply in the period when the supply/advance payment was made, or at the moment an invoice is issued for the transfer and granting the use of intellectual property rights.
The transfer of assets or a part of assets
The amendments to Article 6 of the Law state that if the conditions for deeming that an out of scope supply took place cease to be fulfilled within three years from the year when the transfer of assets or a part of assets took place, the recipient will be obligated to calculate VAT on this supply using reverse charge, as if the conditions were not fulfilled from the beginning.
The obligation to compute VAT does not apply to equipment and objects used for business activities and investments into objects used for business activities for which the obligation to correct input VAT applies in accordance with the Law.
Finally, it should be noted that the obligation in question applies also to supplies that already took place, if the expiration of the said conditions occurs after the coming into force of the mentioned changes.
The right to deduct input VAT
The changes to Article 29 of the Law led to the removal of the provision denying the right to deduct input VAT for acquiring carpets, household appliances, television and radio devices, paintings or works of applied art and other decorative items, which are used for the furnishing of administrative spaces.
On the other hand, it has been made clear that the right to deduct input VAT cannot be claimed for employees’ (or other engaged persons’) food and transport expenses, for workplace commuting purposes.
Further, the definition of entertainment expenses has been clarified, for which there is no right to deduct input VAT. Accordingly, VAT payers cannot claim the right to deduct input VAT for HORECA services, gifts (except low value gifts), vacation, sport and other amusement expenses made for the benefit of existing or potential business partners, or their representatives or other physical persons, without there being a legal obligation to provide such benefits.
Subsequent changes to the VAT base and the obligation to correct input VAT
Further, the changes to Article 31 of the Law specify the obligation to correct input VAT if the VAT base changes, meaning that the VAT payer, to which goods and services are supplied, is obligated to correct input VAT if the VAT base is reduced. On the other hand, the VAT payer may correct input VAT if the VAT base is increased.
Additionally, Article 31a has been introduced which prescribes/specifies that the tax debtor – VAT payer from Article 10 para 1 item 3) and para 2 of the Law may correct input VAT if the amount of VAT determined by a competent tax authority has been paid on the basis of a tax audit decision.
Finally, it should be noted that the amendments to Article 32 of the Law state that the VAT payer is not obligated to correct input VAT in the case of investments into objects used for business activities, for which a fee is charged.
Finally, several other changes and amendments to the Law were made, namely:
- The date for the submission of the VAT return for quarterly taxpayers has been changed, meaning that quarterly taxpayers submit their VAT returns by the 15th day of the month (rather than by the 20th), beginning with January 1st, 2016;
- The obligation to report to the Tax Authority the purchases of secondary raw materials and agricultural products from persons not registered for VAT has been widened by the abolishment of the RSD 1,000,000 threshold;
- An obligation to submit the overview of the VAT calculation is introduced, along with the VAT return, beginning with January 1st, 2017;
- The scope of accommodation and passenger transport services the supply of which is subject to a reduced VAT rate has been widened;
A VAT exemption without a right to deduct input VAT is introduced for the supply of services for which the taxpayer did not have the right to deduct input VAT (the previous provision was only applicable to the supply of goods).