VAT quick fixes (part 1)

Przemysław POWIERZA
Tax Partner at RSM Poland

The value added tax model that is in place in the European Union is a practical example of a net all-phase turnover tax. In this model, tax is collected at each stage of turnover (in each phase of turnover), and the amount transferred to the tax office is related with the added value produced by a given participant of turnover (taxpayer). Thus, the mechanism must provide a method for calculating this amount. In addition, expenses incurred on the consumption of goods and services in their final form are also taxable, hence the model must also ensure effective collection of the tax in the country in which the consumer is staying at the time of consumption.

VAT system still in transition

It sounds ambitious, doesn’t it? It does; that is why the European Union has been struggling for many years now with the effective collection of VAT, on the one hand trying to make it effective (VAT is the source of over 40% of budget revenues of countries where it is in place), and on the other hand: preventing abuse (tax avoidance, tax evasion and appropriation of amounts due to the tax authorities). As a result, we have been functioning in the realm of a number of transitional solutions. Works are under way to replace them with the target VAT system. However, this is a process that will take many years; therefore, both national and EU legislators are trying to make certain changes and make the collection system more effective as of now. The motivation is very strong. Over recent years, we have seen increased tax fraud and it was mainly connected with VAT. The grey economy is also a serious concern: over two thirds of the VAT Gap (estimated shortage of collected tax) results from the practice of avoiding invoices and receipts for clients-consumers.

What stirs a lot of emotions in Poland is, among others, the split payment we have addressed many times, for example here. The process of making the tax collection system more effective also continues in our neighbouring country, where landmark changes were introduced for online sellers on the territory of Germany. It should be considered quite a success that definite actions have been taken at the entire EU level: the Council of the European Union has just adopted three legal acts that are rapid response tools and introduce changes in cross-border transactions that will apply as of 1 January 2020 (they are known as “quick fixes”). This is about making improvements as fast as possible wherever it is possible, not waiting for all the elements of the target model to be ready for implementation.

Quick fixes on the RSM blog

With this article, we are starting a series of posts on the RSM Poland blog dedicated to the aforementioned quick fixes in the intra-Community trade. There are four areas of reform:

1. Call-off stock: new regulations provide for a simplified and uniform treatment of such call-off stock arrangements in the entire European Union. At present, national legislators have certain freedom in this respect, which often means that this type of simplification cannot be used to deduct VAT;
2. Proof of intra-Community supplies: to claim VAT exemption (0% rate) for any intra-Community supply, taxpayers will have to use standardised documentary evidence. All tax authorities and tax auditing bodies in the entire EU will (finally) require the same documents from taxpayers;
3. Chain transactions: clear-cut criteria are introduced to determine which supply in the chain is a cross-border transport transaction. Hence there is a chance that such transactions will no longer be a nightmare for taxpayers who trade with many intermediaries or in groups of companies;
4. The VAT identification number: to claim a VAT exemption (0% rate) for any intra-Community supply, taxpayers will have to use a valid VAT number registered for the purposes of intra-EU transactions at all times. The lack of this number in any intra-Community supply will result in the refusal of VAT exemption.

Even though the above changes are already decided, the legislative process is not finished yet. Regulations adopted in December 2018, i.e.:

• Council Implementing Regulation (EU) 2018/1912 of 4 December 2018 amending Implementing Regulation (EU) No 282/2011 as regards certain exemptions for intra-Community transactions,
• Council Regulation (EU) 2018/1909 of 4 December 2018 amending Regulation (EU) No 904/2010 as regards the exchange of information for the purpose of monitoring the correct application of call-off stock arrangements,

are in force and shall apply directly as of 1 January 2020. However, Council Directive (EU) 2018/1910 of 4 December 2018 amending Directive 2006/112/EC as regards the harmonisation and simplification of certain rules in the value added tax system for the taxation of trade between Member States, must be implemented in the domestic legal systems of all Member States as an act of law. Member States shall do this by 31 December 2019. The publication date of the draft amendment of the Polish VAT Act is not yet known.

You can read more about different rapid response tools in the upcoming articles on quick fixes that will appear regularly on our blog. It is a good idea to prepare for these changes in advance, without any rush or fuss.