EU: “VAT quick fixes” to simplify international trade (effective 01/01/2020)

18.10.2019

The European Council formally approved proposals for four “quick fixes” concerning value added tax (VAT) to simplify international trade. The “VAT quick fixes” will be effective beginning 1 January 2020, and will be expected to have considerable implications for businesses trading in international goods.

The VAT quick fixes concern the following four changes:

  • Simplified treatment for call-off stock
  • Uniform rules to simplify chain transactions
  • Mandatory VAT identification number to apply the zero VAT rate
  • Simplified proof of intra-Community supplies

These changes will affect different facets within a business (such as changes to the ERP systems and the tax control framework), and could require businesses to update their administrative processes, VAT compliance procedures, billing processes, and other matters such as contracts and order processes with customers and suppliers.

 

Simplified treatment for call-off stock

To shorten delivery times, it is becoming increasingly common for suppliers to transfer stock to a warehouse or other location (for example, a store or showroom) of a regular customer in another EU Member State. The goods remain the property of the supplier until they are picked up by the customer (this process is also referred to as “call-off stock”). Under the current VAT rules, when a supplier transfers the goods to the call-off stock, it performs a deemed intra-Community supply in its own EU Member State and a deemed intra-Community acquisition in the EU Member State of arrival. As soon as the customer takes the goods out of the call-off stock, the supplier performs a domestic supply. Generally, the supplier will have to register for VAT purposes in the EU Member State where the warehouse is located. At present, most EU Member States have VAT simplification arrangements for call-off stock, but these differ per country.

Under the new harmonized rules, the transfer of goods to a warehouse in another EU Member State will no longer qualify as a deemed intra-Community supply and a deemed acquisition (for a maximum period of one year). As soon as the customer takes the goods out of the stock, the supplier performs a direct intra-Community supply to the customer. The supplier will not be required to register for VAT purposes in the EU Member State of arrival of the goods. The supplier and customer that use this simplification, however, must keep a register that complies with specific conditions. In addition, the supplier must report on the EC sales list that it transported goods to foreign stock. If a supplier does not comply with all the conditions for call-off stock, it must in principle still register for VAT purposes.

Uniform rules to simplify chain transactions

In the case of a chain transaction with consecutive supplies of goods among three or more taxable persons in different EU Member States, the intra-Community goods transport can only be attributed to one link in the chain. This means that the zero VAT rate for intra-Community supplies only applies to one supply. The other supplies are local (domestic) supplies of goods. In practice, there is often discussion about which link must be attributed to the intra-Community goods transport.

Under the new rules, the starting point is that the intra-Community supply takes place in the link in which the goods are supplied to the taxable person that arranges the intra-Community transport or has this arranged. This is usually the first supply in the “link A-B.” Exceptions to this fiction are possible, for example, if intermediary B, which arranges the transport or has this arranged, provides the supplier with a VAT identification number of the EU Member State of dispatch of the goods. In that case, the intra-Community goods transport is attributed to the link between the taxable person arranging the transport or that has this arranged and its customer (in this example the “link B-C”).

VAT identification number for application of zero VAT rate

A customer’s valid VAT identification number is currently a formal requirement for applying the zero VAT rate to intra-Community supplies of goods. However, it has been settled by the Court of Justice of the European Union (CJEU) that, in principle, a taxable person only has to comply with the material conditions in order to apply the zero VAT rate. Therefore, the zero VAT rate cannot formally be refused due to the mere fact that a taxable person did not receive a valid VAT identification number from its customer.

Under the new rules, the use of a valid VAT identification number that the customer communicated to the supplier will be regarded as a material requirement for applying the zero VAT rate. If a supplier fails to state the customer’s valid VAT identification number on the invoice, it will no longer be possible to apply the zero VAT rate as of 1 January 2020. Furthermore, as a condition for applying the zero VAT rate, the taxable person must file an EC sales list.

Simplified proof of intra-Community supplies

The fourth quick fix provides for the harmonization and simplification of the rules on proof of transport for the purposes of applying the zero VAT rate to intra-Community supplies. To be eligible for the zero VAT rate, taxable persons must, for example, prove that the goods were dispatched from one EU Member State to another EU Member State. EU Member States currently maintain different rules to prove this transport, and this leads to uncertainty and significant administrative expense for businesses with cross-border trade. According to the new rules, there is a rebuttable presumption of transport to another EU Member State if the supplier can provide at least two non-contradictory evidential documents that were prepared independently from one another. This may include signed CMR documents, together with a copy of payment for transport issued by the bank. Logistics service providers are expected to play an even more important role under the new rules in respect of the provision of proof for the purposes of applying the zero VAT rate.

Our observation

Businesses involved with cross-border goods transport need to consider how the new VAT rules could affect their transactions in 2020. Prompt action may be essential, given that organizing the administrative and order processes as well as the ERP systems will require time and resources—and not forgetting the fact that tax authorities worldwide are tending more toward digitalisation. The requirements for the collection, analysis, and actual retention of data are rapidly increasing. This means that tax authorities expect taxpayers to implement changes to regulations promptly and correctly within their business.

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CFE Tax News – Statistics Available for EU VAT Mini One-Stop-Shop

Statistics have been made available by the European Commission concerning the VAT Mini One-Stop-Shop (“MOSS”) for the period from 2015 – 2018. The MOSS was introduced in 2015 as a means to collect VAT on telecommunications, broadcasting and electronic services.

The statistics show a significant increase in VAT collected, from 2.7 billion Euro in 2015 to 4.1 billion Euro in 2018 within the EU. Collection increased by over 20% between 2017 and 2018 alone. The statistics also show that the total number of traders registered on MOSS also increased steadily each year.

From 2021 onwards, the MOSS will also be used to collect VAT on distance sale of goods, and concerning services supplied to consumers in the EU.

19-Dec-2017: The main amendments on Romanian Fiscal Code, to enter into force starting with January 2018

Corporate income tax

  • The current provisions regarding the limited deductibility of interest and net foreign exchange losses are replaced by the provisions of EU Directive 2016/1164 laying down rules against tax avoidance practices that directly affect the functioning of the internal market, which will be applicable to companies that are part of a group.
  • The excess indebtedness costs, computed as the difference between the interest revenues and other economically equivalent revenues and indebtedness costs and other economically equivalent costs, including foreign exchange losses, which exceed the EUR 200,000 annual threshold, are deductible for corporate income tax purposes up to 10% of the gross accounting profit, minus non-taxable revenues, plus excess indebtedness and tax depreciation; if this computation base is less than or equal to 0, the non-deductible costs can be indefinitely carried forward and can be deducted when this base becomes positive.
  • Companies that are not part of a group and which have interest expenses and net foreign exchange losses available to be carried forward as at 31 December 2017 can fully deduct said amounts in 2018.
  • An exit tax is introduced to regulate the tax regime for transfers of assets, of tax residence or of the businesses from Romania to other countries.
  • Additionally, a general anti-abuse rule is introduced, according to which tax authorities can ignore a series of arrangements which have been put into place with the sole aim of obtaining a tax advantage.
  • The concept of controlled foreign companies is introduced, according to which certain non-distributed revenues of said entities located in jurisdictions having low tax rates are included in the taxable base of the parent company in Romania.

Tax on micro-company income

  • The income threshold under which companies are required to apply the micro-company regime is increased from EUR 500,000 to EUR 1,000,000.
  • Companies carrying out banking, insurance and reinsurance, capital markets, gambling or upstream oil and gas activities and companies rendering management and consultancy services, regardless of the revenue share derived from said services, are no longer excluded from the application of the micro-company tax.
  • Newly set-up companies having a share capital of at least lei 45,000 or micro-companies which perform a share capital increase to this minimum will no longer have the option to apply the corporate income tax regime.

Income tax

  • The standard income tax rate is reduced from 16% to 10%.
  • It is expressly provided that contributions paid to special social security systems by individuals carrying out independent activities are deductible for income tax purposes.
  • Income tax rates applied to income from intellectual property rights decrease from 10% to 7% for determining the advance payments and from 16% to 10% for determining the final income tax due.
  • The monthly gross salary based on which the personal deduction is granted increases from lei 1,500 per month to lei 1,950 per month; the personal deductions are increased as well; also, regressive personal deductions are provided within the Fiscal Code for gross salary income between lei 1,951 and lei 3,600.

Mandatory social contributions

The social contributions system is changed as follows:

  • The social security contribution is due only by the employee at a rate of 25% from the calculation base (except for cases involving particular or special work conditions, for which the employers also owe social security of 4% or 8% of the calculation base, as the case may be).
  • The health insurance contribution is due only by the employee and has a rate of 10% of the calculation base.
  • A separate contribution of 2.25% is also due by the employer and replaces the unemployment insurance contribution, the contribution for accidents at work and professional diseases, the contribution for medical leave and indemnities and the contribution to the salary guarantee fund.
  • The liability to compute, withhold and pay the social charges remains with the employer.
  • Individuals carrying out independent activities can choose to pay the social security contribution by reference to the minimum monthly gross salary. The health insurance contribution is due also by reference to the minimum monthly gross salary.

Value added tax – VAT

  • A new rule is introduced according to which the right to deduct VAT is refused to a taxable person if it can be proven that said person knew or should have known that the respective transactions were part of a fraudulent chain of transactions.
  • In January 2018, a system of separate Value Added Tax accounts (so called “Split VAT”) will come into force in Romania. The Split VAT system requires the use of separate VAT accounts for all payments and revenues associated with Value Added Tax (input and output VAT). This means, among other things, that invoices for goods and services have to be paid to two separate accounts: the net amount to the business bank account, the VAT element to a separate VAT account. The split-VAT scheme is mandatory for:
    • Companies in insolvency procedure;
    • Companies with delay in payment of due VAT to state budget, if the delay is higher than 60 days and the amount is at least 15000 ron (large taxpayers) / 10000 ron (medium taxpayers) / 5000 ron (small taxpayers).

o   Taxpayers can adopt the system on a voluntary basis, and will receive a tax incentives of 5% reduction of the corporate tax (or corporate tax for micro-business)

Fiscal facilities granted to individual investors – business angels

Law no. 120/2015 regarding fiscal facilities granted to individual investors – “business angels” – has been published. It introduces several fiscal facilities for individuals investing in micro-enterprises and small-sized enterprises, and presents the requirements that need to be fulfilled in order for the facilities to apply.

Details:

Individual investors – “business angels” can benefit from the following fiscal facilities upon investing in micro-enterprises and small-sized enterprises:

  • Exemption from tax on dividends for the first three years from the purchase of the shares. The exemption is granted up to the equivalent of the invested amount.
  • Exemption from tax on capital gains from sale of shares, if the sale takes place at least three years after the purchase of the shares.

New! 15-Jan-2016

As of 01/01/2016, important updates are introduced on Romanian Tax Code, on majority of national and local taxes. The most important updates, by type of tax, are as follows:

  1. Profit tax
    1. General profit tax rate confirmed for 16%.
    2. New allowance for reinvested profit in IT equipment (previously only for machinery)
    3. Maximum interest rate on inter-company loans allowed for deductibility for profit tax calculation is now 4% (previously 6%)
  2. Dividend tax
    1. As of 01/01/2016, new general dividend tax rate is 5% (previously 16%)
    2. Tax on dividends of 0% if a beneficiary hold a minimum 10% of share capital of dividend payer, for at least 1 year at date of payment of dividends.
  3.  VAT
    1. New: General VAT rate reduced at 20% (previously 24%)
    2. Reduced rate of 9% for food industry, accommodation in hotels, catering and restaurants, human and animal care, including drugs
    3. Reduced rate of 5% for books, expositions, museums
    4. New: reverse charge mechanism introduced for real estate industry – land, buildings, part of buildings.
    5. New: Reverse charge mechanism also available for deliveries of mobile phones, laptops, PCs, tablets, gaming console
  4. Local tax
    1. Local tax for buildings is now calculated on economical usage of building – residential or commercial (previously calculated based on ownership).

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