Annual Tax Act 2020 - Effects on Value Added Tax
Annual Tax Act 2020
The Annual Tax Act 2020 addresses legislative needs that have arisen from EU law and ECJ and Federal Finance Court case law. The special situation of the Corona crisis also led to legislative adjustments. Points to be emphasized are:
- Introduction of a home office lump sum,
- Extension of the investment deduction,
- Legal definition of the additionality requirement for employer benefits,
- Facilitation of the renting out of housing at reduced rates, and
- Implementation of the so-called VAT digital package.
In the following, we have compiled a non-exhaustive selection of what we consider to be the most important changes with regard to the implementation of the so-called VAT digital package.
The EU VAT E-Commerce Package
The EU VAT E-Commerce Package amends and expands the existing distance selling regulation of Section 3c German VAT Act (“VATA”). In this context, the existing Mini-One-Stop-Shop (MOSS) will be upgraded to an OSS or IOSS (Import-OSS) and the scope of application will be considerably extended. If electronic interfaces (in particular online marketplaces) are involved, a chain transaction will be simulated, through which, for example, online marketplaces will be treated like suppliers, in contrast to civil law. The import VAT exemption for shipments under € 22 will be revoked. Imports of consignments with a material value of up to € 150 will be tax-exempt in future or may be handled by service providers using a special procedure.
According to Section 3c VATA, the place of supply of distance sales to non-entrepreneurs and certain persons treated as such, is at the end of the movement of goods. For this rule to be applicable, the goods must be transported by the supplier, on his account or with his indirect participation. It is irrelevant where the supplier is established. Depending on the customer it is decisive for the applicability of Section 3c VATA that the acquirer neither exceeds the acquisition threshold of the Member State of destination nor renounces it.
The new regulation distinguishes three constellations:
- In the case of intra-Community distance sales in accordance with Section 3c para. 1 S. 2 VATA the goods move from one EU member state to another - domestic supplies are not included. The place-of-supply rules for intra-Community distance sales does not apply if the supplier is established in only one Member State and if he does not exceed the insignificance threshold (which also includes other services as defined in Section 3a para. 5 S. 2 German VAT Act) of € 10,000. The supplier may renounce the application of this threshold.
- If goods are imported from a third country into one Member State and are forwarded afterwards to another Member State, the place of supply will shift to the end of the movement of goods in accordance with Section 3c para. 2 German VAT Act. A delivery threshold is not applicable hereto.
- If the goods are imported from a third country and remain in the Member State of importation and if the supplier uses the IOSS in accordance with Section 18k VATA, the place of supply will shift to the customer’s location in accordance with Section 3c para. 3 VATA.
One-Stop-Shop (OSS) and Import-One-Stop-Shop (IOSS)
The purpose of the OSS rules is to relieve entrepreneurs of VAT obligations in various Member States when they provide services to customers that are taxable where the customer is established. Under certain conditions, they allow all VAT owed to be declared and paid in only one single Member State. In a complex procedure, this Member State allocates the VAT to the other Member States, with the deduction of a settlement fee. Participation in OSS or IOSS is voluntary for the entrepreneur.
- The OSS according to Section 18i VATA applies to entrepreneurs who are not established in the European Union but provide other services to non-entrepreneur and persons treated as such in the EU for which they owe VAT. The innovation hereby is that all kinds of different services are now covered, not only TC supplies (telecommunications etc.).
- Section 18j VATA applies to EU-resident entrepreneurs carrying out intra-Community distance sales in accordance with Section 3c para. 1 S. 2 and 3 VATA, domestic supplies via electronic interfaces in accordance with Section 3 para. 3a S. 1 German VAT Act and other services to private customers. This OSS can only be used uniformly for all Member States and all types of supplies concerned.
- The IOSS in accordance with Section 18k VATA applies to distance sales of goods imported from a third country. On the one hand it applies to supplies that are not sold via an electronic interface according to Section 3c para. 2 or 3 VATA. On the other hand, it applies to for supplies sold from an interface operator who, due to the chain transaction fiction of Section 3 para. 3a S. 2 VATA, becomes a fictitious supplier for distance sales from the third country (see below). If this IOSS is used, the import will be tax-exempt in accordance with Section 5 para. 1 no. 7 VATA.
An entrepreneur who uses his electronic interface (e.g. online marketplaces) to support the supply of goods of an entrepreneur to non-entrepreneurs and certain persons treated as such shall be regarded as if he had received and delivered the goods himself if he fulfills certain requirements. Therefore, a chain transaction is simulated in which the civil-law seller first delivers to the interface operator, who then delivers the goods to the customer.
This applies to movements of goods within a Member State or between two Member States (Section 3 para. 3a S. 1 VATA) assuming the supplier is not located within the EU. Additionally, this regulation applies to distance sales from third countries with a material value of up to € 150 promoted by the electronic interface of an EU entrepreneur (Section 3 para. 3a S. 2 VATA). However, the residence of the supplier is not of importance in these cases.
In accordance with Section 3 para. 6b VATA, the supply of the interface operator is always to be regarded as the moved supply. Accordingly, the supply by the foreign seller to the interface operator is the so-called silent (non-moving) supply. It is taxable at the beginning of the movement of goods according to the general rule of Section 3 para. 7 S. 2 no. 1 VATA. If the supply is taxable in Germany, it will be tax-exempt in accordance with Section 4 no. 4c VATA.
New import regulations
Section 1a import VAT exemption ordinance (EUStBV), which implies that imports with a value of up to € 22 are exempt from import VAT, is repealed due to the high tax losses resulting from abuse of this provision. Therefore, an import clearance will be required for each consignment. For distance sales by entrepreneurs not established in the European Union, whereby the goods are sent directly to customers in the EU after importation, a special procedure is introduced with Section 21a VATA. According to this procedure, service providers (post office, forwarding agents, etc.) may declare the goods for free circulation in the name and on behalf of the recipient. However, they are not entitled to deduct any input VAT due to lack of power of disposal. Thus, they are obliged to collect the import VAT from the recipient. This new procedure will not be applicable if the supplier uses the IOSS according to Section 18k VATA.
Other amendments to the German VAT Act
Additional new regulations for operators of electronic interfaces
The chain transaction fiction explained above is probably the most significant change for online marketplaces. In addition, the liability of the operator of electronic interfaces, for any VAT that is not paid by the seller under civil law (Section 25e VATA) is preserved. This regulation is slightly modified by the German Annual Tax Act 2020 and adapted to the other legal changes. If the chain transaction fiction of Section 3 para. 3a VATA applies, the liability provision of Section 25e VATA does not apply. If the interface operator proves that the seller has a valid VAT ID number at the time of supply, the seller can release himself from liability, Section 25e para. 2 VATA. According to the explanatory notes to the German Annual Tax Act 2020 (p. 170), this means that the operator must not only record the VAT ID number provided to him (Section 22f para. 1 S. 1 VATA), but also regularly check its validity.
An invoice amendment is not a retroactive event
According to current case law, under certain conditions the recipient of a service would be allowed to retroactively claim input VAT if the corresponding invoice was initially incorrect. In this context, the question is what will actually happen if the assessment period in which the invoice was originally received has already become statute-barred. Section 14 para. 4 S. 4 VATA clarifies that the invoice amendment is not a retroactive event in the sense of Section 175 para. 1 S. 1 no. 2 German Tax Code and Section 233a German Tax Code. This already corresponds to the opinion of the tax authorities, cf. BMF letter of 18 September 2020, document no. 2020/0920350. After expiry of the assessment period, input VAT is therefore irretrievably lost. Interest on additional payments due to the deduction of input VAT from the incorrect invoice does not lapse with the correction. The admissibility of this regulation under EU law is sometimes doubted in view of the outstanding importance of input VAT deduction in the VAT system.
Cross-border discounts in supply chains
The following already applies: If an entrepreneur grants a discount not to his direct customer but to a subsequent customer in a supply chain, this will decrease his VAT assessment basis. It is not the direct but the subsequent customer who is obliged to correct his input VAT deduction. Input VAT will not require adjustments if the entrepreneur’s supply is not taxable. The new regulation in Section 17 para. 1 S. 6 VATA covers the case in which the supply of the entrepreneur is taxable, but the supply to the subsequent customer is tax-exempt. In this case the entrepreneur is not allowed to reduce his tax base.
Non-payment of VAT is sanctioned more severely
The previous Section 26b VATA is cancelled and taken over in a modified form in Section 26a VATA. Even under the previous regulation, an administrative offence is committed by anyone who does not pay the VAT shown in an invoice at the due date. The new regulation renounces the reference to the tax statement in the invoice. Sections 18, 18i, 18j and 18k VATA are supplemented by an explicit requirement to pay VAT. This removes any uncertainties in the previous regulation. As the regulation requires intent, a corresponding Tax Compliance Management System gains even more significance here. It should be noted that VAT will become due on the 10th of the following month even if no preliminary VAT return is submitted. The three-day grace period for late payment fines according to Section 240 para. 3 German Tax Code does not apply here. An extra charge for delay or late payment may be set additionally.
Decentralized taxation procedure for federal and state governments
Under the validity of Section 2 para. 3 VATA (old version) the tax authorities allowed the federal and state authorities to decentralize and independently report their VAT without a legal basis. According to Section 2b VATA (new version), the concept of commercial businesses is no longer used, and therefore also the connecting point for (non-standardized) decentralized taxation. Section 18 para. 4f and 4g VATA creates the new term of the organizational unit, which submits the VAT returns for its own. It is possible to form subordinate organizational units. Superordinate organizational units can fulfill the VAT return obligations of the subordinate ones. The application of this new regulation can be renounced.
Entry into force
According to Article 34 German Annual Tax Act 2020, the new regulations regarding invoice correction (B / 2.) and cross-border discounts (B / 3.) will come into force on the day after their announcement.
On 1.1.2021, the new regulations of the decentralized taxation procedure for federal and state governments (B / 5.) will come into force.
The new regulations concerning the EU VAT E-Commerce Package (A / 1.–2.), operators of electronic interfaces (A / 3. and B / 1.) and the new import regulations (A / 4.) will come into force on 1.7.2021 in accordance with Section 27 para. 33 VATA or Art. 50 para. 6 German Annual Tax Act 2020 (the regulations for the OSS and IOSS [Sections 18i–k VATA] already on 1.4.2021 with effect from 1.7.2021 Art. 50 para. 5 German Annual Tax Act 2020 in conjunction with Section 27 para. 33 VATA).
The new regulations mentioned here regarding the EU VAT E-Commerce Package were originally intended to apply to services performed as of 1.1.2021. However, at the EU level, the previously set effective date was postponed to 1.7.2021 due to the corona pandemic; the notification of participation to the OSS was postponed from 1.10.2020 to 1.4.2021.
The postponement of the effective date was made because the EU VAT E-Commerce Package makes it necessary for all member states to update their IT systems to apply the originally adopted Regulation (EU) 2017/2454. To respond to the impact of the Corona pandemic, Member States have now been given six months more time to update their IT systems.