Wednesday, July 7, 2010

NEW VAT RULES IN THE EU - Are you aware?

As part of a large scale, phased, amendment of the VAT rules at a European level, a large number of EU VAT rules will change with effect from 1 January 2010. The most significant change concerns the rules for determining the place where a service is supplied according to the VAT rules, and which country can therefore tax these services (the "place of supply" rules). In 2011, 2013 and 2015 a number of smaller changes will follow. In addition to simplifying some of the existing rules, the changes also create new obligations, particularly from an administrative point of view.

All EU member states must implement these European rules into their national legislation. Accordingly, the proposed amendments to the Dutch VAT legislation have been published and are examined below.

Place of supply of services from 2010
Until 1 January 2010, the place of supply of services is where the service provider is established for VAT purposes, according to the ‘basic rule’ (specific rules exist for certain services). With effect from 1 January 2010, this ‘basic rule’ will change: for services provided to businesses (B2B services) the new ‘basic rule’ is that these services are deemed to be supplied where the recipient of the services is established (reverse charge mechanism).

The service provider will not charge VAT but the recipients of these services will have to account themselves for the VAT payable on these services in their local VAT returns under the reverse charge mechanism. This VAT is deductible in the same VAT return according to the normal rules. As a result of this new ‘basic rule’ for cross-border B2B-services, in many cases VAT will no longer have to be charged (and reclaimed).

The changes to the rules that determine the place of supply of services to non-business customers (B2C services) are less far-reaching.

With effect from 1 January 2010, businesses that supply ‘basic rule’ services to businesses in other EU countries will have to periodically report these services by submitting a listing electronically to the tax authorities. These services must be broken down by value per VAT number for each service recipient. Services that are exempt in the recipient’s country should not be included in the listing.

The listing should be submitted monthly to the Dutch tax authority, but all businesses may opt to submit quarterly listings. This choice should be communicated to the Dutch tax authority in a timely manner.

Refund of foreign (EU) VAT
With effect from 1 January 2010 it will be easier for EU established businesses to reclaim foreign (EU) VAT. The new procedure is also applicable to foreign (EU) tax paid in 2009. Where previously businesses had to send a number of documents and all original invoices by mail to each individual foreign tax authority, Dutch established businesses can, from 2010, apply for a refund of foreign (EU) VAT with the Dutch tax authority via the internet. The Dutch tax authority will assess the refund applications and forward them to the relevant foreign tax authorities.

From 1 January 2010, the costs on which VAT is reclaimed will have to be classified according to ten categories (nine specific categories and a general category). In addition, the applicants must include details of their deductible VAT method of calculation (if applicable) in the country of establishment. In addition, the foreign tax authorities will be required to process requests within a certain time. If they exceed the specified time (different time limits will apply in different circumstances), they will have to pay interest to the applicants.

Tax point – when is VAT due?
An additional rule will be introduced into the Dutch VAT legislation regarding the time at which VAT should be accounted for, i.e. the tax point. Where the service recipient is required to account for VAT under the reverse charge mechanism (as explained above), the tax point will be the moment when the service is provided.

In most cases, recipients of these services will not know (or will have no way of knowing) at what moment the services are provided or the value. They will usually rely on the invoices issued by the service providers. If they receive these invoices after the moment at which the VAT was due according to the new rule, strictly, they will be late in accounting for this VAT.
This new rule will have the most significant impact for businesses that cannot fully deduct input VAT, as these businesses will actually have to pay (part of) the VAT due on these services. Businesses with a right to fully recover input VAT can normally fully deduct the VAT accounted for on these services in the same VAT return.

In addition, where these services are supplied cross-border within the EU, there is a chance that mismatches will occur between the VAT accounted for in the VAT returns of the recipients and the services reported in the listings submitted by the service providers. This could result in enquiries from the tax authorities.

Important: what to do now?
The date of 1 January 2010 has passed and many are not aware of the new rules, it is a lot that needs to be done:

Both for determining the place of supply of services as well as for completing the new listing, businesses will have to establish whether their (EU) clients are VAT taxable businesses.

For this purpose, clients will have to provide businesses with their VAT identification numbers and these numbers should be checked by the service providers with the Dutch tax authority. When a customer provides a business with its VAT identification number, and the business has checked this VAT number with the Dutch tax authority, the business may assume that it will provide its services to a VAT taxable business.

Businesses will have to adjust their ERP systems to accommodate the new rules. This applies not only to the place of supply, but also, for example, when invoices include a reference to specific sections of the relevant legislation. ERP systems should also allow compilation and easy access to all data relevant for completing the new listings.

The procedures for reclaiming foreign (EU) VAT will have to be adjusted.
Everyone in your business that is involved in processing and raising invoices, and the completion and filing of VAT returns and listings, should be familiar with the new rules in time to implement new procedures and be fully compliant.

Good luck!
Jarl Moe

Thursday, June 17, 2010

Cyprus to increase their corporation tax

THE GOVERNMENT said yesterday it plans to raise its corporate tax rate, one of the lowest in the EU, by one percentage point to 11 per cent for two years to contain a deficit that is more than double EU limits.

The announcement, which drew the ire of businesses, came a day after the EU formally took disciplinary action against Cyprus for a projected deficit of 7.0 per cent in 2010, well above a limit of 3.0 per cent under EU rules.

"This will be (valid) for two years. It is a temporary measure to improve the budget position," Finance Minister Charilaos Stavrakis told Reuters. Businesses said the tax rise could stifle the island's nascent recovery from its first recession in more than three decades.

The government said it would submit legislation raising the tax to 11 from 10 per cent for parliamentary approval this week.

Stavrakis said the higher tax would bring in an extra €73 million for the government, based on calculations of some €730 million in corporate tax earnings in 2009.

Tax revenue has been crimped by the poor performances of the real estate and tourism sectors. Cyprus's economy contracted by 1.7 per cent in 2009 but stabilised in the first quarter of this year.

The tax measure will affect local firms and hundreds of international companies which take advantage of Cyprus' low-tax status.

"This is like killing the sacred cow of our economic model," said Stelios Platis, an independent economist.

"Businesses have relocated here because of our stable tax regime and low taxes. If you create instability this is the wrong thing to do. It is definitely wrong," he said.

Local and foreign companies have paid 10 per cent corporation tax since 2002 after Cyprus scrapped a 4.25 per cent tax on offshore companies under pressure from the EU, which it joined in 2004.

By phasing out the discrepancy, it also brought down the tax rate for domestic companies to 10 per cent from 20 and 25 per cent, depending on their turnover.

The employers and industrialists federation, (OEV), said the measure was short-sighted. It said the construction industry would be hard hit as the finance ministry is also planning to introduce a new calculation of tax in real estate transactions.

Until now property tax has been calculated on the basis of 1980 land values but in future will reflect current market values for properties worth €170,000 and above. The plan has yet to obtain parliamentary approval.

"While other countries are taking measures to drastically cut spending, including the state payroll, Cyprus is unfortunately opting to tax businesses, harming our credibility as an international business centre," OEV said.

Jarl Moe