DStV Position Paper S 05/24 Federal Ministry of Finance

On December 8, 2022, the European Commission proposed a comprehensive package of measures to make the EU's VAT system more efficient and fraud-resistant for businesses (see EU Commission proposal, COM (2022) 701 final, dated December 8, 2022). These planned measures for "VAT in the Digital Age" (ViDA) broadly encompass three legislative packages.

In light of the intended political agreement of the member states in the ECOFIN Council under the Belgian presidency, we, as the German Tax Advisors Association (DStV), would like to comment on an aspect of the ViDA proposal. This concerns the planned extension of the reverse charge mechanism according to Article 194 VAT Directive-E (reverse charge procedure).

A. Preface

The EU Commission plans to minimize the number of VAT registrations for entrepreneurs. This includes improving the existing One-Stop-Shop and Import-One-Stop-Shop systems, as well as expanding and enhancing the reverse charge procedure, where the tax liability is reversed. As DStV, we fundamentally support these plans.

The reverse charge procedure is seen as an effective means of combating VAT fraud, as already outlined in the DStV information dated January 20, 2022. The coalition agreement 2021-2025 between SPD, Bündnis 90/Die Grünen, and FDP also emphasizes the importance of this procedure in relation to a definitive VAT system (Dare More Progress, p. 132).

The planned expansion of the reverse charge procedure within the framework of ViDA should therefore be extended to further scenarios. The following explains why this is considered particularly important for small and medium-sized enterprises (SMEs) in Germany.

B. Reverse Charge for Services by Non-Resident Companies, Art. 194 Para. 1 VAT Directive-E

The aforementioned proposal by the EU Commission aims to reduce the number of cases where VAT registration in another member state would be required. For this purpose, the proposal provides for the reversal of tax liability if the supplying entrepreneur is not resident in the member state where VAT is due and the service is provided to an entrepreneur who is VAT registered in the member state of consumption (see Article 194 Paragraph 1 of the VAT Directive - VAT Directive-E).

So far, member states have the option to provide for the reverse charge procedure in the mentioned cases according to Article 194 Paragraph 1 of the VAT Directive. Germany currently makes very limited use of this option, mainly for work supplies by foreign entrepreneurs (see § 13b Paragraph 2 Number 1 in conjunction with Paragraph 5 Sentence 1 of the German VAT Act - UStG). In the event of an agreement, § 13b UStG must be accordingly expanded.

This change will result in sales by non-resident entrepreneurs in the Business-to-Business (B2B) sector being taxed much more frequently under the reverse charge procedure. This offers several advantages to the non-resident entrepreneur.

On one hand, reversing the tax liability incurs fewer administrative costs. For example, the question of the correct tax rate for the service provided does not arise. On the other hand, some contractual partners prefer billing via reverse charge. Thus, a domestic company receiving services under the reverse charge procedure does not have to prepay the input tax and wait for the refund as part of the VAT advance return. This allows the service-receiving company to retain a liquidity advantage. There is therefore a risk that the planned new regulation creates incentives to procure goods from foreign entrepreneurs instead of domestic competitors.

This could disadvantage domestic business competitors and weaken the economic location, particularly resident small and medium-sized enterprises (SMEs).

One way to avoid this disadvantage would be to allow domestic companies to also apply the reverse charge procedure in the B2B sector. However, Germany could not independently determine this due to the mandatory compliance with the VAT Directive.

Therefore, Germany should urgently advocate at the European level within the framework of the ViDA agreement for a corresponding adjustment of the VAT Directive. This would also allow the federal government to fulfill its commitment in the coalition agreement to advocate for a definitive VAT system at the EU level, such as the reverse charge procedure.

Already in 2005/2006, both Austria and Germany attempted to pave the way for the reversal of tax liability in the B2B sector by submitting corresponding authorization requests to the Commission. However, the Commission rejected these at the time due to the high administrative burdens for businesses and administration associated with the specific plans at that time.

Since then, the initial situation has significantly changed, particularly due to increasing technologization. With the planned transition to electronic invoices in the B2B sector and the resulting implementation of a reporting system, the discussion about a general reverse charge procedure in the B2B sector should be revisited. This view is also shared by some voices from academia.

Therefore, Germany should advocate for an amendment within the legislative initiative "VAT in the Digital Age" to avoid disadvantaging domestic companies. Specifically, member states should have the option to provide for a reversal of tax liability in cases where sales in the member state are reported via a reporting system according to Articles 271a and 271b of the VAT Directive-E. In this way, the legal basis for introducing the general reverse charge procedure in the definitive VAT system would also be created, as agreed in the coalition agreement.