In the past year a few legislative measures were discussed and subsequently adopted on a EU level directed towards the thorough overhaul of the common European value added tax system. The need of such measures is triggered by the cumulative impact of a number of factors.
On one hand, the regulation of the European tax law proves to be inefficient under digital economy conditions. The digitization of the economy, for instance, is a premise for the emergence of new social relations that require tax regulation. Such is the case with online activities as the sale of user generated data and content which remains outside the scope of the current rules. On the other hand, there is the need to prevent and combat VAT frauds resulting in significant losses of tax revenues for the member states.
The existing EU legislative framework for the VAT taxation has been designed to serve as a transitional regime.
Given the vulnerability of the current transitional regime to VAT frauds, the EU Commission works hard to facilitate the process of adoption of a definitive single VAT system which shall function within the territory of the Union the same way as within the the territory of a single member state. A proposal is made this system to be based on the destination principle where the supply of goods and services is taxed in accordance with the legislation of the country of destination.
As a result of the particular steps taken in this direction, amendments of Council Directive 2006/112/EC on the common system of value added tax (referred to below as “the Directive”) are now in force, pursuant to which:
1. prolongation is provided of the term in which member states can apply the optional reverse charge mechanism for payment of VAT on supplies of pre-defined in Article 199a of the Directive goods and services which are susceptible to fraud and the quick reaction mechanism for VAT frauds.
Under the so called “reverse charge mechanism” the responsibility of paying VAT is for the buyer, unlike the general principle according to which VAT is paid by the supplier. The possibility of applying this regime has anti-fraud purposes and is provided particularly for goods and services listed in Article 199a of the Directive. As an anti-fraud measure this same mechanism could be applied with respect to other supplies than those listed in Art. 199a, upon unanimous adoption by the Council based on Commission proposal. This procedure, however, is too awkward when it comes to massive frauds which need emergent reaction. That is why, article 199b of the Directive provides for faster procedure to introduce the reverse charge mechanism under certain conditions, thereby providing Member States with a more adequate and effective response to sudden and massive frauds. This faster procedure is what the quick reaction mechanism is all about. Both mechanisms expire on the 31st of December 2018. Under the amendments this term is prolonged till the 30th of June 2022. The quick reaction mechanism has never been effectively applied so far, but it remains a useful tool and a precautionary measure for exceptional cases of VAT fraud.
2. member states which meet certain criteria can apply temporarily – till 30 June 2022 the so called generalized reverse charge mechanism with regard to domestic supplies of goods and services which are not cross-border and are in the amount exceeding 17 500 euro. Consequently, for all supplies over this threshold the tax burden shifts from the supplier to the buyer. Thus, if a Bulgarian company for instance delivers goods to another Bulgarian company for the amount below 17 500 euro, the first shall charge and pay the VAT due for the supply, as it is now. However, if the supply is to the amount of 17 501 euro or higher, the obligation to charge VAT shall be for the latter – the recipient company. The generalized reverse charge mechanism might be applied only by member states which meet certain conditions related to the VAT gap.
3. simplification of the EU rules on VAT taxation with respect to cross-border transactions and with regard to the role of the VAT identification number in the context of the exemption for intra-community supplies, to the call-off stock regime, to the chain supplies and the transportation evidence to prove intra-community supplies.
4. a possibility is given to the member states which apply reduced rate for supplies of printed publications (books, newspapers and others) to apply the same reduced rate for electronic supplies of these publications and overall to align the VAT treatment of printed and electronic publications.
5. the current arrangement for minimum standard VAT rate of 15% applicable for the period 1 January 2016 – 31 December 2017 remains appropriate and becomes permanent for the purposes of the common EU VAT system.
Of all the amendments in force, probably most relevant for the business are the rules providing simplifications for cross-border transactions or the so called “quick fixes”. These simplified rules have been adopted with Council Directive (EU) 2018/1910 amending Council Directive 2006/112/EC. These rules have some practical implications in so far as they provide for certain requirements with regard to documentation and declaring of the transactions and envisage particular rights and obligations for the parties involved. Most of the provisions are sufficiently precise, clear and unconditional to have direct effect. Pursuant to the Council Directive 2018/1910, member states shall transpose the new rules in their national laws by 31st of December 2019. What amendments shall be proposed and implemented for the purposes of the transposition of the Directive in the Bulgarian VAT legislation remains to be seen.
More on the package of “quick fixes” in the next issue.
Author: Ralitsa Mileva is a lawyer based in Sofia. She is currently a PhD candidate in Financial Law at Sofia University.