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Previous articles on the 1996 Tax Act have presented two VAT changes resulting from the 1996 Tax Act, one of which is potentially of considerable importance to banking consortiums. The other modification concerns the treatment of what was in our article misleadingly referred to as "repair". This is, however, only one aspect of processing work performed on goods for others (job-processing). We therefore wish to comment more amply on this topic and to cover two others as well as follows:

-- VAT taxation of job-processing

-- Taxation of pre- and post-carriage directly connected to intra-community transport of goods

-- and

-- Input VAT recovery procedures.

The changes in the first two of the above three areas were necessary to bring Germany's tax law into compliance with the Second VAT Simplification Directive.

a) Job-processing in another EU country

Under the VAT law valid through 31 December 1995 (old law), the processing of another's goods in such manner as to change their function or nature could under certain circumstances result in an intra-community acquisition by the owner of the goods and in an intra-community delivery by the processor. The intra-community delivery is tax-free under certain circumstances.

Processing of goods without changing their function (e.g. repair) is presently treated as a service. The service is deemed performed at the place where the work is physically carried out (sec. 3a par. 2 no. 3 c UStG). This service is free of tax if the work is carried out for an entrepreneur resident abroad who places his order using a VAT ID number issued to him in another EU country and would be entitled to deduct the input VAT in full, provided he evidences this by means of an official entrepreneur's certificate (sec. 4 no. 1 c aa UStG).

Under the new law, the processing of goods belonging to another (job-processing) is always treated as a service whether or not the nature or function of the goods is changed thereby. As a consequence of the change, the delivery fiction in old sec. 3 par. 1a no. 2 UStG and the corresponding acquisition fiction in old sec. 1a par. 2 no. 2 UStG have been deleted.

If the object is moved out of Germany following the work performed on it, the place of performance can be shifted to another Member State if the customer provides the processor with a VAT ID number issued by that Member State (new sec. 3a par. 2 no. 3 c UStG).

b) Pre- and post-carriage directly connected to intra-community transport of goods

Under present law, the transportation of goods inside Germany either prior or subsequent to their intra-community transport (pre-carriage or post-carriage, also known as "leads and lags") is taxable in Germany. An exemption can apply if transportation is provided for an entrepreneur resident abroad who uses a VAT ID number issued by another EU member state and shows that he is entitled to deduct input VAT in full.

As a result of the new law (sec. 3b par. 3 sentence 3 UStG) taking effect on 1 January 1996, pre-carriage and post-carriage will be assimilated to the intra-community transport which they precede or follow if directly related thereto. The same applies to services ancillary to such pre-carriage and post-carriage (loading, unloading, and transhipment).

c) Input VAT recovery procedures

Under the old law, the recovery of input VAT by entrepreneurs not resident within the country is possible under sec. 59 ff. UStDV irrespective of whether the entrepreneur in question is resident in another EU member country or not.

As a result of the 1996 Tax Act, German VAT will be recoverable by entrepreneurs resident outside the Union only if no tax comparable to VAT is levied in the country in which the foreign entrepreneur has his registered office or if the comparable tax levied in the country of the applicant is also refunded to German entrepreneurs (reciprocity).

Furthermore, the recovery of input VAT on flat rate travelling expenses and the purchase of motor fuel is abolished for all entrepreneurs who are not resident within the EU.

It should be noted that these new rules are retroactive to 3 June 1995.

Besides the tense budgetary situation, the main reason for the restriction of the recovery procedures is the sharp increase in the number of forged invoices, particularly from eastern Europe.

Disclaimer and Copyright
This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.