Claudia Hillek, KPMG Munich
For editorial cut-off date, disclaimer, and notice of copyright see end of this article.
Important changes were made to Germany's VAT law (officially the Turnover Tax Act or Umsatzsteuergesetz – UStG) with effect from 1 January 2002. These changes are contained in the VAT Anti-Fraud Act (Steuerverkürzungsbekämpfungsgesetz) and the 2001 Tax Amendment Act (Steueränderungsgesetz 2001). Non-VAT aspects of these bills are discussed in articles in KPMG German News no. 1/2002 p. 25 and 39 (articles nos. 246 and 249).
1. VAT Anti-Fraud Act
The VAT Anti-Fraud Act is aimed at schemes involving wrongful credit (deduction) of input VAT, in particular fraudulent practices by which input tax credits are claimed for VAT that is invoiced, but never paid. To curtail such practices, the VAT control and security systems are tightened. The risk of tax revenue shortfalls is reduced by making refunds of excess creditable VAT contingent on the posting of security and by extending the scope of secondary VAT liability. The new legislation also defines new tax crimes and administrative offences to aid in the fight against organised tax fraud. Moreover, monthly (as opposed to quarterly) filing of VAT returns has been made the norm for newly registered firms for the period from initial registration until the end of the calendar year that follows the year of registration, irrespective of VAT liability. Finally, the tax authorities have been given authority to conduct no-warning on-site VAT inspections that are unrelated to a pending field audit.
The major provisions of the VAT Anti-Fraud Act are described in sec. 1.2 ff. below.
1.2 Purchaser's liability for supplier's wrongful failure to remit VAT
The new legislation seeks to combat so-called carousel frauds by imposing VAT liability on the recipients of supplies under certain circumstances. New § 25d UStG makes the purchaser of goods or services liable for VAT separately shown on the related invoice where:
- the issuer of the invoice (generally, the supplier) fails to remit the invoiced VAT either in accordance with a premeditated intention not to remit or because of intentional or grossly negligent inability to remit, and
- the recipient of the supply was aware of these circumstances at the time of contracting for the relevant supply.
Where the above requirements are met with respect to several entrepreneurs in the chain of supply, they are all jointly and severally liable.
1.3 Posting of security for refund of input VAT
Entrepreneurs are in principle entitled to a refund where creditable input VAT incurred exceeds output tax invoiced. In order to guard against refunds obtained on false pretences, firms can now be required to post security in order to receive refunds with respect to the period covered by a monthly or quarterly VAT return. New § 18f UStG states that the tax authorities may, with the taxpayer's consent, require security to be posted before refunding VAT pursuant to such a return. If the taxpayer refuses to consent, the tax refund will be delayed considerably. The legislative history indicates that the tax authorities are supposed to invoke the new provision where there is reason to doubt the legitimacy of the input tax credit claimed. Insistence on security in other circumstances might therefore be challenged as an abuse of discretion.
While security can in theory be posted in cash, the customary practice is to provide a bank guarantee, which will result in additional cost for the firms affected. Such firms will, however, have no alternative but to accept the extra expense if they wish to obtain refunds of excess creditable VAT under the fast-track monthly and quarterly filing procedures.
1.4 New criminal and administrative offences
New § 26b UStG imposes an administrative fine of up to €50,000 for failure to remit all or part of the VAT separately stated in an invoice by the time required under VAT law. Where the failure to remit is the work of a band formed for the purpose of repeated commission of such acts or part of a commercially organised activity, new § 26c UStG increases the penalties to criminal fine or imprisonment of up to five years.
In addition, new § 370a AO defines the new crime of organised tax evasion (tax evasion committed by a band or as a commercially organised activity). The minimum punishment for violation of the new offence is imprisonment of one year, the maximum sentence is ten years.
1.5 No-notice VAT inspections
From 1 January 2002 onwards, new § 27b UStG authorises the tax authorities to enter the premises of persons engaged in an independent commercial or professional business for the purpose of gathering information that may have VAT relevance. Access is permitted at any time during normal working hours without prior notice. Inspections are independent of tax field audits.
This provision permits the tax authorities to gather information that they consider to have potential VAT relevance. Taxpayers must thus expect unannounced visits from the tax authorities even in the absence of reasonable cause to suspect the commission of a tax crime or tax administrative offence. The tax authorities are authorised to require the persons subject to VAT inspection to reply to questions asked and produce books, records, business papers, and other documents regarding matters of relevance for the VAT inspection. The findings of a VAT inspection may be used for purposes of other taxes as well. Where the findings of a VAT inspection so warrant, a full field audit under § 193 AO may be commenced immediately without prior service of an audit order under § 196 AO. Written notice of the transition from inspection to audit is all that is required.
1.6 Filing of monthly VAT returns and notice of commencement of a commercial or professional business
Enterprises that commence a professional or commercial activity (such as start-up companies or foreign enterprises that begin German operations and register for VAT) must now file VAT returns on a monthly basis for the rest of the year in progress and the calendar year to follow regardless of the amount of VAT owing. This requirement, like that of posting security in order to obtain swift refund of excess input tax paid (see above), imposes a burden on start-up businesses.
2. 2001 Tax Amendment Act
The 2001 Tax Amendment Act also makes significant changes in VAT law. Above all, the old VAT withholding system and the zero withholding procedure have been eliminated in favour of a new reverse charge system under which VAT liability is shifted from the supplier to the purchaser. Regulations issued by the Federal Ministry of Finance on 5 December 2001 provide guidance on application of the new system.
2.1 Elimination of withholding system and zero withholding procedure; new reverse charge system
Until 1 January 2002, the Federal Republic of Germany was the only member state of the European Community that had not implemented the so-called "reverse charge system". Instead, Germany handled the situations addressed by the reverse charge system by means of VAT withholding rules under which withholding was waived if certain conditions were fulfilled (so-called zero withholding procedure). By switching to the reverse charge system, which is based on the 6th EC Directive, Germany has brought its VAT law in this area into line with that of the rest of European Community. Below we summarise the system in effect through the end of 2001 before describing the central features of the new law that applies from 2002 onwards.
2.2 Law in effect through 31 December 2001
The old withholding rules and zero withholding procedure were contained in old § 18 (8) UStG and old §§ 51 ff. UStDV. They applied to the following services taxable in Germany that were effected by entrepreneurs (businesses) not resident in Germany (non-resident entrepreneurs):
- Certain work involving the manufacture, construction, or processing of tangible objects including buildings where control over the finished product is transferred to the purchaser by the non-resident entrepreneur in Germany (so-called "work supplies");
- All services performed by non-resident entrepreneurs in Germany;
- Supplies of collateral to which the secured party receives title from the party providing security outside of insolvency proceedings;
- Supplies of real estate during an execution sale by public auction.
The withholding rules applied to the last two categories of supplies even if the performing entrepreneur was established in Germany instead of in another jurisdiction.
The following persons were required to withhold and remit VAT:
- entrepreneurs (as defined by VAT law); public law juridical persons; and
- small entrepreneurs (as defined by VAT law), a farmer or forester or entrepreneur subject to flat-rate VAT, and entrepreneurs effecting only tax-exempt (zero-rated) supplies.
It made no difference whether the recipient of the supply was established in Germany or not, or whether the supply related to the recipient's business or non-business activities.
The recipient of a supply subject to withholding was required to withhold the German VAT owing with respect to the supply and remit the proper amount to the appropriate German tax office.
Because of the recipient's input tax credit, the obligation to withhold was waived where the conditions of the so-called "zero withholding procedure" were met. The essential requirements were (i) that no VAT was shown on the invoice issued by the supplier and (ii) that, if VAT had been shown on the invoice, the recipient of the supply would have been entitled to deduct the full amount (full input tax credit).
The old withholding rules did not apply to barter or quasi-barter transactions.
2.3 Reverse charge system for years 2002 ff.
2.3.1 In General
The reverse charge system took effect on 1 January 2002. Under this system, the liability for VAT and the responsibility for paying tax on certain supplies is shifted from the supplier to the recipient. § 13b UStG makes the recipient liable for VAT on certain supplies effected by non-resident entrepreneurs (entrepreneurs established in foreign jurisdictions).
The types of supplies subject to the new reverse charge system are the same as those subject to the old withholding rules (see sec. 2.2 above).
The definition of non-resident entrepreneur is also unchanged. Non-resident entrepreneurs are entrepreneurs having neither their domicile, their legal seat (registered office), their principal place of management nor a registered branch establishment (Zweigniederlassung) in Germany, on the Island of Helgoland, or in a free trade port within the meaning of § 1 (3) UStG. Foreign resident entrepreneurs are treated as established in Germany if they own and let domestic real property, whether the rental is subject to VAT or VAT-exempt (cf. sec. 240 (2) UStR). Resident or non-resident status is determined at the time of performance of each supply.
2.3.2 New requirements for the supplier
Since the reverse charge system shifts VAT liability for certain supplies effected by foreign entrepreneurs from the supplier to the recipient, foreign suppliers are required to note on the invoice that their customer is liable for VAT on such supplies (new § 14 (1) sent. 1 UStG in conjunction with § 14a (4) UStG). The shift in tax liability is not contingent on this notation, and failure to include it does not affect the parties' substantive VAT liability. The recipient is still liable in such cases.
The invoice is not permitted to contain separately stated German VAT. A supplier who nevertheless shows VAT on its invoice is liable for the amount shown under the rule of § 14 (2) UStG. This liability is in addition to, not in lieu of, the recipient's VAT liability. However, it is possible to escape such liability by amending the invoice under certain circumstances.
2.3.3 New requirements for the recipient
There are changes as well for the recipient of a supply. The invoices received by the recipient will no longer show German VAT. While recipients need pay to the supplier only the invoice amount, which is net of VAT, they are required to calculate the VAT owing on the invoice, include the appropriate amount on their monthly or quarterly VAT returns, and remit the amount due. The tax authorities thus collect the VAT owing through the instrumentality of the recipient. However, recipients are also entitled to claim the relevant amounts as input tax on the same return to the extent they are entitled to an input tax credit under § 15 UStG.
The new reporting obligations incumbent on recipients are fulfilled by filing monthly and annual VAT returns. If it is unclear whether the supplier is a non-resident, the recipient of the supply has no VAT liability if its supplier furnishes certification of German residence from the tax office with jurisdiction over the supplier.
2.3.4 Accrual of tax
Under the old withholding rules, tax in principle accrued when the recipient of a supply paid the supplier's invoice. By contrast, the accrual of VAT under the new reverse charge system follows the standard VAT rules based on the agreed consideration. Except for partial payments or payments on account, the time of payment is irrelevant. Specifically:
- Tax accrues under § 13b (1) UStG when the invoice is issued or upon expiration of the calendar month following that in which the supply was effected, whichever is earlier.
- If the consideration is received in whole or part prior to performance of the supply or partial supply, VAT accrues pro rata under § 13b (1) sent. 3 UStG upon expiration of the reporting period in which payment was received.
2.3.5 Recipient's accounting obligations
The VAT owed by the German purchaser is calculated on the basis of the agreed consideration. This will generally be the amount shown on the invoice received. The applicable rate depends on the general rules: 16 % in most cases, 7 % for supplies subject to the reduced rate. Both the recipient and its foreign resident supplier are required to keep records showing above all the VAT tax base, the amount of tax owing for each of the two tax rates, and the time of receipt of consideration (§ 22 (2) sent. 1 no. 8 UStG).
2.3.6 Accounting system changes
The implementation of the new reverse charge system necessitates certain accounting system changes. Supplies for which VAT liability is shifted from the supplier to the recipient should be recorded on separate accounts (alternatively on collective accounts using a special code), just like intra-community acquisitions of goods under prior law. Information must also be recorded on the identity of the supplier, the nature of the supply, the VAT tax base, the amount of VAT owing thereon, and the time of receipt of consideration.
The recipient of a supply subject to new § 13b UStG may account for the transaction as follows:
1. Dr. Asset account (or expense account)
Cr. Cash account (or account payable)
2. Dr. Input VAT receivable (§ 13b UStG)
Cr. VAT payable (§ 13b UStG)
Use of the accounting codes previously used in recording transactions subject to the old withholding system or the zero withholding procedure must be discontinued. However, these codes must remain functional for evaluation purposes in case this is required during a future tax audit.
2.3.7 Barter transactions now covered
Although not subject to the old withholding rules, barter and quasi-barter transactions are covered by the new reverse charge system.
2.3.8 Supplies received by non-residents
Under the old withholding tax system, situations were common in which a non-resident entrepreneur effected supplies subject to German VAT, the recipients of which were likewise non-resident entrepreneurs. In such cases, it was sometimes possible to reach agreement with the German tax authorities for the foreign supplier to issue invoices that showed German VAT and remit the amounts owing to the tax authorities. This permitted the non-resident recipients to avoid registering for VAT purposes in Germany.
As recipients of supplies subject to the new reverse charge system, foreign businesses (entrepreneurs) are required to file monthly and annual VAT returns in Germany even if the only VAT they owe results from the reverse charge rules.
2.3.9 Entry into force of the new system (§ 27 (4) UStG)
Supplies by non-resident entrepreneurs effected prior to 1 January 2002 for which payment was not made until on or after 1 January 2002 are subject to the new system (VAT liability on the part of the purchaser = recipient of the supply).
Where payment or partial payment is received before 1 January 2002 for services carried out after this date and the withholding procedure or zero withholding procedure has been applied, the VAT liability of the recipient (Steuerschuldnerschaft) upon final settlement is reduced accordingly.
2.4 New information required on an invoice
The information that an invoice must contain to constitute an invoice for VAT purposes has been expanded. The supplier must quote the tax ID number issued to it by the respective tax authority on all invoices issued on or after 1 July 2002. Invoices must also make specific mention of an applicable tax exemption. The available information indicates, however, that the tax authorities may allow an input tax credit to be claimed on the basis of invoices that lack the new information.
Editorial cut-off date: 20 March 2002
Disclaimer and notice of 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. KPMG Germany in particular insists 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 that the article is current only through its editorial cut-off date shown immediately above (not to be confused with the later date as of which the article was placed online – the date appearing at the article's outset). Related developments subsequent to the editorial cut-off are not necessarily reported on in later articles. 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 KPMG Germany's articles are carefully reviewed, it can accept no responsibility in the event of any inaccuracy or omission. Any claims nevertheless raised against KPMG Germany 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 Germany (KPMG Deutsche Treuhand-Gesellschaft AG). No use of or quotation from the article is permitted without full attribution to KPMG Germany and the article's stated author(s), if any. Distribution to third persons is prohibited without the express written consent of KPMG Germany in advance.