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1. Input tax credit for VAT incorrectly charged or overstated
The Federal Tax Court held in a 1998 decision (BStBl II 1998, 695) that VAT separately shown in an invoice may only be deducted as input VAT by the recipient of the related supply if the VAT shown is owed in fact. This means that the input tax credit is no longer available in particular in the situations covered by § 14 (2) UStG.
The Federal Tax Court based this aspect of its ruling on the case law of the European Court of Justice (decision of 13 December 1989, Genius Holding BV – UR 1991, 83). The tax authorities have issued two administrative orders in response to the Federal Tax Court decision (OFD Nuremberg, Vfg. of 16 November 1998 - DStR 1998, S. 1919; OFD Düsseldorf, Vfg. of 24 September 1998 - UR 1998, 479).
The decision marks a reversal of previous decisions in tax cases, which had permitted the recipient of a supply to claim the input tax credit regardless of whether the VAT invoiced was actually owed. The previous interpretation, now abandoned, had been accepted by the tax authorities (sec. 192 (6) (7) UStR) and the courts. It regarded the recipient's input tax credit for VAT separately invoiced as matched by the supplier's obligation to pay the VAT so charged to the tax authorities. The input tax credit was available even if the supply in question was in fact exempt from VAT or if the VAT owing had been overstated.
If the new decision is rigorously enforced, this means that a considerable new burden will be placed on the recipient of an invoice to verify the correctness of VAT charged. The recipient will in the future have to determine whether supplies invoiced are taxable at all (for example, the sale of a business will not be taxable), whether the supplies are tax free but VAT has been charged, and whether the proper VAT rate has been applied. It is advisable for a recipient who is uncertain as to the correctness of the VAT treatment to contest the invoice or at least withhold payment of the disputed VAT amount until the matter can be clarified.
In the situations covered by § 14 (2) UStG, it is always possible in principle to correct an invoice for purposes of the input tax credit as long as the VAT position for that year has not yet been finalised with the tax authorities.
In light of the new high court decision, it is no longer advisable for invoices to include VAT "just in case" in doubtful situations (for example, when one is uncertain whether the requirements for sale of a separate division of a business are met) on the assumption that the recipient will be able to recover the full amount of VAT charged as input tax and hence incur no additional net cost.
The Federal Ministry of Finance directive of 23 December 1998 (UR 1999, 83) states that the new decision is applicable to input tax credits claimed under invoices received by the addressee after 6 November 1998, the date of publication of the decision in the Federal Tax Gazette (Bundessteuerblatt).
2. VAT for so-called representation services
An administrative order of the Münster Regional Tax Office dated 2 July 1998 (UR 1998, 476) provides that various services provided by a group member company to its affiliates, such as information gathering, market observation, maintenance of customer relations, product consulting, etc., which are typically invoiced on a cost-plus basis, are generally to be treated as non-separable and hence constituting a single uniform supply which is taxable, pursuant to § 3a (1) UStG, where the supplier is established. This means that it is no longer possible to separate out services which are taxable where the recipient is located. We believe that there is serious doubt whether the view espoused by the tax authorities is correct when the services in question all fall under the list of so-called catalogue services (Article 9 (2) (e) services), which are taxable in principle at the recipient's location.
This administrative order is particularly significant for representation services provided to foreign affiliates unable to avail themselves of the VAT refund procedure because of lack of reciprocity.
It is therefore advisable to determine whether service agreements of the sort described are in place and, if so, to consider alternative structures.
The possibility can also not be ruled out that the separability of services may be rejected in the future with respect to other types of (intra-group) contracts. It is therefore advisable to assess the present situation for this reason as well. Regardless of this, documentation must be maintained in respect of all the services provided.
This decision could impact on clients who receive services from Germany which have previously been treated as Article 9 (2) (e) services, and therefore subject to the reverse charge in their own country. Besides the possibility of encountering difficulties in obtaining refunds of German VAT, these clients may have to negotiate with their tax authorities in order to cease accounting for VAT on the services by means of the reverse charge.
3. Documentary evidence for export deliveries and intra-community deliveries
Ruling on a motion to stay collection of tax, the Düsseldorf Tax Court has held that an entrepreneur must give notice of any necessary documentary evidence which is not in his possession at the time of filing of the monthly (or quarterly) and annual VAT returns. Should he fail to do so, export deliveries and intra-community deliveries which would otherwise be tax exempt must be treated as taxable (if necessary, the documentary evidence can be provided up to the last hearing in an action before the Tax Court contesting the assessment of taxes). The Tax Court furthermore noted that an entrepreneur may commit the administrative offence of reckless understatement of tax (leichtfertige Steuerverkürzung – § 378 AO) by failing to provide the required notice, provided the subjective elements of the offence are also fulfilled.
The Düsseldorf Tax Court relied on a decision of the Federal Tax Court of 28 February 1980 in which the high court had held that an entrepreneur who is not in possession of the necessary documentary export evidence but is able to provide evidence based on his own accounting records may anticipate the expected tax exemption by refraining from paying tax, provided he notifies the tax authorities that the documentary evidence is still lacking.
The decision of the Tax Court and the cited Federal Tax Court decision could be of considerable practical significance since there is generally a substantial delay before forwarding agents provide the documentary evidence to the entrepreneur. In many cases, entrepreneurs have in the past probably often not been in possession of the required documents at the time of filing of their monthly VAT returns, without giving notice of this circumstance. It should also be noted that the tax authorities may treat failure to give notice of missing documentary evidence as a reckless understatement of tax. In these cases, the reproach of reckless understatement of tax cannot be cured by completing the documentary evidence after the fact.
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