This newsflash gives a short overview of the main issues to be aware of and to take into account when the new VAT Law comes into force on 1 January 2013.
Find your way in three legal norms
We should immediately note that the initial promise was that the new law would be much broader and no application regulations for the law would be necessary. However, it is now clear that – despite the breadth of the law – application regulations are being drafted. Thus, as before, in searching for answers to questions about taxing deals, taxpayers will have to find their way in at least two regulatory enactments.
With regard to the new law, we remind you that application of VAT is regulated not only by the VAT Law (the old one or the new one), but also by VAT Regulation No 282/2011 (“Regulation”). The Regulation is in force as of 1 July 2011 and already applies in all Member States of the European Union (EU), so that it will never be implemented in local law. Taxpayers must see the norms of the Regulation together with the norms of the new law and the old law. However, in our practice we often encounter events when taxpayers are unaware of the Regulation or have forgotten its existence. Moreover, the SRS unfortunately does not promote this while explaining VAT application. It is especially important to be familiar with the Regulation if you provide services to persons from other EU Member States or third countries.
Benefits of the new VAT Law
The following are the most significant improvements awaited by taxpayers in the new VAT Law:
- Application of domestic reverse charge VAT to construction services: as of 2013, reverse charge VAT will also apply to designing and greenery services if they are part of the construction service.
- Norms for recovering lost debts are coordinated with norms of the Insolvency Law: VAT on lost debts can be adjusted by 100% if the debtor, a legal entity, has finished insolvency proceedings (the 50% adjustment is no longer available). Reference to finishing bankruptcy proceedings refers only to debts of natural persons.
- Likewise, inequality is eliminated with regard to input tax deduction on private vehicles for taxpayers with limited deduction of input tax. Namely, companies with less than half of their total turnover being taxable transactions can now also deduct 80% of private vehicle input tax in line with the proportion of their taxable transactions. Transitional provisions state that non-deducted input tax for previous years can be deducted only up to 30 June 2013, although this contradicts the option provided in the law "On Taxes and Fees" to adjust taxes payable for up to three years as of their occurrence.
The most significant news that should improve and facilitate taxpayers' everyday work:
Legal terminology has been adjusted in line with Directive 2006/112/EC. For example:
- Taxable person: in the old law this was a person recorded in the VAT register (with a VAT number); however, the new law explains that a person who is not registered for VAT purposes may also be a VAT payer irrespective of their registration status.
- Fixed establishment (to determine whether an invoice for services is issued for a domestic transaction or for a transaction with foreign parties): the new law prevents misunderstanding by specifying that this concept refers only to services.
- Taxable amount: the principle for calculation is now in line with EU Court case law and is based on the remuneration received for the transaction instead of the market value. Linking the transaction value to the market value is maintained only for transactions among related parties if any transaction party has limited deduction of input VAT.
- Norms have been specified in relation to timely issue of invoices between EU companies – namely, long-term services need an invoice at least by the end of the year. These changes are significant for companies that provide and receive services from other EU Member States. The problem of third-country transactions is still unsolved.
- A self-billing possibility has been introduced, namely, to issue an invoice to yourself in the name of your transaction partner providing goods or services. To do so, both parties must introduce an acceptable procedure for mutual invoice exchange and acknowledgement.
- An option has been created to register as a temporary VAT payer – this novelty may be beneficial if a foreign or local person expects one or several transactions without continuing them in the longer term.
Additional administrative burden
Together with changes to the VAT Law, taxpayers must also take into account the additional administrative burden related to the transition towards application of the new law:
- Taxpayers must introduce changes to their IT systems issuing automatic invoices – new references to invoices are needed if VAT is not applied under the general procedure (in cases of exemptions, special regime, reverse charge calculation procedure).
- Further, the SRS will have to register all immovable properties even if no input tax is deducted – the VAT return will be supplemented by a form to register immovable property.
- A VAT invoice must also be issued within 15 days for prepayments received.
The new law does not solve some previous problems of VAT application. For example, when the regulation changes with regard to taxing separate types of immovable property, it does not change the situation when VAT is paid twice to the state budget for one and the same property, causing price increases for these properties as well as competition distortion. To solve these problems, the first amendments to the new law are expected in mid-2013.
Despite these problems, we still find the new VAT Law to be positive – the law has become more transparent both structurally and in line with Directive 2006/112/EC, so that taxpayers may expect fewer problems in future in interpreting and applying legal norms. Furthermore, taxpayers will have almost a month to prepare for the new law and its actual application, which should be seen as progress in comparison to the previous much shorter terms for adaptation. Realistically, though, the transitional period could be much longer. The law was officially gazetted on 14 December 2012.