The Minister of Finance issued a general ruling on April 1, 2016 (file ref. no. PT3.8101.41.2015.AEW.2016.AMT.141), defining the moment when VAT becomes chargeable on construction work.
Article 19a(5)(3)(a) of the VAT Act of 11 March 2004 provides that VAT in the case of construction or construction and assembly work becomes chargeable upon the issuance of the invoice for the work at issue, while Article 106i of the VAT Act requires invoices for this kind of work to be issued no more than 30 days after their completion. The interpretation of what is meant by “completion of construction or construction and assembly work” is thus key in determining the time of invoicing and the moment when tax becomes chargeable on the work done.
The view currently embraced by tax authorities and courts is that construction or construction and assembly work is completed when it is finished “in actual fact”. This gives rise to a host of practical problems as it is both the building contractor and the contracting entity that must agree when the works have actually been finished.
The Minister of Finance now ruled that
- by date of completion of a construction or construction and assembly service is to be meant the date when the service is actually completed, that is to say the date when the contractor has finished a contractual service or a portion thereof (if the service was to be rendered in parts) and has announced the work to be ready for inspection and acceptance (when the contractor decides that the service or its part is ready for inspection and acceptance by the party purchasing the service);
- if the service is to be accepted in parts, which is when the contract requires regular payments to be made following the completion of parts of the ordered construction or construction and assembly service, a given part of the service is deemed completed when the contractor actually finishes performing the given part of the service (the given part of the service has been actually rendered) and invites the party purchasing the service to inspect and accept the works (Article 19a(2) of the VAT Law);
- if a service is provided on an ongoing basis (with successive dates of payments and settlements defined), the service is deemed completed upon the lapse of every period to be paid for and settled. If a service is provided on an ongoing basis for more than a year at a stretch and the said applicable dates of payments and settlements fall beyond a year’s end, the service is deemed completed at the end of each tax year, until the end of service provision (Article 19a(3) of the VAT Law). The Minister of Finance also clarified that if it is possible to identify distinct activities comprising the construction service provided in any given settlement period, this service may not be deemed as one provided on an ongoing basis.
The general ruling is not advantageous to taxpayers. The process of works acceptance under construction contracts is lengthy, consisting of multiple stages, and is never guaranteed to end successfully. When tax chargeability and invoicing date is to be conditional on the works becoming declared ready for acceptance, the contractor may find itself forced to issue an invoice and pay VAT although the contracting entity refused to accept the works and the invoice it received. If this happens, the contractor may find itself facing loss of financial liquidity as it will have to pay the VAT without being itself paid by the contracting entity for the work it performed.
It is to be expected that the general ruling discussed here will have significant bearing on decisions taken by tax authorities in practice.