The reverse charge mechanism is a means by which, in certain circumstances, the liability to charge VAT on a particular transaction shifts from the supplier to the beneficiary. In most of the cases, this liability arises at the same time as the beneficiary’s right to claim input VAT credit for the same amount of VAT.
In practical terms, if a particular transaction is subject to the VAT reverse charge rules, the supplier issues an invoice without VAT to the buyer, while the latter will include that transaction in his VAT return and account for both the output and input VAT related thereto. This way, VAT cash settlements with business partners and the state budget are no longer an issue.
It goes without saying that the application of the VAT reverse charge depends on the type of the underlying transactions and is subject to various conditions which vary based on the nature of these transactions. Where supplies of electricity are concerned, the first condition -- and the easiest one to fulfill -- is that both the supplier and the buyer must be taxable persons registered for VAT in Romania. However, things become more complicated when one needs to deal with the second set of conditions, which are specifically designed for supplies of electricity.
When Romania’s Government Ordinance 16/2013 amending the Fiscal code was published in early August 2013, the VAT reverse charge for supplies of electricity, in force starting with 1 September 2013, should have been conditioned by several additional requirements that were relatively easy to meet. To be more exact, the buyer of electricity would have had to provide the supplier with: a copy of its license to supply electricity, issued by the Romanian Energy Regulatory Authority (ANRE) and attesting to the fact that the buyer is a trader of electricity, and an affidavit that the buyer's main business consists in the re-sale of the electricity it acquires while its own consumption is marginal. A point to note is that GO 16/2013 did not define the term "marginal".
The market seemed quite open to this relief, especially since the requirements related thereto did not seem cumbersome and the newly-introduced VAT reverse charge was likely to generate important cash flow advantages for certain players. We even witnessed affidavits flying left and right, so that when 1 September 2013 came, no trader would be taken by surprise.
Unexpectedly, yet not surprisingly, a new Government Ordinance (GO 28/2013) regarding certain fiscal and budgetary measures was published in Romania's Official Gazette on the last Friday of August, two days before the new relief entered into force. One of these "fiscal and budgetary" measures referred to the application of the VAT reverse charge for supplies of electricity in that it brought additional clarification and introduced further requirements, as follows:
- Marginal consumption was defined as a maximum of 1% of the total volume of electricity acquired during January – November of each calendar year;
- A new category of buyers of electricity who are eligible for the application of the VAT reverse charge rules was defined, namely those who have a valid power market operator license issued by ANRE for trading on the day-ahead and intra-day markets (their list can be found on the website of OPCOM, Romania's electricity market administrator).
- GO 28/2013 clarifies that buyers other than those mentioned at point 2 above can benefit from the new relief if: they provide their suppliers with a copy of their license to supply electricity issued by ANRE, and if they are listed on the website of the Romanian National Agency for Fiscal Administration (ANAF) in the list of taxable persons who have issued an affidavit that their main business consists in the re-sale of the electricity they acquire while their own consumption is marginal. In theory, this list should be made available in December of the current year for the following year.
- The traders mentioned at point 3 above who obtain their license during the year will not be required to submit their affidavit to the tax authorities. Instead, they will have to send it directly to their suppliers. The affidavit will be issued taking into account their estimated consumption until the end of the calendar year (which, of course, should be marginal).
Experience has taught us that for every clarification brought to Romania’s tax legislation, at least two new questions arise. This situation is no exception. Studying these new provisions, we cannot help but ask ourselves the following questions: Will traders mentioned at point 2 above need to submit affidavits regarding the nature of their business and their consumption? What happens if ANAF's website is not updated in a timely manner and traders mentioned at point 3 above are not properly listed? What happens if the buyers' licenses are revoked? Is it the suppliers' responsibility to verify the validity of the buyers trading licenses and of the information published on ANAF’s website? What if a trader who obtains his license during the year exceeds the estimated consumption? In this case, will the VAT reverse charge continue to apply? Is there a risk that the tax authorities will reconsider the VAT treatment of the transactions? If so, who will bear the associated tax liability?
These are only the issues that are triggered by the wording of the new provisions themselves. We are sure though that more questions will arise once players in this market will begin to face all sorts of practical problems. We can only hope that these problems do not create so much pressure on trading relationships as to make the application of the reverse charge mechanism extremely difficult.