EU Countries
Value Added Tax (VAT) or a similar tax is charged in over 130 countries. In the European Community a common VAT system was initially provided for under the 2nd Council directive in 1967. This was advanced significantly by the adoption in 1977 of the 6th VAT directive.
In 1981 the decision was taken by the EU (then EEC) that organizations within the EU should be able to compete on equal terms. VAT refunds are therefore available to EU companies on the same service charges which local businesses are able to deduct on their local VAT declarations (8th VAT Directive, legal document 31979L1072 issued 6 Dec 1979).
In February 2008 the new council directive 2008/9/EC was adopted changing the procedure and rules under which organisations within the EU should reclaim their foreign VAT as from 1 January 2010.
There are however new procedures issued by the EU in relation to the VAT Reclaim process. These changes were implemented from the 1st of January 2010.
The two areas of significant change for us and our customers are:
1. Place of Supply
From the 1st January 2010 business-to-business supplies of services will be taxed (VAT) where the customer is situated, rather than where the supplier is located. If you supply any services to business registered customers in other EU countries then you should zero VAT rate the service supply and include these sales in your quarterly VIES listing.
If you receive service invoices from other EU suppliers they should be zero rated and you should self-account for them on the reverse charge method in your local VAT returns.
2. Method of reclaiming foreign VAT refunds.
The second change relates to the method of seeking foreign VAT refunds. From the 1st January 2010 applications for refunds can be done online through a local tax office portal. We feel that this new system will be of more benefit to the various Tax offices than to applicants. It will just replace the final step of the application process but will make greater demands on applicants; example more specific details relating to each invoice will need to be included-VAT number/address/category coding.
Non EU Countries
In 1988 the 13th VAT Directive (legal document 31986L0560 issued 17 Nov 1986) was implemented allowing organizations outside the EU to reclaim their VAT within the EU. Refunds may be conditional to reciprocity being granted.
A Summary to the VAT rules can be broken into the following categories:
Local EU business having transactions in own EU country.
For local sales the business must charge the relevant VAT on goods or services that it provides.
For local purchases a business can offset VAT charged to it by local suppliers.
The essential piece of EU VAT legislation governing this is Directive 2006/112/EC. This VAT Directive was formally known as the Sixth VAT Directive of 1977 and amended over the years. The recast brings together various provisions in a single piece of legislation. It provides a clearer overview of EU VAT legislation currently in force.
Business located in one EU country having transactions in another EU country.
For sales to other EU countries a business, unless it is provided with the VAT number of its other EU customer it must charge the local VAT. It can make the sale at zero VAT if it has its customers VAT number (expressly shown on the sales invoice). Based on turnover amounts and thresholds, EC Sales listings/VIES reports and Intrastat returns may also be required.
Provided a business supplies its EU supplier with its VAT number, then it will receive the goods at zero VAT rate. However in this case there is a need to “Reverse Charge” this transaction in the VAT return. Reverse Charge is where a business accounts for other EU supplies or services by inputting them into both the sales and purchase line of VAT returns. In most cases this will have zero effect on amount of VAT payable but in some cases where the purchase VAT is not allowable in the country of receipt then additional VAT liability is charged.
The legislation here is governed by Article 79/1072/EEC also known as the 8th VAT Directive of 6 December 1979 which was replaced by Council Directive 2008/9/EC of 12 February 2008, effective as of 1 January 2010
Non-EU located business having transactions in an EU country.
This effectively covers imports and exports to EU countries from Non-EU business. Exports are VAT free as long as it can be clearly shown that goods have left the EU with the necessary customs documentation. On the other hand VAT must be paid on the point of import. This also applies to services provided to Non-EU countries. The relevant legislation here is directive 86/560/EEC also known as the 13th VAT Directive of 17 November 1986