On 3 June 2020, Germany’s governing coalition agreed on a stimulus package which sets out 57 targeted measures totalling €130 billion. The decision paper for the fiscal package provides for a cut of the standard VAT rate from 19% to 16%, and of the reduced VAT rate from 7% to 5% for the period from 1 July to 31 December 2020. With a cost volume of approx. €20 billion, this specific measure presumably is the largest cost factor for the government. Irrespective of who will profit from the cut – either the consumers if the businesses really adjust the prices, or the businesses themselves with optimised margins: Businesses should gear up for the expected temporary change of the VAT rates.
A draft bill has not yet been published, therefore the specific transitional regulations as of 1 July 2020 or 1 January 2021 are still to be defined. However, in our opinion many of the expected regulations can be derived from the existing legal provisions and from the last adjustment of the VAT rates as of 1 January 2007. At that time, specific cases of doubt were addressed which are also relevant for the current adjustment. Consequently, the following picture would be conveyed:
- For the application of the tax rate, the time when the transaction takes place is decisive in general.
The following is to be considered as critical in this connection:
- Prepayments (receipt of (partial) consideration before the adjustment of the tax rate – but service is supplied after the adjustment):
The adjusted tax rate will presumably also apply to the amounts received before the tax rates changed. The preliminary self-assessment VAT returns of the supplier and the recipient of the service will be adjusted in the tax period when the service is provided.
- Partial services:
If partial services were agreed, the services supplied before the tax rates changed would probably have to be taxed at a rate of 19% or 7%. The services supplied after the tax rate changed would be subject to 16% or 5%. In case of doubt it should be checked whether the service really consists of partial services or whether instalment payments were made towards a (single) service.
- Permanent services: they are supplied
- in the event of other services on the day on which the agreed period of the service ends;
- in the event of recurring services (except electricity, natural gas, heat, water) – on the day of each individual supply.
- The supply of electricity, gas, water, cooling energy and water is performed at the end of each meter-reading period.
- In contracts as invoices for recurring services the applicable tax rate should be adjusted in order to avoid their incorrect tax treatment both by the supplier and by the recipient of the service.
- Long-term contracts:
- As a matter of principle, it should be checked what kind of remuneration was agreed (gross remuneration including VAT or remuneration net of VAT) in the contracts which were entered into before the adjustment of the tax rates, but the services for which are performed only after the tax rates changed.
- Section 29 VAT Act [Umsatzsteuergesetz - UStG] may give rise to an entitlement to compensation for the increased or decreased VAT charge.
- Adjustment of remuneration:
- The basis for assessment will change after the tax rates were changed – service supplied before their change: the tax rate applicable at the time of performing the service is relevant for the adjustment of the remuneration.
- The treatment of non-cash gift vouchers and annual bonuses may be problematic in this connection.
- Preliminary self-assessment VAT returns
- The forms for preliminary self-assessment VAT returns as from July 2020 and the form for the 2020 annual VAT return have not yet been altered. It remains to be seen how quickly the fiscal authorities respond to the new measures.
- The preliminary self-assessment VAT return form contains a separate box in line 62 no. 65 "Tax due to a change of the type of taxation and subsequent tax payable on taxed prepayments due to a change of the tax rate"; also the form for the annual VAT return contains a box for "Subsequent tax on taxed prepayments due to a change of the tax rate" in line 58 no. 319)
The requirements are many: In our opinion, the following also needs to be done in addition to the items referred to above:
- Installation of new tax identifiers in the ERP system / in the ERP systems of the business, including cash register systems, if any
- Adjustment of the invoice layout as at the cut-off dates 1 July 2020 and 1 January 2021
- Demand for intensive checks of purchase invoices in order to avoid incorrect input VAT deduction; in the case of automatic invoice verification the check logic also needs to be adjusted.
The planned changes lead to short-term challenges from a tax point of view, but also for the IT systems and cash register systems of the businesses. With a view to making best use of the economic potential arising in particular from the cut of the tax rates, businesses should use the remaining time to identify and put into practice necessary adjustments already at this stage. The VAT experts of Warth & Klein Grant Thornton and from Digital Advisory of Warth & Klein Grant Thornton will provide advice and assist you with the required measures, such as the adjustment of the cash register systems and the alteration of the ERP software.