Legislative changes to VAT 2022

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The European Commission has announced changes as of July 1, 2022. These changes are therefore not final. If the changes are introduced, they will have major consequences for intra-European Union (EU) trade between businesses.

Definitive VAT system for B2B cross-border trade within the EU?

Following the legislative changes of 2019 and 2020 and the upcoming changes of July 2021, the European Commission also announced changes that are to become effective as of July 2022. Negotiations on these July 2022 changes are currently still underway, and these changes have yet to be adopted.

If these changes are adopted, they will significantly impact businesses making supplies of goods to businesses within the EU.

1. Intra-Union supply

The proposed new regulation puts an end to the artificial split of a single commercial transaction. There will no longer be an intra-Community supply of goods and an intra-Community acquisition of goods. If the proposed legislation is accepted the cross-border trade between EU countries will be defined as a single taxable supply, named the intra-Union supply. The intra-Union supply ensures that the goods will be taxed in the Member State where the transport ends, the Member State of Arrival.

The supplier needs to charge VAT of the Member State of Arrival of the goods to its business customer. If no special regulation was introduced the supplier would need to register for VAT in the Member State of Arrival and file a local VAT return. This is not desirable at all and in order to prevent this, the EU proposed to extend the current Mini One Stop Shop system to the One Stop Shop (“OSS”) system.

The OSS will allow businesses to report the VAT amounts due via one OSS VAT return. This prevents businesses from registering for VAT in every EU Member State where VAT is due.

2. Certified Taxable Person

Another interesting part of the plans of the European Commission is the concept of a Certified Taxable Person (CTP).

Currently the EU VAT legislation does not make a distinction in whether an entrepreneur can be considered as a reliable taxable person or not. The CTP concept intends to bring an end to that. If a business has a CTP status, the business will be considered as a reliable taxable person. Being a CTP will bring significant advantages for companies involved in intra-Union supplies.

Example

Goods are sold by business A to business B, the goods are delivered from Germany to France.

If business B does have a CTP status and business A is not established in France, the French VAT due on the intra-Union supply will be reverse-charged to business B. Business A does not charge VAT at all on the supply of the goods. Business B self-assesses the French VAT amount due and reports it in its French VAT return. If business B is entitled to deduction of input VAT, the French VAT can be deducted in the same VAT return.

In the situation that business B is not a CTP, business A will need to charge French VAT to business B on this intra-Union supply and report and pay that French VAT via the One Stop Shop system. If business B is entitled to deduction of input VAT, the French VAT can be deducted in its French VAT return.

As you can see the application of the VAT reverse charge mechanism would be beneficial for both the supplier and the customer. The supplier would not have to charge and pay French VAT via the OSS, and the customer would not have to pay the French VAT to the supplier and reclaim it.

Impact on your business

If your business is active in (cross-border) supplies of goods within the EU with other businesses, it is likely that that the new VAT rules will apply to your business. We expect that many businesses will have to amend their (ERP)systems and business processes (recordkeeping, invoicing) in order to comply with these rules. E.g. maintaining the CTP status in customer master data, and the logic of applying which VAT treatment applies depending on that status.

Should you wish to exchange thoughts on the upcoming legislative changes, we would be pleased to do so. When e.g. implementing a new ERP system it is key to already anticipate these future changes properly where possible in order to ensure a smooth implementation.

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