Czech Republic – interest on interest from withheld VAT deductions

February 3, 2025February 4, 2025 Michaela Merz1 Comment

In the tax periods of 2013 and 2014, many international companies faced significant challenges as tax authorities withheld large VAT refunds in the Czech Republic. They initiated the tax audits and controls over routine transactions and withheld funds for up to two years before completing audits and returning the money. Sometimes the withheld amounts were significant even for major multinational clients. This extended withholding often pushed companies towards financial distress, prompting them to seek compensation.

Development of Czech law
Initially, Czech legislation provided no compensation for these prolonged withholdings. However, many litigations followed as companies protested that if they owed money to the tax authorities, they would have to pay interest. Eventually, the Supreme administrative court acknowledged this argument and subjected the withheld deductions to an interest.

Groundbreaking Court Decision: Interest on Interest
Many court cases followed, during which the basis for calculating interest on the originally withheld funds by the tax authority continued to grow. The situation evolved dramatically in mid-2024 when a groundbreaking decision by the Constitutional Court finally acknowledged the concept of “interest on interest” in tax law. This significantly broadened the scope for claiming interest on withheld VAT deductions and opened the possibility to claim additional levels of interest – “second” and even “third” interest. The Constitutional Court confirmed that the interest, which was disputed and subsequently had to be repaid by the tax authority, “crystallized” into a new principal on the day of repayment, for which the subjects are entitled to compensation in the form of additional interest.

What does it mean for you

This is a specific issue within the Czech Republic, and here at PwC CZ, successfully helped to recover additional amount in interest on interest, originating from unjustified withholding of VAT deductions by the tax authorities. In case you faced this situation you should be exploring this opportunity for claiming additional compensation

For further details please contact : Michaela Vrana; Email: michaela.vrana@pwc.com

City Green Court | Hvězdova 1734/2c | 140 00 Prague 4 | Czech Republic

Germany – e-invoicing – final decree published

November 27, 2024 Michaela MerzLeave a comment

The Growth Opportunities Act of 27 March 2024 introduced a binding standard for electronic invoices (known as the E-Rechnung, or e-invoice) from 2025, which applies to all supplies of goods and services performed between taxable persons (B2B) established in Germany. Staggered transition periods will apply for issuing e-invoices, but accepting such invoices in the prescribed format will be mandatory from 1 January 2025. Now the Federal Ministry of Finance (Bundesfinanzministerium, or BMF) has published a final decree on this matter.

Issuing invoices

The decree explains that although the law requiring taxable persons established in Germany to issue e-invoices (including credit notes) will go into effect on 1 January 2025, the government has granted comprehensive transitional provisions. In practice, the obligation to issue e-invoices has generally been postponed to 1 January 2027. Small and medium-sized businesses whose total annual turnover does not exceed €800,000 have been granted a further postponement, to 1 January 2028. Electronic invoices submitted via Electronic Data Interchange (EDI) that are not in line with the e-invoice format may also continue to be used until 31 December 2027.

Being established in Germany is the deciding factor as to whether e-invoicing is mandatory, regardless of whether VAT is actually shown on the invoice. For instance, e-invoicing would be required for an intra-Community supply of goods carried out by a German taxable person to a foreign fixed establishment of another taxable person established in Germany. The decree explicitly confirms that, in this respect, holding a taxable lease of a property in Germany will also give rise to the assumption that the taxable person doing so is deemed to be established in Germany.

Some exceptions will apply to this obligation. For example, e-invoicing is not required if goods or services are supplied by or to a foreign taxable person not established in Germany, or to a private individual. Similarly, e-invoicing is also not required for simplified low-value invoices, for travel tickets which qualify as invoices, or in cases where no invoice is required at all – e.g. for out-of-scope transactions and for VAT-exempt supplies where no right to deduction applies. In all these cases, existing invoice formats may continue to be used – i.e. paper invoices, or, if the recipient gives consent, electronic invoices that do not comply with the e-invoice standard (e.g. PDF, email). Even where no obligation to issue e-invoices is in place, an e-invoice may be issued if the recipient gives their express or implied consent.

The decree states that no exception currently applies to taxable persons subject to the small business scheme, and that they would also be obliged to issue e-invoices after the expiry of the transition periods. It should, however, be noted that the current draft of the Annual Tax Act 2024 (which has not yet been adopted) provides for an exception for simplified small business invoices, which are to be introduced as part of an extensive recast of the small business scheme. In cases where e-invoicing would theoretically only be mandatory for part of the invoice – for example, an invoice issued for multiple supplies but where e-invoicing is only required for some of them – the entire invoice must be issued as an e-invoice. Similarly, supplies which are partly for taxable purposes and partly for out-of-business purposes must be e-invoiced in full.

Input e-invoices

The exemptions granted for the transition period only apply to issuing e-invoices: taxable persons established in Germany will still be required to accept e-invoices from other taxable persons established in Germany from 1 January 2025, regardless of whether input VAT is deductible. Providing an email address will be deemed a sufficient means of accepting e-invoices, though other electronic means of transmission may also be agreed. If a recipient refuses to accept an e-invoice, or is unable to accept an e-invoice for technical reasons, the invoice issuer will be considered to have complied with their VAT obligations if they have issued an e-invoice and demonstrably attempted to submit it.

Permissible formats

E-invoices must be issued in a standardised, machine-readable format that complies with European standard EN 16931, and must be transmitted and received electronically. The parties must be able to ensure the authenticity of the invoice’s origin, the integrity of its content and its legibility. Although e-invoices are only required to be machine-readable, a supplementary human-readable document may also be submitted. However, the decree also states that any discrepancies in the human-readable document may give rise to a VAT liability under Article 203 of the Main VAT Directive due to VAT being incorrectly shown on the invoice.

The BMF allows the XRechnung standard for e-invoices in Germany. The ZUGFeRD format, version 2.0.1 or later, will also be permitted (with the exception of the MINIMUM and BASIC-WL profiles) – this is a hybrid format that contains both a human-readable and a machine-readable part, with the latter being relevant for VAT purposes. Permissible formats are not restricted to those from Germany, and other formats that meet the requirements may be used: the decree gives the French Factur-X standard and Peppol-BIS billing as examples, but – in contrast to a draft of the decree published back in June 2024 – does not explicitly mention the Italian FatturaPA standard.

In terms of the requirements from an accounting standpoint, the structured part of the e-invoice must contain all of the mandatory VAT information required for a proper invoice. However, additional information may be included in an attachment to the e-invoice (e.g. a breakdown of timesheets in a PDF file) or, it would seem, in an extension. Additional exceptions have been granted for written agreements that constitute invoices. A link, however, does not meet the requirements of an e-invoice; the BMF apparently does not consider any linked documents to be part of the invoice.

If the parties to the invoice agree to do so, other formats may also be used if they can be correctly and completely extracted to a format which complies with, or is interoperable with, the EN 16931 series of standards. In this context, “interoperable” means that the necessary information from a VAT standpoint can be obtained from the invoice in its original format and processed without any information being lost. Established electronic invoice formats (the decree mentions electronic data interchange protocols such as EDIFACT) may therefore remain in use even beyond the deadline of 31 December 2027, provided that the e-invoice formatting requirements are met.

Input VAT deduction and correcting invoices

Once the transition periods have expired, only an e-invoice will be sufficient to obtain an input VAT deduction in cases where e-invoicing is mandatory. An input VAT deduction will not become completely impossible if invoices of other formats are submitted instead, but will be conditional on the tax authorities (which will be applying a strict standard) having all the information they need to check the material requirements for input VAT deduction. However, an invoice that has not been issued in the prescribed format (e.g. a paper invoice instead of an e-invoice) may also be corrected by an e-invoice that makes clear and specific reference to the original invoice, and thus shows that it is a correction. Such a correction will be retroactively effective to the date of issue of the first invoice, subject to the usual conditions.

For other corrections, the corrected e-invoice must be submitted in the form prescribed for e-invoices. Sending the missing or corrected information in another format is not sufficient. Corrections of this nature will also be retroactively effective, subject to the usual conditions.

Miscellaneous

There are special provisions for invoices on continuous supplies, for written agreements that constitute invoices, and to final invoices preceded by instalment invoices. Other provisions concern the retention of e-invoices and invoicing to entities under public law. Regarding the latter, it should be noted that e-invoicing for supplies to these entities has already been mandatory for several years, which the decree mentions only in passing.

The decree also makes clear that the new e-invoicing rules will be transitional in nature. When the planned EU-wide reporting system is introduced, other channels for transmitting invoices, in the shape of e-invoicing platforms, are expected to be prescribed – alongside the fact that e-invoicing will then no longer be restricted to companies established in Germany.

Source

BMF decree dated 15 October 2024 (in German language only)

https://www.bundesfinanzministerium.de/Content/DE/Downloads/BMF_Schreiben/Steuerarten/Umsatzsteuer/2024-10-15-einfuehrung-e-rechnung.html

OECD : Importance of VAT

November 25, 2024November 25, 2024 Michaela MerzLeave a comment

Last week released report by the OECD provides interesting sources of information on the significance of ITX and contains very useful facts/statistics. The report tells a great story and strongly supports the relevance of ITX.

Link: https://www.oecd.org/en/publications/consumption-tax-trends-2024_dcd4dd36-en.html

“At 9.9% of GDP, revenue from consumption taxes in OECD countries remained stable in 2022 compared to 2020 (9.9%) and 2021 (10.0%). The overall share of consumption taxes in total tax revenues has fallen slightly to 29.6% in 2022, compared to 30% in 2021 and 30.1% in 2020. This decline is mainly attributable to the decreasing revenue importance of taxes on specific goods and services (mainly tobacco, alcoholic beverages and fuel, as well as certain environment-related taxes) as a percentage of total tax revenues in OECD countries on average. Value-added taxes (VAT) generated 20.8% of total revenue in OECD countries on average in 2022. VAT continues to be the largest category of consumption taxes, generating almost four times as much tax revenue as excise duties that form the bulk of taxes on specific goods and services, accounting for 5.6% of total tax revenue in 2022 on average.

Main consumption tax trends in OECD countries

Copy link to Main consumption tax trends in OECD countries

Consumption tax-to-GDP ratios declined in 12 out of the 38 OECD countries between 2020 and 2022, increased in 22 countries while 4 countries saw no change. Consumption taxes produce more than 40% of total taxes in 5 OECD countries (Chile, Colombia, Hungary, Latvia, and Türkiye). They account for less than 20% of total taxes in 3 OECD countries (Japan, Switzerland, and the United States).
VAT revenues have slightly increased in OECD countries between 2020 and 2022 on average, at 7% as a share of GDP in 2022, up from 6.9% in 2021 and 6.7% in 2020. VAT accounts for more than one-fifth of total tax revenues (20.8%) on average, representing 20% or more of total taxes in 21 of the 37 OECD countries that operate a VAT. Seven countries saw a decline in VAT revenue as a share of GDP between 2020 and 2022, while 28 reported an increase and 2 saw no change. Decreases of 0.5 percentage points (p.p.) or more were recorded in Denmark (-0.6 p.p.), Norway (–2.5 p.p.) and Poland (-0.7 p.p.). The largest increases were seen in Germany (+1.0 p.p.), Greece (+1.2 p.p.), Chile (+1.4 p.p.), Italy and Latvia (+1.1 p.p.).
Revenues from taxes on specific goods and services, primarily excises, have further declined both as a percentage of GDP (to 2.8% in 2022; a decline of 0.3 percentage points compared to 2020) and as a percentage of total tax revenue (to 8.2% in 2022; down 1.1 p.p. since 2020).
Standard VAT rates across OECD countries slightly increased in 2024 at 19.3% on average, up from 19.1% in 2023 and 19.2% in 2022. Three OECD countries increased their standard VAT rates: Türkiye (from 18% to 20% in 2023), Estonia (from 20% to 22% in 2024), and Switzerland (from 7.7% to 8.1% in 2024). Temporary standard VAT rate reductions introduced by Germany and Ireland in 2020 in the context of the COVID‑19 pandemic, and by Luxembourg in 2023 to counter the effects of inflation, were removed.
All OECD countries that operate a VAT, except Chile, apply reduced VAT rates to various goods and services to pursue specific policy objectives, most often the promotion of equity (on food, health and hygiene products) and culture (on books, magazines and shows).
All OECD countries with a VAT have introduced rules that reflect the recommended OECD VAT standards on online sales of services and digital products from non-resident e-commerce vendors and marketplaces. Twenty-seven OECD countries (Australia, New Zealand, Norway, Switzerland, and the United Kingdom and the 22 countries that are Member States of the European Union) have expanded these e-commerce VAT regimes to include imports of low-value goods.
Digitalisation, and the resulting increased availability of data provide tax authorities with opportunities for greater access to VAT‑relevant information. Over the last decade, most OECD countries have implemented electronic transactional information reporting obligations. These requirements are heterogeneous across OECD countries, differing on aspects such as scope, data collected or frequency of reporting (systematic or on request). Seventeen out of the 35 countries requiring electronic transactional reporting require the systematic transmission of such information to the tax authorities and 11 of these countries require transmission in (near) real time. While the progressive digitalisation of invoices continues, and electronic invoicing is now permitted in all OECD countries, it is only mandatory (with a varying scope) in 29 of these countries.
Excise duties are used by OECD countries not only to raise revenue but also to influence customer behaviour where consumption is considered harmful to health or to the environment. All OECD countries apply excise duties to alcoholic beverages and tobacco products, but tax rates and structures vary widely. Aviation fuels are often exempt from taxes, particularly when used for commercial international flights.

Car taxation is increasingly aimed at influencing customer behaviour towards the use of low polluting vehicles. In 2024, almost all OECD countries consider environmental or fuel efficiency in determining the level of taxation for the purchase or use of vehicles, and 22 of these countries apply tax rebates or exemptions for electric or hybrid vehicles. In 2024, eight OECD countries provide a direct subsidy on the purchase of these vehicles. On the other hand, two countries have rescinded subsidies since 2022.”

EU: VIDA update

November 8, 2024 Michaela MerzLeave a comment

On 5 of November 2024 the European Council has adopted the VAT in the Digital Age (‘VIDA’) package. This means that significant changes will be made to the EU VAT system starting from 2027.

In short, VIDA applies to all businesses that sell goods and/ or services in the EU, irrespective of whether they are established in an EU Member State or not. The three main pillars of VIDA are:

Introduction of Digital Reporting Requirements – modernize the process of invoicing and move to mandatory e-invoicing on intra-EU business to business transactions

Electronic invoicing will become the default system for issuing invoices and eventually holding a valid e-invoice will become a material VAT recovery requirement. However, Member States will be allowed to authorise other invoices for domestic supplies.
Invoices that have been issued, transmitted and received in electronic format that allow for automatic electronic processing will be considered to be electronic invoices and they should in principle comply with the European Standard (EN16931) and its list of syntaxes (other formats are allowed as long as these data formats ensure interoperability with the European Standard). Member States will not be allowed to request any additional data, to avoid unnecessary administrative burden. Summary invoices will be allowed (however, Member States may exclude this possibility in certain fraud sensitive sectors).
The electronic invoices for cross-border transactions must be issued no later than 10 days following the chargeable event.
The current recapitulative statements (EC sales listings) will be replaced with DRR for cross-border supplies of goods and services. The reporting of the invoice data by the supplier needs to happen in real time (i.e. at the time the invoice is issued or should have been issued). However, in situations of self-billing or reporting by the buyer, the buyer needs to transmit the information no later than five days after the invoice is issued or should have been issued.
Although real-time reporting of domestic transactions is not required under the EU VAT Directive, should a Member State opt to implement such a system, it will need to align with the digital reporting requirements for cross-border supplies. Member States can decide that holding an electronic invoice issued in compliance with the required standard becomes a substantive condition to be entitled to deduct or reclaim the VAT due or paid.
Member States will not be allowed to impose any additional general transaction-based reporting requirements, but may keep national measures to prepare/submit VAT returns for audit purposes, e.g., SAF-T requirements and reporting obligations which are not general such as cash registers.

The requirements above will apply as from 1 July 2030 with specific rules for Member States with domestic digital real time transaction-based reporting obligations already in place or announced on 1 January 2024 (who will have to converge their national systems into the ‘EU model’ by 1 January 2035).

2. Introduce a deemed supplier rule for platforms that facilitate short-term accommodation rentals and passenger transport services by road

3. Reduce the need for multiple VAT registrations through expansion of the One-Stop Shop, the introduction of a specific scheme for the transfer of own goods and a mandatory application of the reverse charge mechanism.

For further details please contact:

Nizora Yakubova
Senior Manager, Tax & Legal Services, PwC Switzerland
Tel.: +41 58 792 46 66
E-Mail

Switzerland : Partial Revision of Swiss VAT Act and Ordinance as from 1 of January 2025

November 7, 2024November 7, 2024 Michaela Merz1 Comment

https://www.pwc.ch/en/insights/tax/tax-and-legal-newsletter-3-2024.html

Starting 1 January 2025, a revision of the Swiss VAT Act will be implemented and will bring certain changes. Below is an overview of the most important updates that you should be aware of:

Platforms: New VAT Rules for Digital Platforms

The revised VAT Act will introduce significant modifications impacting digital platforms. One of the key changes is that the VAT registration obligation will shift from the supplier to the platform. Platforms will be required to act as “deemed suppliers”, register for Swiss VAT, and charge, collect, and remit Swiss VAT on all subsequent supplies of goods.

The “deemed supplier” concept will apply to both cross-border and domestic supplies, where two separate transactions will be deemed to have taken place under certain conditions:

Supply from the supplier to the platform – without Swiss VAT:
Domestic supplies: VAT exempt (with the right to deduct input VAT)
Cross-border supplies to Switzerland: place of supply abroad, no Swiss VAT

Supply from the platform to the end customer:
Domestic supplies: subject to Swiss VAT
Cross-border supplies to Switzerland: import Swiss VAT (generally) + local Swiss VAT on the supply to the end customer (whether B2C or B2B)

The resulting VAT implications for the marketplace operator/platform as of 2025 are as follows:

VAT registration for the platform is required if the marketplace operator’s turnover from low-value consignments from abroad exceeds CHF 100,000 per year (or, in the case of domestic supplies in Switzerland, if worldwide turnover exceeds CHF 100,000 per year).
If turnover from low-value consignments from abroad exceeds CHF 100,000 per year, the place of supply is deemed to be in Switzerland and all subsequent supplies of goods from abroad to end customers in Switzerland, regardless of the value, are subject to Swiss VAT. The platform must act as the importer of record and charge Swiss VAT to Swiss customers (even if no import VAT was due for the relevant low-value consignments).

Reporting & Declarations: Simplified Processes for Annual Declarations

Until now, companies had the flexibility to file VAT returns quarterly, semi-annually, or monthly. As of 1 January 2025, businesses with annual revenues of up to CHF 5,005,000 can opt to file VAT returns annually.

Adjustments to VAT Exemptions

Certain adjustments have also been made regarding VAT exemptions. New VAT exempted services are (these are generic description that need to be analyzed in further detail on a case-by-case basis):

Travel services resold by domestic and foreign travel agencies, along with their related services. (Foreign travel agencies will not be liable for tax in Switzerland when organizing trips to Switzerland);
Active participation in cultural events;
Coordinated care services provided during medical treatments;
Provision of infrastructure for attending physicians in outpatient and day clinics;
Care and domestic services provided by private home care organizations;
Provision of staff by non-profit organizations;
Offering and management of Swiss Investment Foundations.

Emission rights and green certificates

The VAT revision shifts the identity of the VAT-liable person when it comes to emission rights (green certificates and similar rights and certificates). From 1 January 2025, the recipient of such certificate will have to apply reverse charge on such acquisitions (whether the provider is domiciled in Switzerland or abroad).

Tax rate changes for feminine hygiene products

Feminine hygiene products are now subject to the reduced VAT rate (2.6%).

For further details please contact Roland Reding

Roland Reding
Partner, VAT Financial Services Tax, PwC
Tel.: +41 79 540 32 49
Email

Czech Republic : New tax obligations for non-EU entities as from January 1 2025

October 21, 2024October 18, 2024 Michaela MerzLeave a comment

What is the issue?

A new and upcoming amendment of the Czech VAT Act will very likely come into effect from 1 January 2025 in the Czech Republic (“CZ“). This amendment will, among other things, include two new significant obligations for businesses which were established outside the European Union and are registered/identified for VAT purposes in CZ. The new obligations are as follows:

1. Appoint an agent for communication with the Czech tax authorities.

A non-resident entity established outside the EU will be required to appoint an agent for communicating with the Czech tax authorities (“agent”). The Czech tax authorities require a specific channel for communication, so by law the agent can only be an entity that is legally obligated to have a data mailbox. Non-resident companies that have already set up their own data mailboxes will not have to appoint an agent.

2. Notify the Czech tax authorities of an email address.

A non-resident entity established outside the EU will also be required to announce an email address for electronic communication with the Czech tax authorities. This must be done by submitting the official form for a change of registration details.

The deadline for both obligations is the end of February 2025.

What steps need to be taken to comply with the new rules?

1. The agent has to be appointed in CZ and announced to the Czech tax authorities by providing a special power of attorney. This can be done at any time between now and the end of February 2025 (unless the entity has already appointed an agent).

2. The email address for electronic communication has to be announced to the Czech tax authorities by submitting the form for a change of registration details. This can be done between 1 January 2025 and the end of February 2025.

What penalties can apply for non-compliance?

If an entity fails to fulfil one or both of the obligations, penalties will apply.

1. A penalty of CZK 1,000 (approx. EUR 40 / USD 44) per day will be imposed if the agent has not been appointed, starting from 1 March 2025.

2. A penalty of up to CZK 500,000 (approx. EUR 19,750 / USD 21,590) may be imposed for failing to announce the email address by 28 February 2025.

How can PwC help?

We are ready to assist with both obligations. We provide the agent service for our clients based on a power of attorney. The agent service includes forwarding enquiries which the Czech tax authorities have delivered to the PwC CZ data mailbox addressed to the client with a brief English summary of the content of the received document (all communication received from the Czech tax authorities is in Czech). We can also help announce the email address for electronic communication to the tax authorities by submitting the form for a change of registration details, again based on a power of attorney.

If you are interested in our assistance or need any consultation on this issue, please contact our experts Michaela Vrana or Sarka Horvathova from PwC Czech Republic.

Contact:

Michaela Vrana

PwC | Senior Manager | Tax and Legal Services

Mobile: +420 734 798 882

Email: michaela.vrana@pwc.com

Tax-relevant economic capability and financial pains due to one’s own diligence.

June 28, 2024 Michaela MerzLeave a comment

Romania – e-VAT system as from August 1, 2024

June 25, 2024 Michaela Merz2 Comments

On June 21, 2024, Emergency Ordinance No. 70/2024 was published in the Official Gazette of Romania. This ordinance introduces significant changes regarding the implementation of the RO e-TVA system, which is a prefilled VAT return designed to streamline tax reporting processes.

In Short: the Romanian tax authorities are introducing a system whereby they will pre-fill in a VAT return with data gathered from the company from various other sources. The company would still need to submit its VAT return. In case of discrepancies (i.e. that exceed 20% in percentage terms and LEI 1,000 in absolute value – approx. USD 215) the company will be notified and have 10 days to provide explanations. Failure to provide complete explanations on time could lead not only to fines but also to an increase in tax audits.