Released: June 19, 2020
With effect from 1.7.2020 and for a limited period until 31.12.2020, the Federal Government intends to reduce the VAT rate from 19 percent to 16 percent (standard tax rate) as well as from 7 percent to 5 percent (reduced tax rate). On 12.6.2020 the Federal Cabinet already adopted the package of measures of the second Corona Tax Relief Act, so our comments below refer to the currently available draft bill. Our statements are based on the assumption that the planned changes will be implemented in a timely manner, are derived from general VAT principles and take into account the recently published first draft of the Federal Ministry of Finance for an application letter as well as the relief provided for therein.
I. Deliveries of goods
Deliveries shall be deemed to have been executed upon procurement of the power of disposal. In case of transport or shipment, the commencement of transport shall be decisive for the time of performance.
On 25. 6.2020 customer A orders goods from dealer B. Dealer B dispatches the goods on 2.7.2020. The performance date of the delivery is therefore 2.7.2020. The delivery is thus taxed at the reduced VAT rate.
II. Work deliveries
Work deliveries are generally given if extensive contractual agreements have been concluded, e.g. the construction of a turnkey building. The contractor owes the customer the finished work on the basis of these agreements. In the case of a work delivery the acceptance / takeover of the finished work represents the time of performance.
Private individual A commissions contractor B to build a detached house on his undeveloped land. Contractor B completes the detached house on 26.6.2020 but acceptance by private individual A does not take place until 8.7.2020. The work delivery by contractor B is deemed to have been completed in July 2020 and is taxed at the reduced VAT rate.
Miscellaneous services (services) are generally considered to be rendered at the time they are completed. If the service has been agreed upon for a certain period of time, the end of this period of time represents the time of performance. Consequently, if the end of the performance period is between 1.7.2020 and 31.12.2020, the miscellaneous services are taxed at the reduced VAT rates.
Customer A concludes a three-month contract with Provider B for additional TV channels from 16.5.2020 to 15.8.2020. Provider B provides the miscellaneous services at the end of the performance period and thus on 15.8.2020. The miscellaneous services are taxed at the reduced VAT rate.
Should services have been agreed for a longer period of time or even until termination by one contracting party (continuous services), invoices for certain performance phases (months / quarters / years) are usually agreed for commercially reasonable separable services. In these cases there are partial services per performance phase.
The respective partial services shall be deemed to have been performed at the end of the agreed performance phase.
Partial services which are deemed to have been rendered in the period from 1.7.2020 to 31.12.2020 are taxed at the reduced VAT rate.
Company A rents a shop from landlord B. A monthly rent is agreed. Landlord B renders the rental service to A in each case as of the end of each month. Rental services rendered from July to December 2020 are taxed at 16 percent VAT. If an annual rent (1.1.2020 to 31.12.2020) had been agreed as a partial performance, this would be deemed to have been rendered by 31.12.2020 and the reduced VAT rate of 16 percent would also apply. The rent payment would not have to be divided.
A distinction must be made between partial services agreed on a monthly or quarterly basis, which are only invoiced annually. These are deemed to have been performed at the end of the agreed performance period (month / quarter).
Adjustments and corrections to the invoices (contracts, continuous invoices, etc.) are particularly necessary in the case of continuous services that are performed as part of partial services. A temporarily valid adjustment is recommended for the periods in which the reduced VAT rates apply. This invoice correction must contain the invoice details required under Section 14 of the German Value Added Tax Act (UStG).
Furthermore, according to the present draft of the application letter, the Federal Ministry of Finance also intends to allow agreements for shorter accounting periods than hitherto, provided that these agreements are concluded before 1.7.2020. This will allow companies to change the time of performance so that the performance can be taxed at the reduced tax rate where applicable.
In the case of advance payments, the invoice for the advance payment is generally issued according to the taxation of the subsequent actual performance. This means that advance payment invoices can already take into account the tax rates applicable at a later date. This is also confirmed in the draft of the corresponding application letter of the Federal Ministry of Finance.
Customer A wants to buy goods from dealer B. Since dealer B does not have the merchandise in stock, he orders it on 25.6.2020 and requires customer A to make an advance payment for a partial amount. The goods are expected to be delivered on 5.7.2020. The invoice for the advance payment can be issued stating the reduced VAT rate as taxation is based on the later circumstances.
In cases where invoices for advance payments or payments on account have been issued with the currently valid VAT rates, but the underlying service is provided in full after 30.6.2020 (and up to 31.12.2020), the draft of the letter of the Federal Ministry of Finance provides for relief. An invoice correction of the advance payment invoice is no longer necessary if a correct final invoice is issued (with reference to the previous advance payment invoices). The company can apply the reduced tax rates by making appropriate entries in the advance return for tax on sales/purchases.
When receiving an invoice with an incorrect tax rate, an invoice correction should be sought to avoid input tax problems.
Company A receives an invoice in which a service is charged with 19 percent VAT. The service is to be rendered on 17.7.2020. Due to the time of performance, the service should have been invoiced with 16 percent VAT. If the tax amount stated is too high, company A is partially excluded from input tax of 3 per cent.
In order to avoid risks in the deduction of input tax, we recommend that businesses (especially during the transitional periods) carry out increased checking of incoming invoices.
In the case of vouchers, a distinction must be made for VAT purposes between single-purpose and multipurpose vouchers. In the case of single-purpose vouchers, taxation takes place when the voucher is issued and in the case of multi-purpose vouchers when the service is rendered.
The date of issue is therefore decisive for the tax rate for single-purpose vouchers. Consequently, it must be determined whether single-purpose vouchers are issued before 1.7.2020 (currently applicable VAT rates) or after 30.6.2020 (reduced VAT rates).
In the case of multi-purpose vouchers, the VAT rate is calculated according to the date of performance of the service for which the voucher is redeemed. The date of issue of a multi-purpose voucher is therefore not relevant for VAT purposes. The taxation of a multi-purpose voucher is therefore carried out in accordance with the above-mentioned principles.
of the original purchase price for this, the company can declare a change in the tax base and thus correct the taxation. The correction must be made in the month of the cancellation. If a change in tax rate has occurred in the meantime, it has no effect, since the correction is made according to the tax situation at that time.
Customer A buys goods from dealer B on 25.6.2020 at a price of EUR 119 (including 19 percent VAT). On 2.7.2020 he decides to return the goods and receives a full refund of the purchase price.
In a first step, dealer B has to pay 19 percent tax on turnover in the month of June. Subsequently, he can enter the EUR 100 as a negative 19 percent taxable turnover in the advance return for tax on sales/purchases for the month of July and receives the previously paid EUR 19 VAT as a refund from the tax office.
Any discounts, rebates and (annual) bonuses granted will result in a change in the VAT base. The correct VAT treatment of the subsequent granting of discounts, rebates and bonuses is therefore determined by the respective date of performance to which the refunds relate.
If, for example, annual bonuses are calculated for customer sales made in 2020, a distinction must be made for VAT purposes between the currently applicable tax rate and the reduced tax rate.
The company must provide the respective recipients of services with a receipt pursuant to Section 17 (4) of the German Value Added Tax Act (UStG). This document must show the reduction in remuneration granted and its distribution over the periods and the applicable tax rates.
The draft of the letter of the Federal Ministry of Finance provides for considerable simplifications for these corrections. The corrections can be made as follows:
- According to the ratio of taxable turnover of the proportionate half of the year, or
- in the case of an annual remuneration for the entire calendar year 2020, 50 per cent at the reduced VAT rate and 50 per cent at the normal VAT rate, or
- without exception at the general tax rate of 19 percent.
In case of application of the simplification rules, the company must issue the above-mentioned document to the recipient of the services in order to correct the input tax deduction.
If a company car is purchased and delivered between 1.7.2020 and 31.12.2020, the VAT is to be taken into account at 16 percent instead of 19 percent when determining the list price.
Between July and December 2020, VAT is to be subtracted at the reduced tax rate from the non-cash benefits, which remain unchanged in terms of their amount, for the purposes of company car taxation. The changed tax rate must also be taken into account when calculating the gross total costs if the cost capping or the logbook method is applied.
We recommend a regular exchange of information with payroll accounting or even involvement in the implementation of VAT rate changes, as the taxation of possible additional non-cash remuneration and benefits in kind are also likely to be affected by the changes.
Also in this case, the principle of the time of performance applies for determining the correct tax rate. The receipt of payment only has an effect on the time at which the tax arises, but not on the applicable tax rate.
In the case of taxation that has already been carried out, where it later turns out that the reduced tax rate is to be applied, a correction must be made in the same way as for advance payments (see above).
The turnover tax on imports is reduced to the same extent as VAT. In addition, the economic stimulus package provides for an extension of the due date for turnover tax on imports. Thus, turnover tax on imports will no longer be due on the 16th of the following month, but on the 26th of the following month in order to provide companies with a liquidity advantage.
The temporary reduction in tax rates also affects intra-EU acquisitions / domestic taxable reverse charge input services. The tax rate reductions must also be taken into account here.
There is no fundamental legal obligation to reduce prices in relation to the reduction of the VAT rate. The question of price adjustment must be answered individually based on the agreements and contracts concluded under civil law.
Companies that have concluded so-called gross price agreements with their customers can decide individually whether and to what extent they wish to pass on this advantage to the customers. Gross agreements are particularly common in the area of the provision of services to end consumers.
Insofar as net price agreements have been concluded with customers, they are entitled to the correct issue of invoices at the reduced VAT rate.
There is a particularity in the case of long-term contracts (contracts concluded more than 4 months before the change of law). Depending on the respective contractual agreements, there may be a claim for compensation for additional or reduced charges by the contracting parties pursuant to Section 28 (1) sentence 1 of the German Value Added Tax Act (UStG). However, this claim can be excluded by individual contract.
Primarily preparatory actions are to be carried out with regard to ERP and/or POS systems. This concerns the creation of new tax codes and new accounts. Account links and other IT automatisms (automatic tax determination, condition records, tax automatism) are to be checked and adjusted if necessary.
In some cases, old tax keys in your ERP system may have been archived and activated with the tax rates before the VAT increase on 1.1.2007. This can make the technical changeover easier.
Invoice layouts must also be revised with regard to the tax rates.
Check your existing agreements with customers, whether net or gross agreements have been made. If necessary, you can adjust them or revise them for the coming months. Wherever possible, avoid stating too high VAT amounts by applying incorrect VAT rates in your outgoing invoices.
Furthermore, existing agreements regarding continuous services should be examined to see whether they need to be adapted or supplemented. This applies in particular if the corresponding contracts represent a continuous invoice.
Prepare your employees for the more intensive checking of incoming invoices in order to avoid the risk of a partial deduction prohibition of reported input tax amounts.
Due to the manifold effects of the temporary changes in VAT rates, communication between the individual departments of your company should be intensified in order to be able to fully and promptly take account of necessary adjustments.
This can best be achieved by means of a joint implementation plan, which is monitored by employees from different departments.
German Public Auditor, Certified Tax Adviser, Partner
+49 521 2993165Detail
German Public Auditor, Certified Tax Adviser, Partner
+49 521 2993358Detail
Certified Tax Adviser, Lawyer, Certified Tax Lawyer
+49 521 2993388Detail
Frank van der Burg, LL.M.
Certified Tax Adviser
+49 521 2993394Detail
Certified Tax Adviser
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Prof. Dr. Eginhard Werner
Certified Tax Adviser, Of counsel
+49 521 2993172Detail