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VAT Reverse Charge Mechanism Expansion In The Czech Republic
Our VAT expert provides details of an expansion to the reverse charge mechanism - for VAT purposes - for certain crops and cereal grains in the Czech Republic.
The domestic reverse charge has been implemented to help reduce so-called missing trader VAT fraud, as the EC estimates that this type of fraud has cost the member states up to €100bn per annum. This is an activity whereby criminals target the EU VAT simplification procedure to obtain VAT refunds. Criminals claim to make sales of goods across EU borders, which are generally VAT free. In reality they sell the goods within their country, charge VAT but pocket the tax instead of declaring it to the tax authorities.
In this instance, the Czech tax office identified the traders of cereals, oats, peanuts, wheat, sesame seeds and rye.
Under special powers granted by the European Commission, countries may eliminate VAT on domestic trades where they suspect such fraudulent activity. Therefore, such a mechanism has been introduced by the Czech government.
Terms of Application
- The mechanism will apply to all cereal and technical crops, including oil seeds, as specified under the Customs nomenclature codes included in Chapter 10 and 12.
- The expansion will not cover all items, but only those that the regulatory definition (e.g., wheat, rye, barley, oat, rice, peanuts, flax and sesame seeds, and the seeds of certain herbs).
- The reverse-charge mechanism is applied if the total tax base of all delivered selected goods exceeds CZK 100,000.
- The local reverse charge is applicable only in case that the place of taxable supply is in the Czech Republic and the supply is realised between VAT payers.
Impact of this change
- Such a mechanism will eliminate or reduce the obligation for sellers to VAT register in the country where the supply is made. If the supplier incurs any local VAT on costs related to the service or goods supplied under the Reverse Charge, they may recover them through an EU VAT reclaim.
- Suppliers of these commodities for a value exceeding CZK 100,000 will have to issue their sale invoices under the domestic VAT reverse charge mechanism. It means no Czech VAT should be mentioned on the invoices.
- It will reduce the missing trader fraud and will lead to proper tax payments.
Originally, the Czech government's new reverse-charge mechanism was intended to have been in application since 1 January 2015. But, there was a postponement of the effect of the application of the mechanism to specific commodities until 1 April 2015.
The application of the extended reverse charge mechanism from 1 April 2015 included goods such as:
- integrated circuit devices such as microprocessors and central processing units, computer chips
- laptop and tablet computers games consoles
- precious metals and carbon trading licenses
Later, the Government also approved the expansion of the local reverse charge mechanism to new types of selected commodities, which included agriculture crops, with applicability from 1 July 2015.
Technically, there is the question whether the amended regulation is in compliance with the EU VAT Directive, which provides that the reverse charge mechanism may be applied to these items only if they are not commonly used for final consumption in their unaltered state. It can be deduced from the regulation and the previous comments of the Chamber of Tax Advisors on the draft amendment that the submitter of the amendment assumes that the above definition does not cover such items. A similar regulation is currently in effect in Slovakia.
Given the wording of the amended regulation, it is believed that the application of the reverse charge mechanism (where the statutory limit is exceeded) to any item included in the aforementioned chapters meeting the above definition should not be disputed by the tax administrator.
- The application of the local reverse charge in case of sugar beet is effective from 1 September 2015
- Introduction of new reporting obligation effective from 1 January, 2016
In addition to the regulation on domestic reverse charge mechanism, the Czech Republic has also introduced a new control statement to be filed from 1 January, 2016. This new return is not limited to transactions subject to the local VAT reverse charge scheme. All domestic sales and purchases in the Czech Republic will need to be reported on the return by every taxpayer. The statement will be submitted electronically on a monthly basis and at the same time with the VAT return.
It would appear that the Czech Republic is implementing new measures to tackle VAT fraud in 2015. However, 2016 will bring with it an even more significant change and perhaps a significant burden on businesses, as the requirement to file a “Control Statement” is introduced.” Watch this space, as TMF Group will be bringing you more updates.