the coronavirus economic stimulus package has been available as a draft law of the Federal Government since 12.06.2020. It provides for a temporary reduction in value-added tax (VAT) from 19% to 16% and from 7% to 5% for revenues from 01.07.2020 to 31.12.2020. For the detailed questions in practice the draft of a BMF letter was published today.
In the following, we present a few essential principles.
First of all, the tax reduction covers all deliveries of goods and services that are taxable and subject to tax in Germany during this period. A delivery is deemed to have been made when the power of disposal over the delivered goods has been transferred, in particular at the beginning or end of a transport or shipment. A service is deemed to have been rendered at the time when the agreed scope of services has been provided in full.
Important for practice are regularly the questions of delimitation into certain case variants, such as permanent services or advance payments. The above Federal
Ministry of Finance letter contains the following regulations in this regard:
1) Continuing services, for example taxable tenancies, leasing:
This is a completed partial performance, which then leads to the final accrual of sales tax. In order for a partial performance to be considered as a partial performance, 2 necessary conditions according to national law must be fulfilled:
- it must be an economically reasonable and definable service, and
- there must be an agreement on the execution of the service as partial performance; the partial performance must be accepted and invoiced separately
Since this is usually the case for rental or leasing arrangements, the tax rate is reduced for these partial Performances performed from 01.07.2020. to 31.12.2020. It must be ensured that, if necessary, a new permanent invoice is issued with the lower tax rate for this period.
2) Advance payments
Since the VAT does not finally arise until a delivery, service or partial performance has been carried out, this must also be taken into account for advance payments. In other words: advance payments do not guarantee a tax rate! If the service was performed in the period from 01.07.2020 to 31.12.2020, the entire service is to be settled at the lower tax rate. The same applies to transactions carried out after 31.12.2020, which are then again subject to the previous tax rates. In this case, any advance payments would have to be subsequently taxed.
The relief or subsequent taxation of advance payments is carried out in the advance return for the period in which the service or partial performance to which the advance payment refers is performed. The final invoice must be issued with the tax rate applicable for the period in which the service was performed. If the entrepreneur taxes his sales according to the fees received, the relief or subsequent taxation takes place in the advance return period in which the remaining fee is received.
Invoices for advance payments with a tax rate different from the final invoice need not be corrected.
3) Construction work
If uniform construction work is carried out in the period from 01.07.2020 to 31.12.2020 (time of acceptance by the client), the entire work is subject to 16% VAT. The extent to which advance payments with a different tax rate have already been made is not relevant here. Correspondingly, the service is then again subject to the standard tax rate of 19% if the service (acceptance of construction) is carried out after 31.12.2020.
The following example illustrates this:
In 2019, a client commissioned a construction company to build a single-family house. This is to be accepted as a turnkey project. The construction company has already received a down payment of 119K euros (net 100K euros plus 19% VAT) on 30.03.2020. Acceptance is now to take place on 31.07.2020. This means that the complete service is subject to VAT of 16%. The construction company is invoicing a total of 232K euros (net 200K euros plus 16% VAT) and is deducting the advance payment in the amount of 119K euros. This results in a second payment of only 113K euros for the building owner.
The following example shows an opposite effect:
A client commissions a construction company to build a turnkey single-family house in 2020. On 31.07.2020 the construction company settles a down payment of 116K euros (net 100K plus 16% VAT). Due to an early onset of winter, the single-family house will not be accepted until March 2021. Thus, the complete work delivery is subject to VAT at 19%. The construction company settles with 238K euros (net 200K euros plus 19% VAT) and reduces the payment obligation of the building owner by 116K euros to 122K euros. In these cases, it is urgently recommended that partial performances be agreed and invoiced by 31.12.2020!
4) Restaurant and catering services
Different regulations apply to restaurant and catering services due to the Coronavirus Tax Assistance Act: until 30.06.2020, these services are subject to a VAT rate of 19%, from 01.07.2020 a reduced VAT rate of 5%, from 01.01.2021 to 30.06.2021 a reduced VAT rate of 7% and then (from today's perspective) from 01.07.2021 again the general VAT rate of 19%.
Further individual cases and particularities that would go beyond the scope of this information mail can be found in the above mentioned BMF letter https://www.bundesfinanzministerium.de/Content/DE/Downloads/BMF_Schreiben/Steuerarten/Umsatzsteuer/2020-06-12-befristete-Senkung-umsatzsteuer-juli-2020.pdf?__blob=publicationFile&v=3. This concerns, for example, telecommunications services, electricity, gas and heat supplies, exchanges, and much more.
Companies must now devote extensive capacities to the administrative challenges. Accounting/ERP systems have to be adjusted to the new tax rates, invoice layouts have to be adapted accordingly, so that proper posting and invoicing of sales can be carried out at the correct tax rate. It is important to avoid sales tax risks resulting from incorrect tax rate reporting. In particular, it should be pointed out that excessively high VAT is due for payment to the tax office, but cannot be refunded by the recipient of the service as input tax.
Finally, long-term contracts must be reviewed and, if necessary, amended with reference to § 29 of the Value Added Tax Act. This is about an economically reasonable compensation of additional or reduced charges with VAT between two contracting parties, which is only enforceable under certain conditions.
For detailed questions or for clarification of necessary conversion processes, please contact us! We will be happy to assist you!