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Significant changes are on the way in 2010 that will have a major impact on organizations that do business in the European Union (EU). If your company does business in any part of the EU, these changes are more than likely to affect you. This article discusses the changes, their impact on systems and processes, and what taxpayers should consider doing.

“The VAT Package” is being described as the biggest and most important change in European Value-Added Tax (VAT) law since 1994 when the Single Market concept was introduced. There are three main elements to the VAT Package:

• Changes to the taxation of services and additional statistical reporting requirements for businesses.
• Procedures for VAT refunds to non-established businesses (previously known as the 8th Directive).
• Improved cooperation between Member states and anti-VAT evasion measures.

Changes to Taxation: The New Rules Affecting the ‘Place of Supply’ (Effective From January 1, 2010)

Business-to-Business Supplies
For the supply of business-to-business (B2B) services, VAT will typically be due where the customer is established instead of where the supplier is established, as is the current position. Notable exceptions to the basic rule are as follows:

• Services connected with immovable property will continue to be the place where the immovable property is situated.
• Cultural, sporting, scientific, educational services, and restaurant and catering services will all continue to be taxed where the services are physically carried out.
• The short-term hire of a means of transport will be taxed at the place where the means of transport is actually put at the customer’s disposal.

Business-to-Consumer Supplies
For the supply of business-to-consumer (B2C) services, VAT will generally be due where the supplier is established. In addition to the B2B exceptions noted above, there are also the following notable B2C exceptions:

• Electronic services supplied by a vendor not established in the EU will continue to be considered to be supplied where the consumer is established (thus obliging the supplier to account for local VAT).
• Electronic services supplied by a vendor established in the EU to consumers outside the EU will continue to be considered to be supplied where the consumer is established. Supplies to consumers within the EU will continue to be where the vendor is established.
• Certain “intellectual” services supplied to consumers outside the EU will continue to be considered to be supplied where the consumer is established.

New Procedure for VAT Refunds for Non-Established Businesses

For businesses with no establishment in the EU, the existing recourse to the 13th Directive remains. For businesses with an establishment in the EU, the mechanism for obtaining VAT refunds will change. The key measures, aimed at simplifying the process, are as follows:

• Extension of time to submit claims (September 30 instead of June 30).
• Electronic claims instead of paper claims.
• Central filing via a portal in Member state of establishment rather than applying to each Member state of refund.
• Apparent removal of the requirement to submit original paper copies of invoices with claims (although Member states may request “additional information” which may include “submission of the original or a copy of the relevant invoice or import document”).
• A requirement on Member states to pay interest on delayed refund payments.

Improved Co-Operation and Anti-VAT Evasion Measures

Whilst not part of the original VAT Package, Directive 2008/117 has been tacked on to make some changes aimed at the prevention of VAT evasion. Key among the provisions are changes to the time of supply rules:

• Supplies of services subject to reverse the charge which are supplied continuously over a period of more than one year and which do not give rise to statements of account or payments during that period.
  • These services will be regarded as being completed on the expiry of each calendar year until such time as the supply of the services comes to an end. This effectively forces the supplier to include an entry in its EC sales list (see below) and the customer to account for VAT under the reverse charge, even though there may not have been an invoice issued or payment received in respect to the services.
• The option to submit EC sales lists on a quarterly basis is no longer available where businesses make supplies of goods over €50,000/€100,000 in addition to supplies of services.

Impact on Reporting – EC Sales Lists

There will be additional reporting requirements and improved cooperation for the exchange of information between Member states. Effective January 1, 2010, there will be a new additional statistical filing requirement for those businesses that are making intra-community supplies of services. Businesses will need to be able to record and report all services supplied that are treated as supplied where the customer is established. (Currently, this is only required for intra-community supplies of goods).

What Will Be Affected?

Impact on Invoicing and Statistical Reporting Requirements

Businesses finding themselves in a position where they are now making supplies in another Member state will need to ensure that they meet the (existing) invoicing requirements (e.g., stating the customer’s VAT identification number on the invoice).

A potentially more onerous requirement is that businesses making supplies that are subject to the reverse charge will need to ensure that their invoices contain an appropriate reference indicating that the supply of services is subject to the reverse charge procedure (unless, of course, the Member state has waived that requirement—which can happen for supplies of certain services).

What is an “appropriate” reference will vary from Member state to Member state (e.g., provision from the Principal VAT Directive, national legislation or merely a statement that the reverse charge applies).

Even those businesses currently fulfilling this requirement by citing the Principal VAT Directive will need to be cognizant of the fact that the numbering of the relevant provisions governing the place of supply of services changes as a result of the VAT Package, so such references will need to be updated. The same may also be true for national provisions.

In relation to the statistical reporting requirements, businesses will need to look at the quote-to-cash and procure-to-pay processes to evaluate to what extent actual tax points (and hence, the obligation to pay over, or recover VAT), are aligned with the obligation to record the provision of services on a cross-border basis and the new tax point rules. In particular, businesses involved in providing services that are deemed to “continuously supplied” services will need to be aware of additional rules concerning automatic tax points.

Impact on VAT Refunds

The simplification of the refund process is, on balance, a welcome development. However, such simplification comes at a price.

Whilst the requirement to submit original invoices has ostensibly been removed, invoices included in a claim now need to be coded into one of ten prescribed categories according to the type of expenditure. At face value, this requirement does not appear to be too onerous. However, it should also be noted that Member states may request additional break-downs within these categories to the extent necessary to reflect any rules regarding the right to deduction.

Where an invoice falls within the tenth code (“Other”), the Directive stipulates that “the nature of the goods and services supplied shall be indicated.” Exactly how they “shall be indicated” will no doubt vary between the Member states.

Of course, as with any claim for refund, businesses must ensure that they nevertheless hold the necessary documentation to backup their claims. The Directive provides that where an amount has been obtained in a fraudulent way or otherwise incorrectly, the Member state can recover the amounts wrongly paid and any penalties and interest imposed.

What should I be doing?
All businesses involved with selling and buying services from cross-border trade should consider the impact of these changes well in advance of January 1, 2010.

Action Plan

Although each business will have different requirements, a typical work plan to address these issues should be as follows:

Business Model Impact Assessment
Assess the impact of the changes on the current business model to assess the nature of any changes required or desired. Most relevant here will be whether any current VAT identification numbers will no longer be required or, indeed, permitted. (These rules will vary from Member state to Member state). Consider the preparation of EC sales lists.

Impact Assessment Workshop
Gather the relevant business stakeholders to assess what processes and systems will be affected.

Gap Analysis
Evaluate what needs to be achieved and how internal resources will be able to action the necessary changes.

Requirements Blueprinting
Prepare and document changes that need to happen. This process is critical to ensure that all aspects of the business will be covered. Areas of particular focus should also include inter-company transactions, particularly the interaction with transfer pricing.

Deploy, Implement
Do not underestimate the length of time needed to implement and deploy any changes; even organizations with sophisticated ERP systems will need to allow plenty of time to allow for changes to be effected.

Test
The importance of testing cannot be understated—again, allowing time for a program of testing that addresses all aspects of the changes.

Go Live and Post Implementation Testing
Ensure that returns and filings are prepared, if possible in advance, so any discrepancies and problems can be dealt with properly.

ERP Changes

Each business will have different requirements and activities that will need to be undertaken in order to adapt to these changes. Much will be dependent on the underlying processes and IT systems that are in place to cope with the changes. Those taxpayers with “mainstream” ERP systems such as SAP, Oracle, and JD Edwards will need to consider, inter alia, the following issues when validating that the systems will be able to cope post January 2010.

• There will be inherent changes required to the underlying logic for VAT determination for the affected services in all accounting systems. These changes will manifest themselves in either potential modifications to the defaulting structure within the system or changes to the access sequences to various condition records within the ERP. This will be particularly true for entities facing de-registration (compulsory or voluntary).
• There may be changes required to tax codes to ensure that there is sufficient granularity for reconciliation and reporting purposes.
• Reports may need to be created to ensure that there are reports available to fulfill the statistical reporting requirements.
• A review of master data will be required to ensure that there is sufficiently cleansed data to complete the required returns. For example, a common problem with master data is the lack of or valid VAT identification numbers for customers. This may also lead to changes in master data processes and controls.
• Changes may be needed to ensure that invoices generated meet all requirements for VAT invoices.

Best Practice and Indirect Tax Management

While achieving compliance with the new VAT rules will require considerable effort and add a significant burden to tax departments inside businesses, Sabrix customers will have the advantage of a consolidated approach to proactively address these changes. Sabrix provides a monthly content update for any changes in rates and product liability. However, for this major change in European VAT law, this will be supported by the timely provision of a specific update that will enable clients to achieve compliance with the new laws.

This change in the place-of-supply rules is one of the biggest changes seen in VAT in the EU in many years. Sabrix is addressing the issue for customers today so that they can start implementing changes to their ERP environments in the coming months. In the longer term, Sabrix customers achieve faster and more consistent business results through enterprise-grade tax technology and content compared to less sophisticated solutions. Sabrix’s SAS-70 certified processes for managing tax rates and rules and changes in VAT laws ensure that Sabrix users receive the most accurate and timely tax research in the market.

Please Note – This publication has been prepared for general guidance on matters of interest only and does not constitute as professional advice. It should not be regarded as a basis for ascertaining the liability to tax in specific circumstances.