Tax Alert on the Corona economic stimulus package: short-term reduction of VAT rates

BTadvice 2020-Q2

This week, the coalition committee approved an economic stimulus and crisis management package. In the area of VAT, two changes were agreed upon: One is the reduction of VAT rates, specifically the standard rate from 19% to 16% and the reduced rate from 7% to 5%. The reduction is to apply for a limited period from 1 July to 31 December 2020. On the other hand, the due date of the import VAT is to be postponed by 10 days to the 26th of the following month. All companies must now examine and adjust their situations and processes carefully. In this respect, there will be in particular effects on the accounting entry in the ERP systems, the VAT reporting and, if applicable, existing contracts.

Although no draft legislation on the measures has yet been drafted, there is very little time left for companies to prepare for the practical consequences in everyday business. 

Date of supply is decisive
In principle, the decisive factor for the applicability of the new VAT rates is when the supply was performed (Section 27 (1) sentence 1 UStG). In the case of the usual taxation based on agreed amounts, the agreement and receipt of the payment are not decisive. Neither the date of issue of the invoice nor the date of payment are relevant; this also applies to partial supplies.

In practice, special attention must be paid to this: Date of supply, continuous supplies and prepayments. For supplies of goods, the date of supply must be considered in order to select the appropriate tax code for the corresponding tax rate. This can lead to differences between supplies of goods with and supplies of goods without movement.

For supplies of other services, there may also be different dates of supply.
Continuous services are those where the service period extends over a longer period (leasing, rental, maintenance, accounting, mobile phone connection, licenses, subscriptions, etc.). Here it is relevant whether the service is recurring, a service that ends at a certain point in time or, if applicable, the service is partial.

If advance payments or payments on account are received before the cut-off date, but the supply of goods or other service is carried out between 1 July and 31 December 2020, the current VAT rate would initially be applicable and later an adjustment to the lower VAT rate would have to be made.

In the course of the change in the taxation of restaurant and catering services, for which the reduced VAT rate will probably apply for one year from 1 July 2020, and as far as meals are concerned, it should be noted that the VAT rate will then change from 7% to 5% until the end of this year. Beverages would then only be subject to 16% VAT instead of 19%.

In the case of incoming invoices issued at a VAT rate of 19% or 7%, it must be checked in the future whether this VAT statement is correct. Otherwise, the difference would constitute an excessive VAT statement in accordance with Section 14c UStG, so no input VAT can be deducted to this extent.

In the case of contracts that are regarded as invoices or in the case of permanent invoices, it must be checked whether adjustments are necessary. Further issues can arise, for example, in the case of vouchers, refunds (e.g. annual bonuses) and discounts or also in pricing. It is important to consider whether gross or net price agreements exist. When returning goods, it is important to know whether the return of goods is a new supply or a cancellation of the original supply, for example.

Conversion of ERP systems
The ERP systems must be prepared for these changes. Note that you must always create new tax codes with the new VAT rates. This also applies, for example, to intra-community acquisitions of goods, the reverse charge mechanism, and import VAT. If "old" tax codes still exist, at least for the VAT rate of 16%, they should be reactivated pro rata temporis. A new changeover would then be necessary from next year on.     

In this context, it should be noted that the prompt adjustment of the tax codes and tax determination results in clear tax reporting and simplifies the VAT reporting obligations. In contrast to the retrospective declaration, these must already be available at the beginning of the posting period, in this case July 1, 2020.

Draft law and application letter still pending
Since the change in VAT rates was agreed at very short notice, a draft law and (if necessary) a corresponding letter from the Federal Ministry of Finance is pending. It is also questionable whether and when changed forms for the preliminary VAT returns can be expected. These should in principle be available by the beginning of August 2020 the latest. 
Entrepreneurs must prepare themselves immediately for the introduction of the new VAT rates in order to implement the planned short-term changes in good time. 

If you have any questions, our VAT experts Marion Fetzer and Thorsten Went, as well as Thomas Klunk for procedural issues, will be happy to assist you.