What is indirect taxation?

An indirect tax is collected from the taxpayer by a tax-liable intermediary.

The taxpayer is the person who has the obligation to pay the tax back to the Revenue authorities. In European taxation, this responsibility affects the supplier in the first place. This responsibility starts with the choice of the correct tax rate and amount, passes through formal obligations such as invoicing, and ends with payment at the Revenue authorities.

The taxpayer is the last link in the commercial chain.

The taxpayer is at the beginning of this chain and in all the intermediate stages.

This type of taxation:

• is easier to collect because there are fewer people
• the taxpayers themselves fill out their liquidation
• is territorially fair: it is levied where consumption takes place
• is also related to the margin of the intermediary
• often represents more than half of
• is, alas, subject to many frauds more or less elaborate

VAT, means Value Added Tax. This is one of the most common indirect tax.

What are the responsibility of the person liable, his rights (reimbursement, deduction)?

What are the duties of VAT tax liable persons?

The person liable – who is very often the supplier – is therefore solely responsible for applying the correct VAT rate, submitting an invoice in good and due form, collecting and then liquidating the VAT within the time and form established by the local authorities.

“Local” means the territory where the goods are considered delivered or consumed and the services provided.

Consequently, a taxable person who collects VAT has one last obligation, the most important one : that of periodically submitting VAT returns on a self-assessment form. This obligation also goes hand in hand with rights.

What are the rights of VAT tax liable persons?

One of the pillars of VAT is neutrality. The word “liable” is translated in other member states by “passive subject” or “responsible person”.

In return, this taxpayer has – in most cases – a right recognized by his own tax authority: the right to deduct.

There are several exceptions:

• businesses or contractors below a threshold of minimum annual turnover
• special schemes based on margins or administrative simplifications
• goods and services are not considered part of the economic activity
• non-resident taxpayers who are not allowed to deduct

In concrete terms, this right to neutrality can exist in two ways:

What is the right to deduct? 

is offered to companies having access to the periodic VAT settlement forms.

Important: the persons having the right to deduction are automatically entitled to the refund. The opposite is not true.

What is the right for refund? 

when it is not combined with the right to deduct, it is often offered to taxable persons (company, entrepreneurs, etc.) who have borne VAT locally, do not have access to periodic liquidation obligations , and therefore not the possibility to deduce. This is very often a procedure for non-residents on temporary assignment or mission to another Member State.

What is the VAT model applied in Europe?

Does VAT relates to all stages of the production / commercial cycle?

VAT in the European zone is distinguished by its application at all stages of the chain.

Concretely each intermediary is liable – responsible – that his client is a company or an individual, to submit an invoice in good and due form, collect and then liquidate the VAT.

Are there harmonized regulations?

VAT in the European Union is torn by two main constraints:

• it is a strategic tax at the national level for its weight in the budgets and internal politics of each state
• it is an obligation to become a Member State in order to avoid distortions of competition within the European Union.

The regulation that regulates harmonization is therefore relatively “flexible” since it relies mainly on a Directive.

Unlike the “Implementing Regulations” which are strictly and immediately applicable throughout the European territory, the Directive allows Member States a deadline to adopt their national regulations in order to obtain a coherent expected result.

What is the place of Europe in the national VAT?

Legal coherence at European level requires another prerequisite for the Member States: to accept supranational authority. We are talking about the prevalence of international law over the national.

Their interests in the Member States are represented in the institutions that generate Directives, Executive Regulations at European level, some of which will be transposed at national level into law.

To settle disputes and preserve international coherence, there are several institutions such as the Court of Justice (CJEU/ECJ) General Court and the European Civil Service Tribunal. Their decisions are applicable in each Member State.

In terms of VAT their weight is important in the way of applying the Directive, their speed of intervention being incomparable to the legislative processes.

In conclusion, member states weighs in the European decisions. These are, in turn, binding at the national level.

VAT contributes 12% of EU budget revenue in 2019. This is a uniform rate for all Member States to the harmonized basis according to EU rules.

How is VAT harmonized in trade with the EU?

Which types of transactions / transactions according to the Directive?

Transactions fall into 4 types:

• deliveries of goods
• imports
• intra-Community acquisitions
• services provided

There are also several special cases well documented in the European regulations.

How is VAT applied ?

Applying VAT correctly with European customers is easy as answering a few questions:

• Do I sell goods or services
• If I sell goods, are they transported outside my Member State
• What is my transaction
• Is my addressee a taxable person or an individual
• do my products / services have a normal VAT rate, reduced or super reduced

In terms of intra-community VAT, territoriality is generally a point of conflict to be monitored and confirmed with a specialist in case of doubt.

What is the territoriality and legitimacy of the Member States for VAT?

For each transaction there can only be one Member State as recipient of the revenue.

Fortunately the rules regarding the territoriality of transactions (place of supply) and the judgments of the ECJ are very explicit.

Territoriality is important because it requires the taxpayer to depend on to the authority of the country concerned to:

• collect VAT
• comply with national billing rules
• if required, submit liquidations and pay VAT or request a refund.

For example: By delivering goods to particular individuals in another Member State from a local stock, the authorities of the latter could require a series of formalities such as tax identification, filing and submitting of periodic VAT self-assessments, etc.

Finally, related obligations are often omitted by operators, in particular ECSL (VAT listings) and intrastat (DEB in France). These are also mandatory.

Why identifications in Europe are sometimes compulsory ?

There may be several reasons why a Member State requires tax identification from a non-established person, entrepreneur or company, before delivering goods or providing a service.

The logic is as follows: whenever there is a tax official, whether immediately or in the event of fraud or involuntary irregularity, the Member State where will ask either for identification of a non-resident, or will shift the responsibility of the supplier to the recipient of the goods or services.

The most common cases are :

Are distance sales compulsory for VAT identification?

Delivering goods to individuals in Europe: each member state has established a national limit (threshold) above which the territorial derogation disappears and the supplier can no longer invoice except with the VAT of the member state where he makes his delivery . Be careful for excise goods, this exemption does not exist.

As an individual can never be subject to tax, the Member State receiving the delivery has no other choice than to engage the responsibility of the seller. The latter must therefore do what is necessary to obtain a tax identification for VAT purposes, and must subscribe to the periodic reporting obligation: they are expected to collect and therefore pay VAT.

Beyond the VAT there are other informative and statistical obligations to which the taxable persons moving goods through European borders are liable.

Do non-resident importers are required to VAT register?

When an individual, entrepreneur or company brings goods into customs territory, the Member State designates the owner (or a third party of his choice) as “liable for importation” or “importer for record”.

That is to say that this owner receives a liquidation from customs authority, on the basis of an invoice and customs documents, specifying the amount of any duties as well as the VAT to be paid to allow free movement: to simplify, “as long as this is not paid or guaranteed by a third party, the goods are retained by the customs services for a given period before destruction ”.

The Member State which received this goods may request, beyond the EORI, a full local tax identification. In this case, European taxable persons are asked for a VAT number but are not obliged to subscribe to the obligation to declare periodically because the import is not a VAT collection transaction.

Are non-resident exporters required to VAT register ?

From the moment a taxable person brings goods out of the territory of a Member State, the latter will require – as a precautionary measure – that the owner (at the time of leaving the territory) must be identified beforehand and have subscribed to the obligation to report periodically.

Indeed, the suspicion of fraud or irregularity incites the Member State which lets go a good for which no local VAT is invoiced, to constrain administratively this owner: this last will have to identify himself with the VAT and declare periodically. In the event of failure to justify leaving the territory, customs and / or the tax authorities will immediately issue a liquidation taking over the VAT which should have been liquidated if the delivery had been made in the same territory. This liquidation can only be addressed to the supplier since the customer is by default established abroad.

What are taxable persons with the right to deduct

When a taxable person delivers goods under concrete conditions, or provides services which the competent Member State has classified as “entitling to deduction”, the non-resident taxable person will be informed of the obligation to identify himself for tax purposes and to subscribe to the obligation to report periodically.

Indeed, the deduction can only take place via national forms: the right to deduct can only be exercised within the deadlines and the existing legal framework for local taxable persons.

When intra-Community deliveries of goods are VAT exempted ?

It’s about :

• delivery of goods with transport
• whose origin and destination are two separate member states
• of which the supplier and the recipient are taxable, except derogatory regimes
• with financial compensation (against payment)
  

What does a intra-Community supplier of goods for exemption ?

If you meet the conditions for benefit from the exemption:

The corresponding invoice must:

• be without VAT charged.
• indicate the VAT identification numbers of the seller and the buyer, as well as the corresponding mention.
• The supplier must mention the transaction on his VAT return in the “exempt transactions” section.

Supplier must make a statistical declaration (intrastat).

What does a recipient of intra-Community aquisition after exemption ?

If you meet the conditions for benefit from the exemption:

The corresponding invoice must:

• be carried out without tax.
• indicate the VAT identification numbers of the seller and the buyer, as well as the corresponding mention.
• The supplier must mention the transaction on his VAT return in the “exempt transactions” section.
• You must make a statistical declaration (intrastat).
  

Simplified VAT glossary:

What is a taxable person?

You will be able to read in certain texts – even official – “subject to VAT”, which is confusing.

Take care to make the distinction between “subject” and “liable” because it is a basis of tax law.

You should ignore the logical meaning of the word “taxable person” and replace it with “entrepreneur or business”.

A taxable person is an independent person (not employed), physical or legal, who carries out transactions, mainly commercial, on an ad hoc or regular basis.

What is VAT taxable?

A transaction is not considered taxable for VAT purpose if the basic conditions are not met. A graphic example is that of two European entrepreneurs who find themselves at a trade show in the United States and one resells to the other decorative stand items purchased on the spot. It is indeed a delivery of goods between two European taxable persons but the delivery of goods is made in a territory outside the scope of European VAT (understand outside the jurisdiction). In terms of European VAT this transaction is not taxable.

What does VAT exempted mean?

A transaction subject to VAT, but whose regulations allow the taxpayer not to apply VAT, is exempt. Certain essential goods or services are thus exempt from VAT.

A transaction may be exempt for the supplier when the recipient is liable on arrival (case of deliveries / acquisitions of goods and intra-Community services).

What is the difference between non-resident and non-established?

These are two very similar concepts but each refers to its own environment: the term “resident” refer to both legal and physical persons and concerns the main place of attachment. For an economic activity and therefore a taxable person, understand the “headquarter”.

The concept of established or establishment is exclusive of the taxable persons, and refers to an operational center.

There are two degrees of establishment depending on the type of taxation:

• the exclusive VAT fixed establishment
• the permanent (or permanent) establishment which refers to a double taxation agreement

Important: in terms of VAT, the concept of permanent establishment is relatively harmonized and is based on criteria similar to the double taxation treaties, but without bringing them all together. It is therefore easier to qualify as a permanent VAT establishment, without having any repercussions in terms of corporate tax for example.

What means tax liable person ?

It is necessary to distinguish in what context we are in terms of liability : liable for periodic reporting obligations or liable for a given transaction.

Indeed, a taxable person – liable – who files periodic VAT returns is not liable for all transactions.

In the vast majority of transactions, the VAT payer is a taxable person.

The debtor status is triggered by the right to deduct, which is accompanied by periodic reporting obligations.

Take the case of two national taxable persons (understand “professionals” as opposed to individuals) who deliver goods to each other: the supplier is a taxable person liable for the transaction, the customer is also a taxable person, but not liable for the transaction. However, these two taxable persons are liable for a declaration at the end of the fiscal period.

What is a VAT transaction ?

After “dissection” of commercial or logistic operations, we obtain the indivisible elements in law. These are the transactions, there are only 4 in terms of VAT and their hierarchy is of extreme importance in certain sectors:

delivery of goods (national, intra-Community and export)

import

intra-community acquisition

service delivery

You will notice that the service provision is last, and its definition makes it the last classification option: we can only consider a service provision when we have verified that it was not one of the 3 previous categories . The territoriality (understand the competent country which collects VAT) is not the same depending on whether it is a delivery of goods or a service), hence the economic and strategic character of this category to the era of new technology and access to online services.