FEDERAL TAX COURT OVERTURNS ADMINISTRATION’S OPINION
In a judgment dated August 22, 2013 (Case V R 37/10, BStBl. [Bundessteuerblatt, Federal Tax Gazette] II 2014, p. 233), the Federal Tax Court [Bundesfinanzgericht] had decided that the tax liability for construction supplies can be transferred to the recipient of the supplies only when the recipient uses the input supplies to provide construction supplies of its own. Contrary to what the Tax Administration had argued, the Federal Tax Court held that the scope of construction supplies otherwise provided by the recipient of the supplies was immaterial, as was whether the provider and recipient of the supplies had agreed to transfer the tax liability.
© ThinkstockADMINISTRATIVE PRACTICE NOW ESTABLISHED AS LEGISLATION
Based on the proposal from the Bundesrat, the Croatia Tax Amendment and Revision Act has now incorporated provisions under which construction supplies result in a transfer of tax liability without regard to the recipient’s actual use of those input supplies, provided that the recipient is a business enterprise and regularly provides construction supplies. The legislature has established greater legal certainty in this regard for those concerned: the tax authorities are now required to issue an appropriate certification, solely for purposes of value added tax, to the relevant entities who buy construction supplies and regularly provide construction supplies themselves. This will reduce future doubts about whether the reverse charge method applies, and whether entrepreneurs have a tax liability for construction supplies they have received. The Tax Office must limit the certification to not more than three years, and can revoke it only with effect for the future.
Under the legislation, a regular delivery of construction supplies is still to be assumed when those supplies amount to at least 10% of the supplies recipient’s worldwide revenues. However, it was not considered necessary for the statute to enact specific terms here because established certification practice has already ensured legal certainty for those concerned.
In contrast to the Bundesrat’s original proposal, property developers will still not fall under the provision, because they do not provide construction supplies in this sense and therefore are not included under the special VAT terms.
On the other hand, equivalent provisions have been included for cleaning services. Accordingly, the tax liability is transferred if the recipient of the supplies regularly provides such supplies itself, which is to be assumed if appropriate certification is presented.
THE FICTION OF THE REVERSE CHARGE METHOD
If the supplies recipient and the supplies provider both agree in applying the prerequisites for a transfer of the tax liability, the supplies recipient is considered the taxpayer irrespective of whether the requirements are met in fact. This fiction applies uniformly to both construction supplies and cleaning services.
The new provisions take effect on October 1, 2014.
TRANSITIONAL PROVISIONS FOR EXISTING CASES …
The legislation also includes a provision that parallels the non-complaint rule under the Federal Ministry of Finance’s circulars of February 2, 2014 (BStBl. I 2014, p. 233) and May 8, 2014 (BStBl. I 2014, p. 823). In those communications, the Tax Administration established a protection of legitimate expectations if the entrepreneur providing the supplies and the recipient of the supplies, by mutual agreement, had incorrectly assumed a transfer of tax liability for revenue generated before February 15, 2014.
… MAY MAKE PROBLEMS FOR DEVELOPERS
This will affect numerous property developers who thought, based on past administrative directives, that they were covered by the reverse charge method. They can now claim a refund from the Tax Office for the value added tax they paid. Contrary to the general rules on legitimate expectations, there is a specific provision that recourse against the supplies provider is generally supposed to be possible. At the same time, the supplies provider is given the option of assigning to the Tax Office any claim for a civil settlement that it has against its client, in order to satisfy the tax liability. But there is likely to be considerable litigation straightaway as to whether any such claim exists. Here questions of civil and tax law must be resolved interactively. It is important in these matters to have access to an advisor who is familiar with both fields of the law.
