Simplification of VAT-bearing transactions: reverse charge

1. Introductory issues

The Value Added Tax ("VAT") is certainly the most common tax, essentially being a consumption tax paid by the final consumer of a product or service.  It is harmonized at the European level, having the benefit of common rules in all EU Member States.

The current VAT system, yet to be finalized, has a bureaucratic component. In addition to the obligations to declare VAT, it also includes successive transfers of the sums representing VAT between taxable persons before their assignment to the state budget. However, the tax should be neutral for these persons, meaning that the financial burden of VAT should be non-existent.

Reverse charge is a way of simplifying the payment of VAT, in the sense that no VAT payment is made between the supplier and the recipient, both being taxable persons. The recipient is the only person to record this tax, both as a collected VAT and as a deductible VAT.

2. The implementation of the reverse charge mechanism

In order to simplify the performance of economic transactions, particularly in regards to intra-Community transactions, the 1993 reform of the VAT mechanism, whilst abolishing tax frontiers between the Member States, allowed derogations from the classic VAT mechanism which required the supplier to collect VAT and transfer it to the state budget. Thus, by way of exemption, the obligation to collect VAT was assigned to the recipient, who was therefore also entitled to deduct VAT.

As a result, the two amounts are neutralized in the recipient's VAT statement and, as a consequence, there will no longer be any obligation to transfer VAT amounts to the state budget in relation to this operation.

Later on, as a result of the success of the simplification measure, the Council of the European Union, through Directive (EU) 2018/2057 of 20 December 2018, introduced an optional generalized reverse charge mechanism for supplies of goods and services of a non-cross-border nature, under the condition that the person liable for payment of VAT is the taxable person to whom goods and services, exceeding a threshold of 17 500 Eur per transaction, are supplied.

Under the Romanian legislation, Articles 306 to 309 and 331 of the Fiscal Code allow for the simplification of the operation, in the sense of applying the reverse charge, only for a series of operations expressly and restrictively provided.

We can notice that Romania preferred not to opt for the application of the new general reverse charge mechanism.

3. Condition for applying the reverse charge

As anticipated in the introductory section, the mandatory condition for the reverse charge mechanism to operate is that both the supplier and the recipient must be registered for VAT purposes, according to Article 316 of the Fiscal Code.

Further, the economic operation must fall in one of the categories of domestic operations exhaustively listed in Article 331 of the Tax Code or in the categories of external operations exhaustively listed in Articles 306-309 of the Tax Code, such as intra-Community acquisitions of goods, imports or intra-Community supplies of services carried out in Romania.

4. Reverse charge transactions

There are two categories of transactions to which reverse charge applies in the Tax Code, which are domestic and foreign transactions.

4.1. Domestic transactions

Article 331 of the Tax Code exhaustively lists the domestic transactions for which reverse charge is applicable.

The transactions for which reverse charge applies are as follows:

a) the supply of the following categories of goods:

1. ferrous and non-ferrous scrap, ferrous and non-ferrous waste, including semi-finished products resulting from their processing, manufacture, or melting;
2. scrap and other recyclable materials consisting of ferrous and non-ferrous metals, their alloys, slag, ash, and industrial residues containing metals or their alloys;
3. waste recyclable materials and used recyclable materials consisting of paper, cardboard, textile material, cables, rubber, plastic, glass shards, and glass;
4. materials specified in 1-3 after processing byways of cleaning, grinding, sorting, cutting, fragmenting, pressing or casting into ingots, including ingots of non-ferrous metals to which other alloying elements have been added;

b) supply of wood and wood materials as defined by Law No 46/2008 - Forestry Code, republished;

c) the supply of cereals and technical plants, including oilseeds and sugar beet, which are not intended as such for final consumers. The methodological rules shall determine the CN codes corresponding to these goods;

(d) the transfer of greenhouse gas emission allowances as defined in Article 3 of Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC, transferable in accordance with Article 12 of that Directive, and the transfer of other units which may be used by operators in accordance with that Directive;

(e) the supply of electricity to a taxable dealer established in Romania in accordance with Article 266(2) of Directive 2003/87/EC (2).

f) transfer of green certificates as defined in Article 2 (h) of Law No 220/2008 on the establishment of the system for the promotion of energy production from renewable energy sources, republished, as subsequently amended and supplemented;

g) buildings as defined in Art. 292 para. (g), as defined in Article 292(2)(f)(2), parts of buildings and land of any kind, for the supply of which the system of taxation applies;

(h) supplies of investment gold by taxable persons who have exercised the option to tax and supplies of raw materials or semi-manufactures of gold of purity of 325 per thousand or more to purchasers who are taxable persons;

(i) supplies of mobile telephones, i.e. devices manufactured or adapted for use in connection with an authorized network and operating on certain frequencies, whether or not they have any other use;

j) supplies of integrated circuit devices, such as microprocessors and central processing units, prior to their integration into end-user products;

k) supplies of games consoles, tablet PCs, and laptops.

l) the supply of natural gas to a taxable dealer established in Romania pursuant to Art. 266 para. (2).

For the calculation and registration of VAT in case of applying the simplification measures provided for in Article 311 of the Fiscal Code, obligations are established both for the supplier and the recipient.

In this context, the supplier is obliged to mention "reverse charge" on the invoices he issues for the supply of goods or services and not to enter the related tax collected. The supplier will then enter the information taken from the sales ledger on the taxable amount for the supplies for which he applies the simplification measures in the VAT return (form 300) on line 13.

The recipient of the transaction, on the other hand, is required to calculate VAT, which he will record both as collected VAT and as deductible VAT in the VAT return form (Form 300) on lines 12 and 27.

4.2.  Foreign operations

When we have services which, according to Art. 278 para. (2) of the Fiscal Code, are taxed in Romania, as well as in the case of imports and intra-Community acquisitions of goods, the obligation to pay VAT is the responsibility of the recipient.

This is in fact the optimal solution, in order not to end up in a situation where suppliers of goods or services from abroad are forced to register for VAT purposes in Romania, especially given that such operations could be occasional for them.

The reverse charge procedure is similar to the one described above, with suppliers issuing invoices without VAT whilst mentioning reverse charge, and recipients being required to calculate VAT and register it in their accounts as both tax collected and deductible.

5. Current issues

In the area of reverse charge, there have been many recurring issues in European countries over the years, but one of the most controversial ones has been the refund of unduly paid VAT to tax authorities.

The issues have been dealt with in the case law of the Court of Justice of the European Union, which is binding for national courts and authorities.

Thus, in order to determine the regime applicable in a situation such as the one referred to above, the Court considered the following preliminary questions in Case C-691/17:

• whether the issuer of the invoice can refund to the recipient of the invoice the amount of VAT that has been unduly paid;
• whether the issuer of the invoice can legally (under the national law of the Member State) rectify it in a self-review and regularise it, thereby obtaining from the tax authority a refund of the wrongly paid tax?

Analyzing these questions in the light of the tax principles of tax neutrality and tax effectiveness, the Court of Justice of the European Union has stated that, if a transaction falls within the scope of the reverse charge mechanism, the tax authority must, before denying the right of deduction to the issuer of the incorrect invoice, ensure that the issuer had the opportunity to rectify that invoice under a self-review procedure.

Moreover, in Case C-835/18 Terracult, the Court of Justice of the European Union ruled that European VAT law precludes national rules which do not give the taxable person the right to correct invoices relating to transactions subsequently found to be covered by the reverse charge mechanism.

Thus, the taxable person must have at disposal a mechanism for rectifying a previous tax return and submitting a new tax return recording the correction made, with a view to refunding VAT paid unduly.  

Finally, as a rule, in such cases, where the recipient pays VAT to the supplier even though the reverse charge scheme was applicable to the transaction, VAT paid in error will not be deductible by the recipient. It is necessary to rectify the invoice and the declarations by applying the reverse charge system, i.e. to refund the VAT paid by the supplier to the beneficiary.

However, the answer has been further detailed in the case-law of the European Court in case C-564/15 Tibor Farkas. Thus, in that case, the Court held that the right to deduct VAT and a possible refund of that amount cannot be refused by the tax authorities, in so far as the refund of the VAT by the supplier to the recipient of the transaction becomes impossible or excessively difficult, in particular in the event of the supplier's insolvency. In such cases, the recipient should be able to pursue his claim for a refund directly against the tax authority.

6. Conclusions

In conclusion, the charging mechanism is an effective method of simplifying VAT collection.

In the end, no VAT payment is made between the supplier on the one hand and the recipient on the other, but the VAT amount is only reflected in the VAT return of the recipient, both as collected VAT and as deductible VAT, without generating a financial burden on taxable persons.

MAXIM / Associates

Av. Călina Tejan și Av. Alexandra Tomuța

05.01.2022

[1] Council Directive 91/680 / EC of 16 December 1991 supplementing the common system of value added tax and amending Directive 77/388 / EEC to eliminate tax frontiers.

[2] ANAF Order 2227/2019

[3] The place of supply of services to a taxable person acting as such is the place where the person receiving the services has established his place of business. If the services are provided to a fixed place of business of the taxable person, located in a place other than that in which the person has his place of business, the place of supply of services shall be the place where the fixed place of business of the person receiving the services is located. In the absence of such a place or fixed establishment, the place of supply of services is the place where the taxable person receiving such services has his permanent residence or habitual residence.

[4] Judgment of the CJEU of 11 April 2019 in Case C-691/17