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VAT News ket value of the property after the premises has been constructed. The schemes seek to provide a means of recovering input tax while minimizing the value of the margin. This is done by having the landowner contract with a GST-registered associate to construct and market the residential premises. The associate is providing taxable services to the landowner and can therefore deduct all input tax it pays to the builders. The associate does not require any progress payments from the landowner as the premises are constructed. After the premises are built and immediately prior to the sale of the premises, the landowner registers and receives an invoice from the associate for all building and selling expenses. The landowner claims the GST included in the invoice. It uses the margin scheme to calculate the GST payable on the sale of the property and uses a valuation of the immovable property at the date of its GST registration (that is, after the premises were constructed). As a result, it is able to claim all input tax and the output tax on the sale is very low (based on the small margin). The ATO has indicated a number of avenues that might be used to attack the arrangements. For example, it suggests that in many cases it will be possible to show that the property owner was under an obligation to register at a much earlier time, when it first decided to have premises constructed (which would shift the starting value to a much lower amount). It also indicated that the general anti-avoidance provision in the GST Act could apply to the schemes as they have the purpose or the effect of generating a tax benefit. A second scheme involves residential properties that are constructed, leased, and then sold. As the properties are first leased (an exempt or input-taxed supply), the owner is not entitled to recover GST on the costs of construction. Once again, the owner will contract with a GSTregistered associate to have the residential premises constructed and the associate will pay a builder to erect the premises, claiming all input tax incurred. The associate does not seek any progress payments and neither does it issue an invoice to the owner before the construction is completed or when the property is leased. If the owner subsequently sells the property to an investor (the property title being subject to the existing lease), the associate will invoice the owner just prior to the sale. The ATO questions a number of aspects of the transaction and concludes that the anti-avoidance provisions in the GST Act are likely to apply, as the arrangement appears artificial and contrived in its design and execution. From our correspondent Richard Krever Monash University, Melbourne Austria In December 2008, the Ministry of Finance released amendments to the VAT Guidelines. The most important changes are as follows. Managing directors An independently acting managing director of a private limited company, who is also the sole or main shareholder of the company, can, as a simplification measure, be treated as a non-taxable person, in particular if the company is not entitled to deduct the VAT on the director’s management fee. Members of the supervisory board of private foundations are in general regarded as taxable persons. However, they are not considered to be taxable persons, if they do not act independently and actually form part of the foundations’ organization. Conference rooms The letting of seminar rooms in hotels, together with technical equipment necessary for meetings, conferences, seminars, etc. and the provision of foods and beverages during the coffee and tea breaks, is not ancillary to the provision of hotel accommodation (to the participants of the meeting, conference or seminar) and, therefore, not subject to the reduced rate. Faxed invoices Until the end of 2009, taxable persons are entitled to deduct VAT mentioned on invoices that they have received by fax. Documentary evidence Where, in the course of a VAT audit, the tax authorities find that a supplier of goods holds insufficient documentary evidence to show that his supplies were zero rated as intra-Community supplies of goods, the supplier cannot repair that deficiency retrospectively for the purposes of the zero rate. Annual VAT congress In December 2008, the tax authorities published the results of the annual congress on various VAT issues. The most important conclusions were: Letting of residential property Real estate companies do not have the right to deduct input VAT in respect of the letting of residential property (houses, apartments, etc.) to their shareholders for the latter’s private purposes, if such a lease is not on conditions that would have applied at arm’s length or the property was especially constructed according to the wishes of the shareholder. Portfolio management Management by banks of their clients’ portfolio of shares and other securities is treated as a single service that is subject to VAT if the bank exercises its management mandate without further instructions from the client. However, if the client decides on the asset management activities of the bank, the latter is considered as supplying different services, which, for VAT purposes, must be treated according to their nature (i.e. tax exempt or subject to VAT). 1 2 INTERNATIONAL VAT MONITOR MARCH/APRIL 2009 © IBFD
Correcting invoices Where VAT is not legally due and only payable to the authorities under Sec. 11(14) of the VAT Act, i.e. on the ground that the VAT was mentioned on an invoice, and the supplier subsequently corrects the invoice, the customer does not have to explicitly accept the invoice (unless he issues the correcting invoice himself under the arrangements for self-invoicing). Furthermore, the initial invoices can only be corrected under those circumstances if the customer has not deducted the VAT mentioned on the invoice or has actually repaid any deducted input VAT to the tax authorities. Good faith The provision laid down by Sec. 12(1)(1) of the VAT Act that taxable persons are not entitled to deduct input VAT if they knew or should have known that the related supply was connected with VAT fraud has a clarifying effect only. Those circumstances must be established under national law. In the case of carousel fraud, VAT shown on an invoice must be remitted to the authorities on the ground that the VAT has been mentioned on an invoice (see Art. 20 of the VAT Directive) and the recipient of the supply is not entitled to deduct that VAT as input VAT, unless he was acting in good faith. The recipient of the supply can be considered as having acted in good faith, if he acted with due commercial diligence in order to ensure that he was not part of VAT fraud. Pharmaceuticals Under the amendment of the VAT Act that was published in Bundesgesetzblatt (Official Gazette) I 1 2/2008 and entered into force on 1 January 2009, the reduced VAT rate of 10% for pharmaceuticals exclusively applies to pharmaceuticals covered by the Arzneimittelgesetz (Act on pharmaceuticals), not to medical products falling under the Medizinproduktegesetz (Act on medical products). The latter products continue to be subject to the standard rate of 20%. In its public notice of 17 December 2008, No. 010219/0498-VI/4/2008, the Ministry of Finance noted in this respect that Chapter 0 of the Combined Nomenclature (“pharmaceutical products”) refers to both pharmaceuticals within the meaning of the Arzneimittelgesetz and medical products within the meaning of the Medizinproduktegesetz. Consequently, the importation of pharmaceutical products within the meaning of Chapter 0 CN is not under all circumstances subject to the reduced rate of VAT. From our correspondent Hannes Gurtner Leitner+Leitner, Linz Belgium Housing as part of a social policy On 1 February 2009, the Royal Decree of 10 February 2009, which amended Royal Decree No. 20 by introducing several measures to stimulate the construction of houses as part of an economic stimulus package, was © IBFD INTERNATIONAL VAT MONITOR MARCH/APRIL 2009 VAT News published in the Official Gazette. The measures apply until the end of 2009. Under the amendments, the reduced rate of to: % applies – demolition and reconstruction of houses in the framework of the social policy; – construction and supplies of private dwellings intended as the sole or main residence of the owner. In that case, the reduced rate applies to a ceiling of EUR 0,000 and any surplus is subject to the stan- – dard rate; housing as part of a social policy, i.e. supplies of private dwellings, intended for letting or sale in the framework of the social policy, made to provinces, intercommunal companies, local authorities, intercommunal public centres for social assistance and other social assistance centres. Work on immovable property used as shelter for psychiatric patients and the homeless is also subject to the reduced VAT rate. Monthly VAT refunds On 1 February 2009, the Royal Decree of 10 February 2009, which amended Royal Decree No. 4 to the effect of extending the categories of taxable persons entitled to monthly refunds of excess input VAT, was published in the Official Gazette. Monthly refunds of excess input tax are made to taxable persons who file their periodic VAT returns on a monthly basis and structurally have excess input tax due to the nature of their activities. The following categories qualify for the refund: – taxable persons making supplies of goods and services that are subject to the reverse charge mechanism, for example taxable persons operating in the construction sector or supplying investment gold; – taxable persons carrying out work on immovable property, supplying buildings, or assigning or transferring rights in rem relating to buildings, on the condition that those transactions are subject to VAT at the rate of %; – in certain cases, taxable persons supplying goods and services that are deemed to be supplied abroad. Penalties relating to the reverse charge mechanism Under Art. 1(2) and (4) of the BTW Wetboek (VAT Code), the reverse charge mechanism applies in an increasing number of cases. Under the reverse charge mechanism, suppliers of goods and services are not allowed to charge the VAT due on supplies to their customers but, instead, the customers must account for VAT through their periodic VAT returns on the value of the received supplies and, since the reverse charge mechanism is limited to B2B situations, are entitled to deduct that VAT through the same returns. Violations of the reverse charge mechanism rules are subject to administrative penalties which – depending on whether the penalty is imposed on the supplier or customer, the reverse charge mechanism was incorrectly applied or incorrectly not applied and the annual 1
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