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VAT
to charge their customers VAT which is different from
that of the Member State in which they are established.
The principle of destination-based taxation requires VAT
to be charged and accounted for in the Member State
where the customer is established (Member State of
‘destination’) rather than in the Member State where the
small business is established (Member State of ‘origin’).
This infers that in principle, small businesses involved
in cross border trade cannot in theory benefit from the
exemption in Member States other than where they are
established. As a result, there is no level playing for small
business to trade and do business within the EU.
SMALL BUSINESSES OPERATING WITHIN A CROSS
BORDER CONTEXT
While the small undertaking rules apply within a local
context, where the business is established, a lacuna in
the legislation exists where such businesses also operate
within a cross border context. However, what are the
implications in this case? Are small businesses offering
cross border supplies being compliant?
The Malta Vat Act, unlike the VAT Directive 4 excludes
small businesses from the obligation to be identified
for VAT under the standard VAT registration in the
cases where such persons carry out supplies to other
taxable persons established in other Member States and
such transactions fall be to taxed in the country where
the customer is established. Therefore, no additional
obligations are imposed on small undertakings offering
supplies of services falling within the scope of the general
place of supply of services rules to taxable persons
identified for VAT in other jurisdictions, and consequently
it is not possible for such persons to file recapitulative
declarations for such supplies.
Furthermore, the small undertaking thresholds do not
hold water in the context of an electronically supplied
service carried out by a small undertaking established
in Malta to a private consumer established in another
Member state. As a result, given that the transaction
is treated as taking place in the Member State of the
customer, in line with the place of supply rules, and to the
extent that the transaction is taxable in that jurisdiction,
then, the small undertaking has to charge VAT at the
applicable rate in that jurisdiction.
This issue is set to deteriorate with the shift towards
destination-based taxation under the proposed definitive
VAT system whereby many small businesses may have
EU PROPOSAL FOR SMALL BUSINESSES
For the purposes of addressing challenges and limitations
present within the existing small business scheme and in
order to enhance exploitation of the single market, the
EU Commission has submitted a proposal amending
Directive 2006/112/EC on the common system of
value added tax as regards the special scheme for small
enterprises. In particular, the proposal includes measures
which seek to:
(i) reduce VAT compliance costs for small businesses
both domestically and at EU level;
(ii) reduce distortions of competition both domestically
and at EU level;
(iii) reduce the negative impact of the threshold effect;
and
(iv) facilitate administrative burden on small businesses
and tax administrations.
Essentially, the proposal opens up the exemption for
small enterprises to all EU eligible businesses, whether
or not established in the Member State where the
VAT will apply and the exemption will be available.
Furthermore, it establishes an updated value for the
maximum level of national exemption thresholds and
additionally introduces a transitional period during which
small enterprises that temporarily exceed the exemption
threshold will be able to continue using the exemption.
Salient considerations for small businesses
Do not charge VAT on supplies carried out
Do not recover VAT on purchases made
Rules apply in the country where the small
business is established
From a Malta perspective, not obliged to do anything
in respect of cross border supplies;
May still have VAT obligations in a MS other than
that where they are established
File VAT returns on annual basis
Small Business who opt to be registered under Article 10
of the VAT Act may be granted an annual tax period
Proposal to modernize the existing regime is underway
46 Spring 2018
4
Art. 214(1)(e) of Directive 2006/112 EC