Temporary reduction of German VAT: initial guidance by the Ministry of Finance on its practical implementation
Companies face major tax and administrative challenges from the temporary reduction in German VAT. The German Federal Ministry of Finance (BMF) published an 18-pages draft on June 15, 2020 with information on the practical implementation of the temporary reduction in VAT (BMF Letter).
Notes: For reasons of simplification, we (i) refer to “Services” in the following text for deliveries and other services, (ii) assume that Services are subject to VAT and (iii) refer to 19% (standard tax rate) or 7% (reduced tax rate) as “Old Tax Rate” and “New Tax Rate” to 16% (standard tax rate) or 5% (reduced tax rate), which applies to Services carried out between July 1 and December 31, 2020.
The draft BMF Letter contains the following points, among others:
- The changes are to be applied to delivery of goods, other services, inner-EU purchases (innergemeinschaftliche Erwerbe) and imports subject to import tax that are carried out between 1 July and 31 December 2020. If partial services are provided instead of a total services, it is not the time of the overall service that matters, but when the individual partial services are carried out.
- Actual taxation (Ist-Besteuerung): If fees or partial fees for services or partial services carried out before July 1, 2020 are received by an entrepreneur after June 30, 2020, the VAT on these amounts is subject to the Old Tax Rate. If an entrepreneur has received partial payments for a service or partial service performed after June 30, 2020 before July 1, 2020, the New Tax Rate must be taken into account when issuing the final invoice for Services carried out between 1 July and 31 December 2020.
- Long-term contracts: The entrepreneur is entitled and possibly obliged to issue invoices for Services that are carried out after June 30, 2020, in which VAT is shown according to the New Tax Rate between July 1, 2020 and December 31, 2020. This also applies if the contracts for Services were concluded before July 1, 2020 and the Old Tax Rate was assumed. The entrepreneur carrying out Services between 1 July and 31 December 2020 is not obliged to lower prices as a result of the temporary reduction in VAT for Services, with the following exception:
- Claims for compensation of lower VAT charge: A contractual partner can request compensation from the other contractual partner if a Service is performed after June 30, 2020. One of the requirements for the compensation claim is that the Service is based on a contract that was concluded before March 1, 2020 unless the contractual partners have agreed otherwise (e.g. that compensation claims in the event of an increase or decrease in VAT rate are excluded).
- Reduction of the assessment basis (e.g. cash discount, discount, recalculation): If after June 30, 2020 there is a reduction or increase in the assessment basis for sales executed before July 1, 2020, the entrepreneur who carried out these sales has to correct VAT. The Old Tax Rate applies in case of taxation based on agreed fees (Soll-Versteuerung) as well as in case of actual taxation (Ist-Versteuerung). The same applies to the correction of the input VAT.
- Vouchers: Experience shows that it is difficult to distribute the redemption amounts between sales before July 1, 2020 and sales after June 30, 2020. It is permitted to make the tax adjustment using a simplified procedure. If the entrepreneur reimburses the vouchers issued from July 1, 2020 to August 31, 2020, VAT tax must be corrected according to the Old Tax Rate. If vouchers are reimbursed after August 31, 2020, VAT must be corrected according to the New Tax Rate. If another entrepreneur benefits economically, this entrepreneur must correct the input VAT. The simplification rule does not apply in this respect. In case of single-use vouchers, the decisive time for taxation is the issue of the issued entrepreneur to the customer. The later redemption of vouchers, i.e. the actual delivery or service provision, is no longer relevant for VAT assessment, as this is not considered to be independent sales.
- Taxation of sales in the hospitality industry: to avoid transition difficulties, it is permitted that services of restaurants, hotels, clubhouses, sausage stands and similar establishments (e.g. delivery of food and beverages for consumption on the spot, deliveries of tobacco products, etc.) are taxed at the New Tax Rate in the night from June 30, 2020 to July 1, 2020. This does not apply to accommodation and related services.
- Exchange of goods: When a good is exchanged, the original delivery is canceled. If an item delivered before July 1, 2020 is exchanged after this deadline, the delivery of the replacement item is subject to the New Tax Rate.
Please contact us if you have questions.
Source: Draft BMF Letter (German language), NWB
Photo: Beatriz Pérez Moya, Unsplash
Disclaimer: We assume no liability for the accuracy of the information. The information listed here does not constitute recommendations for action.