Services and the reverse-charge procedure
In the case of cross-border supplies, services – referred to as other supplies in the VAT Act – are particularly relevant: The RCP is also applicable to other supplies from a company established in a different part of the Community territory or third country that are taxable in Germany according to § 3a (2).
Electronic services also fall under § 3a (2) of the German Value-Added Tax Act. Consequently, many e-commerce businesses often find it necessary to apply the reverse-charge procedure.
Article 7 of the Implementing Regulation to the VAT System Directive defines in more detail what electronically supplied services are. They include the provision of digital products (e.g. software) or services that arrange or support a presence on electronic networks for business or personal purposes, e.g. a website or webpage. Many companies based in Germany make use of such services.
Services and the reverse-charge procedure
In the case of cross-border supplies, services – referred to as other supplies in the VAT Act – are particularly relevant: The RCP is also applicable to other supplies from a company established in a different part of the Community territory or third country that are taxable in Germany according to § 3a (2).
Electronic services also fall under § 3a (2) of the German Value-Added Tax Act. Consequently, many e-commerce businesses often find it necessary to apply the reverse-charge procedure.
Article 7 of the Implementing Regulation to the VAT System Directive defines in more detail what electronically supplied services are. They include the provision of digital products (e.g. software) or services that arrange or support a presence on electronic networks for business or personal purposes, e.g. a website or webpage. Many companies based in Germany make use of such services.
Services and the reverse-charge procedure
In the case of cross-border supplies, services – referred to as other supplies in the VAT Act – are particularly relevant: The RCP is also applicable to other supplies from a company established in a different part of the Community territory or third country that are taxable in Germany according to § 3a (2).
Electronic services also fall under § 3a (2) of the German Value-Added Tax Act. Consequently, many e-commerce businesses often find it necessary to apply the reverse-charge procedure.
Article 7 of the Implementing Regulation to the VAT System Directive defines in more detail what electronically supplied services are. They include the provision of digital products (e.g. software) or services that arrange or support a presence on electronic networks for business or personal purposes, e.g. a website or webpage. Many companies based in Germany make use of such services.
Services and the reverse-charge procedure
In the case of cross-border supplies, services – referred to as other supplies in the VAT Act – are particularly relevant: The RCP is also applicable to other supplies from a company established in a different part of the Community territory or third country that are taxable in Germany according to § 3a (2).
Electronic services also fall under § 3a (2) of the German Value-Added Tax Act. Consequently, many e-commerce businesses often find it necessary to apply the reverse-charge procedure.
Article 7 of the Implementing Regulation to the VAT System Directive defines in more detail what electronically supplied services are. They include the provision of digital products (e.g. software) or services that arrange or support a presence on electronic networks for business or personal purposes, e.g. a website or webpage. Many companies based in Germany make use of such services.
Example: Good-choice, a company based in Germany, uses a paid Google Suite Business account. In Europe, Google is based in Ireland. Google does not indicate VAT on the invoice (VAT (0%) EUR 0.00) but includes a statement regarding the reverse-charge (“Services subject to the reverse-charge – VAT to be accounted for by the recipient as per Article 196 of Council Directive 2006/112/EC”). Good-choice must calculate the VAT on the invoiced amount and consider it in its advance VAT return (and VAT declaration). The VAT will be paid by Good-choice in Germany.
What invoice issuers must pay attention to
Many e-commerce companies in Germany regularly issue invoices for their services to companies based in foreign countries. If there is a case in which the RCP applies, the service provider must ensure that VAT is not shown on the invoice. It is not critical if the VAT is stated at 0% and EUR 0.00. However, suppose the seller does show VAT on the invoice mistakenly. In that case, the amount must be paid to the tax office in accordance with the strict liability in § 14c of the German Value-Added Tax Act.
Mistakes, in this case, are annoying for all parties involved. This is because the service recipient also owes the amount of VAT shown on the incoming invoice, but cannot claim an input tax deduction for it, as this tax is not legally owed. Civil law questions can also arise if he remits the erroneously stated VAT to the invoice issuer. This can also lead to a cashflow disadvantage for the recipient – at least temporarily until the preparation of the invoice.
„Verifying incoming invoices is essential, especially regarding a possible shift in tax liability. This also applies if tax is shown on the invoice despite the reverse-charge. So if German companies receive invoices from companies based in another EU member state, then increased attention is required.“
Reverse-charge procedure: What must be shown on the invoice?
According to § 13b of the German Value Added Tax Act, the supplying merchant must issue an invoice containing certain mandatory information. This includes (according to § 14 (4) with § 14a (5), if no credit note is issued) the following:
- Name and address of both the supplier and recipient
- Tax number and/or VAT identification number of the supplier and recipient of the service
- Invoice date
- Sequential invoice number
- Quantity and nature of the goods supplied or scope and nature of other services provided
- Time/date of delivery/provision of service
- Amount due
- According to § 14b (1) sentence 5: reference to the duty of the recipient to retain records
- Note: “The recipient is liable for VAT”
Important: No VAT may be shown on the invoice. However, there must be a reference to the RCP. According to § 14a para. 1 UStG, this also applies if the service is provided to a recipient resident in the rest of the EU. The wording can be, for example, read: “The recipient is responsible for taxation of the service/goods “. As a rule, an invoice for a service to a recipient in a third country is not subject to German regulations for a proper invoice.
Check VAT identification number
The issuer of the invoice must also ensure that his valid VAT identification number and the valid VAT identification number of the service recipient are shown on the invoice if the recipient is located in another community territory of the EU.
The validity can be checked via the Federal Central Tax Office website. Integrating the query into the company’s software system via an interface is also possible. The VAT identification numbers can then be queried automatically. This procedure can significantly reduce manual effort, especially for e-commerce companies.
Tip: Companies should document the query. Anyone making an individual enquiry via the Federal Central Tax Office website should also document and retain the enquiry. Here you will find detailed information on the VAT ID check
Reverse-charge procedure in the advance VAT return
Recipients of services must declare the tax they owe in accordance with § 13b German Value-Added Tax Act. This also applies if the service recipient is, for example, a small business or only handles tax-exempt sales. The sales pursuant to § 13b must be declared accordingly in an advance VAT return. However, if the service provider is a small business, transfer of tax liability does not apply.
Example: advance VAT return for 2022
- The service recipient must make appropriate entries on lines 40 until 42
- The supplying merchant must make entries on lines 49 and 50. The supplying company must submit a recapitulative statement to the Federal Central Tax Office for services supplied to the rest of the Community.
Advantages and risks of the reverse-charge procedure
Service providers benefit from the RCP because they do not have to declare or pay VAT to the tax office. However, they must submit a recapitulative statement for services in the community territory and declare the “non-taxable services pursuant to § 18b sentence 1 (2) of the German Value Added Tax Act” in the advance VAT return.
In cross-border situations, the RCP can help reduce bureaucracy. After all, in these cases, the service provider does not have to register in the other state to pay sales tax there. And tax authorities are not faced with the problem of collecting taxes from companies based in foreign countries.
However, the RCP can also entail risks. The service recipient must know when a change of tax liability applies, and the VAT must be paid to the tax office. A lack of information on the invoice does not release the service recipient from these obligations. Even if the invoice incorrectly shows VAT, the service recipient must still pay the VAT to the tax office.
Conclusion
The reverse-charge procedure can reduce bureaucracy – especially for the service provider. However, the prerequisite is that companies take special care when issuing and checking invoices. For e-commerce merchants, it may be a good idea to use technological options to automate the process.
