VAT Snapshot Q2 2024

The Q2 2024 VAT Snapshot includes a summary of the latest updates on the VAT in the digital age initiative (ViDA) and the potential impact for businesses as these initiatives are being introduced in the EU.

We outline the findings of the Court of Justice of the European Union (“CJEU”) judgment in the Adient Ltd & Co. KG (C-533/22) case. This case addresses whether an independent group company can be regarded as the fixed establishment of its contract partner.

The VAT Snapshot also addresses the upcoming deadline for the renewal of VAT 56 authorisations.

Finally, we remind clients of the Annual Adjustment of VAT Recovery Rate for businesses to consider.

Please do reach out to any of the contacts referenced or your usual EY contacts to discuss any of these items in more detail.

1. VIDA Latest  

Issue

On 8 December 2022, the European Commission proposed a series of measures to modernise and make the EU’s Value-Added Tax (VAT) system work better for businesses and more resilient to fraud by embracing and promoting digitalisation. The three proposed reforms to improve VAT efficiency and minimise fraud are:

• Single EU VAT registration - Reducing VAT registration requirements in the EU by expanding the scope of the One Stop Shop (OSS) for imports and the reverse charge for business-to-business B2B transactions.
• Digital reporting requirements ‘DRR’ - Introducing common standardized Digital Reporting Requirements and e-invoicing for intra-community transactions between Member States.
• VAT treatment of the platform economy - Addressing the challenges of the platform economy for short-term rental of accommodation and passenger transport services by enhancing the role of digital platforms in collecting VAT.

Relevance

On 21st of June 2024, the Economic and Financial Affairs Council of the European Union (ECOFIN)  met to discuss the changes to the EU VAT rules as part of the ViDA initiative. However, once again, they did not reach an agreement on the changes and discussions will continue with a view to reaching a comprise that all 27 Member States can approve.

Despite the delay to the DRR rules, many Member States have already introduced or are in the process of introducing, domestic e-invoicing, and e-reporting rules sooner than 2028 under the ViDA proposals. It is therefore time to commence a review of your systems to ensure that it will be in a position to cope with these changes.

Revenue recently published a report on  the 27th of June 2024, on its recent public consult concerning modernising Ireland’s VAT administration as part of the ViDA initiative currently being discussed. This asked for views on proposals to introduce real-time, digital VAT reporting for businesses in Ireland, based on electronic invoicing and highlighted practical issues a business may face when introducing the digital reporting. 

How can EY help?

The next ECOFIN meeting is scheduled for 16th of July 2024, and it is as yet unclear whether any of the proposed changes will be discussed at this meeting or at a later date.

Despite the lack of final agreement on the suggested changes to VAT rules for businesses operating in the EU to fit in with the needs of the digital age, taxpayers need to assess how their transactions, invoicing, and reporting processes are affected and how ERP systems should be set up to ensure that future VAT reporting requirements are met. While there is no agreement as yet, these changes will be implemented and become a reality which will form one of the greatest single changes introduced to the operation of VAT across the E.U.

Where you have not already done so, EY can help businesses in undertaking a readiness assessment for their ability to comply with these rules.

2. Latest case considering impact of VAT “Fixed Establishment” – CJEU Judgment in Adient Ltd & Co. KG (C-533/22)    

Adient CJEU case

Issue

This case demonstrates the importance of recognising a permanent establishment for businesses to align with the current legislative, regulatory, economic, operational, and social environment.

The question referred was whether a fixed establishment within the territory of a Member State a substitute for a head office can be established within the territory of a different Member State.

Facts of the case

The claimant company Adient Ltd & Co. KG (‘Adient DE’) has its place of establishment in Germany and the group has its head office in Ireland. The groups’ business activities consist of supplying complete seating systems, modules, and components to equipment manufacturers in the automotive industry. Adient DE entered into a contract with another group member within the Adient group in Romania (Adient RO) to provide manufacturing and assembly of upholstery components. All costs incurred by Adient RO were included in the fee invoiced to Adient DE.

Adient DE is a non-resident company with regard to the transactions carried out in Romania and uses a Romanian VAT number for both domestic and intra-Community purchases and supplies of goods in Romania, manufactured by Adient RO. For the receipt of manufacturing and administrative services rendered by Adient RO, it used its German VAT number. Adient RO did not calculate any Romanian VAT on providing the services as it is assumed the place of supply of such transactions was Germany, where the place of establishment is.

The Romanian tax authorities carried out a tax inspection and concluded that Adient RO was required to collect VAT on its supplies of services to Adient DE since it considered the place of establishment to be Germany. The courts also found that Adient DE had technical and human resources in Romania through the branches of Adient RO, with the result that it satisfied the conditions for a Fixed Establishment for VAT purposes in Romania.

Consequently, the supplies to Adient DE were subject to VAT in Romania.

Adient DE argued that the conditions for a Fixed Establishment in Romania were not satisfied and that although the supply of goods is from the Romanian branches, the task is purely administrative, and the Romanian employees have no involvement regarding the supplying of the products carried out by Adient DE. The shared use of Adient DE’s accounting system put into question the tax administration of the group.

The European courts considered that the primary factor for determining the place of supply for tax purposes is the location where the taxable person is established.​ An entity’s Fixed Establishment must be based on the human and technical resources it has to carry out transactions and cannot be assumed to be the Fixed Establishment merely because it is a subsidiary. ​

The CJEU rules that the local court must decide if Adient DE’s Romanian branch resources were permanently available for its own economic activity. ​

The CJEU found, that Adient DE does not have the human and technical resources to carry out regular taxable transactions in Romania and cannot be considered established in Romania for VAT based on the fact that it has a fixed establishment receiving services in Romania. The courts concluded that the affiliation of companies within the same corporate group or contractual relationship between a parent and subsidiary is not sufficient to the existence of a Fixed Establishment.

How can EY help

The concept of permanent establishment (PE) and Fixed Establishment for VAT purposes has been subject to unprecedented change in recent years. Multinationals should act now to update their PE analysis to align with the current legislative, regulatory, economic, operational, and social environment. EY’s global network of subject matter specialists can work with you to update your PE analysis and compliance program and assist in identifying the key PE risk areas, the potential impact, and other considerations. There has been an increased level of scrutiny by Revenue on this issue particularly with respect to applications for a VAT registration. Therefore, where it is contemplated that a non-Irish entity will apply for a VAT registration, we would advise giving plenty of time to obtain the VAT registration and plan for it in advance.

3. VAT 56 Authorisation – upcoming renewal deadline

Issue

Do you currently hold a VAT 56B Authorisation? If so, this authorisation may be due for renewal by 31st October 2024.

Relevance

A company that generates at least 75% of its revenue from supplying goods from Ireland to the EU or exporting from Ireland to non-EU countries, can be eligible for a VAT 56B authorisation. This permit enables companies to purchase 'qualifying goods and services'—which generally includes a wide range of goods and services—without a VAT charge, essentially allowing them to benefit from a zero VAT rate. To obtain this authorisation, businesses must submit a VAT 56A from to Revenue, and the resulting VAT 56B certificate it is usually issued for a term ranging from one to three years. It's crucial to be aware that this certificate does not renew automatically. When it expires, suppliers must resume charging VAT at the applicable rate until the business has successfully renewed its authorisation.

How EY can help

EY can provide assistance with the renewal process and liaise with Revenue to streamline the process for maximum efficiency. It is advisable to engage early with Revenue on obtaining the VAT 56 authorisations given increasing challenges in recent years in the process.

4. Annual VAT recovery rate reviews

Issue

Is your business engaged in VAT exempt or non-taxable activities? If so, it may be entitled to deduct only part of the input VAT incurred on costs, and it is time to carry out the mandatory annual VAT recovery rate review.

Relevance

For businesses with a 31 December accounting year end, now is the time to carry out the mandatory annual VAT recovery rate review for the year 2023. The adjustment should be included in the May/June 2024 VAT return, which must be filed by 23 July, otherwise statutory interest may apply if you are in a liability position. Businesses are entitled to deduct VAT, in line with the taxable activities they are engaged in. The turnover method is now the standard method to calculate a VAT recovery rate,

How EY can help

In EY, we have a depth of experience in calculating VAT recovery rates to ensure VAT recovery entitlement is optimised but also practical to maintain. We can review the VAT recovery rate being applied or if it is your first time calculating a VAT recovery percentage, we can assist in calculating.

This review should also tie in with your capital goods scheme annual adjustment and most businesses tend to review both at the same time.