Processual and technical challenges: Change in the German VAT rate in the covid-19 crisis recovery package

published on 18 June 2020 | reading time approx. 4 minutes

by Tim König, Rödl & Partner Nuremberg, and Julia Daubenmerkl

As a result of the covid-19 recovery package, changes in value-added tax are planned in Germany. This leads to risks for companies that can be countered by processes and ERP.

• Proposed significant VAT-related changes in the covid-19 crisis recovery package of 3 June 2020

• Implications for the professional practice: Changed VAT rates

• Process-relating and technical challenges

• Changes in due date of the VAT on imports

• Procedure and further information

Proposed significant VAT-related changes in the covid-19 crisis recovery package of 3 June 2020

The economic consequences of the Covid-19 crisis are far-reaching. In order to manage them, the Grand Coalition has agreed to an unprecedented multi-billion economic support programme.

In addition to measures such as the children bonus for families with children and the relief on electricity costs for citizens and companies, the most prominent measure is changing of the German VAT rates. The VAT rates will be changed temporarily between 1 July 2020 and 31 December 2020 inclusive as follows (see Page 1 Paragraph (A) Item 1 of the Guideline of the German Federal Ministry of Finance (BMF) on the Coalition Committee of 03.06.2020):

• Decreasing the standard VAT rate from the current 19% down to 16%; and
• Decreasing the reduced VAT rate from the current 7% down to 5%.´

Insofar as this proposal is implemented (i.e. in the VAT law), companies will basically have to reduce by three respectively two percentage points the VAT payable to financial authorities on all supplies of goods and services which will take place between 30 June 2020 and 1 January 2021. This means a possibility of real savings for entrepreneurs and end customers (financial needs and thus relief at the last stage of commerce by approx. EUR 20 billion).
  
So far, there has been neither a draft law nor a BMF letter. As long as there are no BMF statements to the contrary, companies should probably refer to the BMF letter of 11.08.2006 (Az.IV A 5 - S 7210 - 23/06) regarding the change of the VAT rate from 16% to 19% on 1 January 2007.

Another change relating to VAT is planned for imports. The economic support programme shifts the due date for payment of the VAT on imports to Day 26 of the next month (see Page 2 Paragraph (A) Item 4 of the Guideline of the BMF on the Coalition Committee of 03.06.2020).This means that the measure is limited to the liquidity effect.
 
The measure is intended to give importers in Germany liquidity advantages and to harmonise the German regulations with the regulations on the VAT on imports in other EU countries. For example, some EU countries request reporting payment and deduction of the VAT on imports as part of a single VAT return, which enables avoiding a liquidity impact where the VAT amounts are deductible. Up to now, the VAT on imports is basically due in Germany at the time the merchandise is released for free circulation or with a delay in payment till Day 16 of the next month. The extension should probably be linked to the official customs payment deferral.

Implications for the professional practice: Changed VAT rates

With regard to the expected change of the VAT rates beginning on 1 July 2020, companies must take the first steps without undue delay because of the limited lead time.

Action is needed in particular in the following directions:

• Relevant period cut-offs for the supplies made during the periods immediately before or after the cut-off dates. If, for example, a supply was made in June 2020, but the respective invoice will only be issued in July 2020, this supply should be invoiced in principle applying the 'old' VAT rate (of 19%).The only decisive factor is the point in time at which the service has been rendered - whereas the point in time when the contractual agreement was reached, the invoice was issued or the payment was received is generally not decisive for the purpose of the statutory taxation;
• Application of the required adjustments, if any, to the VAT to be paid or the input tax deduction in the case of advance payment invoices and ensuring the correct issuance of the final invoices (the decisive factor is the point in time when the service subject to VAT was provided, not when the consideration was received (Section 27(1) Sentence 2 of the German VAT law [UStG]);
• Treatment of ongoing services (such as rent, licenses), in particular with regard to input tax deduction and applicable final VAT rate, where for example annual invoices are issued. There can be room for manoeuvre under certain circumstances in terms of the tax timing for partial services;
• Permanent invoices and contracts treated as an invoice must be adjusted accordingly where necessary because a higher VAT will be due otherwise;
• Treatment of long-term projects, open orders or requests (collections) under framework contracts and the applicable VAT rates or treatment of those already closed or to be closed during the transition period and treatment of the VAT (for example, delimitation according to contracts with a gross or net price agreement, claims for compensation of the additional or reduced VAT charges according to Section 29 of the UStG);
• Clarification regarding price adjustments or the possibility to adjust prices, in particular in B2C business with customers or in relation to sales to customers without input tax deduction;
• Verification of the applicable input tax deduction. Even where, for example, a purchase invoice shows 19% VAT, but the underlying supply of goods or services was rendered for VAT purposes after 30 June 2020 and before 1 January 2021, the VAT would only be deductible at the applicable reduced VAT rate of 16%.

The above matters should be reviewed again in view of the upcoming change after 31 December 2020 back to the original VAT rates of respectively 19% or 7%.

Process-relating and technical challenges

In order to face the VAT rate changes in terms of processes and ERP set-up, we recommend clients to perform a direct check and initiate the follow-ing steps as required:

• Implementation of new tax codes for the supplies of goods and services (i.e. 16% and 5% where applicable on the output side) and for the procurement of inputs (i.e. 16% and 5% where applicable for reg-ular input services, intra-community ac-quisitions, Section 13(b) of the UStG: In-put services and VAT on imports). It is not recommended to overwrite the previous tax key for 19% and 7% for reasons of traceability in later audits and possibly because of the new allocation of the tax codes that might be required for the VAT return or annual reporting codes;
• Revision of settings for the electronic transmission of the UStVA files (mapping of tax codes to VAT return or annual dec-laration codes);
• Adjustment of the invoice layout for sales transactions. The invoice layout for all sales made after 30 June 2020 must show the VAT rate accordingly reduced to 16% or 5% and the respective VAT amount;
• Reconfiguration of the VAT determination in purchasing and sales modules (e.g. in the SAP modules MM and SD) and in par-ticular ensuring that the relevant tax con-ditions have been maintained and that the new VAT rates have been determined correctly for the period from the order creation or request processing to the re-ceipt of the invoice or invoice submission.
• Update of travel expense/expense report processes and cash register systems as well as their booking processes;
• Possibly, creation of new balance sheet accounts to delimit VAT sales tax and in-put tax;
• Ensuring the period cut-offs in terms of the applicable VAT rates, for example, by means of guidelines/work instructions to departments and/or system-side (preven-tive) controls;
• Review of open orders and earmarked or-ders, which were previously recorded in the system with the tax code and VAT rate of 19% or 7%. An automated run, for example, based on batch input portfolios or the like, helps avoid manual changes and ensures date-certain adjustments;
• Testing of advance payments for the identification of occasions requiring ad-justment and for the implementation of respective corrections and system-side assurance of the correct issuance of final invoices, for example, by means of a re-spective system-side analysis (e.g. com-parison between the date of receipt of the advance payment and the service provi-sion date);
• Ensuring the process-relating (system-side) check of all purchase invoices for the date of supply and the applicable VAT rate and ensuring in particular that invoices showing a too high VAT amount be subject to correction;
• It must also be ensured when checking purchase invoices that invoices for the relevant catering services (meals) for the periods after 30 June 2020 and before 1 July 2021 show the applicable reduced VAT rate.

Changes in due date of the VAT on imports

The postponement of the deadline for payment of the VAT on imports to Day 26 of the next month can give additional liquidity to the company. Insofar as companies submit their VAT returns without making use of a long-term extension to Day 10 of the next month and have already deducted the VAT tax in the return, the payment of the VAT on imports in principle should have no adverse impact on liquidity.
 

Procedure and further information

It should be pointed out that immediate action is already needed due to the short lead time of only approx. 16 working days till the expected introduction of the change. The basic condition prerequisite for the identification of possible measures for your company is to create transparency about the existing transactions and critical situations.

To that end, Rödl & Partner offers a process-and-data analysis focused on the VAT consequences. In particular, the important VAT risk areas (e.g. advance payments to be adjusted) can be determined efficiently and reliably when converting the VAT rates of your business model using our IT-based data analysis. In addition, we can provide you comprehensive support for the adaptions in the ERP system. To find a suitable solution effectively and quickly, you are welcome to contact us at your earliest convenience.