05
Jun
2020

Umsatzsteuerrecht

VAT: temporary reduction of VAT rates to 16 % / 5 % from July 1st 2020 is being envisaged

Melanie WeistThomas SchäfferRebecca Haß

On June 3rd 2020, the coalition committee has agreed upon a stimulus package including among other things a VAT relief in the form of a temporary tax rate reduction for the second half of the year 2020.

Status quo: How binding is this envisaged tax rate reduction? What has to be kept in mind? What actions have to be taken? This article aims at giving a first assessments of the situation and its potential implications.

Problem
The announcements regarding the reduction of VAT rates are based on decisions made by the coalition leaders so far, which have been presented to the press on June 3rd 2020 and have been summarized in a key issues paper. 

Thus, it is planned to temporarily reduce the German VAT rates from 19 % to 16 % (statutory tax rate) and from 7 % to 5 % (reduced tax rate) from July 1st 2020.

However, as of June 4th corresponding legislative procedures have not been initiated yet. With regard to the public announcement, it may still be expected that the legal foundation in the shape of necessary amendments to the law will be implemented shortly.

Until then, the tax rate reduction is not yet obligatory.

What to take into account and what actions to take?
Due to the envisaged entry into force from July 1st, there is not much time to prepare for the upcoming changes. Hence, it may well be advisable to deal with the potential implications of a VAT rate reduction as soon as possible. In the following, we will non-exhaustively list several aspects that are especially relevant in our opinion:

  • Adaptation of IT systems (especially accounting and cash register systems) as of July 1st
  • Pro rata accrual of revenues that are affected by the tax rate reduction. The exact point in time, at which a service shall be regarded as fulfilled from a VAT perspective, i.e. the time the VAT arises, is vital in this regard.  Usually, this is the end of the VAT reporting period during which the service has been rendered, i.e.

    • at the time the authority to dispose of a delivered asset is obtained  and 
    • at the time a service is being rendered.

  • In case a tax display on an invoice should be too high, this amount is being owed nonetheless due to Section 14c of the German VAT Act without entitling the recipient to deduct the wrong amount as input VAT. 
  • The right to deduct input VAT always refers to the statutory VAT amount, i.e. special attention should be paid to the correct application of the VAT rate while reviewing incoming invoices.
  • Contracts functioning as long-term invoices should be review in regards to the language: Given that those contracts do not refer to the VAT rate “in the respective statutory amount”, an adjustment might be necessary. 
  • The treatment of vouchers / gift cards, which might have been issued with a different VAT rate, should be analysed.  
  • The distinction of partial services and instalment payments is of even more importance than usual. 
  • Regarding the correction of invoices, the applicable VAT rates depend on the dates of delivery or performance.

Practical comments
The aforementioned remarks shall be regarded as first considerations pointing out that the planned reduction of applicable VAT rates may raise numerous questions.  Given the short time until the envisaged implementation date, the areas especially relevant for each respective company should be identified and analysed in order to develop practical solutions. 

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