On 3 June 2020, the Federal Government (Coalition Committee) adopted the 2020 economic stimulus package. One of the most important measures is the temporary reduction of VAT rates, namely the reduction of the standard VAT rate from 19% to 16% and the reduced VAT rate from 7% to 5%. This measure is (initially) applicable from 1 July 2020 to 31 December 2020. This measure is said to cost the government around EUR 20 billion, and is by far the largest measure adopted.
The planned VAT rate cut does not provide for any exceptions. All companies and all sectors are affected.
On the input side, the planned measure may provide relief in particular for companies that are not, or only partially, entitled to deduct input VAT, provided that net prices have been agreed for the purchase of services, as the services purchased will become cheaper. In particular companies in the financial, real estate, health as well as companies from the third sector and the public sector will benefit from this measure. In order to save costs, any planned investments should be postponed, and effected during the period from 1 July to 31 December 2020.
On the output side, contractors who have agreed gross prices for supplies to their customers will benefit most, since less VAT is payable to the state for the same remuneration. Depending on the sector, companies will let their clients participate in additional price reductions. Companies of the retail sector have already announced this.
In principle, VAT is incurred when the service is rendered, i.e. irrespective of when the invoice is issued or the remuneration is received (exceptions include e.g. services from abroad). The applicable VAT rate depends on the time at which the VAT arises. If an incorrect VAT rate is reported for a domestic service, this entails a risk both for the entrepreneur providing the service and the recipient of the service (who is entitled to deduct input VAT). According to § 14c paragraph 1 German VAT Act, a taxable person providing the service owes the VAT stated in the invoice (even if a lower VAT rate would actually be applicable). The recipient of the service on the other hand is only entitled to deduct input VAT from this invoice to the amount of the (lower) VAT legally owed. For companies it is now important to duly prepare for the planned reduction in VAT rates and thus prevent neutralizing the desired relief by errors made in the adjustment of the ERP-system/accounting system which result in increased administrative expenditure due to the necessary invoice corrections.
1 July 2020 has consequently become a key date in terms of invoicing. In practice, particular attention must be paid to all transactions that take place over a period of time before and after this cut-off date, especially in the cases listed below:
In individual cases, it depends on when the adjustments take place and the period of time to which they relate (time of supply). It is to be expected that the tax authorities will issue transitional and simplification rules in this regard.
In order to ensure that invoices are issued correctly and that transactions are correctly declared in the preliminary VAT returns, the ERP-systems/accounting systems must be adapted accordingly. We therefore recommend that you check whether any old tax codes for 16% are still available and can be reactivated, and how new tax codes for 16% and 5% can be set up on a transitional basis. You must ensure that these are correctly linked to all relevant VAT accounts. It is recommended that all services rendered up to 30 June 2020 are invoiced as of this date, if possible, in order to ensure the correct application of the (new) tax codes and proper invoicing.
This measure also poses a practical challenge for the conversion of the cash register systems, because the lower VAT rates have to be incorporated at short notice and on a transitional basis. On the other hand, restaurants and catering businesses will already benefit from the announced application of the reduced VAT rate to the delivery of food, which also needs to be implemented in the cash register systems.
In addition, more checks should be carried out on incoming invoices for the deduction of input VAT, especially with regard to the indication of the time of supply and the correct VAT rate.
If long-term contracts have been concluded and these are also regarded as invoices, we recommend that you check whether these agreements require a supplement. This is especially the case if the contracts mention the concrete applicable VAT rate (19% or 7%) rather than wording referring to the legally owed VAT.
It is currently unclear how sales from 1 July 2020 onwards must be reflected in the preliminary VAT returns. We assume that there will be new form templates on a transitional basis, or that there will be an indication of whether sales are to be shown in the existing fields (19% and 7% or sales at other VAT rates). This will mainly affect the interfaces between the accounting systems and the systems for creating preliminary VAT returns.
In some cases, it is not yet clear how the changes will affect the practical side of things (e.g. with regard to the forms for VAT returns). In some cases, however, it is already possible to start preparing for the changeover announced at short notice, in particular by taking the following measures:
We will keep you informed about the status of the legal implementation of the planned measures of the economic stimulus package and inform you about corresponding statements and information from the tax authorities. It is to be expected that the tax authorities will react in the same way as they did with the last change to the VAT rate (increase from 16% to 19% as of 1 January 2007) (cf. BMF letter of 11 August 2006). At that time, simplification and transitional provisions were provided for the following areas, in particular:
The reduction of the VAT rates also applies to import VAT. At the same time, the economic stimulus package provides for the due date of the import turnover tax to be postponed to the 26th of the following month in order to provide companies with a liquidity advantage.
The insurance tax rate will not be reduced and will remain at 19%. This has no effect on VAT because insurance services are generally exempt from VAT (§ 4 No. 10, 11 GVATA).
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