The Value Added Tax Act in Germany - An In-Depth Explanation
The Value Added Tax Act (Umsatzsteuergesetz) serves as the legal foundation for levying and administering value added tax (VAT) in Germany. First enacted in 1979, it establishes important elements like taxable transactions, VAT rates, rules for calculation of tax liability and input tax credit, invoicing requirements, filing of returns and payment procedures. The law aims to ensure neutrality of taxation along the production-distribution chain and achieve broad coverage of consumption taxes on goods and services.
Scope and Coverage
The VAT law applies to the following four types of transactions taking place within Germany:
Supply of goods and services: Any supply made for a consideration by a business in the course of its economic activity is subject to VAT. Certain categories like factory deliveries, vouchers, exchanges etc. have special rules.
Importation of goods: Imports of goods into Germany from outside the EU are subject to import VAT in addition to customs duty.
Intra-Community acquisitions: Purchases of goods from EU member states by VAT registered businesses are treated as deemed sales liable to VAT.
Reverse charge services: Specified services rendered to a German business by foreign EU suppliers are subject to reverse charge, i.e. VAT is paid by the recipient business.
The territorial scope extends to the region of Germany as defined in the EU VAT Directive. The law uses terms like ‘domestic territory’, ‘intra-Community’ and ‘third territories’ to delimit the chargeability of VAT on transactions.
Registration and Exemptions
Businesses making taxable supplies above an annual turnover threshold must compulsorily register for VAT. Voluntary registration is possible even for exempt businesses to enable input tax deduction. Small businesses with turnover below €22,000 can opt for exemption from VAT. Some supplies like exports, financial services, rental, health and education are exempt from VAT.
Tax Rates
The standard VAT rate in Germany is 19%. A reduced rate of 7% applies to everyday essential supplies like food, books, public transport, hotels etc. Certain supplies like education, health, insurance enjoy zero rating. VAT rates are fixed by the VAT Act and apply uniformly across Germany.
Time of Supply
The tax point or time of supply determines when VAT becomes due on a transaction. For supplies, VAT becomes chargeable when the service is completed or part payment received, whichever is earlier. For intra-Community acquisitions, liability arises when the invoice is issued. In case of reverse charge services, VAT is due when the service is performed.
Valuation Rules
The taxable base for VAT is the total consideration received, excluding the VAT amount. All incidental expenses are included. In barter transactions, open market value is taken as the tax base. For imports, the value as per customs rules is considered. Second hand margin scheme and other special valuation rules apply for certain categories.
Input Tax Deduction
A taxable person can deduct VAT already paid on goods and services procured for business use as input tax credit. Restrictions apply where purchases are used for non-business activities. Deduction is also denied for expenses like entertainment, motor vehicles etc. Partial deduction is allowed in case of mixed usage. Input VAT credit creates a chain of reimbursement along the production-distribution system.
VAT Reporting and Payment
VAT registered businesses must file quarterly VAT returns showing output tax collected and input tax deducted. Net VAT payable must be paid after adjusting input tax credit. Small businesses may be exempted from filing returns. Payment is done electronically in most cases. Default in payment attracts interest and penalties. Refund arises when input tax credit exceeds output tax.
Invoicing Requirements
VAT invoices and credit notes issued by taxable persons must contain particulars prescribed by law regarding supplier, recipient, description of supply, VAT amount etc. Electronic invoicing is permitted subject to specified safeguards. Invoices must be preserved for prescribed time periods. Compliance with invoicing rules is necessary for claiming input tax deduction.
Special Schemes
To reduce compliance burden, simplified VAT schemes exist for small businesses, farmers, travel agents and intra-EU transactions. Second hand goods can be taxed under margin scheme. Special accounting schemes apply to retailers and tour operators. Vouchers and electronically supplied services also have specific rules.
Administration and Compliance
The federal tax authorities consisting of Federal Central Tax Office and state tax offices administer VAT in Germany. Extensive powers exist to ensure tax compliance through audits, recovery of arrears, imposition of penalties etc. Tax authorities maintain databases and exchange information to detect tax evasion. Taxpayers have statutory rights to appeal adverse orders. Complete and correct reporting of VAT transactions as per applicable rules is essential for businesses to avoid disputes.
Anti-Avoidance Measures
The VAT law contains anti-avoidance provisions to prevent abusive practices aimed at tax evasion. Transactions lacking commercial substance can be disregarded to deny tax benefit. Reversal of input tax credit, cancellation of registration, heavy penalties etc. act as deterrence against fake invoicing, sham supplies and missing trader frauds. Recipient liability and reverse charge mechanism also counter VAT losses.
Zero Rating of Exports
Exports are zero rated, ie. VAT is charged at 0% rate. Documents like customs export declaration must evidence physical exportation of goods, otherwise local VAT applies. Related services like commission, transport etc. are also zero rated to ensure no tax burden on exports.
Exemptions and Exceptions
Key exemptions cover financial services, insurance, rental, passenger transport, health, education etc. Exempt suppliers cannot charge VAT on output nor deduct input VAT. Zero rating allows input tax deduction unlike exemptions. Some exceptions permit option to tax under VAT laws of member states.
Special Economic Zones
Differential VAT rules apply to certain designated areas like Bonded Warehouses, Free Ports and Special Economic Zones to suspend VAT as goods move in transit or undergo warehousing, storage and distribution. Goods enter and exit these zones without payment of import VAT and customs duties.