Recently, the Council of the European Union has approved a compulsory reverse charge mechanism for Dutch supplies of specific goods. The legislation has been approved by the government and enters into force on 1 April 2013.
The compulsory reverse charge mechanism will apply to supplies exceeding a taxable amount of EUR10,000 per type of product. The new rules apply to supplies of:
- mobile (smart) phones
- integrated circuits (CPUs)
- game consoles
- tablets and laptops.
If a business supplies goods under the reverse charge rule it should not charge VAT, but the purchasing company should self assess the VAT. When used for VAT-taxed activities, the VAT can be reclaimed in the same VAT return. As the “missing trader” does not receive a VAT payment which it does not remit to the tax authorities, there will be no loss of VAT for the tax authorities. For companies, the reverse charge rule results in a change in the VAT cash flow position and reduces the risk of being (unintentionally) involved in VAT fraud.
CJEU to decide on impact of fraud on VAT treatment
The Dutch Supreme Court has referred questions to the CJEU regarding the impact of fraud in a supply chain on the VAT treatment of supplies. Previously, the court has approved national legislation that refuses the VAT refund on purchases, or application of the VAT zero rate for intra-community supplies if the business knew or should have known that it was participating in a transaction connected with fraudulent evasion of VAT. In the Netherlands there is no such national law. The Dutch Supreme Court has now asked the CJEU whether in the absence of such national law, the tax authorities and courts should refuse a VAT zero rate for intra-Community supplies or a VAT refund in case a taxable person knew or should have known that he was participating in a transaction connected with fraudulent evasion of VAT. In our view, this is an important question as the answer may result in VAT assessments in different Member States and therefore double taxation (the Dutch Supreme Court recognized that in this case VAT assessments for the fraudulent transactions have been imposed in Italy already).
Dutch VAT tobacco method
In the Netherlands the VAT on tobacco products is levied via the system for excises. This results in the payment of VAT over the retail price at the same time as the excise duties are due. No additional VAT charges or refunds apply after this moment. Although internationally this system is sometimes even referred to as the “Dutch method”, it will be abolished in the Netherlands.
As of 1 July 2013, this system will be abolished and the regular VAT system will apply instead. This means VAT charges on each separate supply, which implies a shift in financing the VAT due on tobacco products through the supply chain. Applying the regular VAT system enables VAT refunds in the case of bad debts and in the case of theft, the recovery of input VAT should remain unaffected. Transitional rules apply for obtaining VAT refunds on stocks of tobacco that have been purchased under the “old system” and will be sold under the “new system”. A proper administration of the stock is required for obtaining this refund.