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Archives for VAT

New VAT e-Commerce rules

As from 1 July 2021, a number of amendments to Directive 2006/112/EC (the VAT Directive) will start to apply affecting the VAT rules applicable to cross-border business-to-consumer (B2C) e-commerce activities.

 

The changes are aimed at addressing challenges arising from the VAT regimes for distance sales of goods and for the importation of low value consignments, namely:

  • To reduce the administrative burden imposed on EU businesses selling goods online to final consumers located in other Member States when their sales exceed the distance sales threshold;
  • To reduce abusive practices resulting from the VAT exemption granted for the import of low value goods;
  • To remove the commercial advantage for non-EU businesses selling goods from 3rd countries to consumers in the EU.

 

The EU have issued Explanatory Notes on VAT e-commerce rules and Importation and exportation of low value consignments – VAT E-Commerce Package – “Guidance for MSs and Trade” to provide further guidance on the implantation of these changes.   These changes have been incorporated in the Maltese VAT legislation through the publication of various legal notices.

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Changes to ‘small undertaking’ for VAT purposes

In line with the announcement made during the Budget Speech for 2021, legal notice 463 of 2020 was published to amend the ‘small undertaking’ thresholds in Article 11 of the VAT Act.  Once the legal notice becomes effective, the period to change from Article 10 registration to Article 11 registration will be reduced to 24 months (previously 36 months) with the possibility to request a change after 6 months.   Furthermore, the sixth schedule will be amended with one of the categories defining the exit and entry threshold being removed.  The entry threshold for economic activities consisting principally in the supply of services with a relatively low value added has been removed.  Entry threshold for other economic activities has been amended to €30,000 and the exit threshold to €24,000.

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VAT treatment of reimbursement of employee cost

The VAT treatment on reimbursements has always presented challenges as to whether reimbursements are subject to VAT or whether these fall outside the scope of VAT since this matter is not directly addressed in the VAT Act.

Recently, the Court of Justice of the EU (CJEU) issued its decision in case C-94/19, San Domenico Vetraria SpA v Agenzia delle Entrate, providing guidelines on the VAT treatment on the reimbursement of employee costs.  In its judgement, the CJEU essentially confirmed that the lending or secondment of staff by a parent company to its subsidiary, carried out in return for the mere reimbursement of the related costs, generally constitutes a taxable supply for consideration falling within the scope of VAT.  Case C-94/19 concerned the secondment of an employee by one company (Avir) to a subsidiary (San Domenico Vetraria). The secondment was carried out on the basis of a legal relationship of a contractual nature between Avir and San Domenico Vetraria, in the context of which there was reciprocal performance, namely the secondment of an employee (a Director) from Avir to San Domenico Vetraria, on the one hand, and the payment by San Domenico Vetraria to Avir of the amounts invoiced to it, on the other.  This was considered as being a transaction to be carried out for consideration, thus deemed a supply of a service which was subject to VAT.

It is understood that unless staff (employee or holder of an office) are in effect jointly employed by two or more companies forming part of the same corporate group where employee costs are being shared on a pure cost basis, reimbursement of staff costs is regarded as giving rise to a supply of service for Malta VAT purposes and therefore subject to VAT in Malta.

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Reduction in interest rate

By virtue of two separate legal notices, the interest on late payments of income tax and VAT has been reduced from 0.54% to 0.33% per month.  The change is effective from 1 January 2020.

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VAT Grouping

Following the announcement made by the Minister of Finance during the budget speech in October 2015, a legal notice (L.N. 162 of 2018) was finally published to introduce VAT Grouping. However, this new concept is not being made available to all groups which may exist for other purposes, such as the Income Tax Act.

 

VAT Grouping is quite common in other EU Member States however, it appears that Malta is reluctant to introduce this concept across the board and therefore the new regulations are only applicable to groups wherein at least one member is a licensed or regulated entity within the gaming sector or the financial services industry such as banks, financial institutions, insurance, investment services, securitisation etc, the services of which are usually exempt without credit.

 

To form a VAT Group, the following conditions must be satisfied:

 

  • All members of the VAT Group are legal persons established in Malta;
  • At least one of the members of the VAT Group is a taxable person licenced or regulated under any of the following Acts:
    • The Banking Act;
    • The Financial Institutions Act;
    • The Gaming Act;
    • The Insurance Business Act;
    • The Insurance Intermediaries Act;
    • The Investment Services Act;
    • The Lotteries and Other Games Act;
    • The Retirement Pensions Act;
    • The Securitisation Act.
  • Members of the VAT Group are financially, organisationally and economically linked to each other.  A financial link exists when two or more entities are directly or indirectly held by at least 90% by the same person or persons.   The financial link may be established on the basis of voting rights, profit entitlement or access to winding up distributions.  An organisational link exists when two or more entities share their management structure whilst an economic link exists when entities are linked to each other by virtue of the industry they operate in, or provide services which are interdependent or complementary to each other.  An economic link also exists when group members carry out activities which are wholly or substantially carried out for the benefit of the other Group Members.
  • All Members of the VAT Group are up to date with their VAT filing requirements and VAT payments.

 

Members of a VAT Group may only form part of one VAT Group.  Approval must be obtained from the VAT Department and such approval may be done by any member.  An application may also be made by a person to join an existing VAT Group.

 

Application for the registration of a VAT Group as well as the addition of new members must be made electronically however, the details are not yet available.

 

Members within a VAT Group must nominate a Group Reporting Entity. Such entity is responsible of fulfilling all the obligations arising under the regulations.   Once an entity forms part of the VAT Group, any supply (including supplies and/ or Intra-community acquisitions as well as any importation made under Article 4 of the VAT Act) made by the members are deemed to have been supplied made by the Group Reporting Entity and therefore reported as such.  The VAT status of members within the group (whether taxable persons or non-taxable legal persons) becomes irrelevant as the VAT Group itself is regarded as a taxable person.

 

Approved VAT Groups are notified by the VAT Department with the date from when the VAT Group is deemed to have been formed. The Group Reporting Entity and the other members of the group are also approved by the VAT Department.  The VAT Group will also have a separate Group VAT number.

 

The VAT registration number of the members of a VAT Group is cancelled once a member becomes an approved member of a VAT Group.  This is done because all the transactions entered into by any of the VAT Group Members is deemed to be made by the Group Reporting Entity.   The regulations contain provisions to regulate the cancellation of the VAT number of individual VAT Group Members where the assets of the economic activity include capital goods.

 

Members within the same VAT Group have joint and several liability for the payment of any tax as well as any administrative penalties and interest due.    Such liability will continue to apply even after a Member leaves the VAT group if such payments arose during the period when such Member was still part of the VAT Group.

 

The Group Reporting Entity is required to inform the Commissioner for Revenue should any of its members cease or will cease to satisfy the conditions to form part of the VAT Group.  Such notification should be made within 15 days from the changes in circumstances.

 

The VAT Group may also be dissolved after the lapse of 24 months from its registration.  The members of a ‘former’ VAT Group may reconstitute the VAT Group only after the lapse of 24 months from the cancellation of such VAT Group.

 

Supplies between members of a VAT Group

 

Any supplies made between VAT Group Members are disregarded for VAT purposes.   The regulations include an anti-abuse provision whereby the Commissioner for Revenue is granted the necessary powers to bring to tax supplies made within the VAT Group should the transactions be deemed as being tax avoidance or tax evasion.

 

The ‘exemption’ for intra-group supplies does not apply when the supply of services is made by or to an establishment situated outside Malta (including for example a branch or a permanent establishment of a Maltese company which forms part of a Maltese VAT Group), if that establishment forms part of a foreign EU VAT Group.

 

Through the introduction of VAT Grouping provisions, separate legal entities may now operate as a single taxable person thus reducing the administrative burden on the various group companies as well as reducing cash flow issues associated with the payment and recovery of VAT.  It is a pity that the group definition for VAT grouping is very restrictive and not all groups may benefit from such provisions.

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VAT thresholds

Persons eligible for registration under Article 11 of the VAT Act has been widened by means of Legal Notice 163 of 2018 whereby the provisions of Council Implementation Decision (EU) 2018/279 of the 20th February 2018 have been implemented.

 

Article 11 exempts taxable persons carrying on a small undertaking from charging VAT thus reducing the VAT compliance and costs associated with normal registration under Article 10.   However, Persons registered under Article 11 may not claim any input tax incurred.

 

By way of an EU derogation, taxable persons whose economic activity consists principally of supplies of services with high value added, thus, with relatively low-cost base, may register under Article 11 if their annual turnover does not exceed €20,000.  The entry and exit threshold in Schedule 6 has been updated to reflect the revised entry and exit threshold (now revised to €17,000) for such undertakings.

 

Such derogation is applicable from 1 July 2018 until 31 December 2020.

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