The Author of the Article
What Topics are Covered in this Article?
The reverse charge mechanism is a VAT rule that shifts the liability to pay VAT from the supplier to the customer. It applies to certain situations where the supplier is not established in the country where the VAT is due, or where the transaction is prone to fraud or evasion. The reverse charge mechanism has the following effects:
- The supplier does not charge VAT on the invoice, but indicates that the reverse charge applies.
- The customer reports the VAT due on their VAT return as output tax, and may also deduct it as input tax if they have a full right of deduction.
- The net result is zero for the customer, unless they have a partial or no right of deduction.
- The reverse charge mechanism reduces the risk of missing trader fraud and simplifies cross-border transactions.
The reverse charge mechanism is mandatory in some cases throughout the EU, such as intra-Community supplies of goods or certain services listed in Annex X of the VAT Directive. It is also optional for Member States to apply it to other supplies of goods or services under certain conditions and with prior authorization from the European Council.
VAT reverse charge mechanism : what does it mean?
As a general rule, the taxable person supplying goods or services is liable to pay VAT.
As a derogation, the reverse charge mechanism allows to designate the recipient of the supply as the person liable for the payment of VAT.
Under this reverse charge mechanism, VAT is not charged by the supplier but accounted for by the customer (a taxable person) in his VAT return. This VAT is then deducted in that same VAT return and, therefore, insofar this person has a full right of deduction, the result is nil.
Mandatory reverse charge (art. 195 to 198 of the VAT Directive)
In certain well-defined situations, it is provided for that the liable person is the person acquiring goods or services and not the person supplying these goods or services. Such mandatory reverse charge is applicable throughout the EU in all EU Member States under the conditions determined by the Articles 195 to 198 of the VAT Directive.
Optional reverse charge for non-resident suppliers (art. 194 of the VAT Directive)
Member States in which the VAT is due may provide for that the person liable for the payment of VAT is the person acquiring the goods or services where the transaction is carried out by a supplier who is not established in the country in which VAT is due. Such reverse charge is regulated by national regulation.
Optional reverse charge for specific transactions (art. 199 of the VAT Directive)
Member States in which the VAT is due may provide that the person liable for the payment of VAT is the person acquiring the goods or services for specific transactions irrespective of the supplier's place of residence or establishment.
Such reverse charge, which is aimed at tackling potential tax frauds or evasions, is regulated by national regulation.
The reverse charge mechanism can be implemented by the Member States in specific cases in accordance with the following provisions of the VAT Directive:
- Special authorization issued by the European Council on the basis of Article 395 of the VAT Directive (or on the basis of a standstill provision of Article 394);
- Option to apply the reverse charge mechanism to the supplies of goods or services defined by and under the conditions laid down of the Articles 199, 199a and 199b of the VAT Directive.
To keep in mind
VAT reverse charge mechanism applies in different kinds of transactions:
- Reverse charge on specific goods and services
- Reverse charge on domestic transactions performed by foreign suppliers
- Reverse charge on intra-EU transactions
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Reverse charge on postponed import VAT
The application of the reverse charge is not an option for foreign companies. They need to know if they qualify for the reverse charge. Local tax authorities may refuse to refund local VAT when the reverse charge has not been applied or conversely reclaim VAT when the reverse charge has been applied incorrectly.