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.
Liability to pay VAT
The EU VAT systems is essentially based on fractionised payments, VAT being collected at each stage of the production and distribution chain after offsetting the input VAT paid on purchases against output VAT received on sales. According to the main rule laid down by Article 193 of VAT Directive, the person liable for the payment of this VAT is the person supplying goods or services. The liable person is the person who is held to pay VAT to the Treasury
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.
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