VAT guideline cross border transactions | Nordic Smart Government and Business

The VAT-guidelines can be used by operators and solution providers and demonstrates how to improve services in order to benefit from a more accurate and precise use of existing VAT-codes.

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1. Introduction

This paper is based on the findings and discussions after invoice and order document test by Nordic Smart Government and Business solution area A “Digital business documents and Product information” (NSG&B SA A). The idea of the tests is to transfer on production environment Peppol documents including invoice, order, order response and catalogue; of which catalogue has yet to be tested. Peppol advises parties to use VAT Tax Category Codes on documents to indicate VAT treatment of the document. An invoice compliant with the EN 16931 standard must include at least one VAT Tax Category Code, whereas it is possible to use VAT Tax Category Codes on other documents (order and order response). For 0-rated transactions there are also structured reason codes, VATEX reason codes, to indicate the reason for a 0-rated transaction. Parties to the test were advised to use VAT Tax Category Codes, nevertheless SA A left open for participating parties to decide on proper codes for transactions.

After tests, our discussion with participants showed that parties use different VAT Tax Category codes for cross-border transactions. Intra-community supply was indicated using either VAT Tax Category Code E (general code for exempted) or VAT Tax Category Code K (intra-community supply). Export was indicated using either VAT Tax Category Code Z (zero-rated goods) or VAT Tax Category Code G (export). All parties would benefit if they used the same VAT Tax Category Code to indicate similar transactions, and furthermore a distinction between different 0-rated transactions could be indicated more precisely. The purpose of this paper is to propose that all parties should in the future use same VAT Tax Category Codes in comparable transactions. Also based on the discussions, we recommend analysing the benefits if all documents in the process (covering catalogue, order, order response, invoice and receipt) were to contain a VAT Tax Category Code. Catalogues and orders could be one method for sharing data which confirms to the seller reason for a 0-rated transaction.

The VAT directive and national legislation are technology neutral in this respect and therefore the legislation allows different ways in which to indicate the reason for a 0-rated transaction. Peppol documents follow the semantic model. This semantic model contains structured VAT Tax Category Codes and structured VATEX Reason Codes which indicate a precise reason for a 0-rated transaction. The main benefit is that all parties could understand and interpret structured VAT Tax Category Codes and VATEX Reason Codes. If VAT Tax Category Codes cannot be trusted and/or the reason for a 0-rated transaction is in text, manual handling or maschine learning solutions are required to record transactions

Also, we recommend analysing whether a catalogue or an order could carry data to indicate that the buyer is eligible for a 0-rated transaction including e.g., domestic reverse charge, intracommunity supply and export. In such cases the seller has to verify that requirements for 0-rated transactions are met, such as the VAT ID is valid and goods shall be delivered to another member state.

All examples which we present are 0-rated transactions. For these transactions, the seller may indicate a reason using a structured VATEX Reason Code if available, in which situations a buyer as well as other parties, such as the tax administration, know exactly why this is 0-rated, and therefore the buyer knows if the buyer has to handle the transaction in its VAT accounting (e.g., reverse charge).

In many cases a buyer needs to handle a 0-rated transaction in its' own tax accounting. The reverse charge is an example of a situation where VAT Tax Category Codes AE and K indicate precisely and exactly that the buyer must follow the reverse charge method for these transactions, whereas a sale of used vehices is indicated using E VATEX Reason Code VATEX-EU-D (marginal scheme) to separate these transactions from intracommunity transactions. The reverse charge means that the buyer pays the VAT instead of the seller. For this change of VAT liability, the seller must have proof to indicate that reverse charge may be applied.

By using AE and K for reverse charging, these transactions can be handled following the reverse charge method, whereas VAT Tax Category Codes (O, E or Z) do not include any indication for use of the reverse charge method even though they include reference to 0 rated transaction.

2. Proposal - Between EU member states

We propose that intracommunity supply should be indicated by VAT Tax Category Code K and VATEX Reason code VATEX-EU-IC. This ensures that the invoice contains content requirements of the VAT Directive.

The process starts with a catalogue:

How should the Catalogue VAT look?

<cac:ClassifiedTaxCategory>
   <cbc:ID>K</cbc:ID>
   <cbc:Percent>0</cbc:Percent>
   <cac:TaxScheme>
       <cbc:ID>VAT</cbc:ID>
   </cac:TaxScheme>
</cac:ClassifiedTaxCategory>

How should the Order VAT look?

<cac:ClassifiedTaxCategory>
   <cbc:ID>K</cbc:ID>
   <cbc:Percent>0</cbc:Percent>
   <cac:TaxScheme>
       <cbc:ID>VAT</cbc:ID>
   </cac:TaxScheme>
</cac:ClassifiedTaxCategory>

How should the Invoice VAT look?

Right now, we will use K because this is the optimum selection for business rules. Business rules (validation) follow what the VAT directive requires concerning the content of the invoice.

<cac:TaxCategory>
<cbc:ID>K</cbc:ID>
<cbc:Percent>0.000</cbc:Percent>
<cbc:TaxExemptionReasonCode>VATEX-EU-IC</cbc:TaxExemptionReasonCode>
<cbc:TaxExemptionReason>Intra-Community Supply</cbc:TaxExemptionReason>
<cac:TaxScheme>
<cbc:ID>VAT</cbc:ID>
</cac:TaxScheme>
</cac:TaxCategory>

How should the Credit note VAT look?

3. Proposal - Between EU member states and EFTA/EØS:

How should we use the PEPPOL VAT code list when sending Business Documents between EU member states and EFTA/EØS?

Here we propose that all parties use VAT Tax Category Code G and text "Export" as a reason.

This is export for the seller and import for the buyer. General code (Code list published by the UN UN/CEFACT code list 5305 D 16B) for export is G and we propose that all parties use G for export transactions. Tests showed that parties also use Z for export. As Z is a general code for zero-rated goods, it does not contain or allow a reason for 0-rated transactions. Nevertheless, the invoice should always contain a reference that this is an export and therefore G VATEX-EU-G or G "Export" is best for indicating precisely why this transaction is zero-rated.

The process starts with a catalogue:

How should the Catalogue VAT look with EFTA/EØS?

<cac:ClassifiedTaxCategory>
   <cbc:ID>G</cbc:ID>
   <cbc:Percent>0</cbc:Percent>
   <cac:TaxScheme>
       <cbc:ID>VAT</cbc:ID>
   </cac:TaxScheme>
</cac:ClassifiedTaxCategory>

How should the Order VAT look with EFTA/EØS?

<cac:ClassifiedTaxCategory>
   <cbc:ID>G</cbc:ID>
   <cbc:Percent>0</cbc:Percent>
   <cac:TaxScheme>
       <cbc:ID>VAT</cbc:ID>
   </cac:TaxScheme>
</cac:ClassifiedTaxCategory>

How should the Invoice VAT look with EFTA/EØS?

<cac:TaxCategory>
<cbc:ID>G</cbc:ID>
<cbc:Percent>0.00</cbc:Percent>
<cbc:TaxExemptionReasonCode>VATEX-EU-G</cbc:TaxExemptionReasonCode>
<cbc:TaxExemptionReason>Export outside of EU</cbc:TaxExemptionReason>
<cac:TaxScheme>

<cac:TaxScheme>
<cbc:ID>VAT</cbc:ID>
</cac:TaxScheme>
</cac:TaxCategory>

How should the Credit note VAT look with EFTA/EØS?

<cac:TaxCategory>
<cbc:ID>G</cbc:ID>
<cbc:Percent>0.00</cbc:Percent>
<cac:TaxScheme>
<cbc:ID>VAT</cbc:ID>
</cac:TaxScheme>
</cac:TaxCategory>

4. Proposal - VAT in special situations

This proposal shows how to use structured VATEX reason codes for exempted transactions. Remember that not all reasons have a specified VATEX Reason code and text is always available to be used instead of structured VATEX reason codes. Structured reason codes are specific and support advanced handling of documents by all parties and therefore their future use is recommended.

VAT in hospitals, doctors, dentist etc.

How should the Catalogue VAT look in special situations with hospitals, doctors and dentists, etc.?

<cac:ClassifiedTaxCategory>
   <cbc:ID>E</cbc:ID>
   <cbc:Percent>0</cbc:Percent>
   <cac:TaxScheme>
       <cbc:ID>VAT</cbc:ID>
   </cac:TaxScheme>
</cac:ClassifiedTaxCategory>

How should the Order VAT look in special situations with hospitals, doctors, and dentists, etc.?

<cac:ClassifiedTaxCategory>
   <cbc:ID>E</cbc:ID>
   <cbc:Percent>0</cbc:Percent>
   <cac:TaxScheme>
       <cbc:ID>VAT</cbc:ID>
   </cac:TaxScheme>
</cac:ClassifiedTaxCategory>

How should the Invoice VAT look with in special situations with hospitals, doctors, and dentists, etc.?

<cac:TaxCategory>
<cbc:ID>E</cbc:ID>
<cbc:Percent>0.00</cbc:Percent>
<cbc:TaxExemptionReasonCode>VATEX-EU-132-1B </cbc:TaxExemptionReasonCode>
<cac:TaxScheme>
<cbc:ID>VAT</cbc:ID>
</cac:TaxScheme>
</cac:TaxCategory>

How should the Credit note VAT look in special situations with hospitals, doctors, and dentists, etc.?

5. Proposal - VAT in financial services

Financial services are exempted, nevertheless there is no VATEX reason code for financial and insurance services. Therefore, the reason should be written as text.

VAT in special situations with financial activities etc.

How should the Catalogue VAT look in special situations with financial activities etc.?

<cac:ClassifiedTaxCategory>
   <cbc:ID>E</cbc:ID>
   <cbc:Percent>0</cbc:Percent>
   <cac:TaxScheme>
       <cbc:ID>VAT</cbc:ID>
   </cac:TaxScheme>
</cac:ClassifiedTaxCategory>

How should the Order VAT look in special situations with financial activities etc.?

<cac:ClassifiedTaxCategory>
   <cbc:ID>E</cbc:ID>
   <cbc:Percent>0</cbc:Percent>
   <cac:TaxScheme>
       <cbc:ID>VAT</cbc:ID>
   </cac:TaxScheme>
</cac:ClassifiedTaxCategory>

How should the Invoice VAT look with in special situations with financial activities etc.?

<cac:TaxCategory>
<cbc:ID>E</cbc:ID>
<cbc:Percent>0.00</cbc:Percent>
<cbc:TaxExemptionReason>Financial activities etc. without VAT</cbc:TaxExemptionReason>
<cac:TaxScheme>
<cbc:ID>VAT</cbc:ID>
</cac:TaxScheme>
</cac:TaxCategory>

How should the Credit note VAT look in special situations with financial activities etc.?

<cac:TaxCategory>
<cbc:ID>E</cbc:ID>
<cbc:Percent>0.00</cbc:Percent>
<cbc:TaxExemptionReason> Financial activities etc. without VAT </cbc:TaxExemptionReason>
<cac:TaxScheme>
<cbc:ID>VAT</cbc:ID>
</cac:TaxScheme>
</cac:TaxCategory>

6. Concluding remarks

The VAT Tax Category Code must be included on the invoice. Therefore, why is it necessary for an order and a catalogue to include the VAT Tax Category code?

The catalogue is issued to a specified party and at that moment it is normally decided whether this receiver is purchasing in the same country (a domestic buyer and pricing; VAT Tax Category Code S), inside the EU (pricing and delivery terms may differ; VAT Tax Category Code K) or outside the EU (pricing and delivery terms may differ and the customs procedure for goods may be required; VAT Tax Category Code G).

The order is the document through which the buyer can share data and confirm that the buyer is eligible for a 0-rated transaction if such data is needed, such as export, intracommunity supply, supply to a vessel in international traffic or domestic reverse charge.

Based on these, the invoices contain more precise data on VAT, as both parties have a common understanding about the transaction. This ensures that the buyer can handle, e.g., transactions requiring the reverse charge method more accurately.

How do these proposals support current tax returns, proposed enlargements in the future and future methods, including CTC (Continuous Transaction Control/Corner 5) and SAF-T?

The main challenge for CTC, is 0-rated transactions, because they must be reported distinctly according to the legal requirements. Theoretically, the Peppol VAT Tax Category codes together with VATEX Reason Codes could assign transactions into correct reporting entities. This requires that use of VAT Tax Category Codes is harmonised. This could be as follows:
   AE domestic reverse charge (distinct to intracommunity supply),
   K intracommunity supply,
   G export,
   E Exempted together with VATEX Reason Codes (assigns them quite well into reportable and not reportable transactions),
   O outside of scope and
   Z for other situations not specified.

Regarding intracommunity supply (K), the buyer needs data to decide the tax rate and whether this transaction involves goods or services. For domestic reverse charge (AE) transactions, standard rate is applied in most cases. When goods are imported through Customs VAT rate is indicated on Customs' invoice. The catalogue may transmit information to the buyer to decide the tax rate and to separate services and goods if needed.

For all transactions including VAT, the buyer needs tools to decide whether this transaction is deductible or not. The buyer makes this decision based on the buyer's business activity. The buyer may use the order as a method for routing the transactions more precisely into deductibles or non-deductibles. Reporting directly from the access point of the buyer/receiver never includes this information and the operator should not assume how this transaction should be recorded into the VAT receivables of the buyer.

Creating a VAT report - Sales

The sum of domestic sales is the sum of S divided according to tax rates
The sum of domestic reverse charges should be the sum recorded by AE
The sum of exported goods should be the sum of G
The sum of exported services is not covered by VAT Tax Category Codes

The sum of 0-rated sales of services and goods is split into different codes. Typically, the taxpayer is required to report such sales for which the taxpayer has the right to deduct input VAT. Such sales may include Z and part of E VATEX reason codes. An example is E VATEX-EU-148-D supply to commercial vessels.

The EU sum of intracommunity supply should include the sum of K, nevertheless this must be divided into goods and services for reporting purposes. This is not supported by current VAT Tax Category Codes, and therefore additional information is needed, such as product and service codes shared through the catalogue.

Creating a VAT report - Buyer

The buyer needs information on the deductibility of the input VAT for all transactions concerning VAT. This is always internal information which the operator does not have. The buyer may add this kind of information into order/order reference by creating internal routing rule in the accounting for the transaction.

For reverse charge transactions, the buyer needs information to determine the tax rate and whether the transaction concerns goods or services. The catalogue or product/service code may include or refer to such information.

The buyer must pay VAT for reverse charge AE and K and imported taxable services: output VAT.

Deductible VAT on purchases includes VAT on invoices having VAT Tax Category Codes S, AE, G, K, and VAT on imported services.

VAT Tax Category Codes O, E and Z should not require any VAT handling by the buyer. Nevertheless, there may be some reporting requirements or accounting requirements, such as the margin scheme indicated by E VATEX-EU-F must be followed as a separate entity in VAT accounting.