The VAT rules and regulations in the European Union are changing and developing all the time. Since 1st of July 2011 there is a new concise piece of guidance which is called the EU VAT regulation. This article will discuss some of the main aspects of this Regulation.
The Regulation is dedicated to the implementing measures for the EU VAT Directive and it has direct effect in the Member States. The purpose of the Regulation is to achieve uniform application of the VAT rules all across the Union.
The Regulation is applicable mainly for services. It provides guidance and definitions on different practical oriented issues – for example, how to determine where a business is established, what is a fixed establishment or what can be considered as sufficient checks for the taxable status of the customers.
Due to the complexity of the matter, some of the points which the Regulation discusses may be considered as contradictory with the currently existing local VAT rules or as not clear enough and this may lead to experiencing difficulties for the taxpayers until some consistent practices in the implementation of the Regulation are developed.
It is essential to define in which country the parties on a transaction are established as this influences the place of supply for VAT purposes and respectively, the country in which VAT will be charged. The main rule for taxation of services provided to businesses is that they should be taxable at the place of establishment of the recipient. The situation with services which are provided to non-business customers is different – they will be taxable in the country where the supplier has established its business. Respectively, the countries should use the same criteria for determining the place of establishment of the business of the supplier, as well as of the customer.
As to the case of Bulgaria, the existing rules determine that the business is considered to be established in the country in which the requested address of the business is located. What the Regulation provides is that the business shall be considered established in the country in which the central administration’s functions are carried out. This should be assessed in compliance with the place where the essential decisions concerning the general management are taken; the place where the registered office of the business is located; the place where the management body meets.
As to the degree of importance of these cases, priority should be given to the place where the essential decisions are taken. The mere presence of a postal address will not be considered a place of business establishment of a taxable person.
The difference arising between the domestic rules and the new Regulation may lead to certain confusions and misunderstandings. For instance, this may happen if a Bulgarian company provides services to a company registered abroad and the important decisions for the business are made in Bulgaria. The Regulation could empower the revenue authorities in Bulgaria to claim that the recipient of the service is established in Bulgaria and respectively the service fees should bear Bulgarian VAT.