News and changes to the VAT law and Administration Act

Indirect Tax Alert, August 2016, Issue 4

In brief

In this Indirect Tax Alert, we provide an overview of proposed amendments to the VAT Act and Administration Act which are currently going through the legislative process. The proposed amendment of the VAT Act would introduce a reverse-charge mechanism on the import of goods, specifies the rules of VAT deduction for foreign entities and introduces interest on unpaid VAT refund payments. To increase the efficiency of tax proceedings, the proposed amendment of the Administration Act regulates preliminary measures, regulates objection proceedings and introduces a new instrument of shortened assessment proceeding, the so-called assessment order. We will keep you informed of changes and final versions.

Proposed amendment to the VAT Act

Reverse-charge mechanism on the import of goods - postponed

According to the current version of the VAT Act, the reverse-charge mechanism on the import of goods from third countries would have become effective as of 1 January 2017. In practice, it would have meant that the VAT payers would not pay VAT to the customs authorities on the import of goods (which they were entitled to deduct subsequently via a VAT return), but rather they would self-assess the import VAT directly via a VAT return via the reverse-charge mechanism. VAT payers would also have been entitled to deduct self-assessed input VAT if the respective legal conditions were met. This would have had a significant positive impact on cash flow for importing companies.

However, the proposed amendment of the VAT Act would postpone the introduction of a reverse-charge mechanism on the import of goods indefinitely. The reverse-charge mechanism on the import of goods would enter into force from the calendar year after the year when the public administration debt is reduced to a legally defined level. This should ensure that both the Financial Directorate and entrepreneurs will have enough time to implement all the legislative (e.g. VAT return and Control Statement template) and non-legislative measures (e.g. changes in information systems) related to the proposed changes.

General pardon on construction work

The proposed amendment of the VAT Act introduces a general pardon for the supply of construction work and goods with installation and assembly in accordance with § 69 (12) (j). In practice, supplies of construction work are often classified by the CPA classification in a non-uniform manner, which may create a risk to the supplier and customer of the levying of additional VAT, or a VAT refund rejection.

The introduction of a general pardon on the supply of construction work should bring legal certainty for both parties (supplier and customer) and reduce the administrative burden arising from the verification of the correctness of the classification of supply of construction work in accordance with the CPA classification. According to the proposal, the recipient would automatically apply a reverse-charge if the supplier reasonably classified a supply of construction work as supply subject to the reverse-charge and the information “prenesenie daňovej povinnosti” (“VAT is shifted to the customer”) is stated on the invoice.

VAT refund for foreign companies

VAT refund for foreign companies from other EU Member States and third countries

According to the proposed amendment, foreign companies (Slovak VAT payers) that only carry out supplies for which VAT is shifted to the customer under § 69 (2), (3) and (12) (e.g. construction work, supply of metal waste and scrap, supply of mobile phones, etc.) will only be entitled to deduct input VAT via the VAT refund procedure for foreign entities. This amendment will have a negative cash-flow impact for foreign VAT payers, as the period of VAT refund payment by the Tax Office will be longer. These changes would be effective from 1 January 2017.

Foreign Slovak VAT payers will still be entitled to deduct input VAT via a VAT return related to the received supplies for which liability is shifted to the recipient (e.g. intra-community acquisition of goods in Slovakia) even if they only carry out supplies of goods/services where the reverse-charge mechanism applies in accordance with § 69 (2), (3) and (12).

Compensation for a VAT refund unpaid due to a VAT inspection

Following the judgment of the European Court of Justice (ECJ) in case C-107/10 Enel Marica Iztok 3 AD and order of the ECJ in case C-120/15 Kovozber s.r.o., the amendment proposes the introduction of the right to financial compensation for a VAT refund (i.e. interest from VAT refund) unpaid due to an opened VAT inspection.

Under the proposal, the right to interest on an unpaid VAT refund will arise if the Tax Office opens a tax audit by the statutory deadline for a VAT refund repayment and the tax audit lasts more than six months from the day of the repayment deadline. Annual interest of 1.5% on the total amount of the VAT refund would be calculated per day until the VAT refund is paid to the VAT payer. This provision would be effective from 1 January 2017. It would apply to VAT inspections opened prior to 1 January 2017, but not closed by this date. 

Proposed amendment of the Administration Act

Increasing the efficiency of objection proceedings

The proposed objection proceedings assumes different consequences for not following a request from the Tax Office to eliminate deficiencies in a tax return. If deficiencies have no effect on the final tax position (tax liability or claim), the Tax Office is allowed to correct them if the relevant information is available (e.g. SK NACE number, tax identification number, tax period). Deficiencies with an impact on the final tax position due to a failure to comply with a request will still lead to a tax audit or a determination of the tax amount/claim in shortened assessment proceedings, i.e. assessment order - the new instrument of assessment proceedings.

Assessment order

The assessment order is a new instrument of “shortened assessment proceedings”. As stated above, imposing tax or allowing a claim in a shortened procedure will only be possible if the taxpayer does not eliminate deficiencies in a filed tax return with an impact on the final tax position and a tax audit has not been opened. The taxpayer will have right to lodge an objection against an assessment order, which would lead to a regular tax assessment (tax audit and standard assessment procedure). If the taxpayer does not appeal, this is considered as an agreement with the tax assessment and thus, no remedies would be acceptable. 

More efficient preliminary measures

If there is a reasonable concern that not yet imposed or due tax will not be paid by a subject by the deadline, the Tax Office may decide to use a preliminary measures instrument (e.g. advance deposit payment). If there is a risk of a late deposit payment, such an issued decision on preliminary measures is automatically considered as the execution title.

Limitation of objections of bias

To reduce the numerous objections of bias in tax proceedings, the amendment proposes that objections cannot be repeatedly lodged in cases for the same reasons which have already been decided on. It will also not be possible to lodge an objection against the Tax Office director or the Customs Office director. The proposal also establishes the general requirements of an objection of bias and the subjective period for objection submission, which is 8 days from the day when the taxpayer learns about facts proving bias, otherwise such an objection will not be taken into consideration. 

Other significant changes to the Tax Administration Act

The preparation of an expert opinion will cause the suspension of a tax proceeding or tax inspection, which may lead to the extension of a deadline for a refund repayment unpaid due to tax inspection.

In addition, tax overpayments not returned to tax subjects by a deadline will be transferred to a special government budget account. Taxpayers will not be able to apply for the repayment of an overpayment, or to offset it against underpayments of other taxes. Such overpayments will be lost. 

Amendments to the provision of lien in tax proceedings propose the option of securing the belongings of persons other than the tax debtor e.g. members of a VAT group, guarantors of VAT and other persons against who tax enforcement proceedings may be started. 

The effectiveness of the changes to the Administration Act is proposed from 1 January 2017.