Annual Tax Act 2022 – Input VAT deduction in the refund procedure and late submission of the EC sales list

We previously informed you hereabout a significant change to the VAT Act through the Annual Tax Act 2022:The introduction of a zero VAT rate for turnover in connection with photovoltaic systems. Furthermore, it is important to note that the deduction of input VAT in the refund procedure is excluded in certain cases and that the VAT exemption of an intra-Community supply can still be obtained if the supplier reports the supply late in the EC sales list.

Input VAT deduction excluded from the refund procedure

Due to an amendment to § 18 (9) UStG (German VAT Code), input VAT amounts are excluded from refund if an invoice with VAT was issued even if one of the following applies:

1. In the case of an export supply, the foreign customer or a person authorised by this person has transported the goods and the supply is VAT exempt pursuant to § 4 no. 1 lit. a in conjunction with § 6 UStG.
2. A VAT-exempt intra-Community supply has been carried out.
3. There is a supply which could be VAT exempt as an intra-Community supply with regard to § 6a para. 1 sentence 1 no. 4 UStG, i.e., if all conditions for the VAT exemption are met except for the recipient's use of a VAT ID issued by another EU Member State.

In cases 1 and 2, the foreign customer, in the past, often had the VAT refunded by the BZSt (Bundeszentralamt für Steuern – Germany’s Federal Central Tax Office). If the supplier realised that they had wrongly charged VAT, they applied to their tax office for a refund, whereas the foreign customer often did not repay the VAT to the BZSt. To prevent the corresponding loss of tax, the tax authorities had already inserted a regulation similar to the current amendment to the law in section 18.11 para. 1a of the UStAE (VAT Application Decree) in the circular letter dated 16 February 2016. The BMF (Bundesfinanzministerium – Germany’s Federal Ministry of Finance) stated that in these cases there is an incorrect VAT statement pursuant to § 14c (1) UStG. For the refund procedure, it is also expressly regulated at the EU level that wrongly invoiced VAT is not refunded (Art. 171 para. 3 lit. a VAT Directive and Art. 4 lit. a of Directive 2008/9/EC). The new German legal regulation therefore further clarifies this, and these principles naturally also apply to the normal procedure.

Case 3, on the other hand, is new and the need for regulation only arose with the introduction of the Quick Fixes, which made the use of the VAT ID a material condition for VAT exemption. If the recipient has not used a VAT ID issued by another Member State, the supply is not VAT exempt and the VAT statement in the invoice is correct, meaning that there is no incorrect VAT statement within the meaning of § 14c (1) UStG. Nevertheless, this input tax is not refunded in the refund procedure. The legal basis for this is Article 171 (3) (b) of the VAT Directive.

In the normal procedure, meaning the one for recipients of supplies registered for VAT in Germany, the refund of input VAT is still possible. If the recipient of the supply submits the VAT ID later, this has a retroactive effect according to section 6a.1 para. 19 sentence 3 UStAE, and the supply becomes retroactively VAT exempt. The recipient must then reverse their input VAT deduction. As the recipient is registered for VAT, the tax authorities have greater opportunities to enforce this than in the refund procedure.

Late submission of the EC sales list

This change originated with the Quick Fixes: § Section 4 no. 1 letter b UStG has stipulated since its introduction that an intra-Community supply is not VAT exempt if the supplier has not fulfilled their obligation to submit the EC sales list or insofar as they have submitted it incorrectly or incompletely with regard to the respective supply. Until the end of 2022, the provision still contained the addition: "§ 18a (10) remains unaffected". § 18a (10) UStG stipulates that the supplier must correct an EC sales list within one month if they subsequently realise that it was incorrect or incomplete. Some concluded from this that the VAT exemption of the intra-Community supply can also no longer be obtained after the one-month period has expired. In a letter dated 20 May 2022, Germany’s Federal Ministry of Finance clarified that a VAT exemption is to be granted retroactively if the EC sales list is corrected or  submitted later.  If this is not done within one month, a fine may be imposed under § 26a (2) no. 5 UStG, but a VAT exemption is also granted if the supplier corrects the EC sales list only after the expiry of the one-month period. The amendment removes the misleading reference.

Dated: 20 January 2023