Mazars Tax Newsletter, November & December 2020.

Tax reform

Following the adoption of the final proposals for amendments to the tax Acts, proposal for amendments to the tax Rulebooks, which further define the earlier proposed changes to the tax Acts, have been presented to the public through the online platform E-savjetovanje.

Proposal for amendments to VAT Rulebook

As we already covered in the previous issues of tax newsletters, new rules concerning B2C supplies of services and distant sale of goods are coming into force as of July 2021, and therefore proposal of VAT Rulebook has been adapted accordingly.

Proposed amendments define that taxpayers which are involved in B2C supplies of telecommunications, broadcasting, electronically supplied services and distant sale of goods to individuals who are not taxpayers (and that resides in other member states) will be obliged to record an overview of supplies of telecommunications, broadcasting, electronically supplied services and distant sale of goods, starting from 1^st July 2021.

Further, taxpayers will have to submit that overview to Tax Authority by the 20th January of the current year for previous year. Exceptionally, taxpayers will be obliged to submit overview within 8 days in the event of exceeding a threshold of HRK 77,000 (approx. 10,000 EUR) for these supplies. Moreover, overview will be submitted on the prescribed e-commerce form via the application for electronic submission of the e-commerce form.

Apart from abovementioned, proposed amendments define that taxpayers, which will have in other member states B2C supplies of telecommunications, broadcasting, electronically supplied services and distant sale of goods in 2020 and also in period from 1st January to 30th June 2021, will be obliged to submit overview of these supplies on the prescribed e-commerce form via the application for electronic submission of the e-commerce form by 20th July 2021 at the latest.

With respect to the adoption of amendments to the VAT Act which introduced possibility of import VAT deferment to the VAT payers which have full right on input VAT deduction and that have previously received approval from Customs Authority on import VAT deferment, the proposed amendments to the VAT rulebook further define that request for applying import VAT deferment will be submitted to the Customs Authority electronically via E-Customs system (e-Carina). Moreover, until the implementation of an electronic data exchange system for the submission of request, the request will be exceptionally submitted to the Customs Authority. 

Apart from the previous mentioned changes, there are no significant changes, except for a more detailed definition of certain terms, modification of certain forms (PDV-P) and clarification of certain legal changes (for example, detailed explanations of the VAT exemption for hospital and medical care, etc.). Additionally, provision defining that the B2B supply of residential lease could not be considered as residential lease exempt from VAT, was added.

Proposal for amendments to Corporate Income Tax Rulebook

Following the adoption of the amendments to the CIT Act which introduced transfer pricing adjustment, i.e. adjustment of profits in the current period in order to prevent misunderstandings, corrections of tax returns and court or arbitration proceedings, proposed changes to the CIT Rulebook further define that in the event of price discrepancy from arm’s length price taxpayer is obliged to carry out compensating adjustment at the end of the year.  

In this case, the compensating adjustment will be carried out before submitting the corporate income tax return and the taxpayer will have to provide an explanation of why the price it set before or at the time of the controlled transaction did not meet the arm's length principle.

In addition, Rulebook defines that in CIT return for 2020, a lower tax rate of 10% will be taken into account when calculating advances for all taxpayers who will have revenues up to HRK 7.5 mil. (approx. 1 mil. EUR).

Proposal for amendments to Personal Income Tax Rulebook

In addition to the adoption of amendments to the PIT Act which prescribe that personal income tax is not paid on receipts of individuals on the basis of employment or activity for an employer not registered in the Republic of Croatia based on acquired digital nomad status in accordance with a special regulation, proposed changes further define that these receipts are not reported in personal income tax return (JOPPD form). 

Further, the proposal clarifies that the write-off of debt on the basis of a housing loan with credit institutions is not considered a receipt from which income is determined.

Also, the Rulebook equalizes the status of full-time and part-time students in relation to income from work through student working agencies.

In addition, the proposal stipulates that from 2022, the Tax Authority will ex officio link unrelated payments of personal income tax, surtax and health insurance per each recipient of the income. In case the amount of payment differs from the calculated amount, the link will be made in order starting from the oldest amount of payment and debit for a certain type of contribution (this will be made after six months from the date of unrelated payment).

Proposal for amendments to the Fiscalisation Rulebook

Proposal for amendments to the Fiscalisation Rulebook defines in more details determination of cash register maximum.

Cash register maximum will be determined by the taxpayer obliged for fiscalisation in its internal statute in accordance with its needs and security requirements, with maximum limit of: 

• Micro entrepreneurs and individuals HRK 10,000.00 (approx. 1,300 EUR),
• Small entrepreneurs HRK 50,000.00 (approx. 6,600 EUR) and
• Middle entrepreneurs HRK 80,000.00 (approx. 10,600 EUR).

The size of the company is determined in accordance with the criteria of the act governing the development of small businesses.

Exceptionally, taxpayers who exceed the criteria that determine the size of the company in accordance with the act governing the development of small businesses, can set the cash register maximum in the amount of HRK 100,000.00 (approx. 13,300 EUR). Also, regardless of the above criterion, the taxpayer who performs foreign exchange operations can determine the cash register maximum in the amount of up to HRK 100,000.00.

In addition, the cash register maximum is determined for taxpayers as a whole, and within that amount, the taxpayer can determine the cash register maximum for its organizational units. However, the maximum cash register amount per individual business premise is limited to HRK 15,000.00 (approx. 2,000 EUR).

Brexit

The Tax Authority has issued a brief guidance on the tax implications of the end of the transitional period for the application of EU tax and customs rules and procedures, which allowed the United Kingdom of Great Britain and Northern Ireland ("UK") to apply them as if it were still an EU member.  

Cross-border supplies of goods

Starting from 1st January 2021, cross-border supplies of goods between the EU and the United Kingdom will be subject to the VAT rules on imports and exports. This implies that import VAT will be due on goods which are brought into the VAT territory of the EU from the United Kingdom while dispatch of goods to the United Kingdom, will be subject to customs export procedures. 

Exceptionally, if dispatch of goods from EU start prior to the end of transition period and accordingly goods arrive after the 31st December 2020, it will be consider as supply of goods within EU (intra EU supply). Accordingly, if dispatch from UK starts prior to the end of transition period and goods arrive in EU after the 31st December 2020, it will be considered as acquisition of goods from EU. 

In addition, it is important to emphasize that in accordance with the relevant protocol the provisions of EU VAT law on goods will continue to apply in Northern Ireland beyond the transitional period. Therefore, in case of supplies of goods between the EU and Northern Ireland, the rules and procedures for taxation will remain the same as before (intra EU transaction).

VAT refund

The conditions of refund will remain the same as before. Namely, the requests for VAT refunds, which were paid by the EU-based taxpayer in the UK in the period up to 31 December 2020, are submitted via the electronic system no later than 31 March 2021.

Requests for a VAT refund, paid by an EU-based taxpayer in the UK after 1 January 2021, will be eligible under the VAT refund procedure for third countries. In this regard, the Republic of Croatia and the United Kingdom confirmed the reciprocity in the field of VAT refunds and the United Kingdom confirmed that it will continue to refund VAT to Croatian companies even after the transitional period.

More details concerning Brexit can also be found on European Commission’s website.

Tax Authorities’ opinion

The Tax Authority has issued instructions for preparation and submission of a VAT return for the last tax period of a calendar year with a detailed explanations and practical examples.

This instruction is an upgrade of the previous instruction from 2015 and there are no significant changes. Within the instruction itself, the Tax Authority addressed several important issues such as the input VAT adjustment for capital goods, pro rata, the VAT treatment of deficits, donations and the like.

Additionally, the instruction defines that aid for preserving jobs granted to employers whose economic activity has been disrupted due to a special circumstance caused by the coronavirus virus (COVID-19) is not included in the denominator when calculating pro rata.

Mazars comment:

The instruction is a good reminder for all taxpayers, especially those who have VAT-exempt supplies (e.g. financial transactions, health and dental services, etc.).

Therefore, it is recommended to all such taxpayers to review instruction in more detail and make an appropriate adjustment of input VAT in the December VAT return in order to avoid additional assessments of VAT and penalties by the Tax Authority.

Other news

Contribution base for compulsory insurance

The Decision on amounts of base for calculating compulsory insurance contributions for 2021, which established the highest monthly base for calculating contributions of HRK 55,086 (approx. 7,300 EUR) or HRK 661,032 (approx. 87,600 EUR) per annum, was recently adopted. In addition, the minimum monthly basis for contributions for management staff employed in the company in which they perform this full-time function, will amount to HRK 5,967.65 HRK (approx. 800 EUR).

Temporary abolition of the obligation for payment of Croatian Chamber of Commerce fee

Due to the epidemic caused by the Covid-19 virus, the Croatian Chamber of Commerce passed a Decision on the temporary abolition of the obligation to pay membership fees. The decision is valid from November 1 to December 31, 2020. The temporary abolition of the obligation to pay membership fees relates to the following activities:

• H4931 Urban and suburban passenger land transport;
• H4939 Other passenger land transport n.e.c.
• I5610 Restaurants and mobile food service activities;
• I5629 Other food service activities;
• I5630 Beverage serving activities;
• J5914 Motion picture projection activities;
• N8230 Organisation of conventions and trade shows;
• P8551 Sports and recreation education;
• P8552 Cultural education;
• R9001 Performing arts;
• R9002 Support activities to performing arts;
• R9003 Artistic creation;
• R9004 Operation of arts facilities;
• R9200 Gambling and betting activities;
• R9311 Operation of sports facilities;
• R9312 Activities of sport clubs;
• R9313 Fitness facilities;
• R9319 Other sports activities;
• R9321 Activities of amusement parks and theme parks;
• R9329 Other amusement and recreation activities.

Amendments to the Act on Membership Fees in Tourist Boards

The Amendments to the Act on Membership Fees in Tourist Boards was recently adopted in the parliamentary procedure, within which the following amendments were adopted:

• Reduction of rates for calculation and payment of membership fees by 12%:
  • First class - 0,14212
  • Second class - 0,11367
  • Third class - 0,08527
  • Forth class - 0,02842
  • Fifth class - 0,01705
  • The Tax Authority  will be allowed to change the amount of the monthly advance payment of membership fees in the event of significant decline in entrepreneurial activity;
  • The calculation of the lump sum membership fee will be arranged when persons providing catering services in the household or on the family farm obtain a decision on approval in the current year for a first time since the membership fee is calculated based on previous year's capacity according to eVisitor.
    • These persons pay the annual lump sum membership fee until 31 December of the current year while they submit the TZ Form within 15 days from the enforcement of the decision on approval for the provision of catering services in the household or on the family farm.
    • Exceptionally for this year, persons who have obtained a decision on approval for the first time, pay the annual lump sum membership fee for 2020 until March 31, 2021.

 Guidance on the transfer pricing implications of the COVID-19 pandemic

On December 18, the OECD published guidance addressing the difficult transfer pricing issues that multinationals may face due to the current pandemic.

The new guidance is helpful as it provides multinationals with enhanced certainty, given that this guidance reflects the consensus view of the Inclusive Framework on BEPS, an OECD-led body comprised of 137 countries.

The guidance has four chapters reflecting comparability analysis, losses, and the allocation of COVID-19 specific costs, government assistance programs and advance pricing agreements.