1 M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Working Group for Chapter 16– Taxation Bilateral screening: Chapter 16 PRESENTATION OF MONTENEGRO Brussels, April 2013

2 Indirect Taxation Value - Added Tax Ministry of Finance Tax Administration Novo Radovic M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation TAXATION Chapter 16:

Concept of the tax General consumption tax - introduced in replaced the tax on trade of goods and services Law on Value - Added Tax (Official Gazette of the Republic of Montenegro 65/01, 38/02, 72/02, 21/03, 76/05 and Official Gazette of Montenegro 16/07) Trade of goods and services is taxed at the place of consumption, in line with the principle of destination Tax liability is determined in line with the invoice methodology, i.e. method of witholding “ tax on tax” Export of goods is VAT exempt (zero rate is applied), while import is taxed and has the same treatment as trade of national goods on national market 3 M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation TAXATION Chapter 16:

EU Legislation on VAT The Law is based on VI VAT Directive 77/388/EEC of 17 May 1977 and other EU Directives, which have been replaced by Directive 2006/112 Directive 2006/112/EC of 28 November 2006 on Common System of Value-Added Tax 4 M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation TAXATION Chapter 16:

Taxable event (Articles 3 to 11) Supply of goods and services - with reimbursement - in the country - use of goods by a taxpayers Import of goods 5 M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation TAXATION Chapter 16:

Trade of goods Transfer of disposal rights Sale with reimbursement based on the decision of a state authority Sale based on contract with which commission is paid Sale based on leasing contract on defined time Sale based on purchase contract with deferred payment Sale of newly constructed buildings Disposal of business assets by another person Trade of electricity and gas Use of goods for non-business purposes Exchange of goods It is not precisely prescribed what is considered as a newly constructed building, i.e. how this category is defined 6 M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation TAXATION Chapter 16:

Non-taxable trade of goods Trade of land Trade of used passenger vehicles Category of used passenger vehicles has not been precisely defined Problem of determining the ration of land value in the value of building constructed on it 7 M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation TAXATION Chapter 16:

Supply of services All actions that are not considered as supply of goods, carried out with reimbursement Transfer of copyrights, patents, licences and other ownership rights Supply of services based on regulations of state authorities Exchange of services Problem of identifying supply of goods and services upon simultaneous trade of goods and services 8 TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation

Taxpayers (Article 13) All subjects With independent business Running business Regardless of purpose or outcome of the business Temporary business operation related to delivery of newly contructed buildings Importing goods, i.e. person on whose belhalf goods are imported 9 M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation TAXATION Chapter 16:

Taxpayers (Article 13) Public institutions If they supply goods or services taxable in case of other taxpayers Risk of unfair competition taxpayers were registered for VAT in Montenegro in M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation TAXATION Chapter 16:

Obligations of a taxpayer VAT registration; Book - keeping; Issuing of receipts; Submission of VAT returns; Payment of the net amount upon submission of tax return. 11 TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation

VAT registration VAT registration in the tax authority is obligatory Threshold for obligatory registration is € Threshold for registration is not related to non- resident persons 12 TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation

Place of supply (Articles 14 to 17) Place of supply of goods Territory of Montenegro Tax is paid according to the place of supply of goods - place where good are located in the moment of shipping or transport; - place where goods are installed, i.e. assembled; - place where goods are located in the moment of supply, if supply of goods is carried out without shipping, i.e. transport; - place of reception of electricity, gas and energy for heating, freezing and cooling Place of supply of goods is the place where goods are brought in Montenegro 13 TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation

Place of supply (Articles 14 to 17) Place of supply of services Place where taxpayer supplying services has the seat or branch office, from which he/she supplies services, or permanent, i.e. habitual residence, if he/she does not have the seat or branch office. Place where real estate is located as for the services related to real estate Road or part of the road where transport services are supplied Place where services are supplied in the field of: a) culture, science, education, art,... b) ancillary trasport services c) services of assesment and valuation of goods Regulations related to place of supply of services are not aligned with Directive 2008/8/EC. 14 M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation TAXATION Chapter 16:

Place of supply (Cont.) Place of the seat, i.e. residence of the recipient of services for specific types of services: - copyrights, patents, licences - telecommunications - economic propaganda - engineering, attorney, accounting, notary and similar consulting services - electronic processing of data and supply of information - banking and insurance services - rent of movable property - winding up of business - intermediation in relation to listed services TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation

Place of supply – cont. Not aligned with Directive Transport services are taxed only for a part of road in Montenegro, therefore it is difficult to tax certain services, for example international transport of passengers Currently, it is very difficult to make difference between B2B and B2C transactions, as it is difficult to get quick information on PIN on non- resident persons If services are supplied by Montenegrin residents, VAT should be paid in the other country, we cannot provide evidence that tax was paid there Services from Article 17, paragraph 3, are very flexibly interpreted by taxpayers (for example, many services can be considered as engeneering services or economic propaganda) 16 TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation

Taxable moments (Articles 18 and 19) Moment of supply of goods, i.e. services Moment of payment, if payment is carried out before delivery of goods (cash advance) Import of goods There is an issue for services supplied in several tax periods if payment dynamics doesn`t follow tax periods (construction industry, hotel industry etc.) 17 TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation

Tax base (Articles 20 to 22) Reimbursement for supplied goods and services in which VAT was not included Upon import: value of goods assessed by customs regulations Tax base includes: - excise and other taxes, fees, customs duties and other import duties, except for VAT - indirect costs, such as provisions and wrapping, transport and insurance costs, calculated by supplier to recepient. TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation

Tax base (Articles 20 to 22) The following items are not included in the tax base: - discounts, approved at the moment of supply (rebate, super rebate, discounts for pre-payment etc.) - amounts which taxpayer receives from his/her client as a refund for costs paid on his/her behalf 19 TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation

Tax rates (Articles 24, 24a, 25) Standard rate 17% - it is the same for supply of goods, services and import Reduced rate 7% - Article 24a of the Law and Rulebook on Identification of Goods and Services taxed by the Reduced VAT Rate are aligned with Annex III of Directive 2006/112 - reduced VAT rate will be applicable for maintenance services supplied in marinas and for computer equipment until Montenegro accesses the EU 20 TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation

Zero rates - export transactions (goods and services); - supply of goods intended for official needs of diplomatic and consular representative offices and international organisations; -supplies of goods and services based on international agreements on donation; -supplies of medicines financed from resources of the Republic Fund for health insurance etc. 21 Tax rates (Articles 24, 24a, 25) TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation

VAT exemptions 22 Public interest services (Article 26 ) - health care system, social security, education, culture... Other exemptions (Article 27) - insurance and reinsurance, real estate trade, except for the first transfer of disposal rights, banking and financial services, gold and other precious metals procured by the Central Bank of Montenegro. M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation TAXATION Chapter 16:

Exemption of import of goods (Article 28) 23 - Imported goods, the trade of which is VAT exempt in Montenegro; - Goods brought in Montenegro within transit customs procedure; - Re-import; - Goods intended for official needs of diplomatic and consular representative offices and international organisations, as well as members of those organisations; - Goods specially produced for education, training and employment of blind and deaf persons, i.e other physically and mentally disabled persons; - Products imported by charitable organisations and organisations of disabled persons etc. TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation

Exemption of import of goods (Article 28) - Non-commercial goods of prescribed sort, value and quantity, which passengers carry with themselves from abroad; quality limitations (alcohol, cigarettes, parfums) quantity limitations (150 € limit) - Non-commercial parcels sent from abroad to natural persons in Montenegro; - Agricultural products, received on farms of Montenegrin residents owned in a specific region of a neibouring country etc. 24 TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation

Exemptions upon temporary import (Article 29) - goods temporarily imported under condition that they are customs duty exempt, pursuant to customs regulations and Convention on Temporary Import. Special exemptions (Article 30) -Import of goods declared to the customs authority; -Goods brought in the customs free zone, i.e. customs free warehouse; -Goods in the procedure of customs warehousing or procedure of import for export in line with the deferral system. 25 TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation

Tax period, VAT assesment and payment (Articles 33 to 36) Calender month Declared in monthly return for VAT assesment Return shall be submitted until 15th of the month following the tax period, when tax liability shall be paid Upon import, customs duty shall be paid simultaneously with VAT, in the manner prescribed by customs regulations 26 TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation

Input VAT deduction (Articles 37 do 40) Taxpayers carrying out taxable supplies of goods and services are entitled to pretax deduction under following conditions: - if receipts for supplied goods and services contain all the data prescribed by Article 32 of the Law (with separately declared amount of VAT) - if supply of goods or services was carried out by other VAT taxpayers - if right on input VAT deduction was not excluded for received goods or services 27 TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation

Input VAT deduction (Articles 37 to 40) Input VAT deduction is possible for given cash advances as well, if the recepient issued and the payer received the receipt for the cash advance in line with Article 32 of the Law Taxpayer carrying out partly taxable and partly exempt supplies of goods or services, is entitled to input VAT deduction only in the part related to taxable supply 28 TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation

Correction of input VAT deduction (Article 39) Carried out if VAT deduction is calculated in higher or lower amount, compared to the amount that the taxpayer should have paid Due to payment inability Due to changes of conditions relevant for taxation (for equipment correction, correction is carried out in the period of 5 years, while this period is 10 years for real estate) 29 TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation

Issuing receipts (Articles 31, 32) Receipts in paper form in two copies; Receipts in e-form with authorization of the tax authority (currently, there are technical challenges); Receipt is issued for all supplies and for all pre-payments; The Law prescribes minimum elements that a receipt has to contain; Important elements are: VAT number and PIN of the supplier, declared amount of VAT assessed to the client, date of supply, VAT rate; For supplies paid in cash, issuance of fiscal receipts from fiscal cash registers is obligatory. 30 TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation

Special taxation procedures (Articles 42 to 49) Small taxpayer (whose taxable turnover is under € for last 12 months) Farmer Travel agency Intermediary in supply of used goods, works of art, collections and antiques 31 M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation TAXATION Chapter 16:

VAT refund (Articles 50, 51) Within 60 days after submission of VAT return To taxpayers mainly exporting within 30 days after submission of VAT return Taxpayer without the seat in Montenegro doesn`t have the right to refund VAT calculated by other taxpayers in Montenegro, or calculated upon import of goods in Montenegro, under conditions prescribed by Article 51 Buyer – natural person without permanent or temporary residence for goods procured in Montenegro and brought out of Montenegro 32 M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation TAXATION Chapter 16:

Taxpayer’s book - keeping Book of issued invoices (I-RAČ) Book of input invoices (U-RAČ) Data on sales according to rates Data on output VAT Data on supplies according to rates Data on input VAT 33 TAXATION Chapter 16: M O N T E N E G R O Negotiating Team for Accession of Montenegro to the European Union Chapter 16: Taxation

34 Thank you for your attention! QUESTIONS