„The Austrian System of Reverse Charge (RC)" author: Helmut Wiesenfellner Federal Ministry of Finance Belgrade 16 December 2008

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AGENDA VAT fraud and carousel fraud Reverse Charge System (RCS) Art 199 EC-Directive 2006/112 Reasons for change Austrian solution -building services (10/2002) - scrap metal (7/2007) Examples

4 VAT fraud and carousel fraud In both types of fraud taxation for the domestic transactions is interrupted If the customer is bona fide tax authorities can only enforce obligations vis-à-vis the missing trader Cases of VAT fraud and carousel fraud in which the buyer’s cognisance cannot be proven are identical

5 Reverse Charge System Entrepreneur A e.g. constructor Entrepreneur A e.g. constructor Entrepreneur B e.g. floor layer Entrepreneur B e.g. floor layer Invoice € 11,000 Indication: The recipient has to assume the tax liability A accounts for the VAT of B A has the credit for the input VAT simultaneously If A does not meet the entrepreneurial status then tax liability falls back to B A accounts for the VAT of B A has the credit for the input VAT simultaneously If A does not meet the entrepreneurial status then tax liability falls back to B

6 Entrepreneur has to invoice in a standard format: Supplier: Name and address of B (Floor layer) VAT-ID of B Recipient of the supply: Name and address of A (Constructor) VAT-ID of A (if exceeding € *) Date of the invoice Continuous number Date of supply Identification of goods supplied Applicable tax rate (11,000 € excl. VAT) Reverse Charge System

7 Entrepreneur has to invoice in an RCS-format: the EU VAT identification number of the recipient of the supply an indication that the recipient of the supply is the tax debtor Example 1:“second sentence of Sec 19(1) VAT Act 1994 Example 2 “the tax liability is shifted to the recipient of the supply Example 3 “Reverse charge system” it is not allowed to show the VAT separately on such invoices Reverse Charge System the recipient of the supply is liable for the tax (constructor)

8 Transfer of tax liability obligation for B (Floor layer) filing a VAT return separately mentioning turnover according to RC obligation for A (Constructor) filing a VAT return separately mentioning turnover according to RC accounting the tax due deducting input tax Reverse Charge System

9 Advantages of RCS The merits of the RCS cannot really be questioned Auditors can focus on sensitive retail businesses The RCS if limited to specific supplies encourages the shift to other opportunities ; Reverse Charge System

10 Advantages of RCS The Austrian RCS in the building and scrap metal sectors has led to the exclusion of cheap and fraudulent providers After initial scepticism the business community has completely accepted the system The question of protection of good faith must be fully clarified Reverse Charge System

11 Preventive measures Sensitization/training of staff Public relations Risk analyses/Pre-registration visits Present observation/further visits Monitoring of claims for VAT repayment Reverse Charge System

12 How to detect VAT fraud Risk indicators Cooperation within tax administration International cooperation Cooperation with other national authorities Data analyses Reverse Charge System

13 How to stop VAT-fraud Blocking repayment of VAT input-tax Recovery measures Reverse charge on single-case basis Reverse Charge System

14 Reasons for change Fraudulent activities in the building sector cost billions of euros in taxes and social contributions Legal measures in the area of VAT Project ”restrictive antifraud measures in the building sector“ = Task Force Reverse Charge System

Reasons for change Task force After visiting the building site enforcement case warrant of execution

Reasons for change Task force Visit the Building site Enforcement case warrant of execution

17 Preparatory actions for fraud Registration in the company register as a limited liability company --resident at an existing address --notification of employees at the insurance company Services fulfilled Issuing of invoices with VAT/NO payment of VAT In cases of auditing no longer exist or go bankrupt No payment of wage taxes and social contributions Reverse Charge System

Reasons for change VAT: 40,000 damage: 160,000

Reasons for change VAT: 160,000 damage: 0

20. Austrian solution The reverse charge scheme applies to the following supplies of goods and services 1.all supplies of services and most installation supplies rendered by foreign taxable persons that do not have their seat of fixed establishment in Austria to taxable persons and non- taxable legal bodies 2.the supply of goods provided as security by one taxable person to another in execution of that security 3.the supply of immovable property sold by a judgment debtor in a compulsory sale procedure 4.the supply of goods following assignment of a reservation of title to an assignee and exercise of that right by the assignee 5.the supply of electricity, natural gas and certain ancillary service by foreign taxable persons that do not have their seat or a fixed establishment in Austria to taxable persons and non- taxable legal bodies 6.construction services 7.the supply of scrap

21 In the case of construction services the tax is owed by the recipient of the service when the recipient is a contractor, who for his part is engaged (commissioned) to provide the construction services. The recipient of the services is obliged to point out that he is engaged to provide the construction services. If this happens, but it is untrue, the recipient of the services is also liable for the tax due on the turnover. Austrian solution

22 If construction services are provided to a contractor, who usually provides construction services himself, the tax for these construction services is always owed by the recipient of the services. Construction services are all services that serve the -production -repair -maintenance -alteration or removal of construction works*. That also applies to the leasing of labour, when the leased workers provide construction services Austrian solution

23 The regulation does not differentiate between domestic or foreign contractor in cases of construction service. The foreign contractor has to apply for tax registration in Austria. Austrian solution

24 Austrian solution The following services are no construction services as they have to be considered independent main services: Planning services Rental of equipment and maintenance work Deliveries of material e.g. by dealers in building materials or stores *

25 Austrian solution If the service is provided for a contractor who, for his part, usually provides construction services (e.g. building contractor, master builder), the recipient of the construction service is always liable for the turnover tax, i.e. even if the latter has not been commissioned to provide these construction services.

26 Austrian solution In case the company does not usually provide construction services So that the contractor who provides the construction service knows that the recipient of the service, for his part, has been commissioned to provide the construction service and that not he but the recipient of the service is liable for the tax, the recipient of the service must inform the contractor of this circumstance e.g. in the form of a written confirmation in the letter giving the commission

27 Austrian solution Obligation of documentation Contractor providing the service The contractor providing the service has to separately list the remuneration for turnover for which the tax is owed by the recipient of the service. The recipient of the service The recipient of the service has to list the bases for the assessment of the construction services (deliveries and other services) for which the tax liability has been passed to him separately according to the rates of tax and the tax amounts apportioned to them.

28 Supply of personnel leased for construction services The tax liability is also transferred when personnel for construction services in the state are supplied by contractors in the state. The personnel must provide construction services for the leasing company. This is not to be judged according to the actual service provided by the individual worker but rather according to whether the worker is active in the context of a construction service. * If the supply of personnel is undertaken by foreign contractors in the state this generally gives rise to the transfer of tax liability to the contractor for whom the personnel is supplied =has nothing to do with this kind of RC !!! RCS example 5

29 RCS examples 1.Mix of normal scheme and RCS 2.Entrepreneur usually provides construction services 3.Entrepreneur who does not usually provide construction services 4.Invoice according to RCS and normal scheme 5.Tax declaration & bookkeeping with and without RCS

30 RCS example 1 A contractor invoices transport of material to one building site (not a construction service) and excavation work on another building site (construction service) to his client who, for his part, provides a construction service. Transport to building site X according to confirmation of transport € 2, % turnover tax€ 400 subtotal € 2,400 Excavation work on building site Y on 5 and 6 May 2006: 20 hours à € 50€ 1,000*) total amount € 3,400 *) For this amount the tax liability is transferred to the recipient of the service.

31 RCS example 2 installation company Building firm erects a residential building with 40 residential units on a site belonging to the building firm. The building firm usually provides construction services installation company ORDER invoice without VAT RC

32 RCS example 3 A hotel association gives a commission to a building firm to erect a residential building with 40 residential units on a site belonging to the hotel association. The building firm commissions an installation company to carry out the installation

33 RCS example 3 Hotel association Building firm installation company order for providing construction services orderorder

34 RCS example 4 Hotel association Building firminstallation company invoice without VAT invoice with VAT

35 RCS example 5 Hotel association Building firm installation company only declares the net worth of the services invoice without VAT, invoice with VAT § § Tax declaration & bookkeeping

36 RCS example 5 Hotel association Building firm declares net worth of the construction services calculates VAT deducts this VAT as input tax declares turnover with VAT (hotel association) invoice without VAT, invoice with VAT § § Tax declaration & bookkeeping

37 RCS example 5 Hotel association deducts input tax invoice with VAT §

38 Impact on VAT fraud in Austria VAT collected in 2007 € 19 billion Loss estimated minimum € 700 million per year Detected fraud € 70 million per year

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