What You Need to Know About VAT Taxation from July 1st?

Numerous changes are expected for entrepreneurs regarding VAT taxation; the topic is by no means simple. Therefore, below we provide an overview of a few changes that can facilitate entrepreneurs’ understanding of certain items, as well as good preparation to avoid negative surprises.

1. Scope of the new VAT Law. Since the Republic of Croatia will become the 28th member of the EU in July, the new VAT Law will apply to all transactions of goods and services within Croatia (domestic), to transactions within the single EU market, and to transactions with non-member countries (as before, imports and exports). The law also distinguishes the basic principles of taxation for goods and services, by type of buyer (entrepreneur or individual), the buyer’s status in VAT terms (whether they are a taxpayer or not), according to the place of taxation, and defines numerous exceptions.

2. Imports and exports versus acquisitions and supplies within the EU. Previous import and export transactions with EU member states will, after Croatia’s accession to the European single market, terminologically become acquisitions (in English) and supplies (in English) of goods or services. For all other markets, the terms import and export will still apply.

3. The VIES database and its importance. VIES (VAT Information Exchange System) is a kind of database of all VAT taxpayers within the EU. Its importance lies in the fact that it will allow Croatian entrepreneurs to verify the affiliation of foreign entrepreneurs to the VAT system of another EU member state, just as it will allow foreign entrepreneurs to verify the affiliation of Croatian entrepreneurs to the VAT system of the Republic of Croatia. The absence of an entrepreneur in this database automatically entails a different VAT treatment for the supply of goods and services. Croatian entrepreneurs will receive their VAT identification number in the VIES database, which will be identical to the previous OIB number with the prefix ‘HR’ (e.g., HR20431105615).

4. The European Court of Justice and its importance. In principle, every law passed is accompanied by a regulation that defines it more closely and in detail, and if additional questions arise in the practice of entrepreneurs, the Ministry of Finance has so far issued accompanying opinions. The rulings of the European Court of Justice have legal force and take precedence over domestic regulations, so entrepreneurs should certainly check specific VAT taxation situations from their business in the database of the mentioned court to ensure they are acting correctly and to verify if there is a decision in their favor in the case of a tax audit based on a similar example. For example, there are more than 500 cases and decisions in the court’s database just for VAT taxation (more at http://curia.europa.eu).

5. Rules for taxing transactions of goods within the EU. The basic rule for taxing goods within the European market, if the buyer is a VAT taxpayer, is that the VAT rate of the member state where the dispatch of the goods ends is applied. Unlike the previous VAT on the import of goods, a significant novelty for Croatian entrepreneurs is that VAT will not be calculated and paid if the acquisition is within the EU; therefore, the Croatian entrepreneur will simultaneously charge the VAT obligation and recognize it as input tax, which will positively affect the cash flow of the entrepreneur.

When taxing the supply of goods to individuals, the VAT rate of the member state of origin of the goods is applied (for example, goods sold to Croatian citizens by an Italian company will be taxed at 21%, which is the VAT rate in Italy). An exception is the so-called distance selling through catalogs, brochures, the internet, etc., directly to individuals, and monitoring the so-called delivery threshold defined by each country to protect its financial interests; then, up to the delivery threshold, the VAT rate of the member state of origin is applied, and above the delivery threshold, the VAT rate of the member state of destination of the goods is applied.

6. Rules for taxing service transactions within the EU. Similar to the previous import of services, taxation is performed according to the seat of the entrepreneur receiving the service if they are in the VIES database (which means they are also a VAT taxpayer in their country). If this is not the case, then the rate of the member state of the service provider is applied. Similar to the acquisition of goods, the service recipient self-assesses VAT and recognizes it without cash flow.

7. Abolishment of R1 and R2 labels on invoices. EU legislation does not recognize R1 and R2 labels, but to distinguish between invoices of entrepreneurs who recognized or paid VAT according to the cash principle (previous R2), they will mark their invoices with ‘calculation according to the received payment’. This provision applies only to transactions domestically and is in effect until the end of 2014. After that, previous R2 entrepreneurs should recognize or pay VAT independently of the cash principle (i.e., regardless of whether they have paid and collected the invoices).

8. Invoices are always issued in kunas. If there is any doubt among Croatian entrepreneurs about whether to issue an invoice in another currency, if the buyer is a foreign taxpayer, invoices should definitely be issued in kunas, and another currency is only an option provided that the stated VAT is always at the average exchange rate of the HNB on the day the VAT calculation obligation arises.

mr.sc. Tanja Rukavina, financial and tax advisor, ABAK USLUGE d.o.o. (www.abakusluge.hr)