Input Tax Deduction: Important Change from December 1 for Those Calculating VAT on Issued Invoices

VAT payers who calculate it based on issued invoices will have changes to the input tax deduction rules from December 1, 2022. They will be able to deduct VAT from the input invoices of suppliers who, at their discretion, calculate VAT based on received payments only after they pay that input invoice. For VAT payers who calculate VAT based on received payments, there are no changes. They determine their tax liability based on the invoices they have collected from customers and their right to input tax is realized based on the invoices they have paid to their suppliers, regardless of the tax regime of the supplier.

According to the ruling of the EU Court

The change in the right to input tax deduction for VAT payers applying the so-called regular taxation procedure and calculating VAT based on issued invoices followed the ruling of the European Court of Justice, which decided on the right to input tax deduction of a German entrepreneur.

Namely, Germany applies an exception allowed by the Directive and grants the right to input tax deduction to VAT payers who calculate VAT based on received payments and those who calculate VAT based on paid invoices, regardless of whether the taxpayer has paid the supplier’s input invoice. The dispute involved two German VAT payers who calculate VAT based on received payments, so the customer used the input tax only after paying the invoice, and not upon receipt of the invoice as regulated by German tax legislation.

Since the rulings of the EU Court are binding on all member states, the Tax Administration of the Republic of Croatia requested clarification of the ruling from the VAT Committee as a special body of the European Commission responsible for the application of VAT directives. The interpretation obtained and the ruling of the EU Court were interpreted by the Tax Administration of the Republic of Croatia in such a way that all VAT payers, both those applying the regular procedure and those paying VAT based on received invoices, have the input tax deduction conditioned by the paid supplier invoice.

The result of this is the instruction from the Ministry of Finance published on the Tax Administration’s website informing VAT payers that from December 1, 2022, the previous instructions regarding the right to input tax deduction will no longer apply, but that taxpayers who calculate VAT in the regular procedure will realize the right to input tax deduction based on the input invoices of suppliers who calculate VAT based on received payments only after they pay the invoice.

How to know the supplier’s calculation

How will a VAT payer recognize whether their supplier calculates VAT based on issued or received invoices? A VAT payer who calculates VAT based on paid invoices is obliged to state on the issued invoice that they calculate VAT based on paid invoices. According to the VAT regulations that Croatia applied before joining the EU, entrepreneurs marked outgoing invoices with the labels R-1 and R-2, where the label R-2 provided information that it was a business entity calculating VAT based on received payments.

In that earlier tax regime, only individual taxpayers who also determine income tax based on the cash principle could have the R-2 label. Meanwhile, the VAT system has been significantly changed, and all taxpayers, both legal and natural persons with turnover up to 15 million kuna, have been given the option to calculate VAT based on received payments at their discretion, and the R-2 label on the outgoing invoice has been replaced by a mandatory note: ‘VAT is calculated based on received payments.’

Very important note

This note will be very important from December 1, 2022, as it provides the customer who calculates VAT based on issued invoices with information on when they have the right to deduct input tax. If a supplier who calculates VAT based on received payments omits the mandatory note on their outgoing invoice, and the customer deducts input tax even though they have not paid the invoice, the tax authority will dispute their right to input tax in a subsequent check, and their supplier may be sanctioned for non-compliance with the legal provisions regarding the mandatory content of invoices.

In the coming months, this issue will likely become relevant, in order to provide VAT payers who calculate it based on issued invoices with information about the VAT calculation model applied by their supplier.

The ruling of the EU Court is from February 2022, and the new instruction from the Ministry of Finance applies from December 1, 2022. This implies that the VAT calculation for November 2022, which must be submitted to the Tax Administration by December 20, 2022, is prepared according to the rules that applied for deliveries made until November 30, 2022. The new regime for the right to input tax deduction applies to deliveries received from December 1, 2022, which will be included in the VAT form submitted on January 20, 2023.