Recent BFH judgment in Germany: Providing a valid VAT ID is not determinative for the reverse charge mechanism to apply
GermanyThe use of a valid VAT identification number by the recipient is not determinative for the reverse charge to apply under German VAT Law. Objective circumstances – e.g. high transaction volume or company name – must also be considered.
If the reverse charge applies, a so-called reversal of the tax liability falls on the recipient of the service who then has to pay the VAT due on a supply.
In a recently published judgment the German Federal Tax Court (BFH) decided that the use of a valid VAT identification (VAT ID) number by the recipient is not relevant for the reverse charge mechanism to apply, i.e. for the classification of the recipient as a VAT taxable business. Objective circumstances – e.g. high transaction volume or company name – must also be considered.
Furthermore, according to the BFH the burden of proof objectively lies on the actual supplier of the service for the reverse charge mechanism to apply as a deviation from the standard principle. As a decision based on the burden of proof can only be made in tax court proceedings if the facts of the case cannot be clarified, the BFH overturned the decision of the tax court and referred it back. It held that the tax court was able to at least randomly check the existence and identity of the recipients of the services and their status as a VAT taxable business.
Key takeaway
As reverse charge is a focus of tax audits, businesses should focus on their compliance and ensure that their business partners’ data is kept up to date. This especially relates to keeping records of the identity of the recipients of any services, their VAT IDs and transaction volumes. In case of audits, claims by tax authorities to pay arrears may amount to high figures depending on the business.
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