Not even on these hot summer days did the team of VAT specialists and methodologists of General Financial Directorate, led by their director Mr Fojtik, lie idle, but made them a glorious summer by publishing a rather interesting and user friendly material focusing on the application of the reverse charge. The text, divided into eight parts, uses a well-arranged, Q&A method of clarification of certain pitfalls of the reverse charge mechanism as defined in Section 92 (f) of the VAT Act. All the question are true-to-life issues of local businesses, and the answers provide quite a solid basis for a few general principles, which we would like to acquaint you with.
As the title suggests, the first section of the text deals with incidental expenses directly connected to effected taxable supply (these are, in the case of delivery of goods or provision of services, e.g. packaging costs, transportation, insurance etc.), and suggests that, if the basic condition of reaching the limit amount of CZK 100.000 (which includes BOTH the price of the goods/services AND the incidental expenses directly connected) is met, the reverse charge mechanism applies. It means that the relevant invoice is to contain both the price of goods and the connected extra costs and all the items are to use the same tax mode.
This, however, does not exclude the possibility of an invoice containing items using different tax modes, for instance, books on one hand and game consoles or mobile phones on the other. The rules are clear: the tax bases are not to be added and different tax modes are not to be combined; in other words, all the items are to be dealt with separately (with the reverse charge mechanism applying to, in this case, the latter type of goods after/if all the necessary conditions have been met). Yet another interesting case comes unbidden into the reader's mind while pondering over the text although the document disregards it (for fear of possible ambiguousness of the interpretation, perhaps?). What would be the correct procedure if an invoice contained several items for which the reverse charge mechanism applies (the full list of the goods/services can be found in the VAT Act's addendum number 6), but some of them do not exceed the requirement limit for the application while others do? Since the basic philosophy of the law itself aims to minimise the administrative load and at the same time reduce the risk of possible tax evasions, such delivery appears to be processed as though it were one taxable supply and apply the VAT accordingly, i.e. total the amounts of all the items and see whether the limit of CZK 100.000 has been exceeded or not. Nevertheless, so as to avoid any misunderstanding, it is highly recommended that separate invoices should be issued for each item.
Invoicing is also the central part of the next topic the document deals with – invoices containing the price of a taxable supply in foreign currency (i.e. other than CZK). Surely, an answer springs to mind and one speculates that the exchange rate as declared by the Czech National Bank and valid as of the date of the effected taxable supply applies. Indeed, it comes as no surprise to find out that the authors of the document concur with this assessment, adding that whatever the VAT mode the related tax is to be indicated in Czech Crowns.
The text then moves on to an interesting comparison of consecutive and repetitive taxable supplies. As defined in Sect. 21(9) of the VAT Act, a repetitive taxable supply is such a transaction which is effected within a taxable period (i.e. a calendar month) in several prearranged (i.e. in a contract) delivery dates. Also, the goods are to be of the same, interchangeable kind, or, in the case of services, nature. With these conditions having been fulfilled, one invoice for all deliveries is to be issued as they are deemed to be one taxable supply with tax bases being totalled; subsequently, reverse charge is to be applied if the total exceeds the limit of CZK 100.000. On the other hand, consecutive taxable supplies, which are effected on different delivery dates and invoiced separately, are not to be dealt with in the same manner – they are considered to be unconnected.
We would like to conclude this brief summary with a reply to a rather interesting question: Is it possible for a supplier and a customer to enter into a contract on application of reverse charge even if the limit amount of CZK 100.000 has NOT been reached? Or perhaps the opposite – NOT applying the reverse charge when exceeding the limit? The document states that neither of these options is supported by the law and it is particularly strict in the latter case. The letter of the law is more unclear in the first case, especially in situations when it is somewhat difficult to ascertain whether all the conditions necessary to apply the reverse charge have been met. If both parties (supplier and customer) proceed in concord and, having fulfilled the conditions, apply the reverse charge, such a contract is possible to be made. Unfortunately, this is not the above case since exceeding the limit amount is a sine qua non.
The Czech version document in its unabridged form can be found on http://www.financnisprava.cz/assets/cs/prilohy/d-seznam-dani/Nejcastejsi-dotazy-k-uplatneni-par-92f-ZDPH.pdf
Have you, managing your own businesses, faced similar issues with which you are not absolutely sure how to proceed? Do not hesitate to contact the team of our tax advisors – we are happy to help!
Filip Tejmar
