General introduction of the reverse charge mechanism

24. 10. 2018

At the October meeting of the Economic and Financial Affairs Council (ECOFIN), a proposal was approved on the possibility of general extension of the VAT reverse charge mechanism to domestic taxable transactions. The principle of reverse charge simply moves the obligation to pay tax from the supplier to the customer. At present, this principle is applied in the Czech Republic, for example, in the supply of gold, construction and assembly works, provision of telecommunication services and supply of grains.

The reverse charge mechanism is generally viewed as one of the ways to combat VAT evasion. The tax payable by the customer to the supplier in the standard system is paid to the financial office by the customer itself if the reverse charge system is used. The general introduction of reverse charge is one of the priorities of the Ministry of Finance of the Czech Republic, which considers it a very effective instrument against VAT frauds.

The adopted proposal sets the threshold for the introduction of reverse charge at EUR 17,500 for one taxable transaction, irrespective of the type of goods or service supplied. If the general reverse charge mechanism was introduced, it would be only for a limited period of time, until June 2022, when the new VAT system should come into force throughout the EU. It should be added that the introduction of the general reverse charge system must now go through the EU legislative process, and the Czech Republic must submit and substantiate the application for permission of the general introduction of reverse charge to the ECOFIN and then incorporate it in the Czech VAT Act. Therefore, the new system cannot be expected to be approved, for example, in the tax package for 2019.

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