EU accession means new VAT rules for CroatiaOctober 25, 2013
Accession to the European Union (EU) means that numerous new terms, schemes, taxation concepts and reporting requirements have come into force in Croatia. These changes include the concept of intra-community supplies and acquisitions, new place-of-supply rules for services, distance-selling rules, new rules for electronically supplied services, new reporting requirements, new VAT refund rules and many others. In our last article, we dealt with some of these new concepts on the basis of the draft legislation, but since then, Croatia has joined the EU. This article provides more detail on several changes made since the draft law was published and touch upon some that were not covered previously.
The final draft of the new VAT Act was published in May 2013. The ACT was passed by the Croatian Parliament in June 2013 and came into force on 1 July 2013. The VAT Bylaw, which provides more detail and guidelines on implementation of the provisions of the VAT Act, was also issued. The Croatian tax authorities have also published guidance on the changes resulting from EU membership.
VAT on printed newspapers and magazines
The new VAT Act maintains the application of two reduced VAT rates (5% and 10%). Daily newspapers and magazines can be taxed at either of these rates: the 5% VAT rate applies to daily newspapers printed on paper and containing at least 25,000 words per issue, except those that are either wholly or mainly advertising, and the 10% rate applies to other newspapers and magazines, except those that are either wholly or mainly advertising.
However, based on a conclusion that it infringes the freedom of the press and the freedom of speech, the Croatian Constitutional Court recently adopted a temporary decision postponing the application of the 10% VAT rate on daily newspapers. The Constitutional Court’s final decision on this matter is expected in September this year.
Call-off stock simplification
“Call-off stock” is a term used for inventory that is stored in a warehouse, often at or close to the customer’s premises but remaining in the supplier’s ownership until the customer requires it. For a supplier based in another EU country, holding call-off stock to meet Croatian customers’ needs could potentially lead to a VAT registration and reporting obligation for the nonresident supplier.
Although not incorporated into the Croatian VAT Act, a call-off stock simplification rule that is applied by several EU countries has been introduced by the Croatian VAT Bylaw. Under the simplification, the foreign supplier is not required to register for VAT in Croatia with respect to call-off stock held in Croatia. This simplification is particularly helpful in reducing compliance burdens for international supply chains; for example, to fulfill “just-in-time” delivery needs.
Under this system, sale of goods from a Croatian customer’s warehouse will not trigger VAT in Croatia until the customer takes the goods from the warehouse. At that moment, the seller should record an intra-community supply in the country from which goods were transported, and the customer is required to account for the intra-community acquisition in Croatia.
Reverse charge accounting for local supplies received from foreign suppliers
According to the new VAT Act, the Croatian recipient is liable to pay VAT on supplies of goods and services made in Croatia by a foreign entity to a Croatian taxable person. This means that if, for example, a foreign entity sells goods to a Croatian company in Croatia, the foreign entity is not obliged to register for VAT in Croatia and does not have to apply Croatian VAT on the invoice in question. The customer in Croatia is obliged, instead, to account for the output tax due.
Postponed VAT at import
The new VAT Act has introduced a postponed accounting system for VAT paid at import. Under this provision, instead of paying VAT on goods at the time of importation, it will be possible for VAT-registered importers to report and deduct import VAT on their VAT returns, subject to receiving permission from the tax authorities. However, the conditions that the importer should meet to be able to use postponed accounting are not yet known.
Postponed accounting provides a major cash-flow advantage compared with the old system, whereby import VAT was payable at the time of the import but could not be recovered until the next VAT return. This method effectively removes the VAT cash-flow difference between imports from outside the EU and intra-community acquisitions on which the VAT is self-assessed and recovered, using the reverse charge mechanism.
However, based on currently available information, it is not likely that the postponed accounting method for imports will be available to use in 2013.
Cash accounting scheme
Currently, one of the biggest problems facing Croatian businesses is the issue of insolvency. As a result, the cancellation of the cash accounting scheme, which was announced in the draft VAT Act, triggered much public discussion and commentary by the business community, especially self-employed entrepreneurs. The final VAT Act confirmed the cancellation of the cash accounting method. However, it postponed cancellation until 1 January 2015.
Canceling cash accounting will mean that self-employed entrepreneurs who are VAT-registered will be required to pay VAT based on invoices issued and not upon collection of the consideration from customers. It is anticipated that this change may create cash-flow issues for many Croatian craftsman, who will be required to account for VAT on supplies before payment. The situation will be particularly difficult if the customer pays late or never pays.
More entrepreneurs obliged to register for VAT
By contrast to the VAT Act in force until 30 June 2013, the new VAT Act says that the value of exempt supplies without the right of deduction of input VAT should also be taken into account in calculating the VAT registration threshold, set at HRK230,000 (approximately €30,000). This means that various Croatian entrepreneurs who were not previously obliged to register for VAT (since they have not previously exceeded the threshold as they made exempt supplies) now have to register as Croatian VAT payers.
The full version of this article was published in EY´s Indirect Tax Briefing, issue 8 (PDF, 3.28 MB).
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