The European Commission has issued a communication criticising the introduction of a split payment in Romania. In the light of the position of the Union, which is strongly restrictive as regards compliance with EU rules, the Polish Ministry of Finance has relaxed its line and postponed the introduction of a compulsory split payment for certain industries.
The Polish government planned to introduce a split payment obligation in some sectors mainly to improve tax collection, as well as to replace it with a reverse charge and solidarity. Meanwhile, the European Commission's position on the changes that Romania has introduced in this respect shows that the implementation of the new tool requires precise alignment with EU law, which is still lacking in the application of the split payment in Poland.
EC position on the introduction of a split payment in Romania
Romania implemented split payment for certain categories of taxpayers mandatoryly at the beginning 2018. According to the European Commission, it has broken a number of EU rules. As we read in the EC Communication of 8 November.b.r.
‘Romania has requested a derogation from Title XI of the VAT Directive in order to be authorised to introduce a compulsory split payment mechanism for taxable persons and public institutions which have tax arrears or are subject to insolvency proceedings.
The split payment mechanism would apply to business-to-business transactions (B2B) and would not apply to exempt taxpayers for SMEs.
Divided payment is applicable when tax arrears exceed 15,000 RON (approximately 3,200 EUR) for large taxpayers, over 10,000 RON (approximately 2,150 EUR) for medium-sized taxable persons and 5,000 RON (approximately 1,080 EUR) in the case of other taxable persons and they were not paid after expiry 60 the working days following the due date.’
The Commission concluded that the introduction of a split payment in this form undermines the functioning of the general VAT system and that the derogations from Title XI of the VAT Directive, describing the obligations of taxable persons and certain non-taxable persons that Romania has adopted, ‘are raising serious concerns about their proportionality’.
„The Commission considers that setting the thresholds at a fixed level for third the categories of taxable persons do not ensure equal treatment of taxable persons within the same category – we read further in the explanatory memorandum of the EC position. – It is a fact that the threshold 15,000 RON will not have the same effects on all large taxpayers and the threshold 5,000 RON it will not have the same effect on all small taxpayers, as there are differences within these groups. The Commission therefore considers that the proportionality of such a system of fixed thresholds cannot be justified and that a better criterion could be the threshold linked to the percentage of turnover. In addition, under the Romanian split payment system, the customer is required to check the register of taxable persons to whom the split payment system applies and to allocate the payment accordingly to the net amount and VAT amount. However, tax authorities send a notification of inclusion in such a register to the supplier rather than to customers. Romania does not consider it necessary for the supplier to inform the customer of the need to apply the split payment mechanism by adding an appropriate reference to the invoice. In addition, if the customer does not apply the split payment mechanism and pays VAT on an account other than the supplier's VAT account, a penalty of EUR 0.06% the amount paid incorrectly if this irregularity has not been corrected within the period 30 working days. However, it is the supplier (and not the customer) who can correct the situation and transfer the amount in question from his main account to his VAT account and inform his client of this fact, so that the customer avoids sanctions. Romania explained that such transfer by the supplier is only an option, not an obligation, as the responsibility for payment of VAT to the correct VAT account is borne by the customer.
Such a split payment system represents an unjustified and disproportionate burden on the customer.
Even if the customer's obligation to use the register of taxable persons covered by the split payment mechanism is maintained, the supplier should at least inform the client of the obligation to use the split payment mechanism by adding an appropriate reference to the invoice.
Because under Article 226 The VAT Directive lists the details to be included on the invoice, the inclusion of an additional reference requires a derogation from the provisions of that Article.
Letter dated 17 May 2018 However, Romania has informed the Commission that it considers it unnecessary to include on the invoice a reference to the application of the split payment mechanism.
The penalty imposed on the customer in the event of non-application of the distribution of payments is disproportionate, in the Commission’s view, where the supplier remains the person liable for payment of VAT[1]. Such a penalty should rather be imposed on the supplier, in particular because the supplier can correct the error at any time by transferring the VAT received to his VAT account.
It should be stressed that Article 273 The VAT Directive allows Member States to impose other obligations they consider necessary for the correct collection of VAT and for the prevention of tax evasion. However, the proportionality analysis also applies to measures taken under that Article.
In the light of the above, the Commission considers that the Romanian split payment mechanism is not proportionate to the objective pursued, i.e. the correct collection of VAT and the prevention of tax evasion’.
Another problem is the Romanian government's obligation to open a bank account by an entrepreneur not established in Romania. This would strengthen the Romanian funnel, but is grossly incompatible with Article 56 TFEU on the free movement of services.
Poland is leaving the hard course
The Polish government seems to have taken a step backwards in the implementation of the split payment obligation, which was to enter sensitive industries as early as the beginning of the year.
Director of the department of tax on goods and services Wojciech Sliż in a conversation with PAP declared that mandatory split payment would not be introduced In the first mid next year". Moreover, changes in the current system are expected to occur.
The MF plans to introduce the possibility of paying taxes and contributions from the VAT account of ZUS, as well as the use of the mechanism also for card payments, which will de facto lead to a frostbite of the money deposited on the VAT account. How can we read informally?
In one of the comments on Wojciech Sliż MF's social account "does not plan to cover payments to single-member companies providing consulting services (or generally self-employed) mandatory split payment. The use of voluntary split payment in such cases also does not seem justified.
In this case, it is difficult to talk about doubts about the reliability of the counterparty and the risk of the tax authorities questioning the deduction of input tax from invoices issued by e.g. self-employed persons. And a voluntary split payment is used to prevent such consequences.
However, I do not exclude that such payments may occur, and in the case of micro-entrepreneurs, who make up the value of their service in the vast majority on the basis of their own work (no purchases for which we can pay from the VAT account) this may create a temporary problem with the possibility of any disposal of funds.
We are particularly sensitive to this problem, releasing resources below 19 days and we assume the possibility of using funds from the VAT account to pay other public tributes (ZUS, PIT, CIT)" - writes the director of the department of tax on goods and services.
It can be noted that the voluntary split payment, which has been operating in Poland for the last quarter, divides the payers into his supporters and people who want to avoid him at all costs, which is not always possible. There are many doubts about this.
It happens that subcontractors issue invoices without VAT, but at the same time pay for purchased goods and certain VAT services, after which they wait for a refund from the Tax Office, which may even take 120 days, and which significantly impedes the operation of the company.
The liberalisation of the law in this respect, even if it were to be possible to pay from the account of Vátov’s liabilities to the State Treasury, would certainly help to maintain a balance of entrepreneurship.
The Commission decision to introduce a split payment obligation in Poland is to appear at the end of this year or at the beginning of the new one. The MF expects that it will be positive, especially since Poland's system of implementing the new obligation takes into account the problems arising from the mandatory introduction of the mechanism in Romania.
Chart Source: BIG InfoMonitor *Scaner MSP survey conducted by the B2B Keralla Research Research Research Research Institute, on trial 500 SMEs including 126 sample companies that have expressed their willingness to use split payment
Author:
Katarzyna Kołbuś - Editor leading RB Magazine. From Over 10 years related to industry press, including the Financial Gazette and portal ipip.com.pl, which is devoted to finance, taxation, law, politics and the economy. She graduated from Polish philology at the UMCS and the language editing of the text at the University of Warsaw.