Taxation of Services with VAT and Claiming the Right to Refund VAT Paid Abroad

Value added tax is an important source of public finance funds that finance public consumption. In the single market of the European Union, the current VAT system, originally designed as a transitional system, is fragmented, complex for taxable persons operating cross-border, and thus also enables fraud.

Problem

Value added tax is an important source of public finance funds that finance public consumption.

Solution and Method

In the single market of the European Union, the current VAT system, originally designed as a transitional system, is fragmented, complex for taxable persons operating cross-border, and thus also enables fraud. Domestic and cross-border transactions are treated differently, and goods or services can be purchased on the single market without paying VAT. Therefore, reforms are gradually being adopted through Directives, aiming at simplifications, limiting the risk of fraud, and higher efficiency of tax administrations.

Frequent legislative changes due to European Union strategies affect unstable national legislation, which implements these changes each time through amendments to existing legislation. If taxable persons encounter up to 27 different national legislations in international transactions, the field of VAT is among the most harmonised precisely because of its integration into common fiscal policy. In the accounting treatment of international transactions, it is therefore crucial to follow legislative changes, as this is the only way to ensure consistent fulfilment of obligations, as well as the exercise of rights of taxable persons identified for VAT.

In the case of taxation of services, both general rules and special rules apply, which determine the place of taxation and thus oblige taxable persons to correct treatment in international transactions. In these cases, VAT may be paid abroad (in a country different from the country of identification for VAT), so the legislation enables a simplified procedure for claiming the right to refund it, provided that the applicant meets the prescribed conditions. Correct accounting treatment and consequently correct reporting enable the exchange of data between the authorities of European Union member states and supervision of taxable persons; meanwhile, case law shows how lack of knowledge of legislation can cause irreversible losses for taxable persons.