Country-specific updates: Germany

Reverse charge procedure for telecommunication services

The German legislator has introduced a reverse charge procedure for telecommunication services provided to a company that is itself a reseller of such services (new sec. 13b para. 2 no. 12 of the German VAT Act). The aim is to avoid fraud schemes and the idea came via so-called Voice over IP (= VoIP) systems.

Before the introduction of the reverse charge mechanism, VAT on telecommunication services has been due by the supplier (general rule). However, such cases have often been misused for VAT evasion. For example a grifter acquired a shell company in Germany (this also works with another EU country) which purchased telecommunication services from a so-called missing trader. The shell company deducted input VAT from this purchase of services. Afterwards the shell company resold these telecommunication services usually to third countries or other EU countries, so that the service did not become taxable in Germany. However, the missing trader did not file and pay VAT. Because of the interaction between the shell company and the missing trader there is a VAT shortfall.

By applying the reverse charge mechanism, in the above example VAT should now be due by the German shell company which is better tangible for the German tax authorities. However, the new reverse charge provision applies only if the recipient of telecommunication services is a taxable person whose main activity with regard to the acquisition of these services consists in their provision and whose own consumption of these services is of secondary importance (5% threshold; so-called reseller). These two criteria have to be cumulatively fulfilled. Companies that buy and/or sell telecommunication services must, therefore, adapt their internal processes and systems accordingly on the input and output side.