How reverse charge works in VAT

Although it is not the norm for VAT, a reverse charge can apply in certain cases, which it is advisable to know about
Before attempting to analyze the VAT reverse charge procedure, it may be worthwhile to clarify the concepts of the 'person liable' and the 'taxpayer', since although with many types of tax these tend to be the same party, there are also some substantial differences between the two. It is therefore worth clarifying these terms before explaining what VAT reverse charge is and how it works.
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While the taxpayer is charged for the amount of the tax, the person liable is the physical or legal person that is obligated to comply with these tax obligations, whether also in the role of the taxpayer, or as the party that is ultimately liable for paying the tax. With VAT, while the tax is charged to the taxpayer, who is the final consumer, the person liable is the company or professional that delivers the goods (the vendor) or provides the services, which is then obligated to comply with payment of the tax obligation through the tax settlement process.

What does reverse charging mean?

Reverse charging means that the receiving party in the transaction, that is, the party buying the good or receiving the service, becomes the person liable for payment of the VAT, instead of the party selling the good or providing the service as in the regular VAT scenario. In order for reverse charging to be performed, the recipient of the goods or services must be a businessperson or professional, and doing business as such.

When does reverse charging occur?

Reverse charging takes place for the following transactions:

  • Transactions carried out by individuals or entities not based within the territory where the tax is applicable.
  • For deliveries of unworked gold or semi-worked gold products, with a purity equal to or greater than 0.325.
  • For deliveries of new industrial wastes or other scrap or waste products.
  • For provisions of services related to emission allowances, emission reduction certificates, and units of reduction of greenhouse gas emissions.
  • Deliveries of real estate assets when taking place as the result of an insolvency process.
  • Deliveries of exempt real estate assets as referred to in sections 20 and 22 of part I of article 20 of the Law on VAT, where the person liable has waived the exemption.
  • Deliveries of real estate assets taking place via execution of a guarantee established on real estate assets, with the understanding that the guarantee is executed when the real estate is transferred in exchange for full or partial discharge of the guaranteed debt, or in exchange for an obligation upon the acquiring party to discharge the cited debt.
  • In execution of construction work, whether with or without provision of materials, as well as in provision of personnel to perform such work, as the result of contracts directly formalized between the developer and the contractor for urbanization of land areas or construction or renovation of buildings.
  • In cases where a business premises is renovated by its lessee. Construction work for renovation may be carried out on buildings that are owned by the renovator or by a third party.
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How does reverse charge VAT work?

When the vendor or service provider prepares the invoice, the invoice must reflect the fact that it is a reverse charge transaction. The invoice must therefore be issued without VAT and must include the statement “Transaction with reverse charging pursuant to article 84.I.2 of Law 37/1992”. The invoice issuer must include these amounts on form 303 as information in the section on “operations not subject to tax or with reverse charging that give the right to the deduction”, with the sum of the amounts reflected on form 303 transferred to form 390 in the section on “operations not subject to tax due to localization rules or with reverse charging”.

On the other hand, the recipient of the invoice, as explained above, will be the person liable for the tax, and must record the invoice received with reverse charging so that the taxable base from it is declared on form 303 as part of the VAT accrued, in boxes 12 and 13 on the form, and in the corresponding boxes in the deductible VAT.

New aspects from Law 28/2014 of November 27 in relation to Law 37/1992, on reverse charging.

Beginning on April 1, 2015 with the tax reform, the situations where reverse charging is applicable were expanded, so that recipients of deliveries of some of the following goods and assets have become the persons liable for the tax:

  • Silver, platinum, and palladium, whether raw, powdered, or semi-worked; also includes deliveries of such metals in relation to the performance of transformation activities by the acquiring businessperson or professional. In all cases this must involve products that are not included within the scope of application of the special regimen applicable to second-hand goods, objects of art, antiques, and collectibles.
  • Cell phones.
  • Videogame consoles, portable computers, and digital tablets.
  • The contents of these last two points will only be applicable when the recipient is:
    • A businessperson or professional re-selling these goods or assets, regardless of the amount of the delivery.
    • A businessperson or professional other than those referred to in this section, when the total amount of the deliveries of such goods or assets made to this person, and as documented on the invoice itself, exceeds €10,000, excluding VAT.

New types of violations and sanctions are also established (articles 170.II.6-8, 171.I.6-7, and 171.II of the Law on VAT), for failure to provide notification, or for providing incorrect notification, regarding certain transactions where the reverse charging rules are applicable because of their status as businesspersons or, as the case may be, because of the nature of the construction work (work executed for construction or renovation of buildings or urbanization of land areas and real estate transfers by execution of a guarantee). Such conduct will be sanctioned with a proportional, punitive fine of 1% of the total payments with respect to which a notification violation took place, with a minimum amount of €300 and a maximum of €10,000.

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