Germany: VAT Rate Reduction

Yesterday (3 June 2020) the governing grand coalition between the Union and the Social Democratic Party in Germany have agreed an economic stimulus package of EUR 130 billion in their coalition committee in order to combat the economic downturn following the Coronavirus crisis. 

One of the measures includes a temporary general reduction of the standard VAT rate from 19 % to 16 % and of the reduced VAT rate from 7% to 5% for supplies taking place between 1 July and 31 December 2020. 

This would come on top of the reduction of the VAT rate from 19 % to 7 % on food served in restaurants etc for one year starting on 1 July, which was already approved by the German Parliament at the end of May.  

Although the general temporary reduction of the VAT rates announced yesterday is, on the face of it, only an agreement between the coalition parties, it is likely that it will become law. The grand coalition hold a healthy majority in the German Parliament. Also, due to the resentment a U-turn would trigger amongst the electorate, it would be difficult for parliament not to follow on and approve the measure.   

The freshly announced plans of the German government should be very closely monitored especially by companies restricted in their right to input VAT deduction when buying goods or services subject to German VAT. Where possible, completion or delivery dates should be shifted to fall on or after 1 July 2020 and before 1 January 2021. Equally, companies selling goods or services subject to German VAT on the basis of VAT inclusive prices should review their completion or delivery dates to salvage the possible profit to be made from the reduced VAT rate. Further, companies selling to German private consumers (distance sellers) can look forward to a windfall for their profits or more room for competitive pricing. 

Brexit: VAT and other Mazes

On 16 April 2020 the European Commission published an updated version of its helpful guidance on the VAT implications of goods movements between the EU and the UK after the end of the Brexit transition period: https://ec.europa.eu/info/sites/info/files/notice_to_stakeholders_brexit_online_sales_0.pdf

This paper brings the stark realities of the Withdrawal Agreement for goods into the limelight. Despite the Good Friday Agreement and away from the public eye thanks to remarkable PR of the Johnson government, the Withdrawal Agreement has effectively split the United Kingdom into two parts for goods regarding VAT, customs and excise duties: Great Britain and Northern Ireland.

This has introduced complexities of a level not seen before in these areas of law. 

Customs in particular is a minefield. Every goods movement into or from Northern Irland with regards to the rest of the UK, the EU or third countries is administered and subject to customs in a different way. For example, the import of a good into Northern Ireland from a third country like the USA could, on the face of the wording of the Withdrawal Agreement, be treated under one of two different sets of customs rates depending on the circumstances of the import. Or, imports of Union goods from Northern Irland into Great Britain will be subject to fewer customs restrictions than Union goods departing from another part of the EU. Further, important particularities for the determination of customs rates - which can turn a deal into a loss making venture or a business success - are still undecided. Clearly, where the UK and the EU were unable to agree, they postponed problems to later discussions in the Joint Committee between the parties. As can be seen at the moment though, the UK and EU are again almost at the point of stalemate with no productive outputs to be seen. Businesses treated as cue balls, as ever.

However, not everything is gloom.

Northern Ireland with its privileged customs gateway to the UK as well as its cosy position within the Union's internal market could become a fertile ground for businesses.

It will also be intriguing to watch the EU's and the UK's VAT systems drifting apart over time through the forces of different jurisdiction and changed laws, which could create VAT advantages for businesses. 

And services, for which the VAT border between Great Britain and Northern Ireland bewilderingly vanishes, are set to be another area with potential: When the UK has shaken off the shackles of EU law after the transition period, it will likely be keen to assert its legislative freedom and attract new business. VAT opportunities, especially for financial services, could not be far off.

Get accustomed to mazes. They will be the new reality!

Taxing Plastic Packaging

The growing mountain of plastic waste and its terrible impact on our environment has been in the limelight for a while, especially after China banned imports of plastics in January 2018.

In May 2018 the EU Commission tabled a proposal to introduce a plastics tax at 80 Euro Cents per kilogram of non-recycled plastic (and thereby to generate an extra EUR 6.6 billion per year for the EU's budget, which is weakened by the departure of the UK). The plastics tax was to be imposed on the Member States.

By contrast, the new "Plastic Packaging Tax" the UK Government plans to introduce in April 2022 is to be paid by businesses who manufacture or import plastic packaging in the UK, including​ imported filled packaging.

The tax, first announced by the UK government in 2018, is aimed at introducing "a new world-leading tax" on the UK production and import of plastic packaging with less than 30% recycled content. The tax wants to incentivise the production of more sustainable plastic packaging and increase the use of recycled plastic.

The tax is planned to be charged at £200 per tonne.  A de minimis threshold of 10 tonnes is aimed to prevent excessive administrative burdens being​ placed on the smallest businesses.

For imported plastic packaging, the UK government wants to impose the tax on the person "on whose behalf the plastic packaging is first commercially exploited in the UK" (i.e. transported, stored, etc.), excluding imports for personal or non-business use by the first customer in the UK. A joint and several liability, for example of overseas companies and their fulfilment house operators, is also discussed.

Currently, the UK government is consulting with stakeholders on the detailed design and implementation of the tax (e.g. regarding types of plastics in scope, taxable person in supply chains, exemptions, invoicing, tax registration), although a significant number of specifics seem to be hammered out already.  

The UK government plans to publish primary legislation in Finance Bill 2020-21, followed by draft secondary legislation and guidance. 

It will be important for the plastics industry to follow this new legislative initiative as closely as possible. It might - depending on the individual circumstances of a business, its products and the conditions of its supplies - introduce a new cost factor and compliance burden to them which needs to be mitigated. We recommend drawing up new contracts regarding plastic packaging carefully and rethinking established supply conditions.