In almost no other professional group do the problems of unnoticed, incorrect invoicing occur as often as with online traders. On the one hand, this is due to the fact that the development at online merchants often scales strongly overnight and therefore goes unnoticed. On the other hand, invoices are written automatically and are out of the client's field of vision.
Of course, these two grounds do not protect the client from penalties. So much for that.
Note: Just because it is technically possible to automatically cancel and rewrite all incorrectly written invoices, this is nevertheless associated with major problems in terms of VAT.
How this is revealed in practice at the end and why you should not take this lightly is explained below.
Which variants can there be with a wrong, automated invoicing and how do we structure our article:
- Incorrect or unjustified tax statement according to § 14c UStG
- Case study: Cross-border trade - PAN EU and CEE
- The practice - how does it come out?
1. incorrect or unjustified tax statement - tax trap § 14c UStG
If an entrepreneur has either wrongly or incorrectlyValue Added Tax stated in his invoices, this can have blatant consequences without being noticed. In addition to the consequences under criminal tax law of any tax evasion, additional demands by the tax authorities can put the company in a considerable predicament.
The main case of application for § 14 c UStG is the ever growing area of online trade, especially when national borders are crossed.
Although the consequences are similar, a distinction must be made Value Added Tax between incorrect and unjustified expulsion. First of all, it should be noted that both the incorrect and the unjustified expulsion must Value Added Tax first be paid to the tax office. In the case of cross-border transactions, the amount due Value Added Tax after the incorrect or unjustified expulsion has been determined must be paid to the respective foreign tax office, without any automatic reimbursement of the amount already paidValue Added Tax. This poses an immense threat to the liquidity of the company.
First of all, let us look at the two paragraphs of § 14c UStG to understand where the problem lies.
§ Section 14c paragraph 1 of the German Turnover Tax Act: Incorrect tax reporting
As can be seen from paragraph 1, this is the case of the separate disclosure of an amount of VAT higher than that due.
Classical examples of this are:
- the application of the full VAT rate of 19 %, even though the reduced rate of 7 % should have been applied
- or the identification of a Value Added Tax service which is exempt from value added tax
These examples are not an exhaustive list, but are intended to show what is meant by incorrect tax reporting.
In the following calculation example, we illustrate the consequences:
Performance by an entrepreneur for EUR 1,000, which is to be shown at a Value Added Tax rate of 7%. However, the entrepreneur shows 19 % in his invoice.
The entrepreneur would owe the tax office only 7% Value Added Tax of an amount of EUR 1,190, i.e. EUR 77.85. However, since he has Value Added Tax shown 19 % in the invoice, he owes the tax office the full 190 EURValue Added Tax.
For the entrepreneur who has received the service, however, only an input tax deduction of EUR 77.85 remains.
The way out of this is to correct the invoice.
For this purpose, the originally incorrectly issued invoice must be corrected accordingly, i.e. the invoice amount must be reduced to EUR 1,070 and that VAT to EUR 70. However, this correction can only be recognized if the excess amount of 120 EUR is refunded to the recipient.
Alternatively, the originally created invoice can be corrected in such a way that the fee and the VAT corresponding corrections are made - for our example this means the following:
However, such a correction has the consequence that the service rendered becomes more expensive for the recipient by a good EUR 112.
Note: Only after the appropriate correction and possibly reversal of the transaction - as offered by the first option - is there a claim against the tax office to get Value Added Tax back the overpaid amount.
However, in the case of understatementValue Added Tax, the entrepreneur owes the legally owed Value Added Taxamount. In our example, the entrepreneur has Value Added Tax declared 7%, although he should have declared the full rate of 19%. He only issues an invoice amount of EUR 1,070 including one VAT of EUR 70.
Here the entrepreneur owes one Value Added Tax of 19% from an amount of 1,070 EUR, i.e. 170.84 EUR.
Consequently, the recipient of the service is only allowed to deduct the VAT amount of EUR 70 as input tax, which is shown on the invoice. However, if the service recipient has claimed a higher input tax than the legally owed input tax, he must refund the excess amount to the tax office.
Conclusion: As you can see, the excessive Value Added Tax amount is first paid to the tax office. The process of a correction is also connected with a considerable effort and the money paid to the tax office is gone for the time being.
§ Section 14c, paragraph 2 of the UStG: Unauthorized tax reporting
Paragraph 2 refers to the tax statement of a trader or a non-entrepreneur, who is not entitled to do so.
Classical examples of this are:
- the small entrepreneur within the meaning of § 19 para. 1 UStG, if this is shown in an invoiceValue Added Tax
- Sham invoices for services that were not performed
- a non-entrepreneur shows in his invoiceValue Added Tax
- if an entrepreneur is not acting within the scope of his business
Again, the list is not exhaustive.
The legal consequence of paragraph 2 of § 14c UStG is that the reported Value Added Tax amount is owed to the tax office.
In order to get back the unjustified input tax, the incorrect invoices must be corrected. In addition to the correction procedure, the prerequisite for this is that there is no risk to tax revenue.
There is no threat to tax revenue if the recipient of the invoice has not made a deduction or has reversed the deduction with the tax authorities.
The adjustment of the tax amount must be applied for separately in writing to the competent tax office.
Conclusion: The reversal of an unjustified tax statement involves even more effort than with an incorrect tax statement.
2nd practical example: Cross-border trade - PAN EU and CEE
Let us look at cross-border trade. In this context, it should be regularly checked in which country the money is to be Value Added Tax paid. Here, we must keep an eye on the delivery thresholds, which will probably not be standardised throughout Europe until mid 2021.
Let us take as an example an entrepreneur based in Germany who provides his services in the Netherlands. First of all, there is an obligation to pay VAT at the place of business, i.e. in Germany. The delivery threshold to the Netherlands is EUR 100,000 per year. If our entrepreneur exceeds the threshold of EUR 100,000, the right to tax the turnover in the Netherlands is transferred to the Netherlands.
The invoices of the trader would all have to be issued with the Dutch Value Added Tax invoice and paid in the Netherlands. However, this is rarely done in such an automated area as online trading. This is where the dilemma begins.
After you have paid your supposed Value Added Tax tax to the German tax office, the Dutch tax authorities will contact you at some point and ask you to pay your Dutch Value Added Tax tax. In most cases, this problem is only recognised after a few years in the course of an audit. The liquid funds that were raised to pay the tax Value Added Tax in Germany are initially gone and the company is already in existential difficulties. Since many online traders do not only deliver to one European foreign country, the above-mentioned problem arises for all other member states to which delivery is made, provided that the delivery thresholds have been exceeded.
Even if the company has overcome the problems described above, a reversal of the transaction and reimbursement of the unjustified costs is Value Added Tax almost impossible in view of the procedure shown above.
In the field of online trading with several thousand or ten thousand invoices, you are faced with a task that is virtually impossible to master.
It should also be noted that for the unpaid or underpaidValue Added Tax , interest is accrued and fines may be imposed. There is also the possibility of tax evasion.
In addition to the sales tax component, this problem of § 14c UStG also affects all levels of income taxation - balance sheets and financial statements must also be changed in such cases.
3. the practice - how does it come out?
There are several possibilities here:
- Either this is determined - by the domestic or foreign tax office - in the course of a tax audit
- or the client notices his mistake himself during the year and corrects his invoices.
The tax audit itself might be the worse case here, since the mistake probably remained unnoticed for both sides until then.
We expect a drastic increase in tax audits of online merchants, as hardly any other professional group has more difficulties with the VAT law and incorrect invoicing than this one. Due to the QuickFixes and the 22f certificate, we therefore expect a wave of audits.
If the client has noticed the error and now corrects his invoices, high differences in the VAT return at the end of the year arise. This can lead to the client noticing that corrections have been made. This is because, with clean and well-maintained accounting, the VAT return at the end of the year would have to end with EUR 0, since everything has already been correctly reported and posted during the year. Only corrections result in either corrected advance returns or high differences in the annual returns.
For these reasons, a clean setup is priceless. In practice, cleaning up several years is a complex and expensive mammoth project!
However, as postal/parcel delivery services in other countries have already been obliged to report to the state when foreign companies frequently deliver to private individuals and this network is also becoming more and more closely meshed (Quick Fixes; ZM Meldungen and VAT ID), it is in our opinion only a question of time before such an error goes unnoticed.
About the author
Tax consultant and managing director
Master of Arts in Taxation
- Lecturer for tax law at the university FOM
- Lecturer for paperless tax consulting at Deubner Verlag
- External author for DATEV eG, subject area "digitisation
- Phone: 0208 / 98 99 22 22
- Mail: email@example.com
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