VAT TAXATION PREREQUISITES: DEROGATING FACTS AND FURTHER INFORMATION 

In the previous article, https://bit.ly/44I8uA5, the three main VAT taxation requirements, objective, subjective and territorial, were introduced: in the present paper, however, the picture is completed through the consideration of derogating cases in view of the territoriality requirement related to the provision of services and further information on the subject.

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REGULATORY REFERENCES

As recalled in the previous paper, VAT, or value added tax, is an indirect consumption tax that is applied in relation to the supply of goods and services, in the exercise of business or the arts and professions, and on imports by anyone carried out: in order for a VAT-relevant transaction to take place, it is necessary that the supply of goods or the provision of services is considered to be carried out in the territory of the State. 

Generally speaking, as far as the supply of goods is concerned, the transaction is considered to be carried out in Italy when the good is in Italy at the time of its delivery or shipment, generally defined as the time of the transaction, and the good is domestic, i.e., produced in Italy, nationalized, produced outside the EU but permanently imported into Italy, EU, produced in other EU member states, or bound to the temporary import regime, produced outside the EU but temporarily imported into Italy to be processed and then destined for international traffic. 

In addition, Article 7-ter of Presidential Decree 633/72 considers supplies of general services to be those supplies made in Italy to:

• VAT-registered taxable persons established in the territory of the State, so-called B2B transactions, 
• non-taxable customers, i.e. private individuals, from taxable persons established in the territory of the State, so-called B2C transactions. 

In the first case, B2B, the rule of relevance of the principal, i.e., the consumer, is introduced: services are considered to be made in Italy when they are rendered to taxable persons established in the national territory, it is not taxable if the place of business is abroad; in the second case, B2C, the criterion of relevance of the place of business of the professional is discriminating: the service made by a professional executor of the service resident in Italy is taxable for VAT purposes, regardless of whether the private person is Italian or foreign.

The assumption of territoriality contained in Art. 7-ter of Presidential Decree 633/72, as defined above, is considered "ordinary practice" related to services, sticking to a generic definition of them; however, Art. 7-quater, 7-quinques, 7-sexie, 7-septies of Presidential Decree 633/72 presents the exceptions regarding the general rules on the territoriality of services, in view of the services defined as specific.

In detail:

• in Art. 7-quater, the relevance criterion is identified differently from that of the place of the principal by listing illustrative cases, such as services related to real estate, which are taxable only if the property in question is located in Italy, or passenger transport services, which are taxable in proportion to the distance traveled in Italy;
• in Article 7-quinquies, the VAT relevance is dependent on the material execution of the activity in the territory of the State, as in the case of services related to access and activity of cultural, artistic, sports, scientific, educational events and so on, for which the taxable place coincides with the place where the event or activity is actually carried out;
• in Art. 7-sexies, relevant services are outlined even if rendered to non-taxable customers, for example, the activity of intermediation on behalf of the customer, relevant only if the intermediation is carried out in Italy, the services of intra-EU transport of goods, relevant service if the transport begins in Italy, as well as for ancillary activities to the transport itself;
• in Article 7-septies are presented the services rendered that are not considered to be performed in the territory of the State and, therefore, are out of the VAT field, substantially rendered to a nontaxable person residing in a non-EU country, for example: assignments, concessions, licenses and the like relating to copyrights, industrial inventions, models, designs, processes, formulas and the like and those relating to trademarks and signs; advertising services; banking, financial and insurance transactions; granting access to natural gas or electricity systems; services rendered electronically.

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FURTHER INFORMATION 

The three taxable conditions, in order for the transaction to be within the VAT field, must be simultaneously met: in the absence of even one of them, the transaction comes to be called out of the VAT field or not within it.

VAT transactions can have a dual classification: 

• VAT-relevant transactions, which can be classified as taxable, nontaxable and exempt, 
• non-VAT-relevant transactions, i.e., those excluded from the application of the tax.

Taxable persons for VAT-relevant transactions are always required to certify the transactions made by means of an invoice: a fundamental document for the practical operation of the regulations, which is both formal, i.e., documentation and control, and substantive, i.e., the exercise of recourse and deduction.

As of Jan. 1, 2019, transactions between persons resident or established in Italy are conducted with electronic invoicing through SDI, the interchange system: the traditional paper invoice is allowed residually for certain operators, but it must be in duplicate, one retained and the other delivered to the customer, the moment when the document is intended to be issued, and will be destined to be used even more residually as of 2024. Invoices, both issued and received, must be kept in chronological order in registers with opposing sections between active and passive transactions for tax purposes, for 5 years from December 31 of the year in which the tax return was made. 

Some traders, who are not obliged to issue an invoice, are alternatively required to issue a receipt or receipt for tax purposes: again, these must be kept in the register of receipts.

As of Jan. 1, 2020, persons engaged in "retail trade and similar activities" who are not obliged to issue an invoice, such as traders, artisans, hotel managers, and restaurateurs, will certify daily receipts by storing and transmitting them electronically to the Internal Revenue Service: these persons, therefore, are no longer required to keep a register of receipts.

The mandatory VAT registers are:

• the register of issued invoices,
• the register of purchases;

subjects who use the journal book, entrepreneurs, or the time book, professionals, can choose not to keep VAT registers if they note the same information on the other registers.

In the register of invoices issued, the trader must record all the invoices he issues; for each invoice, the following should be indicated:

• the sequential number,
• the date of issue,
• the data of the customer,
• the amount of taxable income and tax distinguished according to the rate applied,
• in addition, other entries should be made, for example, self-invoices for purchases from non-residents.

In the VAT purchase register, the enterprise records purchase invoices, customs bills, invoices for intra-EU purchases, i.e. from suppliers established in other EU countries received from its own suppliers for goods and services related to its business; on the other hand, the entry of accounting documents in the VAT purchase register is necessary in order to benefit from the deduction of VAT on purchases, which is due according to the type of goods and services purchased: in general, the business is obliged to charge the tax to the customer and pay it to the Treasury, at the same time it is entitled to deduct from the tax due the VAT paid to suppliers for its purchases; the mechanism of VAT settlement and payment due takes place monthly or quarterly, depending on its accounting regime. 

Generally, VAT is due only on taxable transactions and is charged at different proportional rates depending on the type of transaction performed.

In fact, taxable transactions are all those transactions in which all three of the prerequisites provided for by the regulations are met, they are subject to the following rates: 22% ordinary; 10% intermediate, related to the supply of electricity and gas for domestic use, medicines, building rehabilitation work for specific goods and services; 5% on certain types of food, such as herbs and aromatic plants, as well as some transactions related to social cooperatives; 4% on basic necessities, such as food, beverages and agricultural products. 

Non-taxable transactions are transactions on which one or more requirements under the relevant regulations are missing: classic example are export transactions, since the transaction is carried out outside the territory of the state, but all formal and substantive obligations under the VAT regulations (such as registration, invoicing, declaration) equally arise on it.

Exempt transactions, ex. art. 10, are those transactions that for social reasons are excluded from the scope of application by explicit regulatory provision, although they have all the requirements of taxability; however, in this case too, all the formal requirements of registration, invoicing and declaration arise. 

Ultimately, transactions not covered by VAT are therefore excluded from both the application of the tax and from formal and substantive obligations; they also do not contribute to turnover: the VAT turnover of a business, art or profession is defined as "turnover" and is formed by the sum of the taxable amount of the supplies of goods and services that the person makes, records or is required to record in a calendar year; consequently, VAT-taxable transactions, non-taxable transactions and exempt transactions are included in turnover.

 

Edited by: Daniela Di Camillo, Chartered Accountant and Statutory Auditor

You can download the article in PDF here

For more information:

danieladicamillo@valoreassociati.it