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Accession of Croatia to the EU 1 July 2013 – A checklist

By November 26, 2012Uncategorized|VAT news

Croatia is set to join the EU on 1 July 2013 and this section of the article aims to highlight key impacts for businesses:

 

Transitional Period – Imports and Exports or Intra Community transactions?
  • The logic here is usually a ‘like with like’ approach – any movement of goods into or out of Croatia starting prior to the switchover date but ending afterwards is categorised in the same way both ends ie an export and an import or vice versa as opposed to an export and an acquisition
  • Assuming the same rules apply as for previous EU accessions, businesses will need to be able to manually ring-fence transactions straddling the cutover period so that they are in a position to apply a different VAT treatment to that programmed into the systems, otherwise eg acquisition tax would automatically be applied to the receipt of goods from Croatia post 1 July whereas import VAT and potentially customs duty are to be accounted for via an import entry
P&L Impacts – Changes to VAT and Duty liability for certain transactions
  • There are a number of scenarios where an additional VAT cost will arise for the business with the change to Croatia becoming an EU Member State
  • EU established businesses making certain B2C supplies (electronic services, telecommunication services etc) will need to start accounting for VAT on their sales to individuals in Croatia going forward – this has an impact on pricing decisions raising the question of whether the business will bear the additional VAT cost or pass it on in part or full
  • EU travel businesses using the tour operator’s margin scheme (TOMS) to account for VAT will need to account for VAT on Croatian holidays/trips.  Croatia is a popular destination and with brochure prices and sourcing costs likely already agreed for 2013, the question arises as to whether businesses have taken this additional VAT cost into account when budgeting
  • For businesses operating in the VAT exempt finance and insurance sectors where VAT recovery on costs is dictated by the location of the counterpart (ie EU or non EU), there is a negative impact in Croatia becoming an EU Member State as VAT recovery on direct costs is inhibited and overhead VAT recovery further restricted
  • EU established etailers and mail order companies selling delivered goods to private individuals will need to start accounting for VAT on sales to individuals in Croatia and will also need to monitor the distance selling threshold for sales into this country.  Consideration should be given to the impact on pricing of a switch from a zero rate of VAT currently (as an export), to the UK VAT rate (20% assuming standard rated products are sold) post accession, to the Croatian VAT rate of 25% when the distance selling threshold there is breached
  • On a more positive note a customs duty liability will no longer arise on transactions in goods involving Croatia and other EU Member States – in addition there will be no requirement to complete import and export declarations which reduces costs from freight forwarders
  • Croatia will adopt EU VAT principles and as such it is likely some cross border services purchased historically with Croatian VAT may become VAT free/subject to the reverse charge
  • Businesses incurring  Croatian VAT eg on business travel, will be able to recover this via an 8th or 13th Directive reclaim
Cashflow Impacts – largely positive
  • There will no longer be a requirement to lodge guarantees to defer import VAT and duty on imports
  • There is a positive impact in the switch to accounting for acquisition tax on the VAT return rather than funding import VAT.  Import VAT funding can present a significant cost for businesses importing into countries such as the UK where there is no simplification in the form of a plafond type arrangement
Compliance and Systems – Changes
  • Systems changes are required to ensure Croatia’s status as an EU Member State with the associated VAT treatment is updated
  • Customer standing data and invoice templates will need to be change to ensure the customer’s Croatian VAT registration number is logged and shown on invoices
  • There will be an increased compliance burden in the form of the need to record transactions on Intrastat declarations and EC Sales Lists – whilst import and export compliance costs reduce, VAT compliance costs for additional reporting increase, and as these reports are frequently completed by in-house teams as opposed to third parties such as freight forwarders, there may be an impact on resource depending on the volume of Croatian transactions

 

First published in Tax Journal on Friday  23rd November 2012 as part of their “Special Report, VAT and the EU”.  If you would any further advice or assistance on this or any other VAT issue, please contact Julie Park on 01962 735350.

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