EU Tax directives

EU Tax directives

A well-formed intra-community or export invoice in the European Union should have a certain remark for the issuer (exporter) to have a tax-free delivery, and for the recipient (importer) to apply the proper tax regime.

In the past we used to build complex hard-coded logic into our invoices in Dynamics AX: “if the destination delivery address is not our country but another EU member, and the goods are tangible, then print XXXX, otherwise YYYY” etc. It turns out we were reinventing the wheel. Pascal, a colleague of mine, discovered a function called Tax directive which emerged apparently in one of the AX2012 releases and remained in Dynamics 365 for Finance and Operations EE.

On the VAT codes screen there is a button called Tax directives. This button appears in legal entities with a primary address in one of the EU countries. The remark can be entered in the language of the prospective customer:

Now, if the parameter VAT specification in Sales ledger (en-us: Accounts receivable) > Setup > Forms > Form setup is set to either Registration currency or Registration and company currency, the text of the directive appears nicely in the middle section of the sales order invoice or the free text invoice:

The remarks are as flexible as the tax configuration itself, and the tax directives are additive, which allows for complex cases e.g. where services (=reverse charge) and goods (=IC delivery) are billed with one invoice.

There are limitations. The tax directives are not yet available on PSA (professional service automation) project invoices, in particular on the so-called “Project invoice without billing rules”. The remedy is the VAT exempt codes with their Translations. They are a bit more difficult to configure because not assigned to tax codes directly but to VAT group — Tax code combinations, but they fulfil the same purpose, here for the reverse charge remark in the German language:

You may vote for my product improvement suggestion to extend the VAT directives into the Project accounting realm sooner.

Blog series on Finance and VAT in the EU

Further reading:

Troubleshoot the VAT Declaration in D365 for Finance
D365 Petty cash review
Advance payment invoices in Fixed fee projects in D365, D-A-CH style
Sometimes you pay Reverse Charge in D365
Minimalistic EU VAT Configuration in Dynamics 365
Austrian VAT declaration / Umsatzsteuervoranmeldung 2020
EU Tax directives

Minimalistic EU VAT Configuration in Dynamics AX

Minimalistic EU VAT Configuration in Dynamics AX

Introduction

Let me present my 4th iteration of the EU VAT setup in Dynamics. The below concise VAT configuration in Dynamics 365 for Finance has been tested over 3 years of my operations. It has been constantly updated with the changes in taxation. It covers intra-community import, export and import of services within the European Union and beyond, domestic supplies, travel within the EU and abroad.

Before we begin with the setup let me explain some background facts and assumptions:

    • Any export of goods or services in or outside of the European Community is tax-free, but reported
    • An export of services is special: in accordance with Directive 2008/8/EC any service rendered for customers abroad is subject to reverse charge
    • In the case of an intra-community (IC) delivery, goods and services are presented separately on the EU Sales List
    • On the contrary, goods and services delivered in the home country are reported together and should not be distinguished
    • Intra-community deliveries are reported separately from the foreign trade with the so-called 3rd countries (i.e. countries which are not the 28 members of the EU, e.g. Norway or Switzerland). IC trade appears of the EU Sales list, while 3rd country trade does not, but it is reported to the INTRASTAT instead.
    • Most of the countries apply a full rate and several reduced rates. The reduced rates are there mostly for the basic consumer services and goods (Austria: 10%). They normally do not affect enterprises, until the employees start reporting travel expenses.
    • A semi-reduced “hotel” rate of 13% stands out in Austria, but also in Switzerland and France for accommodation. Update 2018: 13% were reverted back to 10% in Austria, but I am going to keep it in my scheme.
    • A grocery may have separate tax codes for an IC acquisition of Polish potatoes (self-assessed 10%) or French wines (self-assessed 13%). However, the reduced-% goods and services are rarely imported by manufacturing or professional service businesses, with the exception of foreign books and printed media (self-assessed 10%).
    • In Switzerland, the VAT receivable from investments is reported separately from the VAT received from current assets or services (de-ch: “Vorsteuer auf Investitionen und übrigem Betriebsaufwand” vs “Vorsteuer auf Material- und Dienstleistungsaufwand“) despite the same rate.
      Since 2019, a similar aspect has become valid in Austria too. The mandatory Chamber of Commerce contribution (de-at: “Kammerumlage 1” or KU1) is evaluated at 0,29% of the total VAT receivable excluding any investments i.e. assets acquired either domestically or abroad.
      The reduced VAT (foodstuffs, pharmaceuticals) may be neglected: milk is unlikely to become a long-term asset, unless condensed 😉
    • From the system point of view, there is a difference between a “zero rate” and “no rate”. A tax code with a 0,00 rate still logs the tax base for reporting, as long as a record in the tax Values table exists.
    • From the fiscal standpoint, there is a difference between a “zero” an “no” rate too. For example, in the UK public transportation is taxable at 0% which is considered a tax rate of its own. In France, 0% is applied to newspapers. To enable a zero rate, just open the Values table in connection with the tax code, let the system create a record, leave the Value = 0,00000 and save the record.
    • It is a good practice to have a valid tax code, i.e. a valid Customer/Item group combination in every business case whenever it is reported on the tax declaration or not. This is enforced by keeping the tax parameter Check VAT groups active. For example, on a business trip from the UK to Hungary the VAT may theoretically be recovered, but hardly any company does it. The tax codes TF and NR below help stay compliant to the Check VAT groups setting.

VAT codes (en-us: Sales tax codes)

Tax codeNameRate ATExample
vatFDomestic VAT, full20%Sales or purchase of regular goods and services, e.g. raw materials, office consumables, car expenses (electric cars or ‘fiscal cars’ only)
vatADomestic VAT from assets, full20%Investments in long-term assets, i.e. machines, office equipment, electric car fleet
vatHReduced “hotel” rate13%This reduced rate applies to accommodation, but not restaurant bills
vatRDomestic VAT, reduced10%Public transportation, taxi, and basic foodstuffs, including restaurant bills with non-alcoholic beverages, books and newspapers
TFTax free
Out of scope		0%Exempt international air and sea transportation, or services delivered by “non-genuine” tax exempt suppliers such as insurances, postal services (de-at: “unechte Steuerbefreiung“), but also the City tax (de-at: “Tourismusabgabe“, “Ortstaxe“) component on hotel bills. The base on purchases may still be reported to the authorities.
NRNot recoverable–On a travel abroad, services consumed by the employee are taxable per se, and within the European Community the tax may even be recovered, but very few companies do so. The code is not reported to the authorities. Running expenses from traditional personal cars with internal combustion engines fall into this category too.
euFIC export
IC acquisition		0%
20%		Delivery of goods to another country of the European Community is tax free, but the value of the goods is reported to the tax authority.
On a regular import of goods from another member of the European Community the full domestic tax is levied; the tax is self-assessed with a zero effective tax load (what you pay is what you get recovered). This is achieved with the Use tax (en-us) i.e. Import VAT / purchase VAT (en-gb) setting in the VAT group.
euAIC asset export
IC asset acq.		0%
20%		It is highly likely, that the investments into long-term assets (machinery, other equipment) go into another EU country. Less probably but also possible, is that used assets are sold into an EU country.
euRReduced IC export
IC acquisition		0%
10%		Delivery of goods to another country of the European Community is tax free, but the value of the goods is reported to the tax authority.
On goods that would be subject to the reduced tax rate domestically (e.g. books), the same reduced tax rate is applied when procuring such goods from another member of the EU; the tax is self-assessed with a zero effective tax load and the Use tax setting in the VAT group.
euSIC services export
IC services import		0%
20%		Delivery of services in another country of the European Community is tax free but reported.
The buyer, however, must obey the reverse charge principle. The setup for the reverse charge and the zero tax impact is similar to the above IC goods acquisition.
3rdFExport 3rd county
Import 3rd country		0%
~20%		The export of goods is tax free in most of the countries, but the value has to be reported.
Tangible goods imported into the EU from a 3rd country is subject to an import tax, whose base is hard to calculate because it includes the portion of insurance and freight up until the border. Normally the import tax is calculated and paid by the customs broker; in the exotic import tax self-assessment mode (de-at: “Einfuhrumsatzsteuer geschuldet”) this 3rdF tax code may be used to post the tax.
3rdSServices export 3rd
Services import 3rd		0%
20%		If the place of supply of services is outside of the EC, the export is tax-free but still have to be reported (as taxable elsewhere under the reverse charge regime).
The procurement of services outside of the EC is subject to a self-assessed reverse charge.

VAT groups (en-us: Sales tax groups)

In every business case in Dynamics 365 for Finance, the tax code is deducted by the system from an intersection between the customer/supplier VAT group and the product Item VAT group. Aside of the basic “F”, “S”, “TF” item VAT groups I recommend “H”, “Food” and “PubT” for the travel expense reporting. The reason to separate the latter 2 groups is my reverence to companies recovering foreign taxes: tax rates for these categories vary across Europe.

The group AP-NR is used in the Travel and Expense module to have a formal tax code TF even if the VAT is not recoverable, and satisfy the Check VAT groups validation in the tax module.

Tax codes to be marked Exempt in the VAT group configuration are stroke through in the table below, and those marked as a Use tax are in italic:

Customer or supplier VAT groupItem VAT group “F” (full)Item VAT group “A” (assets)Item VAT group “S“ (services)Item VAT group “TF“ (tax free)Item VAT group “H” (hotel)Item VAT group “Food“Item VAT group “PubT“ (public transp.)
Suppliers
AP-DOMvatFvatAvatFTFvatHvatRvatR
AP-EUeuFeuAeuSTF euR 
AP-3RD3rdF 3rdSTF   
AP-NRNRNRNRNRNRNRNR
Customers
AR-DOMvatFvatAvatFTFvatHvatRvatR
AR-EUeuFeuAeuSTF euR 
AR-3RD3rdF 3rdSTF   

Disclaimer

The above configuration is going to work well in the D-A-CH countries, in Scandinavia, and even in Spain. Yet it doesn’t account for the “VAT on payment” aka Conditional tax common in France (de: “IST-Besteuerung“), and it will probably not work for countries with inflated reporting requirements (Italy).

This blog is followed by Part 2 – selection of the VAT reporting codes for the Austrian VAT declaration.