- VAT reverse-charge mechanism: how is it currently applied?
Introduction
The EU VAT Directive[1] provides that VAT should generally be assessed and remitted to the State by the taxable person acting as the supplier in any operation subject to this tax[2]. Consequently, a retailer selling groceries and a restaurant supplying food & beverage services are required to assess VAT on the invoices to be raised to their customers and remit such tax to the State (by declaring it on their VAT returns).
However, there is a major exception to the above-mentioned rule. In business to business operations (“B2B”), the EU VAT Directive grants EU Member-States the option to consider the acquirer of goods or services as the person liable to assess[3] and remit VAT when the supplier does not have its seat of business nor a fixed establishment in the EU Member-State where VAT is due – the so called “reverse-charge” mechanism[4].
The reverse-charge mainly finds its grounds on anti-tax avoidance and practicality reasons: it is easier to collect the VAT due from a person linked to the territory where such VAT should be assessed and remitted than from a (foreign) taxable person without such a link[5].
Portugal exercised the option granted by the EU VAT Directive and, since 2002, the Portuguese VAT Code foresees that businesses purchasing goods / services from entities without their seat of business, fixed establishment or tax representative in Portugal are liable to (self) assess and remit VAT due on such operation to the State[6]. As a result, the retailer and the restaurant mentioned in the example above are required to (self) assess VAT if they purchase marketing services from a Spanish business[7].
The table below summarises the above-mentioned rules on the liability to pay VAT with respect to transactions located in Portugal as per the VAT place of supply rules:
| Seat of business / fixed establishment | Applicable rule | Legal basis | |
| Supplier | Acquirer | ||
| Portugal | Portugal or abroad | The supplier shall assess VAT | Art. 2,1 a) Portuguese VAT Code |
| Abroad | Portugal | The acquirer shall (self) assess VAT | Art. 2,1 g) Portuguese VAT Code |
Whilst at first sight the rules outlined above are clear-cut, practical difficulties, as well as unsteady interpretations of the Portuguese Tax Authorities on the scope of application of these rules have given rise to the following major questions for businesses involved in international trade:
- How to assess VAT in operations where neither the supplier nor the customer are established or VAT registered in Portugal?
The question here boils down as to whether the general rule should apply or the reverse charge mechanism: in the first case, the foreign supplier is required to register for VAT in Portugal to assess the tax due (Article 2, 1, a) of the Portuguese VAT Code); should the reverse-charge mechanism apply, the foreign acquirer should instead be required to register for VAT to self-assess VAT due (Article 2,1,g) of the Portuguese VAT Code).
- Are entities without their seat of business / permanent establishment / tax representative in Portugal, but VAT registered in this territory due to the performance of other operations[8] therein, required to assess VAT (using their Portuguese VAT ID number) when selling goods / services in Portugal to:
- Portuguese established entities?
- foreign entities without a fixed establishment in Portugal?
The question here is if a foreign entity VAT registered in Portugal might be compared to a Portuguese taxable person and, consequently, assess VAT in using its Portuguese VAT number, or if the reverse-charge mechanism applies even though the supplier already has a Portuguese VAT number.
The “state of art” in Portugal and possible impacts of the ViDA package
The Portuguese Tax Authorities first provided their (non-binding) interpretation of these rules in the Circular Letter no. 30073/2005[9], pursuant to which taxable persons without their seat of business / fixed establishment, albeit VAT registered in Portugal, should also be required to assess and remit VAT to the State in operations located in Portugal.
This interpretation though generated uncertainties for both the foreign suppliers and the Portuguese acquirers. Indeed, by determining that foreign entities with an active VAT registration in Portugal are required to assess VAT in the same terms applicable to entities with seat of business / fixed establishment in this country[10], the Portuguese Tax Authorities seemed to accept instances of double responsibility to assess VAT when such entities sell goods / services to Portuguese established[11] entities. As per this interpretation, these operations seemed to be covered by both the general and the reverse-charge rules for VAT assessment.
Returning to the example of marketing services purchased by the Portuguese retailer / restaurant from a Spanish company: should the above interpretation be followed, i) the Spanish service provider would be required to charge and remit VAT if it already had a Portuguese VAT registration number and ii) the Portuguese retailer / restaurant would (also) be required to (self) assess VAT on such services, as the conditions for the application of the reverse-charge rule set out in Article 2,1 g) of the Portuguese VAT Code would also be met.
This interpretation unfolded into several instances of litigation between the Portuguese Tax Authorities and foreign taxpayers VAT registered in Portugal, culminating (at least) into one favorable decision for the taxpayer. We refer to the Arbitration Court’s (“CAAD”) decision in process no. 543/2018-T[12], where the Arbitration Court ruled that this requirement imposed by the Portuguese Tax Authorities goes against the ratio and the wording of Article 2, 1 a) of the Portuguese VAT Code, as this provision only requires taxable persons with a seat of business or a fixed establishment in Portugal to assess VAT when carrying out operations deemed to be located in this country[13]. The Arbitration Court ruled, therefore, that the reverse-charge mechanism should apply instead (and, consequently, the Portuguese customers where required to (self)assess on goods supplied by the foreign – however VAT registered – entity).
Right afterwards, a new Circular Letter was issued (Circular Letter no. 30213[14]), where it was clarified – in a footnote (!) -that the previous position held by the Portuguese Tax Authorities in Circular Letter no. 30073 had been tacitly repealed…
More recently, Circular Letter no. 30235[15] clarified that, regardless of whether foreign taxable persons are VAT registered in Portugal or not, the reverse-charge obligation set out in Article 2, 1 g) of the Portuguese VAT Code should apply when such taxable persons are supplying goods / services to entities with a seat of business / fixed establishment in Portugal.
The Tax Authorities’ interpretation of the scope of application of the reverse-charge rule thus seems to be finally clear: this mechanism applies to all cases where Portuguese established business[16] purchase goods / services from foreign suppliers (having these foreign suppliers an active VAT registration number in Portugal or not). This conclusion seems to be in line with the intended purposes of the reverse-charge mechanism.
It is however still not clear how foreign business should proceed when acquiring goods / services, in Portugal, from other foreign business (being VAT registered or not). In these situations, it seems that neither the general nor the reverse-charge rules have room to apply.
For many years, and as far as we are aware, the Portuguese Courts and the Portuguese Tax Authorities did not clarify their positions on this matter.
Recently though, a quite innovative way was used by the Portuguese Tax Authorities to publish their position regarding this subject-matter: on the “FAQs” tab of their website, the Portuguese Tax Authorities clarified that foreign suppliers should be required to register for VAT in Portugal when selling goods / supplying services in this territory to another foreign taxable person.
At first sight, one may agree with this requirement: in fact, as mentioned above, operations carried out in Portugal between two foreign taxable persons do not seem to be covered by neither the general, nor the reverse-charge rule foreseen in the Portuguese VAT Code.
However, more and more in the European VAT landscape, a trend has been developing to shift the VAT liability to entities purchasing goods / services from foreign suppliers, which are being required to (self) assess and remit such VAT to the State.
The recently proposed “VAT in the Digital Age” (“ViDA”) package[17] of the European Commission seems to confirm such trend. Amongst other measures, this proposal prescribes for a mandatory and uniformised reverse-charge mechanism, according to which all VAT registered entities[18] are required to (self) assess VAT on goods / services purchased from foreign suppliers.
Should this proposal be approved, the Portuguese Tax Authorities’ most recent position on the VAT liability of foreign business supplying goods / services deemed to be located in Portugal to other foreign businesses might be jeopardised. At least in situations where the foreign acquiring entity is (due to any other reason) already VAT registered in Portugal, it should be required to (self) assess and remit the VAT due to the State, so as to avoid an unnecessary VAT registration of the foreign supplier in Portugal.
To conclude, the wording of the Portuguese VAT Code’s provisions foreseeing the VAT liability of taxable persons and the lack of clarity of the (several) publications made by the Portuguese Tax Authorities in this concern seem to have led to a feeling of general uncertainty in respect to who should be liable to assess and remit VAT to the State in B2B operations involving foreign businesses. Temporary clarifications via the “FAQs” tab of the Portuguese Tax Authorities website also seem insufficient and might only increase uncertainty on this subject-matter. Nonetheless, the ViDA package may play a relevant role in this respect, by giving the opportunity to our lawmakers to provide clear guidance when amending the several concerned legal provisions of Article 2 of the Portuguese VAT Code.
Afonso Costa Gomes
February 2023
[1] Council Directive 2006/112/EC, of 28 November.
[2] Article 193 of the EU VAT Directive, transposed into Article 2, 1 a) of the Portuguese VAT Code.
[3] Or (self) assess, in this case.
[4] This major exception is foreseen in Article 194 of the EU VAT Directive. Note that other reverse-charge options are foreseen in the EU VAT Directive, but those will not be covered in this analysis.
[5] Also, (unnecessary) VAT compliance obligations at the level of foreign taxable persons are in these situations reduced (e.g.:obligation to register for VAT and obligation to file VAT returns).
[6] Article 2, 1 g) of the Portuguese VAT Code.
[7] Provided that this Spanish business does not have a permanent establishment, nor a tax representative in Portugal.
[8] E.g., intra-EU movements of goods requiring such a registration.
[9] Dated 24 March 2005.
[10] i.e., by determining that these entities are (also) covered by Article 2, 1, a) of the Portuguese VAT Code.
[11] By means of seat of business or fixed establishment.
[12] This decision dates from 6 June 2019.
[13] The Arbitration Court further clarifies the difference between a fixed establishment and a VAT registration number, in line with the provisions set out in Council Regulation 282/2011.
[14] Dated 1 October 2019.
[15] Dated 27 April 2021.
[16] By means of their seat of business or a fixed establishment.
[17] This package was proposed by the European Commission on 8 December 2022 and aims to amend the EU VAT Directive (and ancillary legal instruments) so as to (i) modernise businesses’ VAT reporting obligations, (ii) address the challenges of the platform economy and (iii) lead the way towards a single VAT registration system.
[18] Having their seat of business / permanent establishment in such country or not.