Germany’s temporary VAT rate and its complex impact on subscriptions

Germany’s temporary VAT rate reduction that came into effect at the start of July has produced a host of unforeseen complexities for subscriptions to consumers based in Germany.

In July Germany’s standard and reduced VAT rates were temporarily cut for a six-month period with the aim to stimulate the German economy. The new VAT rates of 16% standard rate and 5% reduced rate are to be used until December 31, 2020. It is the first time that a rate change was announced for a specific period and, combined specifically with the nature of digital service subscriptions, it has created some unusual and unforeseen complexities.

In Germany, the tax point is the date the service is fully delivered or at the time of the down payment - whichever one is the earliest. In the case of the temporary VAT rate, a special rule in German law has been introduced. In the case of a continuous supply of services where VAT was paid at the time of the down payment you have to adjust the VAT rate for the supply at the point for when the supply is actually fully rendered.

This has a direct implication on the continuous supply of services such as yearly subscriptions or pre-sold software, that are considered to be delivered at the end of the subscription.

Practical implication of temporary rate

For services sold before the change of rate and delivered before December 2020, companies may potentially recover the 3% VAT additionally charged. In case of no adjustment, the risk in this case for companies is limited as too much VAT was paid.

However, concerned companies will need to look at the implication of such rules when the rate goes back up to 19%, i.e. for services delivered after January 2020. In this case, they have two options: they can charge the 16% VAT rate applicable at the time of the down payment and then apply an adjustment to the return when the service is fully delivered to pay the additional 3% VAT rate (the difference between the standard rate of 19% and the temporary reduction to 16%). They can also decide to apply the 19% VAT rate at the time of payment to avoid any adjustment afterwards.

Customer service also impacted

Such a VAT rule change not only has implications for the tax department of affected digital service suppliers but also for the business teams dealing with customers. Likely additional customer queries and requests will have to be managed if the 19% VAT rate is charged during the temporary VAT rate reduction period. A review of the VAT treatment of the sales made during the temporary rate reduction phase may also be necessary.

Right now the temporary German VAT rate reduction ends on December 31, 2020, but what happens if this is extended? This will prolong these unforeseen consequences. We truly are in unprecedented times and more uncertainty in terms of VAT.

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